Shopping group health for your team
For decades, the standard approach to employee benefits in Virginia was the defined benefit model: an employer worked with a broker, selected a fully-insured or self-funded group plan, and offered it to the workforce. Regardless of whether an employee was young, old, chronically ill, or rarely visited a doctor, everyone fell into the same risk pool and had access to the exact same carrier network. Today, structural shifts in federal tax law have popularized a radically different paradigm known as the defined contribution model, executed through Health Reimbursement Arrangements (HRAs)—specifically, the Individual Coverage HRA (ICHRA) and the Qualified Small Employer HRA (QSEHRA).
Under this model, the employer steps entirely out of the business of picking health plans. Instead, the company establishes a tax-free financial allowance. Employees use that allowance to shop on the individual market, purchasing the coverage that best fits their specific household needs, preferred doctor networks, and risk tolerance. The employer reimburses the employee for the premium, and potentially for out-of-pocket medical expenses, up to the defined limit.
This guide provides a total breakdown of how ICHRA and QSEHRA function for business owners and HR leaders in Virginia. It details the administrative mechanics, tax implications, compliance burdens, and structural logic required to transition a workforce away from traditional group health insurance and into a defined-contribution HRA model.
To understand the mechanics of an ICHRA or QSEHRA, it is essential to understand why these frameworks exist and what legal guardrails necessitated their creation. Prior to 2014, some employers informally reimbursed employees for individual health insurance premiums. However, the Affordable Care Act (ACA) fundamentally disrupted this practice. The IRS issued guidance establishing that an employer cannot reimburse an employee for individual market premiums on a tax-free basis unless that reimbursement mechanism complies with all ACA market reforms, including the prohibition on annual limits for essential health benefits. Since standalone reimbursement arrangements inherently have annual monetary limits, the IRS ruled they violated the ACA. Employers caught reimbursing individual premiums faced penalties of up to $100 per day, per employee.
This regulatory environment left small businesses that could not afford traditional group health insurance with zero viable methods to help employees pay for individual coverage tax-free. To resolve this, federal legislation systematically introduced two specific, compliant carve-outs.
First came the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), created by the 21st Century Cures Act in 2016. It was intentionally narrow, strictly limited to businesses with fewer than 50 full-time equivalent (FTE) employees.
Second came the Individual Coverage Health Reimbursement Arrangement (ICHRA), introduced via rules finalized in 2019 and effective for plan years beginning in 2020. ICHRA dismantled the size caps entirely, opening the defined-contribution strategy to businesses of any size, including massive enterprise employers with thousands of employees. Crucially, ICHRA was designed to integrate directly with the ACA’s employer mandate, allowing large organizations to drop traditional group health plans without triggering federal tax penalties, provided the arrangement was structured correctly.
Understanding the stark mechanical differences between QSEHRA and ICHRA is the prerequisite for implementing either arrangement in a Virginia business.
The Qualified Small Employer HRA is the more rigid of the two vehicles, built specifically for small businesses that are not subject to the ACA’s employer mandate. It allows an employer to set aside a fixed amount of money each month that employees can use to reimburse themselves for individual health insurance premiums and qualifying out-of-pocket medical expenses.
The defining constraint of a QSEHRA is employer size. A business can only sponsor a QSEHRA if it is not an Applicable Large Employer (ALE). In concrete terms, the company must have fewer than 50 full-time equivalent employees in the preceding calendar year. If a growing Virginia tech startup with 45 employees implements a QSEHRA but scales to 60 employees the following year, the company legally loses its QSEHRA eligibility and must transition to an ICHRA or a traditional group plan.
Furthermore, an employer cannot offer a QSEHRA if they simultaneously offer a traditional group health plan to any employee. It is an all-or-nothing proposition for the entity. You cannot offer a Blue Cross Blue Shield group plan to your executives and a QSEHRA to your entry-level staff.
QSEHRA operates under strict nondiscrimination rules known as the “Same Terms” requirement. The employer must provide the exact same allowance to all eligible employees. An employer cannot offer $500 a month to management and $200 a month to warehouse staff. The allowance must be structurally flat.
The only permissible variations in the allowance amount are based on:
Unlike ICHRA, which allows limitless employer funding, QSEHRA is constrained by strict statutory maximums set by the IRS. The IRS indexes the exact maximum contribution annually for inflation. For instance, the tax code delineates one maximum limit for self-only coverage and a higher limit for family coverage. An employer can choose to offer less than the maximum limit, but they cannot legally exceed it. If an employer wishes to fund employee healthcare at a higher dollar amount than the IRS allows under QSEHRA, they are forced to adopt an ICHRA instead.
When a Virginia resident purchases health insurance through the ACA Marketplace (HealthCare.gov or Virginia’s state-based exchange), they may qualify for Premium Tax Credits (PTC) based on their household income. The introduction of a QSEHRA alters this math significantly.
