HRAs for Small Employers: QSEHRA and CHOICE Arrangements Explained

Not every small business wants to sponsor a traditional group health plan. Health reimbursement arrangements, or HRAs, offer another route: instead of picking a plan for everyone, the employer sets an amount and reimburses employees, tax-free, for their own health insurance premiums and other qualifying medical costs.

Two kinds of HRA matter most to small employers. The qualified small employer HRA (QSEHRA) is limited to smaller employers that offer no group health plan. The arrangement long known as the individual coverage HRA (ICHRA) is available to employers of any size; HealthCare.gov now calls it a CHOICE Arrangement, "formerly known as" an ICHRA. Federal regulations (45 CFR 146.123, as published in October 2026) and IRS form instructions still say individual coverage HRA, so you will see both names. This guide explains how each works, the 2026 figures HealthCare.gov publishes, and how they interact with employees' Marketplace tax credits. It is general information, not tax, insurance or legal advice.

How HRAs work in general

HealthCare.gov describes HRAs as a type of group health plan that lets employers help employees pay for medical expenses, including, in some cases, premiums for individual coverage. Both the QSEHRA and the CHOICE Arrangement are defined-contribution arrangements: you decide the dollar amount, employees buy their own coverage, and they submit proof of expenses to be reimbursed.

Two conditions run through both. Employees must have qualifying coverage of their own to use the money, and the employer must give employees a written notice before the plan year starts. HealthCare.gov notes that starting an HRA on January 1 lines up with the individual market's annual open enrollment period, and that employees newly offered an HRA may qualify for a special enrollment period to buy individual coverage outside open enrollment.

The QSEHRA

The QSEHRA was created by the 21st Century Cures Act, and IRS Notice 2017-67 (2017) explains the rules. Under that notice, the arrangement must be funded solely by the employer, with no salary reduction contributions; it reimburses medical expenses after the employee provides proof of minimum essential coverage; it is subject to an annual dollar limit; and it must generally be provided on the same terms to all eligible employees.

Who can offer one is limited. IRS Notice 2017-67 says an eligible employer must not be an applicable large employer, which generally means it did not employ at least 50 full-time employees, including full-time equivalents, in the prior calendar year, and it must not offer a group health plan to any of its employees. HealthCare.gov gives SHOP coverage and a flexible spending account as examples of group health plans that rule out a QSEHRA.

The annual limits are indexed for inflation. For 2026, HealthCare.gov lists a maximum of $6,450 for employee-only reimbursement ($537.50 a month) and $13,100 for an arrangement that also covers family members ($1,091.66 a month). IRS Revenue Procedure 2025-32 sets the same 2026 limits. For 2025 the figures were $6,350 and $12,800. Reimbursement amounts may vary only by age and the number of people covered.

A few practical points from the same sources:

• Notice. IRS Notice 2017-67 requires a written notice at least 90 days before each plan year, or by the date a new employee first becomes eligible, and it lists what the notice must contain.
• Payroll reporting. The notice says the permitted benefit is reported in box 12 of Form W-2 using code FF.
• Unused money. HealthCare.gov says that if an employee doesn't submit a claim, the employer keeps the money, though it may let amounts roll over while the employee stays with the business.

The CHOICE Arrangement (formerly ICHRA)

HealthCare.gov describes a CHOICE Arrangement as a way to provide tax-free reimbursements for qualified medical expenses, up to a set annual amount, without offering traditional group coverage. Generally, employers of any size can offer one if they have at least one employee who isn't a self-employed owner or an owner's spouse. Unlike the QSEHRA, there is no annual minimum or maximum contribution.

Employees must be enrolled in individual health insurance, such as a Marketplace plan or another individual policy, or in Medicare (Parts A and B, or Part C). Short-term plans and dental-only or vision-only coverage don't count. A 2019 set of frequently asked questions published by CMS adds that the arrangement must have reasonable procedures to confirm enrollment, and that employees must be allowed to opt out at least annually.

The main design tool is employee classes. HealthCare.gov lists the classes the rules allow, including full-time, part-time and seasonal status; salaried versus hourly; employees in a waiting period; and work location. You must offer the arrangement on the same terms within a class, though amounts can rise with age (no more than a 3:1 ratio) and with the number of dependents.

