This article is for employers who want to learn about QSEHRA and ICHRA Health Reimbursement Arrangements.
An Individual Coverage Health Reimbursement Arrangement (ICHRA) and and a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) both allow small employers to reimburse employees for certain healthcare costs tax-free. Employees need to use a portion of that allowance on health coverage, like an individual Marketplace plan.
ICHRA and QSEHRA are both health reimbursement arrangements, but they work differently. Learn how each one works, who can offer them, and what makes them different.
An ICHRA 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.
ICHRAs allow you to 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.
ICHRAs 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, as they also do not require minimum contributions or minimum participation requirements.
Who can offer an ICHRA
Businesses of any size can offer an ICHRA. 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 an ICHRA as a standalone benefit, though you can choose to offer an ICHRA to all W-2 employees regardless of full-time or part-time status.
A QSEHRA is similar to an ICHRA 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 an ICHRA, you cannot offer a QSEHRA with a group health insurance plan or a flexible spending account (FSA).
The tables show the main similarities and differences between these benefits.
Similarities
QSEHRA and ICHRA
Funding source
The employer alone pays for the QSEHRA or ICHRA.
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.
ICHRA: If their ICHRA 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
ICHRA
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 an ICHRA.
Group health plan compatibility
Employers cannot offer a group health plan alongside a QSEHRA.
Employers can offer an ICHRA 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 ICHRA 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 want to offer ICHRA to your team, we partner with Thatch. They specialize in HRA administration and offer flexible policies. Learn more about setting up an ICHRA in the Health Reimbursement Arrangement (HRA) overview (for admins) article.
If you want to offer a QSEHRA, we recommend Take Command Health. You can use this referral link to set up a new QSEHRA or talk with an expert.
Important: Gusto no longer administers a QSEHRA.
You cannot offer QSEHRA benefits with small-group health insurance. This includes small-group health insurance through Gusto. While you can offer ICHRA benefits with 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 ICHRA through Thatch, you do not need to do any payroll setup. Your reimbursements will all be billed directly by Thatch, and any necessary payroll deductions will happen automatically.
If you offer QSEHRA or ICHRA through a third-party provider (like Take Command Health), you can set up tax-free payroll reimbursements in Gusto.
ICHRA and QSEHRA have different reporting requirements.
You do not need to report ICHRA benefits on employee W-2s. If you have questions about ACA reporting requirements, contact Thatch or your ICHRA provider.
If you offer a QSEHRA, you need to include certain details on your employees’ Form W-2s.
Payroll admins need to report QSEHRA totals when they complete the end-of-year special compensation prompt on your Home page in Gusto. Then we add them to employee tax forms.
Report QSEHRA on the W-2
Once we notify you to confirm annual tax information, you must report the total amount an employee can receive from the QSEHRA for the year. This amount goes in box 12 on Form W-2 with code FF. Report the total allowed benefit, not just the amount the employee used.
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.