Reimbursing Staff for Health Insurance: QSEHRA and ICHRA
Two arrangements that let a small employer pay for employees' individual health coverage tax-free, how they differ, and who is left out.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
A health reimbursement arrangement lets an employer reimburse employees tax-free for individual health insurance premiums and medical costs instead of sponsoring a group plan. A qualified small employer arrangement (QSEHRA) is for employers under 50 employees, with annual caps. An individual coverage arrangement (ICHRA) suits any size, has no cap, and allows offers by employee class.
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How do the two compare?
| Feature | QSEHRA | ICHRA |
|---|---|---|
| Employer size | Fewer than 50 full-time-equivalent employees | Any size |
| Group health plan allowed alongside? | No | Not for the same class of employees |
| Annual reimbursement limit | $6,450 self-only and $13,100 family for 2026 ($6,350 and $12,800 for 2025) | None |
| Employee must have coverage | Minimum essential coverage | Individual market or Medicare coverage |
| Different amounts by employee group | Only by age and family size | By permitted classes (full-time, part-time, location, salaried, hourly, and others) |
| Written notice to employees | At least 90 days before the plan year | At least 90 days before the plan year |
| Premium tax credit interaction | No credit if the arrangement makes coverage affordable; otherwise the credit is reduced dollar for dollar by the arrangement amount | Employee loses the credit if the offer is "affordable"; if not, the employee can opt out of the arrangement and claim the credit |
| Reporting | Amount shown on Form W-2 | Reported on Form 1095-C by applicable large employers |
Who cannot participate?
Sole proprietors, partners, and more-than-2-percent S corporation shareholders are not employees for this purpose and cannot be reimbursed. A spouse who is a genuine employee of a sole proprietorship can be covered, and the owner may be covered as a dependent on the spouse's plan — the long-standing Section 105 approach. C corporation owner-employees can participate.
How does it work day to day?
The employer sets a monthly allowance. Employees buy their own individual coverage, submit proof of coverage and premium or medical bills, and are reimbursed tax-free. Unused allowance can roll over within limits the employer sets — for a QSEHRA, carryovers plus new amounts still cannot exceed the annual cap. A third-party administrator usually handles substantiation and notices.
When does each make sense?
A QSEHRA fits a very small employer with modest budgets and simple eligibility. An ICHRA fits an employer that wants no cap, wants to treat groups of employees differently, or has 50 or more full-time-equivalent employees and must make an affordable offer to avoid the employer shared-responsibility payment.
Frequently asked questions
Can I reimburse employees for premiums without a formal arrangement?
No. Paying or reimbursing individual premiums outside a compliant arrangement can trigger an excise tax of $100 per day per affected employee.
Is the reimbursement deductible to the business?
Yes, as a business expense, and it is not subject to payroll tax.
Can part-time employees be excluded?
A QSEHRA must generally cover all employees with limited exceptions; an ICHRA can treat part-time employees as a separate class.
Does an arrangement satisfy the large-employer mandate?
An ICHRA can, if the allowance makes the lowest-cost silver plan affordable under the IRS safe harbors.
Official sources
The IRS explains: “Section 36B(c)(4)(B) provides that if an employee is provided a QSEHRA for a coverage month, the PTC otherwise allowable for the month to the taxpayer who claims a personal exemption deduction for the employee is reduced by 1/12 of the employee’s permitted benefit (PTC reduction) under the QSEHRA for the year.” — Internal Revenue Service, Notice 2017-67, Qualified Small Employer Health Reimbursement Arrangements, https://www.irs.gov/pub/irs-drop/n-17-67.pdf
The IRS explains: “Specifically, the final rules allow HRAs and other account-based group health plans to be integrated with individual health insurance coverage or Medicare, if certain conditions are satisfied (an individual coverage HRA).” — Internal Revenue Service, Health Reimbursement Arrangements (HRAs), https://www.irs.gov/newsroom/health-reimbursement-arrangements-hras
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk sets up reimbursement arrangements with the notices and W-2 reporting they require. See pricing or book a free fit call.
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