Offering health benefits is one of the biggest challenges small businesses face. Thirty-six percent of small business owners say affordability is their top concern, and 93% worry their current benefits model isn’t sustainable long-term. A comprehensive health benefits plan can help you attract and retain top talent, eventually contributing to company growth.
That said, there are many health insurance alternatives to consider, like HRAs, including QSEHRAs and ICHRAs. Learn more about your options, including QSEHRA’s meaning, how it differs from ICHRA, and how to choose the right fit for your team and budget.
What is a QSEHRA?
A QSEHRA is a health benefit that allows small businesses with fewer than 50 full-time employees to reimburse employees for individual health insurance premiums and other qualified medical expenses on a tax-free basis.
It offers a flexible and cost-effective alternative to traditional group insurance plans. This enables you to support your employees' healthcare needs without the complexities of managing a group plan.
Established under the 21st Century Cures Act of 2016, QSEHRAs provide you with a new way to offer health benefits. By reimbursing employees for eligible expenses, you can offer personalized health benefits that cater to individual needs, promoting employee satisfaction and retention.
Here are some key features of a QSEHRA:
Small employer-focused: Designed specifically for businesses with fewer than 50 full-time employees
Individual coverage: Employees purchase their own health insurance plans, offering greater flexibility and choice
Qualified expenses: Reimbursements can cover a range of medical expenses, including premiums, prescriptions, and co-pays
Tax-advantaged: Reimbursements are tax-free for both employers and employees, provided certain conditions are met
MEC requirement: Employees must have Minimum Essential Coverage (MEC) to receive tax-free reimbursements
While QSEHRAs are a great option for providing flexible coverage, ICHRAs are a similar plan that businesses with more than 50 full-time employees might find more fitting.
2. What is an ICHRA?
An ICHRA is a health benefit that allows employers of any size to reimburse employees for individual health insurance premiums and qualified medical expenses on a tax-free basis. With small businesses being less likely to offer health benefits, ICHRAs provide a flexible alternative to traditional group insurance, enabling employees to choose coverage that best fits their needs.
With rising health insurance premiums — a 24% increase in employer-sponsored family plans since 2019 — 64% of small businesses are exploring ICHRAs as a cost-effective solution.
Here are some key features of ICHRA:
Any size employer: Available to businesses of all sizes, including part-time and seasonal workers
Individual coverage: Employees select their own health insurance plans, offering greater personalization
Greater flexibility in design: Employers can customize reimbursement amounts and eligibility criteria based on employee classes
Budget control: Employers set fixed reimbursement allowances, ensuring predictable healthcare spending
Tax advantages: Reimbursements are tax-free for both employers and employees, provided certain conditions are met
QSEHRAs vs. ICHRAs vs. traditional group insurance
QSEHRAs and ICHRAs offer tax-advantaged ways to support employee healthcare but differ in flexibility, eligibility, and design. For instance, QSEHRAs are for small employers, while ICHRAs work for businesses of any size and offer more customization options.
If you're choosing between the two, consider factors like your company's size, budget, and long-term benefits strategy. Both can replace traditional group plans, offering modern solutions for providing ICHRA insurance or QSEHRA eligible expenses without the high administrative burden.
Here’s a quick overview of the main differences between QSEHRA and ICHRA:
| Features | QSEHRA | ICHRA | Traditional group insurance |
|---|---|---|---|
| Eligibility | Employers with fewer than 50 full-time employees | Employers of any size | Employers of any size |
| Contribution rules | Employer-funded, annual caps apply | Employer-funded, no caps | Employer-funded, which often includes employee premium sharing |
| Plan design | Same benefit for all eligible employees | Can vary by employee class | Fixed plans for groups, limited customization |
| Administrative burden | Minimal; typically lower due to smaller teams | Moderate; more complex employee classifications | High; includes plan negotiation, renewals, compliance |
| Coverage type | Individual insurance + qualified medical expenses | Individual insurance + qualified medical expenses | Group insurance policies |
| Tax treatment | Reimbursements are tax-free with MEC* | Reimbursements are tax-free with MEC* for those with an individual plan | Employer contributions are typically tax-deductible |
| Flexibility | Less flexible — uniform benefit required | Highly flexible — can vary by class, amount, and eligibility | Limited flexibility based on group policy |
| Good fit for | Small businesses wanting a simple | Businesses seeking customizable, scalable coverage | Companies with stable budgets and HR resources to manage a group plan |
*Note: For reimbursements to be tax-free, employees must be enrolled in a health plan that provides minimum essential coverage (MEC).
How does a QSEHRA work?
As we mentioned, a QSEHRA lets small businesses offer tax-free reimbursements for individual health insurance premiums and qualified medical expenses. It’s a flexible tool for managing employee benefits without the cost or complexity of group insurance.
