Types of HRAs: QSEHRA, ICHRA, and Traditional

Health Reimbursement Arrangements come in three structurally distinct forms — the Qualified Small Employer HRA (QSEHRA), the Individual Coverage HRA (ICHRA), and the traditional group-integrated HRA — each governed by separate Internal Revenue Code provisions and Department of Labor rules. Understanding which variant applies to a given employment situation determines eligibility, contribution ceilings, and which health expenses qualify for tax-free reimbursement. The regulatory context for health savings has shifted significantly since 2019, when final rules expanded employer options beyond the original integrated model. This page covers the definitional boundaries, operational mechanics, applicable scenarios, and structural decision factors for all three HRA types.

Definition and Scope

An HRA is an employer-funded account that reimburses employees for qualified medical expenses on a tax-free basis under Internal Revenue Code §105 and §106 (IRC §§105, 106). Unlike Health Savings Accounts, employees make no contributions to an HRA — all funding originates with the employer. Three distinct HRA types exist within this framework:

Traditional (Group-Integrated) HRA — The original form, established under IRS Notice 2002-45. Must be integrated with a qualifying group health plan. Employees must be enrolled in the employer's group coverage to participate. No statutory employer contribution cap applies, though employer design governs the annual limit.

QSEHRA (Qualified Small Employer HRA) — Created by the 21st Century Cures Act (Public Law 114-255, enacted December 2016) and codified at IRC §9831(d). Available exclusively to employers with fewer than 50 full-time equivalent employees that do not offer a group health plan. For 2024, the IRS set the annual contribution limit at $6,150 for self-only coverage and $12,450 for family coverage (IRS Revenue Procedure 2023-29).

ICHRA (Individual Coverage HRA) — Established by final rules published jointly by the IRS, Department of Labor, and Department of Health and Human Services in June 2019 (84 Fed. Reg. 28888), effective for plan years beginning January 1, 2020. Codified at 26 CFR §54.9802-4. Available to employers of any size. No statutory dollar cap on employer contributions. Employees must be enrolled in individual health insurance coverage — including Marketplace plans — or Medicare to participate.

All three forms are subject to IRS rules governing HRAs, which include nondiscrimination requirements under IRC §105(h) for self-insured plans.

How It Works

The operational mechanics differ across HRA types, but a core sequence applies to all three:

1. Employer establishes the plan — The employer adopts a written plan document specifying the HRA type, eligible employee classes (where applicable), annual benefit amount, and eligible expense categories.
2. Employer sets the annual allowance — Funds are notional; no actual account is funded until reimbursement requests are approved. The employer retains unused balances unless the plan document specifies carryover.
3. Employee incurs a qualified expense — Qualifying expenses under all three types must meet the definition in IRC §213(d), which includes premiums, deductibles, copayments, and other medical costs. The ICHRA is the only type that reimburses individual health insurance premiums as a primary function.
4. Employee submits substantiation — Under IRS substantiation rules, employees provide receipts or explanation-of-benefits documents proving the expense was incurred and qualifies.
5. Employer or third-party administrator processes reimbursement — Funds are disbursed tax-free to the employee. The employer deducts the reimbursement as a business expense under IRC §162.

QSEHRA-specific step: Employees receiving QSEHRA funds must hold Minimum Essential Coverage (MEC) or the reimbursement becomes taxable. The employer must provide written notice at least 90 days before the plan year begins, per IRC §9831(d)(4).

ICHRA-specific step: Employees must verify individual coverage enrollment each month. The ICHRA and a traditional group health plan cannot be offered to the same class of employees simultaneously, as established in the 2019 final rules.

For a side-by-side comparison of how HRAs interact with FSAs and HSAs, the HSA vs. FSA vs. HRA overview and comparison page addresses combination rules in detail.

Common Scenarios

Scenario A — Small business replacing group coverage with QSEHRA
A 22-employee landscaping company eliminates its group health plan and implements a QSEHRA offering $450 per month ($5,400 annually) for self-only employees. Employees purchase individual coverage on the ACA Marketplace. The QSEHRA benefit reduces the employee's Premium Tax Credit dollar-for-dollar, a coordination rule codified at IRC §36B(c)(4). Employees must report the QSEHRA amount to the Marketplace to avoid overclaiming the credit.

Scenario B — Large employer segmenting workforce with ICHRA
A hospital system with 800 employees offers its 600 full-time clinical staff a traditional group plan while offering its 200 part-time administrative staff an ICHRA. The 2019 final rules permit this separation by "class of employees," defined categories that include full-time vs. part-time status, geographic location, and seasonal workers. The employer sets the ICHRA allowance for part-time staff at $3,600 annually with no carryover provision.

Scenario C — Traditional HRA supplementing a high-deductible plan
A mid-size manufacturer integrates a traditional HRA with its group HDHP, funding $1,500 per employee annually to offset deductible costs. Because this HRA is integrated with qualifying group coverage, it meets ACA market reform requirements under 26 CFR §54.9815-2711. Employees do not need individual insurance; participation in the employer's HDHP suffices. Note that an integrated HRA paired with an HDHP may restrict HSA eligibility unless it is structured as a limited-purpose HRA — a design detail addressed in hra-and-other-account-combinations.

Decision Boundaries

Selecting among HRA types depends on employer size, whether a group plan exists, workforce composition, and budget structure. The table below maps key structural variables:

Affordability and ACA coordination is the sharpest ICHRA decision boundary. Under 26 CFR §1.36B-2(c)(3)(vi)(A), an ICHRA is considered "affordable" for ACA purposes if the employee's self-only premium cost after the ICHRA allowance does not exceed the applicable affordability percentage of household income. When an ICHRA is deemed affordable, the employee loses access to the Premium Tax Credit entirely — a factor with significant financial implications for lower-wage workers.

QSEHRA vs. ICHRA for small employers hinges on whether the employer wants a contribution cap enforced by statute (QSEHRA) or maximum design flexibility with no cap (ICHRA). Employers that anticipate growth past 49 FTEs must transition from QSEHRA to ICHRA or a group plan, since QSEHRA eligibility terminates at the 50-FTE threshold.

For employers evaluating how HRA design integrates with broader workforce benefits strategy, employer HRA design and administration covers plan document requirements, nondiscrimination testing obligations, and third-party administrator selection criteria.

The national health savings authority home page provides a structured reference index to all account types, regulatory frameworks, and employer and employee decision tools covered across this resource.

References

• Internal Revenue Code §105 and §106 — 26 CFR Part 1 (eCFR)
• IRS Revenue Procedure 2023-29 — 2024 QSEHRA Contribution Limits
• Final Rule: Health Reimbursement Arrangements and Other Account-Based Group Health Plans, 84 Fed. Reg. 28888 (June 20, 2019) — IRS, DOL, HHS
• 21st Century Cures Act, Public Law 114-255 (QSEHRA statutory authority)
• [26

The law belongs to the people. Georgia v. Public.Resource.Org, 590 U.S. (2020)