You can offer a traditional group plan to one class and a CHOICE Arrangement to another, but you can't offer the same class a choice between them. If you mix the two, HealthCare.gov (as of October 2026) lists minimum class sizes: 10 employees for employers with fewer than 100 employees, 10% of the workforce for employers with 100 to 200, and 20 employees above 200.

How each affects employees' premium tax credits

This is where HRAs need the most care, because an offer can change Marketplace costs.

• QSEHRA. HealthCare.gov explains that if the QSEHRA is affordable for an employee, the employee and covered dependents can't get a premium tax credit. If it is unaffordable, the employee's advance premium tax credit is reduced by the QSEHRA amount.
• CHOICE Arrangement. An employee who accepts the arrangement can't get a premium tax credit. If the offer is affordable, the employee and any dependents it extends to can't get one either, even if they decline. If it isn't affordable, the employee can choose either the arrangement or the tax credit, but not both.

For 2026, HealthCare.gov says a CHOICE Arrangement is considered affordable if the employee's monthly cost for the self-only, lowest-cost silver plan in their area, after your reimbursement, is less than 9.96% of one-twelfth of the employee's household income. The 9.96% matches IRS Revenue Procedure 2025-25; for 2027, IRS Revenue Procedure 2026-26 and HealthCare.gov give 10.22%. HealthCare.gov offers affordability tools for both HRA types.

Employees can pay any remaining premium with pre-tax payroll deductions only for coverage bought outside the Marketplace, not through HealthCare.gov. For applicable large employers, the CMS FAQs note that the offer generally must be affordable to avoid an employer mandate payment.

A smaller option alongside group coverage

If you already offer a group plan, HealthCare.gov describes a third type, the excepted benefit HRA, which can reimburse items such as dental or vision coverage, copays and coinsurance up to $2,200 for plan years beginning in 2026. It can't reimburse individual health insurance premiums.

Choosing between an HRA and a group plan

HealthCare.gov's decision guide frames the trade-off this way: HRAs are defined contribution (you choose a dollar amount), while traditional group plans are defined benefit (you choose the plan). One cost to weigh is the tax credit. HealthCare.gov notes that enrolling in SHOP coverage is generally the only way to qualify for the Small Business Health Care Tax Credit, so an employer that chooses an HRA gives up that credit.

For example, imagine a hypothetical eight-person firm whose employees live in three states. A single group plan would need a provider network that works in all three states, while an HRA lets each person choose an individual plan sold where they live. The same firm should still check the affordability rules before setting amounts.

HRAs have detailed rules, and a mistake can affect employees' taxes. Before setting one up, talk with a licensed tax professional or benefits specialist, or search HealthCare.gov's Find Local Help for a registered agent or broker.

Key takeaways

• A QSEHRA is for employers that are not applicable large employers and offer no group health plan; for 2026 HealthCare.gov lists limits of $6,450 (self-only) and $13,100 (family).
• HealthCare.gov now calls the ICHRA a CHOICE Arrangement, while federal regulations still say individual coverage HRA; it has no contribution limit and works for employers of any size.
• Both require qualifying coverage for employees and a written notice, generally 90 days before the plan year.
• An affordable HRA offer can block employees' premium tax credits, so check affordability before choosing amounts.
• Choosing an HRA instead of SHOP coverage means giving up the Small Business Health Care Tax Credit.

Sources

• HealthCare.gov, Health Reimbursement Arrangements (HRAs) for small employers
• HealthCare.gov, CHOICE Arrangements
• HealthCare.gov, Deciding between group coverage and an HRA
• Internal Revenue Service, Notice 2017-67: Qualified Small Employer Health Reimbursement Arrangements (2017)
• Centers for Medicare & Medicaid Services, FAQs on New Health Coverage Options for Employers and Employees (June 13, 2019)
• Electronic Code of Federal Regulations, 45 CFR 146.123 (current as of October 2026)
• Internal Revenue Service, Instructions for Forms 1094-C and 1095-C (2025)
• Internal Revenue Service, Revenue Procedure 2025-32 (2026 inflation adjustments)
• Internal Revenue Service, Revenue Procedure 2025-25 (required contribution percentage for 2026)
• Internal Revenue Service, Revenue Procedure 2026-26 (required contribution percentage for 2027)