ICHRA vs QSEHRA for Washington Small Businesses
Washington small employers have watched group health insurance premiums climb an average of 21 percent in recent renewal cycles. Many owners are asking the same question: is there a way to give employees meaningful health benefits without locking into a fully insured group plan? Two federal tools make that possible. An Individual Coverage Health Reimbursement Arrangement (ICHRA) and a Qualified Small Employer HRA (QSEHRA) both let you reimburse employees tax-free for their own health coverage. They sound nearly identical. In practice, they serve different companies, carry different eligibility rules, and interact with Washington state employment laws in different ways. This guide explains both options side by side so you can pick the right one for your Washington small business.
Not sure which option fits your workforce? Explore small business health insurance options in Washington and get a no-obligation review from a local benefits advisor.
What Is an ICHRA?
An Individual Coverage HRA lets employers of any size reimburse employees for individual health insurance premiums and qualified medical expenses on a pre-tax basis. Employees purchase their own coverage on the individual market or directly from a carrier, submit proof of coverage, and get reimbursed up to the monthly allowance you set. The employer contribution is tax-deductible. Employees exclude reimbursements from taxable income. Neither side pays payroll taxes on the benefit.
Key features of an ICHRA:
- Available to employers of any size, including those with 50 or more full-time equivalents
- No IRS cap on employer contributions
- Employers can set different allowance levels for different employee classes (for example, full-time vs. part-time, or salaried vs. hourly)
- Employees must maintain qualifying individual coverage to receive reimbursements
- Employees enrolled in an ICHRA cannot receive premium tax credits for marketplace coverage if the ICHRA is considered “affordable” under ACA affordability rules
- Employers subject to ACA employer mandate (50-plus FTEs) can use an ICHRA to satisfy minimum essential coverage requirements if contributions meet the affordability threshold
What Is a QSEHRA?
A Qualified Small Employer HRA is designed specifically for small employers. Congress created it in 2016 to give businesses with fewer than 50 full-time equivalents a simple way to offer health benefits without sponsoring a group plan. Like an ICHRA, a QSEHRA reimburses employees for individual premiums and out-of-pocket medical costs. Unlike an ICHRA, the QSEHRA has IRS-imposed annual contribution caps and stricter eligibility restrictions.
Key features of a QSEHRA:
- Available only to employers with fewer than 50 full-time equivalents
- Employer must have no group health plan in place for any employees during the plan year
- Annual contribution limits set by the IRS (adjusted annually for inflation): $6,350 per employee (self-only) and $12,800 per family for 2025
- All eligible employees must receive the same benefit amounts or the same benefit structure by family status
- Employers must provide employees with written notice at least 90 days before the plan year begins
- Employees who receive QSEHRA reimbursements must reduce any premium tax credits they claim on the marketplace by the amount of the QSEHRA allowance
A QSEHRA is generally simpler to administer than an ICHRA because there are fewer design choices. The tradeoff is less flexibility.
2026 Eligibility Rules and Contribution Limits
Understanding the numbers is essential before you choose. The table below compares eligibility and limits for both arrangements.
| Feature | ICHRA | QSEHRA |
|---|---|---|
| Eligible employer size | Any size (1 to 1,000+ employees) | Fewer than 50 full-time equivalents only |
| Group plan requirement | Cannot offer a group plan to the same employee class | Cannot offer any group health plan to any employee |
| Annual contribution cap (self-only) | None set by IRS | $6,350 (2025; 2026 limit adjusted per IRS inflation guidance) |
| Annual contribution cap (family) | None set by IRS | $12,800 (2025; 2026 limit adjusted per IRS inflation guidance) |
| Employee class variation | Yes, different amounts by defined classes | No, same amount (or same structure) for all eligible employees |
| Qualifying coverage required | Yes, individual or other qualifying coverage | Yes, minimum essential coverage |
| ACA affordability rules apply | Yes, for employers with 50+ FTEs | No (QSEHRA employers are below 50 FTEs by definition) |
| Tax credit interaction | Credits unavailable if ICHRA is affordable | Credits reduced dollar-for-dollar by QSEHRA allowance |
A note on 2026 QSEHRA limits: the IRS adjusts these for inflation each fall. Check IRS Revenue Procedure guidance or consult a qualified benefits advisor for the confirmed 2026 figures before your plan year begins.
