Most comparisons of these two arrangements start with headcount. Under fifty full time equivalents you may use a QSEHRA, at any size you may use an ICHRA, and there the analysis stops.
Headcount tells you what you are allowed to do. It does not tell you which choice leaves your people better off, and for a workforce that qualifies for Marketplace subsidies the gap between the two answers is the largest number in the decision.
That gap lives in one paragraph of the tax code, and it is worth reading before you sign a plan document.
What separates a QSEHRA from an ICHRA in the law rather than the brochure
A qualified small employer health reimbursement arrangement exists because section 9831(d) of the Internal Revenue Code carved it out of the definition of a group health plan. That single carve out is why a QSEHRA escapes the market reform rules that would otherwise make a standalone reimbursement arrangement unlawful, and it is also why almost every restriction on a QSEHRA is written into the statute rather than left to regulation.
An eligible employer is one that is not an applicable large employer and that offers no group health plan to any employee. The arrangement has to be funded solely by the employer, with no salary reduction contributions, and it must be provided on the same terms to every eligible employee.
Employees you are allowed to leave out
Same terms does not mean every person on the payroll. The statute borrows the list of excludable employees from section 105(h), so a QSEHRA may exclude employees who have not completed ninety days of service, employees who have not reached age twenty five, part time or seasonal employees, employees in a collective bargaining unit where health benefits were the subject of good faith bargaining, and nonresident aliens with no United States source earned income.
An individual coverage HRA is built differently. It is a group health plan, and the rules live in regulation rather than statute.
Allowance ceilings that apply for 2026
The QSEHRA has a hard ceiling. The statutory base is 4,950 dollars for self only coverage and 10,000 dollars where the arrangement also reimburses family members, and both figures are indexed.
For taxable years beginning in 2026, section 4.63 of IRS Revenue Procedure 2025-32 sets the ceiling at 6,450 dollars, or 13,100 dollars for family coverage. Those are the numbers to use. A good deal of what is currently written about this comparison still quotes 6,350 and 12,800, which were the 2025 figures.
An ICHRA has no ceiling and no floor. You may offer fifty dollars a month or two thousand.
That sounds like a straightforward win for the ICHRA, and on employer flexibility it is. Our ICHRA calculator will model an allowance against your census and show what the same spend buys in your rating area.
Where the money actually lands
The ceiling is the easy part of the arithmetic. What decides the outcome for the employee is whether the allowance leaves the Marketplace subsidy intact, and that is a separate calculation with a separate answer for each vehicle.
Why the same allowance can pass one affordability test and fail the other
Both arrangements are tested for affordability against the employee's household income, and for plan years beginning in 2026 the percentage is 9.96 percent, published in section 3.02 of IRS Revenue Procedure 2025-25.
The percentage is the same. The benchmark plan is not, and almost nobody says so.
For an ICHRA, the employee's required contribution is the monthly premium for the lowest cost silver plan for self only coverage in the employee's rating area, minus the monthly allowance. That is set out in 26 CFR 1.36B-2(c)(5), which also tells you to use the non tobacco user premium and to ignore wellness incentives unless they relate exclusively to tobacco.
For a QSEHRA, the comparison is against the second lowest cost silver plan for self only coverage, under section 36B(c)(4)(C) of the code.
A second lowest cost plan is by definition never cheaper than the lowest cost one. So for any given allowance, a QSEHRA has a higher required contribution than an ICHRA, and a harder time being affordable, in the same county, for the same person.
One worked case, with the arithmetic shown
Take an employee whose household income is 42,000 dollars. Nine point nine six percent of that is 4,183.20 dollars a year, or 348.60 dollars a month. That is the ceiling the required contribution has to stay under.
The employer offers 300 dollars a month. For arithmetic only, assume the lowest cost silver self only plan in that rating area runs 600 dollars a month and the second lowest runs 660.
- As an ICHRA. 600 minus 300 leaves 300 dollars. That is under 348.60, so the ICHRA is affordable, the employee is treated as having an offer of employer coverage, and the premium tax credit is gone.
