Health Benefits for a Small Crew: QSEHRA and ICHRA

“Can I help my guys with health insurance without a group plan?” Yes. Federal law gives a small employer two ways to do it. Each crew member buys his own individual policy, on the Marketplace or from an insurer, and you pay back some or all of the cost, up to an amount you set. HealthCare.gov describes the reimbursement as tax-free to the worker when the rules are met.

The two are the QSEHRA (qualified small employer health reimbursement arrangement) and the ICHRA (individual coverage HRA). If you have seen a third name lately, a September 2026 CMS announcement and the SBA call the ICHRA a “CHOICE Arrangement,” and HealthCare.gov now uses that name. Same arrangement: CMS describes CHOICE Arrangements as “formerly known as” ICHRAs, and the federal rules for them come from a 2019 regulation (84 FR 28888). The SBA adds that reimbursements meeting the CHOICE rules are generally deductible business expenses and not subject to payroll tax.

What the two have in common

• Only you put money in. An HRA is funded solely by the employer, with no salary reduction contributions; the IRS says the same of the QSEHRA.
• The worker must have his own coverage. A QSEHRA reimburses only after the employee shows proof of minimum essential coverage, such as a Marketplace plan. An ICHRA requires individual health insurance, such as a Marketplace plan, a policy from a private insurer, or Medicare; short-term plans and dental or vision coverage do not count.
• They are for employees, not you. HealthCare.gov says the ICHRA is “only for employees, not self-employed individuals,” and you need at least one employee who is not a self-employed business owner or the spouse of one. For the QSEHRA, the IRS says a 2% shareholder of an S corporation is not an employee, so an owner who pays himself through an S corporation is left out too.
• A written notice comes first. Both need a notice to current employees at least 90 days before each plan year starts, and to a new hire when he becomes eligible.

The QSEHRA: simple, capped, the same for everyone

The QSEHRA is built for the smallest employers. To offer one, you must not be an “applicable large employer,” which generally means fewer than 50 full-time employees, counting full-time equivalents, in the prior year. You must not offer any group health plan; HealthCare.gov lists SHOP coverage and a flexible spending account as examples.

• A yearly cap. For 2026, payments and reimbursements cannot exceed $6,450 for self-only coverage or $13,100 for family coverage (Rev. Proc. 2025-32). You may set your amount below the cap.
• Everyone eligible gets it, on the same terms. You must provide it, not just offer it, and an eligible employee cannot waive it. The amount may vary only with the age of the people covered or how many there are, following the price of one “baseline” insurance policy.
• Who you may leave out. Employees with fewer than 90 days of service, those under 25, part-time or seasonal workers, those under a collective bargaining agreement, and certain nonresident aliens. Under the regulation the notice points to, anyone who customarily works under 25 hours a week or under 7 months a year may be treated as part-time or seasonal.
• Paperwork. The yearly amount each employee is entitled to goes on his W-2 in box 12 with code FF, whether or not he used it. Missing the written notice carries a penalty of $50 per employee, up to $2,500 a year (Code section 6652(o)).

The ICHRA: any size, no cap, set by class

The ICHRA has no size limit, and HealthCare.gov says there are “no annual minimum or maximum contribution requirements.” Its flexibility is in the classes. You may offer it to everyone, or treat set groups differently: full-time, part-time or seasonal workers; salaried and hourly; employees still in a waiting period; employees by work location; union-covered employees; certain nonresident aliens; or combinations of these. HealthCare.gov puts it plainly: “you can’t make up your own.”

Within a class the terms must be the same, except that the amount may rise with age, up to a 3-to-1 spread between oldest and youngest, and with the number of dependents. You may not give one class a choice between a group plan and an ICHRA. If you run a group plan for some classes and an ICHRA for others, minimum class sizes may apply (10 employees for an employer with fewer than 100); with no group plan at all, they do not. Each employee must be given the chance to decline the ICHRA once a year.

How they meet the Marketplace tax credit

This is the part that decides whether your money helps a particular worker. A worker who buys Marketplace coverage may qualify for a premium tax credit, and both arrangements change it. The test is whether your offer is “affordable,” and it uses each worker’s household income, which only he knows. For 2026 the line is 9.96% of household income (Rev. Proc. 2025-25).

• QSEHRA. It is affordable when the monthly premium for the self-only second lowest cost silver plan, minus one-twelfth of your yearly amount, is no more than one-twelfth of 9.96% of his household income. If it is affordable, he gets no credit. If it is not, he may still get a credit, but it is cut each month by one-twelfth of your yearly amount.
• ICHRA. The same idea with the lowest cost silver plan. If your offer is affordable, he and his household cannot get the credit, “even if they don’t use” the ICHRA. If it is not affordable, he chooses: your ICHRA or the credit, not both, and to take the credit he must decline your offer. HealthCare.gov gives the 2027 figure as 10.22%.

A worked example

Say a painting contractor sets up a QSEHRA paying $300 a month for self-only coverage, $3,600 a year, well under the cap. The premium below is an illustrative figure, not a real quote. Suppose the second lowest cost silver plan for a single worker in his county costs $550 a month. After the QSEHRA, that leaves $250 a month.

• A worker with $48,000 of household income: 9.96% of $48,000 is $4,780.80 a year, or $398.40 a month. $250 is less than that, so the QSEHRA is affordable for him. He gets no tax credit and your $300 a month instead.
• A worker with $28,000: 9.96% is $2,788.80 a year, or $232.40 a month. $250 is more than that, so it is not affordable for him. He may claim the credit, but it drops by $300 a month, so much or all of your money takes the place of help he would have had anyway.

The second case is why the choice of arrangement matters. With an ICHRA, a worker whose offer is not affordable can decline it and claim the credit instead, and you can set classes and amounts to fit the crew you actually have. You do not run this test yourself: each worker enters the details from your notice on his Marketplace application, and the Marketplace determines affordability. HealthCare.gov has an affordability tool that employers and employees can use beforehand.

Starting one

1. Pick the arrangement. Under 50 full-time and happy with one amount for everyone under the cap: the QSEHRA. Want more than the cap, different terms for full-time and part-time crew, or room to grow: the ICHRA. If you would rather have a traditional group plan, HealthCare.gov says SHOP coverage is generally the only way to qualify for the Small Business Health Care Tax Credit, worth up to 50% of your employer contribution for 2 consecutive years.
2. Pick a start date and count back 90 days. A January 1 start lets workers shop during HealthCare.gov’s Open Enrollment, November 1 to January 15, but a plan year starting January 1, 2027 needed its notice to current employees by early October 2026. A plan year starting April 1, 2027 needs it by January 1, 2027. A mid-year start is workable: HealthCare.gov says employees newly given access to either arrangement may qualify for a special enrollment period to buy individual coverage.
3. Write the notice. The IRS lists what a QSEHRA notice must contain in Notice 2017-67, and HealthCare.gov links a sample ICHRA letter. Workers need its figures for their Marketplace applications.
4. Set up the paperwork. Collect proof of coverage before paying anything, keep the reimbursement records, and for a QSEHRA put the code FF amount on each W-2. HealthCare.gov suggests a licensed tax professional, benefits specialist or agent for the setup.

Whatever you choose becomes part of the cost of each person on the crew, so add it to the labor burden in Your Real Hourly Cost. Health money and pay work together when you are trying to keep good people; What to Pay to Keep Good Crew covers the pay side, and Retirement for a Small Contractor covers the other benefit a small shop can now afford.

General information, not legal or tax advice. Rules change and vary by state; check with the agency named above or a professional for your situation.