Health Reimbursement Arrangements (HRAs) — ICHRA, QSEHRA, and Employer Medical Expense Reimbursement

A Health Reimbursement Arrangement (HRA) is an employer-funded account that reimburses employees for qualified medical expenses, including health insurance premiums, on a tax-free basis. The employer funds it; the employee submits receipts; the reimbursement is excluded from the employee's income. For HSA-based alternatives, see HSA Rules under §§ 105 and 106. HRAs have existed for decades as a flexible alternative to traditional group health plans, but they were significantly expanded by Trump-era regulations in 2019 that created two new HRA types: the Individual Coverage HRA (ICHRA), which allows employers of any size to reimburse employees for individually purchased health insurance premiums; and the Qualified Small Employer HRA (QSEHRA), which allows employers with fewer than 50 full-time employees who don't offer group coverage to reimburse employees tax-free. Before 2019, HRAs could only be used alongside group health insurance; ICHRAs broke that link, allowing employers to "get out of the insurance business" entirely and give workers dollars to buy their own plans. This is one of the most significant changes to employer health benefits in decades. For the ACA employer mandate that ICHRA satisfies, and the ACA marketplace where employees purchase plans, see those pages — though with conditions: ICHRA reimbursements reduce the employee's ACA premium tax credit dollar-for-dollar if the coverage is considered "affordable."

Current Law (2026)

Legal Authority

• 26 U.S.C. § 105(b) — Exclusion from gross income: amounts received from employer-sponsored accident or health plans are excluded from gross income if paid to reimburse the employee for medical care expenses (as defined in § 213(d)) incurred by the employee, spouse, dependents, or adult children; this is the foundational exclusion that makes HRA reimbursements tax-free
• 26 U.S.C. § 106(a) — Employer-provided coverage exclusion: gross income of an employee does not include employer-provided coverage under an accident or health plan; together with § 105(b), this means that the employer's funding of an HRA (the contribution to the arrangement) is also excluded from employee income — the dollars never appear on the employee's W-2
• IRS Notice 2002-45 — Traditional HRAs: IRS guidance establishing that a stand-alone employer-funded account reimbursing employees for medical expenses qualifies as an accident or health plan for purposes of §§ 105 and 106, and that the exclusions apply to reimbursements under such arrangements; also clarified that HRA balances can roll over
• IRS Notice 2017-67 — QSEHRA: regulations governing the Qualified Small Employer HRA created by the 21st Century Cures Act of 2016; established contribution limits (inflation-adjusted annually), reporting requirements, and the prohibition on offering group health coverage simultaneously
• 26 C.F.R. § 54.9802-4 — ICHRA regulations (effective January 2020): created the Individual Coverage HRA; established the classes of employees to whom ICHRA can be offered (full-time, part-time, seasonal, etc., must be uniform within class); defined the affordability standard for ICHRA for purposes of the employer mandate and ACA premium tax credits

Three Types of HRAs

Traditional HRA (pre-2019): The classic structure — employer funds an HRA account that employees use to pay for medical expenses (copays, deductibles, prescriptions) that aren't covered by the group health plan. Traditional HRAs must be paired with group health insurance. Common design: pair a high-deductible health plan (HDHP) with an HRA that covers the deductible. The employer funds the HRA (say, $1,500 per employee), and employees use it to pay HDHP deductible costs. Unused amounts roll over. The combined effect is that employees have catastrophic coverage from the HDHP plus first-dollar coverage from the HRA, at lower premium cost than a low-deductible PPO.

QSEHRA (Qualified Small Employer HRA): For employers with fewer than 50 full-time employees (the ACA "small business" threshold) who do not offer group health coverage. QSEHRA allows small employers to contribute up to $6,450/single or $13,100/family (2026 limits, indexed) per year, tax-free, for employees to use to pay premiums on individual insurance they purchase themselves, as well as other qualified medical expenses. The 21st Century Cures Act created QSEHRAs in 2016 as a response to small employer frustration with the ACA — under previous law, stand-alone HRAs not integrated with group insurance violated the ACA's market reform rules. QSEHRA gave small employers a compliant structure.

QSEHRA employees who receive contributions must notify the marketplace of their QSEHRA amount when applying for coverage — the QSEHRA amount reduces the premium tax credit they can receive dollar-for-dollar. An employee with a $5,000 QSEHRA whose premium tax credit would otherwise be $6,000 receives only a $1,000 credit; the QSEHRA covers the rest.

ICHRA (Individual Coverage HRA): The 2019 regulatory creation — available to employers of any size. An employer can offer ICHRA instead of a traditional group health plan, contributing any amount per employee to use to pay individual insurance premiums and qualified medical expenses. The employee buys their own health insurance (marketplace, off-exchange, or employer-sponsored coverage from a spouse's employer), and the ICHRA reimburses some or all of the premium.

ICHRA is designed to let employers get out of the insurance business: instead of selecting and managing a group plan, negotiating with insurers, and dealing with network changes and annual renewals, the employer simply funds an HRA account and employees choose their own plans. The downside: employees must actively shop for coverage, and plans may vary significantly in quality and network; employer "consumerism" may not translate to better coverage for workers.

ICHRA and the ACA premium tax credit: The interaction is complex. If the employer's ICHRA offer is "affordable" for ACA purposes — meaning the employee's net self-only premium on the lowest-cost silver marketplace plan (after the ICHRA contribution) doesn't exceed 9.96% of household income — the employee is not eligible for the premium tax credit at all. If the ICHRA is "unaffordable," the employee can opt out of the ICHRA, purchase marketplace coverage, and potentially claim the premium tax credit.

