HRA, QSEHRA, and ICHRA: Tax-Free Health Reimbursement

How it works

A health reimbursement arrangement is an employer-funded, account-based plan that reimburses an employee's medical expenses, and in some versions individual insurance premiums, tax-free. It runs entirely on the employer's dollars; nothing comes out of the employee's paycheck. Every reimbursement has to be for medical care as IRC section 213(d) defines it, and it has to be substantiated before it goes out.

The tax result runs in both directions at once. On the employer's side, a reimbursement is an ordinary and necessary business expense, deductible, and not wages subject to payroll tax. On the employee's side, the same dollars are excluded from gross income, under IRC section 106 for employer-provided coverage and IRC section 105(b) for amounts paid to reimburse medical care. Nobody owes income tax or FICA on money that is never treated as pay.

Three versions of this are usable today. A Qualified Small Employer HRA, a QSEHRA, fits a small employer with no group health plan. An Individual Coverage HRA, an ICHRA, fits an employer of any size whose employees carry individual-market coverage. A Section 105 plan, integrated with a group plan or built around a spouse on payroll, is the classic structure; the QSEHRA and the ICHRA came later, each created by its own statute or rule. The rest of this page allocates a piece to each.

The two structures that compete for a growing employer's attention line up like this.

What this is worth in Florida

Florida has no individual income tax, so the exclusion under Sections 105 and 106 changes nothing at the state level; that income was already free of Florida tax. What an HRA delivers, a federal income tax exclusion and reimbursements that are never FICA wages, is a federal benefit only. I mention this because these plans get sold on their tax benefit, and in Florida that benefit is entirely federal.

Who this applies to

Eligibility runs mostly on the employer's side, and it looks different for each structure. Getting that test wrong is what collapses a plan before it reimburses a dollar.

• A QSEHRA employer. The 50-employee ceiling above comes from IRC section 4980H(c)(2), and the no-group-plan condition from IRC section 9831(d)(3)(B); offering even one employee a limited group plan disqualifies the arrangement entirely. Eligible employees generally means everyone, though the plan may exclude a short list of categories carried over from IRC section 105(h)(3)(B): employees under 25, those with under 90 days of service, part-time or seasonal workers, employees covered by a collective bargaining agreement under which health benefits were the subject of good faith bargaining, and certain nonresident aliens. The age element belongs only to the under-25 category; the collective-bargaining exclusion carries none.
• An ICHRA employer. The lack of a size ceiling makes the ICHRA available once an employer outgrows the QSEHRA or never qualified for it. Every participant, and every dependent covered, has to be enrolled in individual-market health insurance or Medicare each covered month; the arrangement cannot reimburse an expense incurred after that coverage lapses. An employer can split its workforce into classes, full-time, part-time, salaried, hourly, or by location, offering an ICHRA to some while keeping a group plan for others, so long as no class gets both.
• A Section 105 plan, integrated or spousal. The integrated version pairs with a group health plan that meets the ACA's market-reform requirements and reimburses what that plan does not. The spousal version works differently: an unincorporated business, usually a sole proprietorship, hires the owner's spouse as a W-2 employee and adopts a written Section 105 plan covering the employee-spouse and their family, which includes the owner. I cover that structure's mechanics, and what a real employment relationship has to look like, in my Section 105 plan piece.
• Who none of the three reaches. A more-than-2% S-corp shareholder is treated as a partner for fringe-benefit purposes under IRC section 1372, and the same treatment reaches partners and sole proprietors; none is an eligible employee for QSEHRA or ICHRA purposes, so a reimbursement to any of them does not qualify. That group routes through the self-employed health insurance deduction instead, covered in a separate guide, with the S-corp-specific version in my S-corp shareholder health insurance piece.

What it requires

Each structure runs on its own calendar and paperwork; missing either is what turns a well-designed plan into a taxable one.

QSEHRA

• A written plan, adopted before the plan year starts. It has to be offered on the same terms to every eligible employee, though the dollar amount can vary with the price of a given employee's insurance by age and family size.
• A 90-day written notice. It has to reach every eligible employee no later than 90 days before the plan year starts, or by the eligibility date for a mid-year hire. It has to state the employee's permitted benefit, direct the employee to disclose that amount to any Exchange when applying for the Premium Tax Credit, and warn about the consequences of lacking minimum essential coverage. Missing it costs $50 per employee, capped at $2,500, under IRC section 6652(o).
• The annual cap. Reimbursements cannot exceed a statutory cap that IRS revenue procedure adjusts most years. For 2026, under Rev. Proc. 2025-32, the cap is $6,450 for self-only coverage and $13,100 for family coverage, and it runs on a proportional monthly basis for an employee who is not eligible the full year.
• W-2 reporting. The employer reports the employee's permitted benefit in Box 12, under Code FF.

ICHRA

• A written plan defining classes. It has to name the classes of employees covered and the dollar amount for each, which may scale by age up to a 3:1 ratio and by family size.
• The same 90-day notice window. It also has to cover the employee's opt-out right, the arrangement's interaction with the Premium Tax Credit, and whether the ICHRA is being treated as affordable.
• Substantiation, twice. Individual coverage has to be confirmed once at enrollment, and again with every reimbursement request.
• A genuine opt-out. Every employee has to be able to opt out and waive future reimbursements at least once a plan year, which is what keeps Premium Tax Credit eligibility alive under IRC section 36B if the ICHRA turns out to be unaffordable.
• Affordability testing for an applicable large employer. An ICHRA is affordable if the employee's required contribution toward the lowest-cost self-only silver plan, priced at the employee's residence or, under the location safe harbor, the employee's primary worksite, does not exceed the Section 36B affordability percentage of household income.
• No Box 12 Code FF. An ICHRA reimbursement is simply excluded and never shows up as wages. Whether a direct primary care membership fee can also run through an ICHRA, and the trap inside that combination, is a related question covered in my direct primary care piece.

