Small businesses have a choice of two health reimbursement arrangements to help employees cover their medical expenses: a QSEHRA and an ICHRA. While both plans provide similar benefits, key structural differences cause them to be used in very different ways. An ICHRA functions as a flexible alternative to group coverage, while a QSEHRA is designed as a company-wide benefit accessible to all employees. Understanding this distinction is key to choosing the right plan for your business. Let's break down how they compare and contrast.
Similarities Between QSEHRA and ICHRA
Both ICHRAs and QSEHRAs share several common features:
- Tax-Free Reimbursements: Both plans allow employers to reimburse employees for eligible medical expenses on a tax-free basis.
- Flexible Reimbursement Options: Employers can choose to reimburse premiums, out-of-pocket medical expenses, or both.
- Identical Administration: The user experience from both administration and employee perspectives is exactly the same.
Key Difference #1: Insurance Requirements
The most significant distinction between these plans is the insurance requirement:
- ICHRA Eligibility: Employees must have Individual Coverage or Medicare to participate in an ICHRA. (Individual Coverage refers to a health insurance plan purchased directly by an individual through the marketplace or directly from an insurer — not provided through an employer.)
- QSEHRA Eligibility: Employees must have any insurance that meets Minimum Essential Coverage (MEC) requirements. This includes Individual Coverage, Medicare, a spouse’s or parent’s group plan, COBRA, or TRICARE, and more.
Takeaways
- An ICHRA resembles traditional group coverage because in both cases, only employees who need coverage are eligible to participate.
- A QSEHRA is a company-wide benefit that all employees with insurance can participate in.
Key Difference #2: Eligible Employees
How eligibility to participate in each plan differs significantly:
- ICHRA Flexibility: Employers can segment employees into different classes (based on IRS-defined criteria) and offer different benefit amounts to each class. For instance, if your business has employees in both New York and Texas, you can provide higher reimbursements to New York employees to reflect higher insurance costs.
- QSEHRA Uniformity: QSEHRAs require the same benefit offering for all employees (excluding specific excluded groups). This reinforces its role as a consistent, company-wide benefit.
Takeaways
This difference underscores the key point: An ICHRA is designed as a flexible group coverage alternative, while a QSEHRA functions as a uniform company-wide benefit.
Other Notable Differences
While insurance requirements and employee eligibility are primary distinctions and determine the nature of the HRAs, there are additional differences worth mentioning:
- Benefit Caps: QSEHRAs have annual contribution limits, while ICHRAs do not.
- Tax Reporting: Each plan follows unique tax reporting requirements, which may influence administrative processes.
Which Plan Is Right for Your Business?
To determine the best option for your company, consider this key question:
Do I want to provide a benefit to employees who are covered under their spouse's group plan?
- If yes, then a QSEHRA is the right choice.
- If no, then an ICHRA is a better fit.
By understanding these distinctions, you can confidently choose the right reimbursement arrangement that aligns with your business goals and employee needs.