Which Scenario Favors ICHRA?
An ICHRA typically fits better when one or more of these apply to your Washington business:
- You employ 50 or more full-time equivalents and need an ACA-compliant offering without the administrative complexity of a group plan.
- Your workforce is varied and you want to offer different monthly allowances to different groups, such as full-time employees versus part-time or seasonal workers.
- You want no ceiling on your contributions and plan to offer a generous reimbursement that exceeds QSEHRA caps.
- Some employees already have group coverage elsewhere (such as through a spouse’s plan) and you want to define classes that exclude them.
- You are growing and expect to cross the 50-FTE threshold, since you can keep an ICHRA at any size.
An ICHRA requires more plan design decisions upfront: which employee classes you are creating, what the monthly allowance is for each class, and how you will document affordability if you are a larger employer. A Washington benefits advisor can walk you through the design choices and confirm ACA compliance.
Which Scenario Favors QSEHRA?
A QSEHRA is often the right starting point when:
- You have fewer than 50 full-time equivalents and no current group health plan, and you want the simplest possible structure.
- Your contribution budget falls within the IRS caps, so the ceiling does not limit what you planned to offer.
- You want uniform benefits for all employees without creating multiple benefit classes.
- Employees are likely to claim marketplace tax credits, and you want them to keep as much of those credits as possible (since QSEHRA benefits reduce but do not eliminate credits, while an affordable ICHRA eliminates them entirely).
- You need simplicity over customization and prefer a standard IRS structure with minimal design decisions.
The QSEHRA constraint that you cannot run a group health plan alongside it is the most common reason small employers eventually switch to an ICHRA. If even one employee class receives traditional group coverage, the QSEHRA becomes unavailable for that plan year.
Ready to compare your numbers? Schedule a free benefits consultation and we will run a side-by-side analysis for your specific workforce.
Washington-Specific Compliance Notes
Federal HRA rules apply nationwide, but Washington State adds several layers that small employers must account for before selecting either arrangement.
Washington Paid Family and Medical Leave Interaction
Washington’s Paid Family and Medical Leave (PFML) program requires both employer and employee premium contributions based on gross wages. HRA reimbursements are not wages and are not subject to PFML premiums. However, the underlying health coverage an employee maintains affects their ability to use PFML effectively. Employees on ICHRA or QSEHRA plans who use individual marketplace coverage are responsible for coordinating their own coverage during PFML leave. Employers who previously handled group premium continuation during leave no longer have that obligation, but employees may need guidance on how to keep individual coverage active. For a detailed breakdown of employer obligations, see the 2026 Washington Paid Family and Medical Leave employer guide.
Washington State Continuation Coverage
Washington requires employers with 2 to 20 employees to offer mini-COBRA continuation coverage to departing employees who lose group health plan eligibility. Because both ICHRA and QSEHRA are employer-funded reimbursement arrangements rather than group health plans, they are generally not subject to Washington’s mini-COBRA requirements. However, employees enrolled in individual plans they purchased themselves own that coverage regardless of their employment status. They can continue paying their individual premiums directly without a separate continuation election. This is often a smoother transition for employees than traditional COBRA processes, but it also means the employer has no obligation to assist. Inform departing employees clearly that their individual coverage continues independently and that HRA reimbursements end on their last day of eligibility.
ACA Marketplace Access and Premium Tax Credits
Washington operates through the federal HealthCare.gov marketplace (not its own state exchange). Employees purchasing coverage there who receive a QSEHRA allowance must report it when applying for premium tax credits. The allowance reduces their monthly credit. Employees offered an ICHRA that meets ACA affordability standards cannot claim premium tax credits at all. Employees offered an ICHRA that does not meet affordability standards can opt out of the ICHRA and claim credits instead. This opt-out right is an important employee protection that Washington employers should communicate clearly during enrollment.
