This article is for admins who want to learn about Health Allowances, also known as Health Reimbursement Arrangements (HRAs). Gusto offers a CHOICE plan (Custom Health Option and Individual Care Expense Arrangement), formerly called an Individual Coverage Health Reimbursement Arrangement (ICHRA). This article explains how to offer a CHOICE plan through Gusto.
A Health Reimbursement Allowance is a health benefit that lets employers give employees a fixed monthly stipend to use on health insurance purchased on the individual marketplace.
Note: ICHRA has been renamed CHOICE. They're the same plan, just under a new name. This article uses CHOICE throughout and mentions ICHRA only as the plan's former name.
If you want to offer an HRA to your team, we recommend Thatch. They offer flexible policies and specialize in HRA administration. To learn more, head to this link to set up a new HRA or speak with an expert.
Thatch administers CHOICE plans for Gusto. You cannot offer a CHOICE plan alongside small-group health insurance.
Gusto does not offer QSEHRA (Qualified Small Employer Health Reimbursement Arrangement) administration. If you already have a QSEHRA through a different provider, you can still set up manual payroll reimbursements in Gusto. Learn more in Pre-existing CHOICE or QSEHRA setups and Compare CHOICE to QSEHRA below.
When you enroll with Thatch from within Gusto, your company information syncs between the two platforms, and Gusto will automatically handle any necessary payroll deductions for your employees.
To set up a CHOICE plan, follow these steps.
Go to Benefits.
Scroll to All benefits.
Next to Health allowance, select Set up.
Select Get started on Thatch to go to Thatch’s website.
Follow Thatch’s onboarding instructions. Check out Thatch’s help center if you need help along the way.
Once you set up your allowance and invite your first employee, your CHOICE plan shows up in Gusto, and you can see who’s enrolled. To make changes to your plan, including adding new employees, use Thatch.
HRA contributions affect taxes differently for employers and employees. Here’s what you need to know:
Employer HRA contributions are tax-free as long as you set them up and manage them according to Internal Revenue Service (IRS) requirements, and only use them for eligible medical expenses.
Employees are eligible for payroll deductions only if the plan they enroll in is more expensive than the allowance you provide. Thatch and Gusto help you manage this so your employees make the most of their benefit.
Small businesses can offer these reimbursement arrangements without violating Affordable Care Act (ACA) rules. However, every situation is different. Consult a licensed professional or tax consultant before choosing this option.
This section compares a CHOICE plan, formerly known as an ICHRA, to a QSEHRA (Qualified Small Employer Health Reimbursement Arrangement).
A CHOICE plan is a health benefit that you can offer. It lets employees pick a health insurance plan they like. You can then reimburse employees, tax-free, for their health insurance premiums and other medical expenses. Employees need to use at least part of their allowance on an ACA compliant individual health insurance plan.
CHOICE plans let you customize your reimbursements by employee class and location. This lets you offer different amounts to employees who work in places where health plans might be more or less expensive.
CHOICE plans work especially well in states where small group health insurance is more expensive than individual health insurance. They can help you avoid the high costs of group health insurance and yearly price increases, since they also do not require minimum contributions or minimum participation requirements.
Who can offer a CHOICE plan
Businesses of any size can offer a CHOICE plan. You can offer it as a standalone benefit to all employees or you can offer it to groups of employees (like part-time workers) who do not qualify for your group health plan. Gusto currently only supports offering a CHOICE plan as a standalone benefit, though you can choose to offer a CHOICE plan to all W-2 employees regardless of full-time or part-time status.
A QSEHRA is similar to a CHOICE plan because it lets you reimburse employees, tax-free, for health insurance costs and other medical expenses. However, with a QSEHRA, employees do not have to buy a qualifying individual health plan. They only need minimum essential coverage (MEC) to keep reimbursements tax-free.
The Internal Revenue Service (IRS) sets yearly limits on how much employers can contribute to QSEHRAs, and all employees must receive the same amount. Even if the employer allows leftover funds to roll over to the next year, the rollover amount cannot go over the next year’s limit.
Who can offer a QSEHRA
Only smaller employers with fewer than 50 full-time workers can offer a QSEHRA. Unlike a CHOICE plan, you cannot offer a QSEHRA with a group health insurance plan or a flexible spending account (FSA).
Gusto recommends and administers CHOICE plans for the following reasons.
CHOICE plans let your employees pay the remainder of their premium pre-tax. QSEHRA only allows for post-tax payments.
CHOICE plans have no limits on how much you can contribute. QSEHRA has maximum caps.
CHOICE plans let you have different contribution amounts by employee location or class. QSEHRA requires all contributions to be the same.
See the tables below for a full comparison between CHOICE and QSEHRA.
