QSEHRAs, ICHRAs, and EBHRAs: Everything You Need To Know

A Look at the New Health Reimbursement Arrangements

Over the past few years, the federal government has been busy adding new acronyms to the field of employee health benefits and, in so doing, has created new options for employers that want to be able to reimburse their employees for the cost of individual insurance plans and qualified medical expenses. These new options involve a retooling of health reimbursement arrangements, or HRAs, which had all but disappeared from the employee health benefit arena after the Affordable Care Act was implemented.

In December 2016, the federal government passed the Cures Act, and introduced qualified small employer health reimbursement arrangements, or QSEHRAs. Shortly thereafter, through a joint ruling issued in July 2019, the Departments of Treasury, Labor, and Health and Human Services unveiled two additional new HRAs: the individual coverage health reimbursement arrangement, or ICHRA, and the excepted benefit health reimbursement arrangement, or EBHRA. The purpose of all of these plans is to increase flexibility, selection, and choice for employer-provided health insurance plans.

Background

The passage of the Affordable Care Act (ACA) brought about many, many changes to the health insurance field, including a number of market reforms that were intended to provide greater protection and enhanced benefits for consumers. Given that the majority of working Americans with health insurance coverage obtain it through an employer plan (or through some association with an employer plan), group health coverage and group health plans were primary targets of the ACA’s market reform measures.

Whether intended or not, the market reforms imposed by the Affordable Care Act had a chilling effect on one type of employer-provided health benefit:  health reimbursement arrangements. A health reimbursement arrangement, or HRA, is a group health benefit plan, funded solely by an employer, that provides cash reimbursements to employees, their spouses and dependents, and retirees for qualified medical expenses, including health insurance premiums (for privately purchased coverage) and prescription drugs.  Funds distributed from an HRA to use for qualified medical expenses are not taxable to the employee.

Because the IRS considers HRAs as a type of group health insurance plan, they became subject to the market reforms imposed by the ACA. However, by their very definition and design, HRAs fail to comply with these reforms.  Consequently, in 2013, various federal agencies—including the IRS and the Department of Labor—made clear that stand-alone HRAs violate ACA provisions and would no longer be allowed.  

Accordingly, traditional stand-alone HRAs lost much of their utility and appeal.  This was especially significant for the small employer market that had embraced HRAs as an attractive alternative to traditional group health insurance plans.

That Was Then, This Is Now . . .

As it turned out, however, the door did not close on HRAs. In fact, the tide is turning in new directions. Over the past few years, there have been a number of changes at the federal level—legislative and regulatory—that have reopened the avenue to health reimbursement arrangements.

• On December 13, 2016, the 21st Century Cures Act was signed into law. A sweeping piece of bipartisan legislation, the Act included in its “Other Provisions” is a relatively short section titled Exception from group health plan requirements for qualified small employer health reimbursement arrangements. This section, constituting only 6 of the more than 300 pages of the Act’s text, introduced a new form of HRA exclusively for small businesses: the qualified small employer HRA, or QSEHRA.

• Less than a year later, on October 17, 2017, the administration issued Executive Order 13813 which, among other measures, ordered the Departments of Treasury, Labor, and Health and Human Services to consider proposing regulations or revising guidance that would:
• • increase the usability of HRAs
  • expand employers’ ability to offer HRAs to their employees
  • allow HRAs to be used in conjunction with individual (nongroup) coverage

The result was a joint ruling by the three agencies, finalized in June 2019, that introduced two additional types of HRAs: the individual coverage HRA, or ICHRA and the excepted benefit HRA, or EBHRA, which are available to any sized employer.