Here’s how the setup and management process works for employers:
Determine eligibility: Your business must have fewer than 50 full-time equivalent employees and not offer a group health plan
Set up the plan: Work with an HRA administrator or benefits advisor to create legal plan documents
Notify employees: Provide written notice before the plan year starts or when new employees are eligible
Set contribution limits: QSEHRA limits for 2025 are $6,350 ($529.17/month) for self-only coverage and $12,800 ($1,066.67/month) for family coverage
Once the QSEHRA is in place, employees follow a simple process:
Enroll in individual health insurance
Submit proof of eligible expenses, such as premium payments or qualified out-of-pocket costs
Receive tax-free reimbursements, up to the maximum allowance set by the employer
Here are the QSEHRA contribution limits from 2019 to 2025:
| Year | Max individual contribution | Monthly (individual) | Max family contribution | Monthly (family) |
|---|---|---|---|---|
| 2019 | $5,150 | $429.17 | $10,450 | $870.83 |
| 2020 | $5,250 | $437.50 | $10,600 | $883.33 |
| 2021 | $5,300 | $441.67 | $10,700 | $891.67 |
| 2022 | $5,450 | $454.17 | $11,050 | $920.83 |
| 2023 | $5,850 | $487.50 | $11,800 | $983.33 |
| 2024 | $6,150 | $512.50 | $12,450 | $1,037.50 |
| 2025 | $6,350 | $529.17 | $12,800 | $1,066.67 |
QSEHRA and ICHRA benefits and considerations
As health insurance costs continue to rise, these types of HRAs offer a flexible, cost-effective alternative for businesses navigating limited benefits budgets. According to a recent report from Thatch, 63% of employees say benefits are a top reason they stay at a job, highlighting how the right health benefits strategy can directly support retention and satisfaction.
Benefits
QSEHRAs and ICHRAs provide a strategic balance between affordability and employee support. Here’s how they benefit both employers and employees:
Employer benefits:
Cost control and predictability over health insurance costs
Tax advantages — reimbursements are typically tax-deductible
Flexibility in setting reimbursement amounts and eligible expenses
Upper hand in attracting and retaining talent in a competitive hiring market
Employee benefits:
Choice and control over their health insurance
Tax-free reimbursements for eligible medical expenses
Potential for unused funds to roll over (if the employer allows it)
Key considerations
While QSEHRAs and ICHRAs are powerful tools, you should consider a few important factors when offering them as a type of company health benefit.
Eligibility summaries:
For QSEHRAs: Must have fewer than 50 full-time equivalent (FTE) employees and not offer a group health plan
For ICHRAs: Employers of any size can offer an ICHRA. Employees must be enrolled in an individual health plan
Can’t be offered alongside flexible spending accounts (FSAs) or health savings accounts (HSAs) to the same employees if the HRA is general-purpose
Generally available to all W-2 employees, though some exceptions, such as seasonal or part-time workers, may apply
Compliance overview:
Employees must maintain minimum essential coverage to receive tax-free reimbursements
Employers are required to follow IRS regulations and provide official plan documentation outlining how the HRA works
Choosing an HRA for your organization
Whether you’re looking for a more flexible health benefit or searching for health insurance alternatives to traditional plans, setting up an HRA requires careful planning. Understanding how to set up a QSEHRA or an ICHRA is key to ensuring compliance, clarity, and a positive employee experience.
Here are the essential steps to guide your implementation:
Define reimbursement allowances: Decide how much your organization will reimburse employees — monthly or annually — and whether allowances will differ by employee class or be uniform (for QSEHRA)
Maintain clear plan documents: Draft formal plan documents outlining who’s eligible, what expenses are reimbursable, how much is offered, and any key compliance rules
Develop an employee communication strategy: Provide clear, timely notifications to employees, especially about enrollment timelines, and how reimbursements work
Implement a streamlined reimbursement process: Use an HRA administration tool or service to handle claims submissions, receipts, and tax-free reimbursements efficiently
Ensure compliance with notification requirements: Send required notices to eligible employees at least 90 days before the plan year starts (or when they become eligible), and keep documentation on file
Train HR and payroll teams: Make sure internal teams understand how to process and report reimbursements, especially for tax and accounting purposes
Monitor and adjust annually: Review reimbursement limits, employee needs, and any changes to IRS rules each year to keep your plan optimized and compliant
Empower your business and employees with HRAs
HRAs are a smart, flexible solution for small businesses looking to offer valuable health benefits without the high costs of traditional group insurance. By embracing HRAs, you can take control of healthcare spending while giving employees the freedom to choose their own insurance plans. This helps improve satisfaction and retention.
Whether you’re just exploring QSEHRA's meaning or looking to find the best small business health insurance, HRAs offer a tailored approach that benefits both employers and employees. Explore your options with Thatch to optimize your benefits strategy and empower your business with the right healthcare solution.
Download our one-page QSEHRA Guide as a quick reference.
QSEHRA FAQ
How does a QSEHRA compare to offering no health benefits?
Offering no benefits may save money in the short term, but it can cost you top talent. A QSEHRA is a budget-friendly way to support employees' health and stay competitive without the expense of a full group plan.
What are the potential cost savings for my company?
QSEHRAs allow you to control health benefit costs by setting reimbursement limits and avoiding unpredictable premiums. Since reimbursements are tax-deductible, they often provide significant savings compared to traditional group insurance.
Can QSEHRA funds roll over?
Yes, employers can allow unused QSEHRA funds to roll over yearly. This flexibility supports long-term employee value while giving employers greater control over benefit design.
