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The Smarter Startup

Getting Creative with Benefits: QSEHRA vs. ICHRA

Both of these health reimbursement plans allow startups to provide affordable and personalized benefits. Learn about the key differences.

We are approaching the time of the year when companies are typically thinking about annual enrollment and benefits. Maybe you are a founder thinking about hiring your second or third employee and deciding if now is the time to go out to a broker for underwriting. It may be a better benefit for your employees and company to explore utilizing a QSEHRA or ICHRA.

What is a QSEHRA?

A QSEHRA is an employer-sponsored employee benefit plan under which the employer reimburses employees for medical expenses incurred by the employees and their family members, subject to certain limitations and other rules. The QSEHRA was specifically created as a solution to the dilemma of companies reimbursing for premiums to pay for their health plans, which ran afoul of some IRS regulations for the ACA. The QSEHRA is a way that employers could reimburse employees for premiums for individual health insurance policies and other medical expenses without running afoul of ACA requirements.

Which employers are eligible to adopt a QSEHRA?

An employer is eligible to adopt a QSEHRA only if (a) the employer had less than 50 full-time employees (counting full-time equivalents) in the prior calendar year, and (b) the employer does not maintain any group health plan covering any employees.

What are the 2023 QSEHRA limits?

The contribution maximums for QSEHRA programs in 2023 should be announced in November. They are expected to increase slightly from the 2022 limits ($5,450 ($454.16/month) for single employees and $11,050 ($920.83/month) for families). The above-referenced limits are the maximums permitted under the law. However, an employer is free to design its QSEHRA to provide for any lower limits it might wish to impose. Also, an employer need not have a separate limit for family coverage. For example, an employer might wish to have a limit of $5,450 per employee in 2022 without regard to whether the employee’s policy is for single coverage or family coverage.

The annual limits must be prorated for an employee who is not covered by the QSEHRA for the entire year. For example, an employee who begins participation in the QSEHRA on May 1, 2022, with single coverage would be subject to a limit of $3,633.33 ($5,450 x 8/12) for 2022.

What is an ICHRA?

ICHRA is an evolution of another type of HRA, called a QSEHRA, that was created in 2017. Both allow employers to reimburse employees tax-free for individual health insurance, but ICHRA represents a “super-charged” version of QSEHRA with higher limits and greater design flexibility that will appeal to more employers.

How does ICHRA work?

As the name implies, ICHRA is based on reimbursing employees for insurance rather than buying it for them. At a high level, the way ICHRA works is very simple: Employers design their plan, including defining which employees are eligible and establishing reimbursement limits. Employees purchase the individual plans they want. Employees submit claims for reimbursement. Employers reimburse employees for valid claims.

What are the employment classes, and how do they work?

Employee classes are a huge benefit of ICHRA. Employers can design unique benefit solutions to fit their workforce. For example, employers could offer $800/mo. to full-time employees and $300/mo. to part-time employees.

It can even get more creative than different employment statuses. Employers can also mix and match traditional group plans with ICHRA implementations. For example, you could offer employees in Colorado a traditional group plan and employees in New York an ICHRA.

ICHRA is a major overhaul of HRAs as we have known them up until this point. Compared to other HRAs, it is king in terms of flexibility.

Three key elements make the new HRA very appealing:

  1. No Size Restrictions – An organization can be a 5-person startup, a midsized 50-person team, or a 500-person corporation. ICHRA is a scalable benefit for all sizes of businesses.
  2. Unlimited Contribution Amounts – There are no annual contribution caps. That means the sky’s the limit for this tax-friendly benefit.
  3. Flexible Class Options – An employer can choose to treat different classes of employees differently based on different available class distinctions. Everyone does not have to be treated equally across the board.

You had the chance to hear about conventional benefits in this article. If you are interested in discussing some of these more creative options, let’s connect!