- As a QSEHRA. 660 minus 300 leaves 360 dollars. That is over 348.60, so the QSEHRA is not affordable, and the employee may still claim a credit.
Sixty dollars of difference in the benchmark premium, and the subsidy survives in one design and dies in the other. Same employer, same 300 dollars, same employee.
Premium tax credit treatment under each arrangement
Here is the paragraph worth the price of the plan document. Section 36B(c)(4)(B) of the Internal Revenue Code is headed Denial of double benefit, and it does something people routinely get backwards. Where a QSEHRA is not affordable, the employee keeps the credit, reduced by one twelfth of the permitted benefit for each month, and not below zero. You will find that mechanic, and worked examples of it, in IRS Notice 2017-67.
Reduced. Not forfeited. Several widely read explainers of this comparison state that an employee who accepts QSEHRA money gives up the credit entirely, and that is not what the statute says.
Carry the worked case forward. Suppose that employee's credit before any offset is 380 dollars a month.
- Under the QSEHRA, the credit falls by the 300 dollar permitted benefit to 80 dollars. That leaves 300 dollars of allowance plus 80 dollars of credit, so 380 dollars of help in total.
- Under the ICHRA, the credit is zero. Nothing offsets it and nothing survives it, so the help stops at the 300 dollar allowance.
The employer wrote the same cheque either way. The employee is eighty dollars a month better off under the QSEHRA, which is 960 dollars over the year, for one worker.
Two traps inside the credit reduction
The reduction is calculated on the maximum permitted benefit available to the employee, not on what the employee actually spent, and that maximum is the figure reported on the Form W-2. Unspent allowance still cuts the credit.
Affordability, separately, is always tested on the self only permitted benefit as stated in your written notice, even for an employee who receives the larger family amount. Where the benefit varies by age, use the age applicable self only figure.
Opt out rules that catch ICHRA employers
An unaffordable ICHRA does not hand the employee's subsidy back on its own. Under 26 CFR 1.36B-2(c)(3)(i)(B), an employee offered an integrated HRA is treated as eligible for employer coverage for any month it is offered if it is affordable or if the employee does not opt out of and waive future reimbursements.
So the employee has to act. And 26 CFR 54.9802-4(c)(4) gives them one opportunity to do it, once and only once with respect to each plan year, and generally in advance of the first day of that plan year.
Opting out is all or nothing. The employee gives up the entire allowance to reach the credit. There is no partial position, and if the window closes they hold neither.
A QSEHRA has no equivalent mechanism, because the statute does the arithmetic for them. The employee takes the allowance and the credit shrinks by that amount. Nothing has to be waived, and no deadline has to be caught.
Classes and flexibility the ICHRA gives in exchange
The regulation permits eleven classes of employees at 26 CFR 54.9802-4(d)(2). They are full time employees, part time employees, salaried employees, non salaried employees, employees in the same rating area, seasonal employees, employees in a collective bargaining unit, employees still inside a waiting period, nonresident aliens with no United States income, employees of a staffing firm placed with the employer, and any combination of the first ten.
Where you offer a traditional group plan to one class and an ICHRA to another, a minimum class size applies. It is ten employees below one hundred, ten percent rounded down between one hundred and two hundred, and twenty above two hundred, measured on the first day of the plan year by the number of employees offered the HRA rather than the number who enrol. State based geographic classes are exempt from the minimum. Our note on ICHRA affordability and county level premium math covers how much the rating area choice moves the result.
How to read your own payroll and choose
The question is not how many people you employ. It is how many of them sit inside the subsidy range, because that is where the two designs stop being interchangeable.
Pull your payroll register and sort employees into two groups.
- Employees whose household income is low enough that the benchmark plan costs more than 9.96 percent of it, who therefore have a credit that a QSEHRA would reduce and an affordable ICHRA would erase.
- Employees whose income is high enough that no credit is available anyway, for whom the credit mechanics are irrelevant and the ICHRA's freedom on allowance size and classes is pure gain.