Side-by-Side: ICHRA vs QSEHRA Decision Guide
Use this framework to determine which arrangement fits your current situation. Answer each question and follow the recommendation.
| Your situation | Recommended arrangement |
|---|---|
| Fewer than 50 FTEs, no group plan, simple benefit structure preferred | QSEHRA |
| Fewer than 50 FTEs, no group plan, contributions exceed QSEHRA caps | ICHRA |
| 50 or more FTEs, no group plan, ACA compliance required | ICHRA |
| Mixed workforce (full-time and part-time) with different benefit levels | ICHRA |
| Employees likely to benefit from marketplace premium tax credits | QSEHRA (credits reduced but not eliminated) |
| Transitioning away from a group plan mid-year | ICHRA (QSEHRA cannot run alongside or immediately after a group plan in most situations) |
| Business growing and may exceed 50 FTEs within 24 months | ICHRA (scale without restructuring) |
Neither arrangement is automatically better. The right choice depends on your employee count, your contribution budget, your workforce composition, and how your employees interact with the individual insurance marketplace. A qualified Washington group health insurance and benefits specialist can model both scenarios with your actual numbers before you commit to a plan design.
Washington Health Insurance Agency works exclusively with Washington businesses. Talk to a Washington benefits advisor who knows both federal HRA rules and state-specific compliance requirements.
Frequently Asked Questions
Can a Washington employer offer both an ICHRA and a QSEHRA?
No. An employer cannot offer both arrangements to the same employee class in the same plan year. You must choose one or the other for any given group of employees. If you have separate employee classes under ICHRA rules, you cannot layer in a QSEHRA for any of those classes.
What happens if a Washington employee declines the ICHRA?
Employees who receive an ICHRA offer that meets ACA affordability standards can opt out of the arrangement if they choose. An opt-out is typically appropriate when the employee is covered under a spouse’s group plan and wants to claim a premium tax credit on their own marketplace plan. Employees who opt out lose access to the reimbursement benefit for that plan year. Employers should document opt-out elections in writing.
Do ICHRA and QSEHRA reimbursements affect Washington unemployment insurance?
HRA reimbursements are not wages and are excluded from Washington unemployment insurance taxable wage calculations. They do not affect your UI tax rate or an employee’s UI benefit eligibility. This is one area where HRAs have a straightforward answer regardless of which type you choose.
Can a QSEHRA reimburse dental and vision premiums?
Yes. Both QSEHRA and ICHRA can reimburse premiums for dental and vision insurance as qualified medical expenses under IRS Section 213(d), provided the employee maintains minimum essential health coverage. The dental or vision plan does not need to be linked to the employee’s major medical plan.
How does a Washington small employer set up an HRA?
The setup process involves adopting a written plan document, establishing a method for employees to submit reimbursement requests, and providing required employee notices. For a QSEHRA, the 90-day advance notice requirement means you cannot start mid-year without penalty unless you are a new employer. Many Washington employers work with a benefits advisor or third-party administrator to handle documentation and compliance. See the HRA for small business guide for a step-by-step overview.
Get Expert Guidance Before You Choose
Choosing between an ICHRA and a QSEHRA is not just a federal tax question. For Washington small businesses, it intersects with PFML obligations, state continuation rules, marketplace access, and your own workforce structure. Getting it wrong can result in compliance penalties, disqualified reimbursements, or employees losing premium tax credits they counted on.
Washington Health Insurance Agency has spent over 26 years helping Washington businesses navigate exactly these decisions. We work with employers across the state to design benefit strategies that control costs, satisfy compliance requirements, and support the employees who make your business run.
Schedule a free benefits consultation today and get a clear recommendation based on your actual employee count, compensation structure, and Washington state obligations.