The tables show the main similarities and differences between these benefits.
Similarities
QSEHRA and CHOICE
Funding source
The employer alone pays for the QSEHRA or CHOICE plan.
Taxation
Reimbursements are generally tax-free for both employees and employers.
Premium tax credits
QSEHRA: If their monthly QSEHRA allowance does not qualify as affordable coverage, employees can claim a premium tax credit for individual coverage bought through the Marketplace.
CHOICE: If their CHOICE allowance qualifies as unaffordable coverage (and they decline it), employees may qualify for a premium tax credit.
Allowance usage
Employees can use their allowance only for qualified expenses, as listed in IRS Publication 502.
Differences
QSEHRA
CHOICE
Employer size
Employers with fewer than 50 full-time employees
Employers of any size
Employee health insurance requirement
Employees must have health insurance from a qualifying source to participate in a QSEHRA.
Employees must have individual health insurance from a qualifying source to participate in a CHOICE plan.
Group health plan compatibility
Employers cannot offer a group health plan alongside a QSEHRA.
Employers can offer a CHOICE plan alongside a group health plan, but not to the same class of employees.
Compatibility with Tricare and a spouse’s work health insurance
Integrates with Tricare and a spouse’s work health insurance
Does not integrate with Tricare or a spouse’s work health insurance
Reimbursement limits
Has IRS yearly contribution limits
Does not have IRS limits. Employers can reimburse as much as they want.
Allowance rules
The same QSEHRA terms apply to all employees, including allowance amounts.
Employers can offer different CHOICE plan amounts to different employee groups.
Rollover
Month-to-month and year-to-year rollovers are allowed, with restrictions.
Month-to-month and year-to-year rollovers are allowed, without restrictions.
W-2 reporting
Needs W-2 reporting
Does not need W-2 reporting
If you already offer a CHOICE arrangement or a QSEHRA through a third-party provider, you can set up your tax-free payroll reimbursements in Gusto.
You cannot offer QSEHRA benefits alongside small-group health insurance, including small-group health insurance through Gusto. While you can offer a CHOICE plan alongside a group health plan, you can only offer one type of benefit per class of employee. Gusto does not support this setup today.
If you offer your plan through Thatch, Gusto and Thatch handle reimbursements and payroll deductions automatically.
If you offer your plan through a different provider, you can set up tax-free payroll reimbursements in Gusto yourself.
Note that for QSEHRAs, there are W-2 reporting requirements. Work with your QSEHRA plan administrator to make sure you comply with IRS Notice 2017-67.
You will be able to enter QSEHRA amounts for year-end W2 reporting.
CHOICE and QSEHRA have different reporting requirements.
You do not need to report CHOICE benefits on employee W-2s. If you have questions about ACA reporting requirements, contact Thatch or your CHOICE plan provider.
If you offer a QSEHRA, you need to include certain details on your employees’ Form W-2s.
Report QSEHRA on the W-2
To report QSEHRA amounts on your employees’ W-2s, follow these steps.
Go to Taxes & compliance.
Under Quick links, select Update [tax year] W-2 special compensation.
Find the employee and enter the total allowed QSEHRA benefit for the year in the QSEHRA column.
Report the total amount the employee could receive from the QSEHRA for the year, not just the amount they used. This goes in box 12 on Form W-2 with code FF. Gusto also notifies you to confirm your annual tax information each year, which is another way to reach this same page.
Here are two examples of allowed benefits and what you report on the W-2.
Example 1:
You offer a QSEHRA with a $3,000 annual benefit limit. The employee uses $2,000 in reimbursements.
What to report: List $3,000 in box 12 with code FF.
Example 2:
A QSEHRA offers $3,000 annually but prorates for employees who join midyear. An employee becomes eligible on May 1, so their allowed benefit is $2,000 ($3,000 × 8/12).
What to report: List $2,000 in box 12 with code FF.
Report QSEHRA reimbursements when the employee does not have MEC
Employees or their family members must have minimum essential coverage (MEC) to get tax-free reimbursements from a QSEHRA. If you mistakenly reimburse expenses for someone without MEC during a month, those reimbursements for that month become taxable.
To report taxable reimbursements on the Form W-2:
Box 1 (Wages, Tips, and Other Compensation): Include the taxable reimbursement amount as gross income.
Boxes 3 and 5 (Social Security and Medicare Wages): Do not include these reimbursements here. Taxable reimbursements are not subject to Social Security, Medicare, or Federal Unemployment Tax Act (FUTA) taxes.
Box 12 (Code FF): The allowed benefit you report here stays the same, even if the employee did not have MEC.
For more help, reach out to your QSEHRA plan administrator or review IRS Notice 2017-67.