Household income is not payroll, and you will not know it exactly. Wages are a serviceable proxy for sorting, and the sort is what matters.
If the first group dominates and you are under fifty full time equivalents and run no group plan, the QSEHRA preserves value that an affordable ICHRA destroys, even though it looks like the more restrictive product on every feature chart.
If the second group dominates, or you want to treat classes differently, or you need an allowance above the 6,450 dollar ceiling, the ICHRA is the better instrument and the credit interaction costs you nothing.
For the underlying cost baseline these allowances get compared against, our breakdown of small business health insurance costs is the place to start.
Reporting and continuation, briefly
The permitted benefit under a QSEHRA is reported in box 12 of the Form W-2 under code FF, per the IRS General Instructions for Forms W-2 and W-3.
On continuation coverage, note what section 9831(d)(1) actually does. It removes a QSEHRA from the term group health plan for purposes of the Internal Revenue Code, and the code's COBRA excise tax at section 4980B is imposed on the failure of a group health plan. An ICHRA is a group health plan and carries no such carve out.
Crossing fifty full time equivalents changes both answers
Eligibility for a QSEHRA ends. The statute limits it to employers that are not applicable large employers, so the arrangement is not something you scale out of gradually.
Section 4980H exposure begins at the same moment. The IRS questions and answers on the employer shared responsibility provisions set out the two payments, one calculated on full time employees minus up to thirty times an adjusted 2,000 dollar amount, the other on each full time employee receiving a credit times an adjusted 3,000 dollar amount. The IRS publishes the adjusted figures annually, and its own published table of them runs only through calendar year 2023, so confirm the current year's amounts before you model a penalty.
An ICHRA can satisfy that offer requirement if it is affordable. Which returns you to the lowest cost silver plan in each employee's rating area, and to the 2026 affordability rules for employer contributions.
Plan the transition before you need it. Our guide to individual coverage HRAs for mid market employers picks up where the small employer rules leave off.
Frequently Asked Questions
What is the difference between an ICHRA and a QSEHRA?
A QSEHRA is available only to employers that are not applicable large employers and that offer no group health plan to any employee, and it caps reimbursements at 6,450 dollars for self only coverage or 13,100 dollars for family coverage in 2026. An ICHRA is available at any size, has no cap, allows different allowances across eleven defined employee classes, and requires the employee to enrol in individual coverage.
Are QSEHRA reimbursements taxable?
Reimbursements are excluded from income when the employee has minimum essential coverage. The statute requires the employer's written notice to warn the employee that if they are not covered by minimum essential coverage for a month, they may be subject to tax under section 5000A and reimbursements may be includible in gross income for that month.
Is a QSEHRA included in box 1 of the W-2?
No. The permitted benefit is reported in box 12 using code FF, and the figure reported is the maximum benefit made available to the employee rather than the amount actually reimbursed.
Can an employer offer a QSEHRA and a group health plan at the same time?
No. An eligible employer for QSEHRA purposes is one that does not offer a group health plan to any of its employees, so running both disqualifies the arrangement.
Who is eligible for a QSEHRA?
Every employee of an eligible employer, except that the arrangement may exclude employees who have not completed ninety days of service, employees under age twenty five, part time or seasonal employees, employees covered by a qualifying collective bargaining agreement, and nonresident aliens with no United States source earned income.
Can a QSEHRA be started at any time during the year?
Not freely. The employer has to give each eligible employee written notice no later than ninety days before the start of the year, or by the date an employee first becomes eligible, and the ceiling is prorated for an employee covered for part of a year.
About the author
Sam Newland, CFP is the founder of Benefitra, where he helps employers understand exactly what their benefits dollars buy and how to spend them better. He holds the Certified Financial Planner designation and has spent his career translating health plan financing and defined contribution design into plain decisions business owners can act on.
Published September 4, 2026. Last reviewed September 4, 2026.
This article explains federal tax rules as published and is not tax or legal advice for any specific employer. Confirm current year figures and your own facts with your adviser before adopting either arrangement.