QSEHRA vs ICHRA: Which HRA Can Your Business Use in 2026?

By Tax Benefit Strategies | Published October 30, 2026 | Updated November 2026 | 6 min read

A QSEHRA and an ICHRA both let an employer give employees tax-free money for individual health insurance instead of a group plan. The difference that matters most is size: a QSEHRA stops at 50 employees. An ICHRA has no size limit.

The ICHRA also has a new name. In September 2026, CMS renamed it a CHOICE Arrangement. Here is how the two compare, with the 2026 numbers.

Small business owner reviewing individual health plan options

What Is the Difference Between a QSEHRA and an ICHRA?

A QSEHRA is for employers with fewer than 50 full-time employees and has an annual cap. An ICHRA is for employers of any size, has no cap, and lets you treat employee classes differently. Both reimburse individual coverage.

	QSEHRA	ICHRA (CHOICE Arrangement)
Employer size	Fewer than 50 full-time employees, counting equivalents	Any size
2026 limit	$6,450 self-only, $13,100 family	No minimum or maximum
Group health plan	Not allowed for any employee	Allowed for other classes, never the same class
Employee classes	Same terms for all eligible employees	Different amounts by class, such as full-time, part-time or location
Coverage the employee needs	Minimum essential coverage	Individual health insurance or Medicare
Written notice	90 days before the plan year	90 days before the plan year
ACA employer mandate	Does not apply (small employers only)	Counts as an offer of coverage if affordable

What Is a QSEHRA?

A QSEHRA (qualified small employer health reimbursement arrangement) lets a small employer reimburse employees, tax-free, for individual health insurance premiums and medical costs. It is only for employers under 50 full-time employees with no group plan.

2026 limits: $6,450 self-only and $13,100 family. The IRS has not yet announced the 2027 limits; we will update this page when it does.
Same terms for everyone eligible. You may leave out employees in their first 90 days, under age 25, part-time and seasonal staff, and union members covered by a bargaining agreement.
Proof of coverage. Reimbursements are tax-free only for months the employee has minimum essential coverage.
Reporting. Show the benefit in box 12 of Form W-2 with code FF. It also reduces any premium tax credit the employee gets.

Why Can’t Employers With 50 or More Employees Use a QSEHRA?

Franchise owner talking with a shift manager during the lunch rush

The law limits QSEHRAs to employers that are not applicable large employers. That means fewer than 50 full-time employees, counting full-time equivalents, in the prior year. At 50, the QSEHRA is no longer an option.

Two details catch growing companies:

Related companies count together. Businesses under common ownership are combined for the 50-employee count. A franchise owner with three companies of 20 full-time employees each is usually one employer with 60.
No group plan of any kind. A QSEHRA employer cannot offer any group health plan, and that includes a health FSA or another HRA.

If you cross 50, the ICHRA is the HRA route that stays open. For the other accounts an employer can offer, see FSA vs HSA vs HRA.

What Is an ICHRA, Now Called a CHOICE Arrangement?

An ICHRA (individual coverage HRA) lets an employer of any size reimburse employees, tax-free, for individual health insurance or Medicare premiums and other medical costs. In September 2026, CMS renamed it a CHOICE Arrangement. The rules did not change.

Classes. You can set different amounts for classes such as full-time, part-time, seasonal or employees in a given area. Within a class, amounts can vary only by age or family size. Some classes have minimum size rules.
No mixing in a class. You cannot offer the same class a choice between your group plan and an ICHRA.
Coverage required. Employees must enroll in individual health insurance or Medicare to get reimbursed.
Tax credits. An employee who accepts the ICHRA cannot also get a premium tax credit.

The House version of the 2025 tax law would have written ICHRAs into the tax code as CHOICE arrangements. The Senate removed that section, so the new name came later, from CMS, without a change in the law.

One change from that law does help ICHRA employees: from 2026, a bronze or catastrophic plan bought with ICHRA money can count as HSA-qualified, so the employee may also be able to contribute to an HSA.

How Does ICHRA Affordability Work for Large Employers?

CFO and benefits advisor reviewing ICHRA affordability numbers

For an applicable large employer, an ICHRA is affordable if the cost of the lowest-cost silver plan, minus the ICHRA amount, is no more than 9.96% of household income in 2026. For 2027, the percentage is 10.22%.

An affordable ICHRA offered to enough full-time employees counts as an offer of coverage under the ACA employer mandate (Section 4980H). If the ICHRA is not affordable for an employee who then gets a premium tax credit, the employer can owe a penalty for that employee.

The IRS gives safe harbors to make the test easier. For example, you can use the silver plan where the employee works instead of where the employee lives. Your benefits advisor or ICHRA vendor runs these numbers by ZIP code and age.

50+ employees? Add payroll tax savings to your ICHRA

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Where Does a Section 125 Savings Plan Fit?

For employers with 50 or more employees, a Section 125 savings plan can run next to an ICHRA. The ICHRA pays toward health insurance. The Section 125 plan lowers payroll taxes across the whole workforce. Our program works alongside an ICHRA in most cases.

We cover how the two work together in Section 125 with an ICHRA or HSA. In short, our program:

Saves most employers $650–$850 per employee per year.
Raises take-home pay by about 4–6% for a typical employee.
Adds benefits: unlimited virtual care with no copay, $0-copay generic prescriptions and hospital indemnity cash benefits.
Costs nothing up front: no setup fee and no minimum contract. The per-employee monthly fee is paid from the tax savings.

If you are a QSEHRA-sized business with fewer than 50 employees, our program is not a fit yet, because it requires at least 50. Owners with more than one location can count employees across all their locations. Check state availability, read the Section 125 plan guide, or estimate your savings.

Frequently Asked Questions

Can a company with 50 or more employees offer a QSEHRA?

No. A QSEHRA is only for employers with fewer than 50 full-time employees, counting full-time equivalents, that offer no group health plan. A larger employer can use an ICHRA instead.

Is a CHOICE Arrangement the same as an ICHRA?

Yes. In September 2026, CMS and the SBA renamed the ICHRA a CHOICE Arrangement. The rules, limits and notices did not change. IRS and Labor Department rules still use the term ICHRA.

What are the 2026 QSEHRA limits?

$6,450 for self-only coverage and $13,100 for family coverage. The IRS has not yet announced the 2027 limits.

Is there a limit on how much an employer can put in an ICHRA?

No. An ICHRA has no IRS minimum or maximum. But a large employer must offer enough for the ICHRA to be affordable, or it may owe an employer mandate penalty.

Is an ICHRA a Section 105 plan?

Yes, in common usage. HRAs, including ICHRAs and QSEHRAs, are often called Section 105 plans, because the tax-free reimbursement rules come from Internal Revenue Code Section 105.

This article is general information, not tax or legal advice. Talk to your tax advisor about your situation.

Sources

The rules and figures on this page come from these sources.

QSEHRA law: 26 U.S.C. § 9831(d)
QSEHRA guidance: IRS Notice 2017-67
ICHRA rules: 26 C.F.R. § 54.9802-4
Employer mandate: 26 U.S.C. § 4980H