Week 9: QSEHRA vs ICHRA – which one’s better for small businesses?

If you’ve spent any time in the employee benefits world over the past couple of years, you’ve probably heard a lot about ICHRA — the Individual Coverage Health Reimbursement Arrangement. When ICHRA launched in 2020, it opened the door for employers of any size to reimburse employees for ACA-compliant individual health coverage. Here we are a few years later and a new ICHRA platform seems to pop up each month with investors and industry leaders piling in.

But in all the excitement, many benefits pros and small business owners have overlooked another option that’s often a better fit: the Qualified Small Employer HRA, or QSEHRA.

And that’s a mistake — because for many small employers, the QSEHRA offers more flexibility, less compliance risk, and a smoother employee experience than its flashier cousin.

When the Affordable Care Act (ACA) passed in 2010, there was widespread debate as to whether an employer could set up a premium reimbursement program to help employees pay for individual health insurance coverage purchased on their own. Throughout 2013 to 2015 the IRS clarified multiple times through formal notices that this was prohibited. Not only was it prohibited, but the potential fines to employers were huge… $100 per employee per day. Ouch!

Fast forward to late 2016 and Congress passed the 21st Century Cures Act during the last few ‘lame duck’ months of Obama’s presidency. Buried in there was the creation of a new program called a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). A “small employer” means it’s not an applicable large employer or “ALE,” as determined under ACA rules. Generally, an employer is an ALE if it averaged 50 or more full-time employees during each month in the prior calendar year. So, QSEHRAs work for employers with <50 FTEs.

The QSEHRA model arrived in 2017 with a whimper. Limited to small employers and without a lot of people in the employee benefits sector talking about it, the market opportunity for QSEHRA seemed quite small. Only a few small software and services companies were focused on it at the time, Take Command and PeopleKeep amongst them.

With the Individual Coverage HRA (ICHRA) created via regulation in 2019 and available in 2020, many people assumed the QSEHRA would simply fade away. However, in recent conversations with a platform serving small businesses we learned that more than half are choosing a QSEHRA for their specific needs. Let’s take a closer look at some points of comparison across the two models.

At first glance it may look like ICHRAs are the clear winner in a heads up comparison. The model has no reimbursement limits, is available to companies of any size and offers greater design flexibility thanks to specific rules allowing for employee classes. 

However, a few key features of the QSEHRA model can make it attractive to small businesses – especially those new to offering benefits. Perhaps the most important is that it can be used to reimburse employees for a wider variety of health insurance premiums. Hiring someone that wants to use COBRA from a former employer? Great, a QSEHRA can reimburse the employee. Have a loyal employee on their spouse’s group health plan? Cool. With a QSEHRA the employee contribution on that group health plan can be reimbursed (though it will be taxable). 

In addition, a QSEHRA is considered an excepted benefit. Unlike an ICHRA, which is technically a self-funded group health plan subject to ERISA, a QSEHRA has minimal compliance considerations. The amount offered needs to be reported on an employee’s W-2. Other than that, there are no significant reporting requirements.

Millions of Americans now qualify for government subsidies in the form of premium tax credits (PTCs) on the federal and state-based exchanges. These marketplaces have grown substantially in recent years thanks to the enhanced tax credits (see our article here). A common question is how these government subsidies intersect with the HRA based programs.

With an ICHRA, an employee cannot combine an employer’s allowance with PTCs. As a friend once told us, “Employer ICHRA dollars and government subsidies are oil & water. They cannot mix.” A crucial question is whether the ICHRA dollar amount is enough to be considered an affordable offer of coverage per the IRS definition.

• If the ICHRA is affordable, then the employee is ineligible for any PTCs and should utilize the ICHRA being provided by the employer
• If the ICHRA is unaffordable, then the employee has a choice to either accept the ICHRA allowance or get PTC subsidies
• Here’s a link to a great ICHRA affordability calculator tool

With a QSEHRA, the rules are largely the same but with one important difference.

• If the QSEHRA is affordable, then the employee is ineligible for any PTCs and should utilize the QSEHRA being provided by the employer
• If the QSEHRA is unaffordable, the employer’s allowance offsets any PTCs the employee otherwise qualifies for. The employee should still accept the QSEHRA from their employer and be sure to deduct the amount from the PTC subsidies being received on the exchange

For more on this topic, here’s a link to guidance provided by the federal marketplace.

Here are few guiding thoughts on when to lean towards a QSEHRA or an ICHRA 

ICHRA tends to fit best when:

• The employer is larger or replacing a group plan
• Monthly employer contributions will exceed QSEHRA caps
• There’s a need to vary contributions by class (geography, salaried vs. hourly, etc.)

QSEHRA tends to fit best when:

• The employer is small and generally new to offering benefits
• Simplicity and predictability matter more than customization
• Employees will benefit from the additional types of coverage that can be reimbursed (e.g., COBRA from a former employer, spouse’s group plan, etc.)