The short version: A QSEHRA is a small-business tool with a dollar cap and one set of rules for everyone. An ICHRA has no cap and no size limit, and lets you set different allowances for different groups of employees. Both let you give employees a tax-free allowance to buy their own health insurance instead of running a group plan.
What they have in common
QSEHRA stands for Qualified Small Employer Health Reimbursement Arrangement. ICHRA stands for Individual Coverage Health Reimbursement Arrangement. Both are employer-funded accounts that reimburse employees for the health insurance they buy on their own, instead of the employer buying one group plan for the whole company.
- The employer sets a monthly allowance. The employee picks a plan, pays the premium, and submits proof to be reimbursed.
- Reimbursements are tax-free to the employee and deductible to the employer.
- Both can only be funded by the employer. Employees cannot fund them with salary reductions.
- Both require written notice to eligible employees at least 90 days before the plan year starts.
- Both can reimburse Medicare premiums, including Medigap and Part D, for employees who are enrolled in Medicare.
- There is no carrier group underwriting, no minimum participation requirement and no group renewal.
QSEHRA vs ICHRA side by side
| Feature | QSEHRA | ICHRA |
|---|---|---|
| Employer size | Under 50 full-time equivalent employees | Any size, from 1 employee to thousands |
| 2026 employer contribution | Capped: $6,450 self-only, $13,100 family | No cap. The employer picks the amount |
| Can you also offer a group plan? | No. Offering a group plan to any employee disqualifies the QSEHRA | Yes, but to a different employee class, never the same class |
| Employee classes | One set of rules for everyone. Amounts can vary only by age and family size | Up to 11 classes (full-time, part-time, salaried, hourly, seasonal, rating area and others) with a different amount for each |
| What employees must have | Minimum essential coverage (an individual ACA plan, a spouse's group plan, Medicare or Tricare all count) | An individual health insurance plan (or Medicare). A spouse's group plan does not qualify |
| Premium tax credit | Credit is reduced dollar for dollar by the QSEHRA amount | Affordable offer: no credit. Unaffordable offer: employee may decline the ICHRA and take the credit |
| Notice to employees | Written notice 90 days before the plan year starts | Written notice 90 days before the plan year starts |
| Employer shared responsibility (ALEs) | Not applicable, since employers under 50 are exempt | An affordable ICHRA counts as an offer of coverage for employers with 50 or more FTEs |
| W-2 reporting | Yes, Box 12 code FF | No W-2 reporting. Employers with 50+ FTEs report on Forms 1094-C and 1095-C |
Dollar limits shown are for 2026. The IRS adjusts QSEHRA limits each year. The ICHRA has no federal dollar cap.
How a QSEHRA works
A QSEHRA is built for employers with fewer than 50 full-time equivalent employees who do not offer a group health plan. You set one allowance, up to the annual cap ($6,450 for self-only or $13,100 for family coverage in 2026, which is $537.50 and $1,091.66 per month), and it applies to every eligible employee on the same terms.
You can vary the amount only for two reasons: the employee's age (because individual premiums rise with age) and the number of family members covered. You cannot give your managers more than your front-line staff just because of their job.
Each employee has to carry minimum essential coverage for the reimbursements to stay tax-free. If an employee goes without, the reimbursements for those months become taxable income to them. The amount you offer is reported on the W-2 in Box 12 with code FF.
The trade-off is the premium tax credit. If an employee gets Marketplace subsidies, their credit is reduced by the amount of the QSEHRA allowance. For a lower-income employee, a QSEHRA can leave them with less total help than the subsidy alone would have given them.
How an ICHRA works
An ICHRA removes the size limit and the dollar cap. A company with 3 employees or 3,000 can use one. You decide how much to contribute, and you can set that amount differently across up to 11 employee classes, such as full-time and part-time, salaried and hourly, seasonal, or employees in different insurance rating areas. Within a class you can also scale the allowance by age (the oldest employee's amount cannot be more than three times the youngest's) and by family size.
Employees and any covered dependents must be enrolled in individual market coverage, such as an ACA plan on or off the exchange, or in Medicare. Short-term medical plans do not qualify. Many employers also let the allowance cover other out-of-pocket medical costs, which is an option rather than a requirement.