The spousal Section 105 plan

• Real payroll. The spouse has to be on actual payroll: a genuine W-2, Florida reemployment tax registration where needed, timesheets, and a wage that is reasonable for real work performed. My payroll guide covers what setting that up involves.
• A written plan document. It has to name the employee-spouse as the covered employee and be adopted before the reimbursements start.

What you need to document

The paperwork decides whether any of this survives an examination, and it has to be built as things happen, not reconstructed afterward.

The written plan document

Whichever structure is in play: a QSEHRA or ICHRA plan naming the eligible classes and benefit amounts, or a Section 105 plan naming the employee-spouse, dated before any reimbursement goes out.

The 90-day notice and proof of its timing

A copy of the notice, plus proof of when it went out. Both QSEHRA and ICHRA live or die on this deadline; content without timely delivery does not satisfy it.

Coverage substantiation

For a QSEHRA, proof of minimum essential coverage before any reimbursement. For an ICHRA, proof of individual-market or Medicare enrollment, checked at enrollment and again with every request.

The underlying medical expense records

Receipts, invoices, or an explanation of benefits behind every dollar reimbursed under IRC section 213(d), plus premium statements where a reimbursement covers a premium rather than direct care.

A cap and eligibility log

For a QSEHRA, a running record of the proportional monthly cap for any employee not eligible the full year, and confirmation no group health plan exists anywhere in the company.

Real payroll records, for the spousal plan

Timesheets, a reasonable wage for the work performed, and payroll tax filings in the employee-spouse's name. The plan's validity depends entirely on the employment being real, so this is the file that carries it.

Where it goes wrong

Most of what goes wrong here is mechanical, not aggressive: a condition that either holds or does not, missed by a date or a dollar.

• Any group health plan kills a QSEHRA. Offering a group plan to even one employee, including certain excepted benefits, voids QSEHRA eligibility under IRC section 9831(d)(3)(B).
• A missed notice does real damage. The IRC section 6652(o) penalty attaches automatically, and a late or incomplete notice calls the plan's whole compliance into question, not just the notice.
• Reimbursing past the cap. Anything a QSEHRA pays above the annual cap becomes taxable, and the cap has to be prorated by month for anyone not eligible the entire year.
• An ICHRA offered alongside a group plan to the same class. This violates the no-choice rule in 26 CFR 54.9802-4(c)(2) directly and unwinds the integration.
• An ICHRA participant who is not actually covered. A reimbursement loses its excludable character the moment the participant is not enrolled in qualifying individual coverage for that month, whether or not anyone caught it.
• Nondiscrimination testing. A self-insured medical reimbursement plan and an ICHRA's classes are both subject to IRC section 105(h) nondiscrimination testing; a plan favoring highly compensated individuals forces them to include the excess reimbursement in income. A QSEHRA sidesteps 105(h) through its own same-terms rule, which still has to be followed.

The mistake I see most

A more-than-2% S-corp shareholder takes a QSEHRA or ICHRA reimbursement anyway. It is disallowed under IRC section 1372, confirmed for QSEHRA purposes in IRS Notice 2017-67, Q&A-9, and the amount becomes ordinary W-2 wages instead. It is also the single most common error I see in a small owner-managed practice, because the person who designs the plan usually assumes it covers everyone who works there, including themselves.

Bona fide employment and the Shellito case

The spousal Section 105 plan is the most-attacked structure of the three, and the fight is never about the statute; it is about whether the employment is real. Shellito v. Commissioner, 437 F. App'x 665 (10th Cir. 2011), is the case usually cited here, and it is worth being precise about what it did: the Tenth Circuit vacated the Tax Court and remanded, holding that the wrong standard had been applied and that the question turns on ordinary common-law agency principles. It did not itself uphold the arrangement, and the order says on its face that it is not binding precedent. What it establishes is the test, which is whether the employment is bona fide: real work, real records, and a written plan. The cases that come out the other way are missing one of those three, a spouse who was not really working, a wage nobody could justify, or no plan document. The statute does not change; the facts do.

A situation where this comes up

The version I see most often is a small S-corp practice with a handful of W-2 staff and no group health plan, where the owner wants to do something for the team's health costs without taking on a full group plan's administration. A QSEHRA fits well. What the owner has to accept is that it helps the rank-and-file staff and gives the owner nothing at all; a more-than-2% shareholder reimburses their own health costs through the self-employed health insurance deduction described above instead.

Once the practice grows past the QSEHRA's employer-size ceiling, or the owner wants a reimbursement level the cap will not allow, the ICHRA is the natural next structure, provided the workforce can carry individual-market coverage rather than a group plan. That is a real trade-off, not a strict upgrade: the ICHRA drops the dollar cap but adds a coverage condition the QSEHRA never had.

The version that concerns me is the sole proprietor who wants to run the family's medical costs through the business by hiring a spouse and adopting a Section 105 plan, where the paperwork gets built around a job that was never really there. That is exactly the fact pattern Shellito and its contrary cases turn on, and getting the employment right matters more than the plan document itself.