How It Affects You

If you're a small business owner (under 50 employees) who can't afford group health insurance: The QSEHRA is your primary option. It lets you contribute up to $6,450 per single employee or $13,100 per family per year — tax-deductible to you as a business expense, tax-free to employees — without the complexity and cost of a group health plan. Employees use the contributions to pay for individual market coverage they choose themselves. Set up a QSEHRA administrator (several vendors offer this — Thatch, PeopleKeep, Take Command Health, etc.) who handles the compliance requirements, tracks eligible expenses, and processes reimbursements. The annual contribution limit means QSEHRA doesn't fully replace group coverage for high-cost employees, but it significantly helps employees afford their own coverage.

If you're a large employer considering ICHRA: ICHRA offers flexibility but creates complexity. You must define "classes" of employees (full-time, part-time, by location) for ICHRA purposes — you can offer different amounts to different classes, but within a class the offer must be uniform. ICHRA eliminates your responsibility for plan selection and management but shifts the burden to employees, who must navigate the individual market. For employers with employees in locations with poor marketplace coverage, ICHRA may leave employees with limited options. Conduct a workforce analysis before switching from group coverage to ICHRA — the ICHRA amounts needed to make coverage "affordable" (under 9.96% of employee income for the cheapest silver plan) can be substantial in high-cost markets like New York or San Francisco.

If you receive an ICHRA from your employer and want ACA coverage: You have a choice: accept the ICHRA and use it to buy individual coverage, or opt out of the ICHRA and (if eligible) apply for an ACA premium tax credit instead. Run the numbers. If the ICHRA amount is large enough to make coverage genuinely affordable, you probably want to take it. If it's a small amount (say, $100/month) in a market where silver plans cost $600/month, opting out and claiming the premium tax credit may net you more benefit. Your coverage choice is annual — you choose during open enrollment or when first eligible.

If you're an HR professional administering an HRA: ICHRA and QSEHRA have specific documentation requirements. Employees must provide proof of individual insurance coverage before each reimbursement. The plan must be structured as a written plan document (HRA plan documentation). QSEHRA requires annual written notice to employees before each coverage year and notification when new employees are eligible. Under the ACA's employer mandate (applicable to employers with 50+ full-time employees), offering an ICHRA that is "affordable" satisfies the employer mandate — you are not subject to the $3,340/employee penalty for employees who enroll in marketplace coverage with the premium tax credit if your ICHRA offer was affordable.

State Variations

States generally conform to the federal tax treatment of HRAs — employer contributions are not state taxable income to the employee, and reimbursements for qualified medical expenses are excluded. Some states have created their own small employer health programs that interact with QSEHRA and ICHRA, and state-run individual marketplaces (California, Massachusetts, New York, etc.) may have specific rules about HRA coordination with marketplace coverage. California and New York have additional state marketplace considerations that can affect ICHRA affordability calculations.

Pending Legislation

No major changes to ICHRA or QSEHRA rules are pending. The Trump administration has signaled continued support for HRA-based approaches as an alternative to traditional group health insurance. Proposals to raise the QSEHRA contribution limits or expand ICHRA flexibility (e.g., allowing ICHRA to be combined with premium tax credits in more circumstances) have been discussed but not enacted.

Recent Developments

IRS guidance in 2022 addressed how ICHRA contributions affect affordability calculations for ACA purposes and the "opt-out" process for employees. The HHS and DOL updated ICHRA regulations in 2023 to address the interaction with short-term health plans (STHPs), clarifying that ICHRA can fund STHP premiums in limited circumstances. The growth of ICHRA adoption has generated a competitive market of HRA administration platforms; the IRS issued updated sample plan documents and notices to help small employers comply without expensive legal counsel.

• ICHRA affordability threshold for 2026: The IRS publishes an annual "Required Contribution Percentage" for ICHRA affordability — if an employee's lowest-cost self-only individual marketplace plan premium exceeds this percentage of household income after the ICHRA contribution, the ICHRA is "unaffordable" and the employee can claim ACA premium tax credits. For 2026, the affordability threshold is 9.96% of household income. Employers structuring ICHRA contributions must calculate affordability by employee location (marketplace premiums vary dramatically by county) to ensure they're meeting the percentage threshold.
• Trump ACA short-term health plan expansion and ICHRA: The Trump administration expanded short-term limited-duration health plans (STHPs) — allowing them to last up to 3 years (rather than 3 months under Biden rules). ICHRAs can fund STHP premiums under specific circumstances. This expansion gives ICHRA users more flexibility in what plans they purchase, including less-regulated STHPs with lower premiums but fewer benefits than ACA-compliant plans. Consumer advocates warn that ICHRA + STHP combinations can leave employees with inadequate coverage; employers must communicate coverage limitations clearly.
• QSEHRA participation and ACA marketplace: Small employers (under 50 employees) can offer Qualified Small Employer HRAs (QSEHRAs) of up to $6,450 per year (individual) or $13,100 (family) in 2026. Employees who receive a QSEHRA must report it to the marketplace, reducing their ACA premium tax credit dollar-for-dollar (after the first dollar of QSEHRA). This interaction can make QSEHRAs less attractive than they appear — an employee receiving $3,000 in QSEHRA may lose $3,000 in ACA tax credits unless their marketplace plan is priced above the credit threshold.
• Individual Coverage HRA adoption growth: ICHRA enrollment has grown from near-zero in 2020 to approximately 500,000 participants by 2025, driven by employer adoption among small and mid-size businesses seeking to exit traditional group health plan administration. The shift from defined-benefit health coverage (employer chooses the plan) to defined-contribution (employer gives employees money to buy their own plan) mirrors the 401(k) shift in retirement. Critics argue ICHRA puts the burden of plan selection on employees who may lack the health insurance literacy to choose wisely; supporters argue it gives employees plan portability and choice.