Because the employer can offer a traditional group plan to one class and an ICHRA to another, it works well as a transition tool. A common setup is to keep the group plan for current full-time staff and offer an ICHRA to part-time workers, remote employees in other states, or new hires. Classes have minimum size rules when you split employees by full-time versus part-time, salaried versus hourly, or location, so check the numbers before you design the classes.
An employer's offer of an ICHRA also gives employees a special enrollment period to pick an individual plan, so you are not stuck waiting for open enrollment.
The premium tax credit, and why it matters
This is the biggest practical difference for your employees.
- QSEHRA: an employee who receives Marketplace subsidies has the credit reduced by the QSEHRA amount. They keep the credit, minus what you give them.
- ICHRA, affordable offer: if the offer is affordable, the employee cannot claim the premium tax credit at all, even if they turn the ICHRA down.
- ICHRA, unaffordable offer: the employee may decline the ICHRA and claim the credit instead. They cannot do both.
Affordability for an ICHRA is measured against the lowest-cost Silver plan available to that employee, based on their age and where they live. Your allowance needs to cover enough of that premium that the employee's remaining cost stays under the IRS affordability percentage. For employers with 50 or more FTEs, the affordability test also determines whether you meet the ACA employer mandate. Our help center explains the mandate in Does the ACA employer mandate apply to me?
Which one fits your business
A QSEHRA is usually the better fit when
- You have fewer than 50 full-time equivalent employees and no group plan today.
- You want one simple allowance with no class design.
- Many of your employees are covered through a spouse's group plan or Medicare. A QSEHRA can sit alongside that coverage, while an ICHRA cannot be used with a spouse's group plan.
- Your budget is modest and falls under the annual cap anyway.
An ICHRA is usually the better fit when
- You have 50 or more employees, since a QSEHRA is not available to you.
- You want to give a larger allowance than the QSEHRA cap allows.
- You want different budgets for different groups, such as full-time staff, part-timers, or employees in different parts of the country.
- You want to keep a group plan for some employees and move others to individual coverage.
- You have a growing company and want a benefit that does not need to be rebuilt each time you pass a headcount threshold.
If you are close to 50 employees
A QSEHRA ends when you reach 50 full-time equivalent employees. Employers who expect to cross that line within a year or two often start with an ICHRA so they do not have to change benefits mid-growth.
Common mistakes to avoid
- Offering a QSEHRA and a group plan together. Any group health plan offered to any employee disqualifies the QSEHRA, and the reimbursements can become taxable.
- Skipping the 90-day notice. Both arrangements require a written notice. A missed notice can bring penalties for a QSEHRA.
- Setting an ICHRA allowance without checking affordability. An employer with 50 or more FTEs can face penalties if the offer is not affordable for the employees who need it.
- Letting employees buy short-term plans. Short-term medical does not qualify as individual coverage for an ICHRA.
- Treating owners as employees. Sole proprietors, partners and most 2 percent S-corporation shareholders are generally not eligible participants.
Frequently asked questions
Can I switch from a QSEHRA to an ICHRA later?
Yes. You can end a QSEHRA at the end of a plan year and adopt an ICHRA for the next one, as long as you give the required notice. This is a common move for growing companies.
Do employees need to buy their plan through you?
No. Employees choose their own plan on the Marketplace or directly from a carrier. We help your team compare plans and enroll, at no cost to the employee or the company.
Can I use either one for employees who are on Medicare?
Yes. Both can reimburse Medicare premiums, including Medigap and Part D, for employees who are enrolled. With an ICHRA you can set a separate class and allowance for Medicare-eligible employees.
Need help choosing?
Tell us how many employees you have, where they live and whether you offer a group plan today. We will tell you which arrangement fits and what allowance makes sense. Call (312) 726-6565 or request an employer quote. Related reading: What is an HRA and how does it work?
This article is general information, not tax or legal advice. Dollar limits shown are for the 2026 plan year and are adjusted by the IRS annually, so confirm current figures before you set an allowance. Talk to your CPA or benefits attorney about your situation. Information current as of October 2026.
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