Why reimbursement arrangements appeal to young companies

An HRA separates the money from the insurance. The startup decides what it will contribute, and each employee picks an individual policy that suits their doctors, family and location. For a founding team that hires one or two people at a time, often in different states, that can be simpler than choosing a single group plan everyone has to share.

The trade-off is that employees do more of the shopping, and the arrangement carries its own eligibility and notice rules. Neither type is an insurance policy. Each is a tax-favored way of paying toward coverage the employee holds in their own name.

QSEHRA: built for the smallest employers

A qualified small employer HRA is reserved for employers that are not applicable large employers, meaning fewer than 50 full-time employees and equivalents in the prior year, and that offer no group health plan to anyone. The IRS reads group health plan broadly here. A stand-alone dental or vision plan, a health FSA or a second HRA each counts, so a startup that adds a dental perk loses the option of running a QSEHRA.

The company pays for it entirely, with no salary reductions from employees, and it runs on identical terms for every eligible person. The plan document can still carve out some groups:

people with fewer than 90 days of service;
anyone younger than 25;
part-time and seasonal staff;
employees covered by a bargaining agreement that dealt with health benefits;
certain nonresident aliens.

A reimbursement is tax-free only when the employee holds minimum essential coverage, and the annual ceilings are indexed each year.

ICHRA, which CMS now calls a CHOICE Arrangement

CMS describes the CHOICE Arrangement, the name it now uses for the individual coverage HRA, as tax-free money employees use to buy their own individual health insurance in place of a traditional group plan. The startup picks the allowance, with no required floor or cap, and can extend it to employees’ families.

It can be offered to everyone or to defined classes of employees, provided each class gets the same terms. Nobody can be handed a choice between group cover and the HRA, and when some classes get a group plan while others get the HRA, minimum class sizes can come into play. Qualifying coverage includes individual policies bought on the Marketplace or directly off-exchange, Medicare Parts A and B, and Medicare Advantage. A short-term limited-duration policy does not count, and neither does dental-only or vision-only cover.

Choosing between them at seed stage

For a team of a few people, these questions usually settle it:

Will you offer any other health benefit? Any group health plan, dental included, rules out a QSEHRA. An ICHRA can run alongside a group plan as long as they go to different classes.
Do you expect to pass 50 soon? A QSEHRA exists only below the large-employer line. Once the company is an applicable large employer, an ICHRA’s affordability is tested under the mandate against the lowest-cost silver self-only plan where each employee lives, with a safe harbor that uses the primary work site instead.
Do different groups need different terms? A QSEHRA runs one set of terms for all eligible staff; an ICHRA allows classes.
Who will run it? CMS notes that an employer can work with a broker or a third-party administrator to set up and operate a CHOICE Arrangement.

Notices and dates to put on the calendar

Both arrangements depend on written notice. A QSEHRA notice goes out at least 90 days before each plan year, or by the first day a newly eligible employee qualifies, and skipping it carries a per-employee penalty. An ICHRA notice follows the same 90-day pattern for current staff, reaches a newly eligible employee no later than their first day of eligibility, and has to explain how accepting the HRA affects eligibility for the premium tax credit.

CMS publishes a model notice and model attestations, plus a look-up table of lowest-cost silver plans, covering plan years through 2026, that employers use to test affordability. Work backward from the start date: a startup that decides in November to launch on January 1 has generally already missed the 90-day notice date for its existing staff.

How each one meets the premium tax credit

Employees who buy Marketplace coverage often ask whether an HRA costs them their premium tax credit. With a QSEHRA, the answer turns on affordability. In a month when the QSEHRA counts as affordable, the employee cannot claim the credit; when it does not, the credit is reduced by the QSEHRA benefit. With an ICHRA, the required notice has to spell out the effect for each employee, and CMS offers model wording for it.

What changes as the startup grows

Crossing 50 does not take effect mid-year. A small employer that grows past the line partway through a year is not treated as an applicable large employer before the next January 1, and even then only when its average for that year hit 50, which leaves time to move from a QSEHRA to an ICHRA or a group plan. A company that later starts a group plan for some staff can keep an ICHRA for others, within the class rules. An excepted-benefit HRA is a different tool again: it is offered with a traditional group plan and helps with costs such as copays and deductibles.

The coverage CMS lists for an ICHRA is US individual and Medicare coverage, and a QSEHRA reimbursement is tax-free only alongside minimum essential coverage, so neither is designed around a hire who lives in another country. That person’s cover starts with the local system, as hiring your first employee abroad explains. Owner participation, payroll treatment and how either arrangement fits your entity are points to settle with a tax professional before launch.

Asking for an introduction

If part of your team works abroad or across several states and you want to look at remote-team health cover, use the quote form on this page. Give us each person’s state or country and the number of people in each place, and we will introduce you to a benefits partner that works with remote and international teams. The partner and the insurer then handle eligibility, plan choices and pricing for each person. For the rest of the startup picture, see insurance for startups and the employee benefits hub.

A few useful answers

Common questions

Can a startup offer a QSEHRA and a dental plan at the same time?

No. The IRS treats a stand-alone dental or vision plan as a group health plan, and an employer that offers any group health plan cannot offer a QSEHRA.

Is there a minimum amount a startup has to put into an ICHRA?

No. The employer sets the contribution, and there is no required minimum or maximum. Once the company is an applicable large employer, the amount’s affordability is also measured under the mandate’s test.

Why do startups with employees in several states look at ICHRAs?

CMS names a workforce spread across several states as one reason an employer might use a CHOICE Arrangement instead of a group plan. Each employee buys individual coverage, so the company is not tied to one plan’s network.

What happens to a QSEHRA when the company passes 50 employees?

Large-employer status is based on the prior year’s average, so crossing 50 partway through a year changes nothing until the next January 1, and only then if that year’s average reached 50. From then on a QSEHRA is no longer available, and the company looks at an ICHRA or a group plan.

Can Mithril1 help us look at health cover for a remote team?

We can introduce you to a benefits partner that handles remote-team and international health coverage, and the partner and the insurer decide eligibility, plans and pricing.

ICHRA and QSEHRA for Startups