In General, What These Plans Offer

Generally speaking, QSEHRAs, ICHRAs and EBHRAs are all intended to increase health benefit options for both employers and employees:

• These plans are employer-provided health benefit arrangements that use a reimbursement approach to pay qualified health care expenses for a business’ employees.“Qualified health care expenses” are those that qualify for the medical expense tax deduction under IRC Section 213(d).
• Employers map the design of the arrangement, including how much will be contributed to the plan, how much employees will be reimbursed from the plan, and the terms for employee eligibility and coverage.
• Rather than having the employer buy health insurance for them, employees select and purchase their own insurance, and the costs they incur for their qualified medical expenses—which can include their plan premiums—are presented for reimbursement.
• If valid, these costs are reimbursed by the arrangement, up to the amount the employer determines will be available.
• The arrangements are funded solely by employer contributions (and are tax-deductible by the employer).
• Reimbursements employees receive -- whether for medical costs or insurance premiums—are not included in their taxable wages.

Comparison Chart: QSEHRAs, ICHRAs, EBHRAs

The following chart compares the primary features of QSEHRAs, ICHRAs, and EBHRAs. QSEHRAs and ICHRAs can stand on their own, providing two different ways of helping employees obtain and maintain their own health coverage. EBHRAs must be offered in conjunction with a group health insurance plan (and they are not compatible with QSEHRAs or ICHRAs), so the motivations of an employer who is considering offering an EBHRA would likely be very different from those of an employer considering a QSEHRA or an ICHRA.

	QSEHRA	ICHRA	EBHRA
Provided By	Employers with fewer than 50 employees	Employers; no limit on size	Employers; no limit on size
Funded By	Employer only	Employer only	Employer only
Reimbursable Expenses	IRC Section 213(d) qualified medical expenses, including insurance premiums; employees choose their own individual coverage	IRC Section 213(d) qualified medical expenses, including insurance premiums; employees choose their own individual coverage	Limited excepted benefits; premiums for STLDI, COBRA; out-of-pocket IRC Section 213(d) medical expenses (except premiums)
Contribution/ Reimbursement limits	Single: $5,000 (indexed) annually Family: $10,000 (indexed) annually	None (employer determines)	$1,800 (indexed) annually
Tax Treatment of Contributions/ Reimbursements	Tax-deductible by the employer; not taxable to the employee	Tax-deductible by the employer; not taxable to the employee	Tax-deductible by the employer; not taxable to the employee
Design Flexibility	Generally, must be offered to all regular, full-time employees (limited classes may be excluded), on the same terms; cannot vary benefits among participating employees Plans can be designed to cover any or all allowable expenses	Can be limited to certain employee classes; can vary terms within a class based on age and number of dependents Plans can be designed to cover any or all allowable expenses	Must be offered on the same terms to all employees within the same employee class Plans can be designed to cover any or all allowable expenses
Carryover of Funds	Permitted; not required (all unclaimed funds belong to the employer)	Permitted; not required (all unclaimed funds belong to the employer)	Permitted; not required (all unclaimed funds belong to the employer)
Other Employer- Provided Coverage	Not allowed	Employer can also offer a traditional group plan; however, a traditional plan and an ICHRA cannot be offered to the same employee class	Must be offered in conjunction with a traditional group plan; however, employee does not have to participate in group plan in order to participate in an EBHRA
Employee Requirements	Must have and maintain minimum essential coverage	Must have and maintain qualified individual health insurance	None
HSA/HDHP Compatible	Can contribute to an HSA only if QSEHRA is designed to reimburse premiums only	Can contribute to an HSA only if ICHRA is designed to reimburse premiums only	Can contribute to an HSA only if EBHRA is designed to reimburse premiums (for limited benefits) only
Premium Tax Credits	Available if employee is eligible; must be offset by QSEHRA reimbursement	Not available if the employee accepts ICHRA reimbursements	Not applicable
Considered a Group Plan Subject to ERISA and COBRA	No	Yes	Yes

Take A Deeper Dive

Understanding these new health reimbursement arrangements can help you better serve your clients and customers. Take a deep dive into learning about QSEHRAs, ICHRAs, and EBHRAs with our new course, Health Reimbursement Arrangements: QSEHRAs, ICHRAs, and EBHRAs. This course is approved for insurance, CFP, IWI, and PRP. View our full continuing education catalogs to see more courses on HRAs to start advancing your knowledge.

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