Qualified Small Employer HRA’s (QSEHRA’s) vs. Individual Coverage HRA’s (ICHRA’s)


Last month we talked about general HRA’s, so this month, I want to talk about two particular types of HRA’s. These two HRAs, for the most part, are very similar and serve similar purposes, but there are a few slight differences in what is allowed with each one and who can even offer them.  

Let’s Chat About Qualified Small Employer Hra’s (Qsehra’s) And Individual Coverage Hra’s (Ichra’s).

When an employer is NOT offering group health insurance, they can set up a specific type of HRA to help employees go out and pay for individual plans, claims, or both. 

Again, the beauty of these types of reimbursement account type plans is that they can be set up based on what is best for the employer and their staff. However, they have some restrictions, so I want to discuss the similarities at a high level and then point out some differences. 

We don’t do many of these as most of our clients are already in the group space, but they can be valuable tools for the right situations. Individual plans in TX also aren’t great (all HMO and expensive, unfortunately), so that’s also part of the problem. I could see this as an excellent, viable option in states where the individual markets are stronger.

The two programs people talk about the most help with individual reimbursements and/or claims are QSEHRA’s (Qualified Small Employer HRA) and ICHRA’s (Individual Coverage HRA). Neither program can have a group medical offering alongside the program, but with an ICHRA, you can have the benefits classed out, you just can’t have the ICHRA and a group health plan offered side by side. 

Both programs can be tailored to cover defined classes, full-time, part-time, etc., but they need to be specifically defined (like all things in the insurance space). Both of these vehicles would be used to help employees who do not have access to group coverage pay for premiums for the cost of an individual health plan or claims (or both). 

Both programs can allow for rollovers to the following year. Still, we recommend doing that conservatively and maybe implementing monthly or annual rollover maxes to help limit an employer’s potential claims payout. 

All items listed in IRS Publication 502 are eligible for reimbursement, subject to how the HRA is set up. 

Again, all are subject to employee needs and employer creative control, which can be fun.

Now, Let’s Chat About the Difference Between the Plans.

  • QSEHRA’s have maximums where ICHRA’s do not.   
  • QSEHRA’s can also let employees who are covered by a spouse’s group plan participate where an ICHRA will not 
  • A QSEHRA can allow someone without any coverage to participate, whereas an ICHRA requires someone to have individual coverage (remember the IC in ICHRA) to participate.  
  • QSEHRA’s are only available to small employers (defined in most states as 1-50 employees), whereas ICHRA’s can be made available by an employer of any size
  • You cannot have other group coverage available with QSEHRA’s, whereas, with ICHRA’s, you can

The main thing with these types of HRAs is that they are intended to help reimburse employees for premiums or out-of-pocket costs when an employer-sponsored group health plan is not present.

Lifestyle Spending Accounts

Now, the last type of reimbursement arrangement I will mention is Lifestyle Spending Accounts. Now, you are probably thinking, wait a minute, there’s no R!! And you are correct, but if you understand how these function, these too are reimbursement accounts, it’s just not in the name. 

Aside from the naming confusion, these are programs set up and reimbursed by an employer (again, and are not employee-funded), so I think they fit better here in this article and within the definition of a reimbursement account vs. a spending account.

As discussed in our spending account article part two an employer can get super creative and set up a lifestyle spending account to help employees with almost anything the employer wants, creating a customized benefit offering.  

  • Want to cover cell phone or internet expenses? You can do that.
  • Want to help pay for monthly gym memberships? You can do that.  
  • Want to help employees who travel cover car & gas-related expenses? You can do that.  
  • Want to give extra perks to your executive or management staff with unique needs or expenses that other employees don’t have? You can. 😊 

As an employer, you can get creative and create specific and tailor-made plans for your staff, which is awesome. The amounts paid out and reimbursed to employees for whatever lifestyle expense you want to cover will be treated as a company expense, equating to lower tax liability for your company. HOWEVER, anything you reimburse your employees for will be treated as income, so these do increase tax liability at the individual/employee level. In this instance, the benefit should always outweigh the small tax increase the employees are facing, otherwise, why do it? 

In most cases, the spending account reimbursements will not be big dollar amounts, so the tax implications for your staff should be minor compared to the benefits they receive. Still, out of all of the above, this is the one account where an employee does not receive a tax benefit. They are getting help paying for whatever you decide to help with, but there are no tax savings for employees, just a new benefit.  

Only the employer generates any tax savings since this can be treated as an expense, but again, amounts should be negligible on both sides. The reason to offer this type of account is not to generate tax savings; it’s to be able to customize a benefits program and get creative with what you are offering and helping your employees with. 

In most cases, you don’t have any creative control over your insurance-related benefits, you might get to choose from some present options, but you don’t get creative control; here, you do. Another cool feature is that owners and shareholders can participate in this type of program where they usually cannot in other types of programs that offer tax savings. In all other types of spending and reimbursement accounts that offer tax savings, most owners or shareholders cannot participate, so this is unique in that regard.

Here’s the overview/breakdown that we’ve done for all of the other spending accounts. 

Items allowed to be paid: Whatever the business owner’s little heart desires! You just need to be specific and class out the benefits as appropriate. The more detailed, the better!

Immediate Max Payout? Potentially, but we would recommend setting monthly maximums to preserve the accounts over the course of the entire plan year. This will help ensure employees have an ongoing benefit throughout the whole policy year, and the employer is not writing a ton of checks on day one and then having employees leave and take all of those funds that were meant to last an entire year.

Maximums Contributions Allowed: The employer sets this up with employer funds only, with NO employee funding. Business owners, be conservative here and start small. Look at the type of program you want to create, figure out what you’d like to do annually, then set monthly caps (this is our recommendation) to help preserve the benefit and stretch it out. Remember, benefits are for recruiting and retention.

Immediate Tax Benefits: Double No. 

  1. There is only an employer expense here if claims are paid. If you set this benefit up, but nobody ever uses it, the business has nothing to write off, so no business expenses are generated. You might be thinking great, but if that’s the case, you’ve probably missed the mark on going down this customizable path. An employer will likely be paying a third party to manage this program for you, so that those costs would be an expense; however, these costs are typically pretty minimal but would generate an expense nonetheless.
  2. There are no tax benefits for employees, actually the opposite. Claims paid to employees will be treated as taxable income at the employee level. I can’t say this enough.

Who is it funded by? Employers.

What are the “gotchas”? There are 2, and both have been touched on previously but to reiterate:

  • From a business owners perspective, be conservative when setting these up, especially for the first time, and we recommend putting monthly maximums in place, which will preserve the lifespan of the benefit over the year AND will keep you from paying out a ton of lifestyle claims the first day you roll this out.
  • I mentioned this already, but I can’t say it enough, this is an employer-funded program, so any claims dollars paid to employees get treated as add’l income, so those dollars are taxable income in the eyes of the IRS.  

Like all things in the benefits space, there can be many moving parts with the various reimbursement accounts. You can go deep down a rabbit hole if you choose to, BUT at the same time, these can be very valuable tools in your efforts to recruit and retain the best talent possible when deployed properly and effectively.  

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Are you interested in learning more? Please reach out, and let’s schedule a time to talk! Thanks so much for your time!

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