If an employee receives a QSEHRA offer, they must notify the exchange. If the QSEHRA allowance makes their individual coverage “affordable” (under IRS calculations), they lose all eligibility for a PTC. If the QSEHRA allowance is too small to make the coverage affordable, the employee can still claim a PTC, but the PTC is reduced dollar-for-dollar by the amount of the QSEHRA allowance. There is no scenario where an employee can double-dip, collecting full federal tax credits while simultaneously collecting tax-free QSEHRA reimbursements for the same premium dollars.
Review the foundational requirements to determine if your company is eligible to sponsor a QSEHRA.
The Individual Coverage HRA (ICHRA) is a vastly more sophisticated instrument than QSEHRA. Designed to scale seamlessly from a small five-person firm to a multinational corporation, ICHRA removes almost all the restrictive guardrails of QSEHRA in exchange for a heavier administrative compliance burden.
An ICHRA is available to an employer of any size. A Virginia-based enterprise with 4,000 employees can adopt an ICHRA just as easily as a local bakery with 10 employees. There is no IRS cap on the size of the employer, nor is there any IRS cap on the maximum allowance an employer can offer. A company can offer $100 a month or $2,000 a month; the funding limit is dictated purely by the employer’s budget.
The most powerful feature of an ICHRA is the ability to segment employees into distinct classes. While QSEHRA forces an employer to treat everyone the same, ICHRA explicitly allows an employer to treat different classes of employees differently.
The IRS permits 11 specific employee classes for an ICHRA:
This class structure fundamentally transforms how an HR department can design benefits. A Virginia employer could offer a traditional fully-insured group plan to its salaried executives while offering a $400-per-month ICHRA allowance to its hourly workforce. Or, a company could offer a $500 ICHRA allowance to employees residing in the Richmond rating area, and a $650 allowance to employees residing in Northern Virginia (where individual market premiums are structurally higher).
The IRS heavily regulates this class flexibility to prevent adverse selection—specifically, to prevent an employer from dumping their oldest, sickest employees into the individual market while keeping their young, healthy employees on a group plan. If an employer offers a traditional group plan to one class and an ICHRA to another class, minimum class size rules apply.
For an employer with fewer than 100 employees, an ICHRA class must contain at least 10 employees. For employers with 100 to 200 employees, the class must represent at least 10% of the total workforce. For employers with more than 200 employees, the class must contain at least 20 employees. These size minimums only apply if the employer is mixing an ICHRA with a traditional group plan. If the employer only offers an ICHRA and no traditional group coverage, these minimum class sizes generally do not apply.
| Feature | Traditional Group Plan | QSEHRA | ICHRA |
|---|---|---|---|
| Employer Size Limit | None | Under 50 FTEs only | None |
| Max Allowance Cap | N/A (Employer defines premium split) | Strictly capped by IRS, indexed annually | No maximum limit |
| Class Differentiation | Limited | No (Must be on "Same Terms") | Yes (11 IRS-approved classes) |
| Can mix with Group Plan? | Yes | No | Yes, for distinct classes |
| Satisfies ALE Mandate? | Yes, if affordable & provides minimum value | N/A (ALEs cannot use QSEHRA) | Yes, if allowance meets affordability safe harbor |
For companies with 50 or more FTEs, the most critical element of deploying an ICHRA is ensuring it satisfies the ACA employer mandate. Under Section 4980H of the internal revenue code, Applicable Large Employers (ALEs) must offer affordable, minimum-value coverage to their full-time employees or face massive tax penalties (the “A” and “B” penalties).
An ICHRA satisfies the mandate if the allowance provided to the employee is large enough to make the individual market coverage “affordable.” But how is affordability calculated when the employee is shopping in the open market?
The IRS uses a specific formula based on the Lowest Cost Silver Plan (LCSP). The employer must identify the monthly premium of the LCSP available in the rating area where the employee resides (or where their primary worksite is located). The employer then subtracts the ICHRA allowance from that LCSP premium. The remaining balance (what the employee would theoretically pay out of pocket) must not exceed a specific percentage of the employee’s household income. The IRS indexes this exact affordability percentage annually, generally hovering between 8.39% and 9.5%.
Because an employer does not know an employee’s total household income, the IRS allows employers to use one of three safe harbors to prove affordability:
If a Virginia business with 200 employees implements an ICHRA, the HR department (usually partnering with a Third-Party Administrator) must map the zip codes of all employees, pull the LCSP rates for those specific rating areas, and mathematically prove that the ICHRA allowance clears the safe harbor hurdle for every single full-time employee. If it falls short, the employer risks triggering an ACA penalty.
One of the most complex interactions in the ICHRA framework is how it handles employees who are legally eligible for federal subsidies on the Exchange.
If an employee is offered an ICHRA that is mathematically “affordable” under the IRS definition, that employee is legally barred from receiving any Premium Tax Credits on the exchange, regardless of how low their actual household income is. The affordable ICHRA offer disqualifies them entirely.
If, however, the ICHRA offer is deemed “unaffordable,” the employee faces a choice. Unlike QSEHRA (which forces a dollar-for-dollar offset), ICHRA rules allow the employee to completely opt out of the ICHRA. If the employee waives the ICHRA allowance, they can go to the Exchange, claim their full federal Premium Tax Credit, and purchase heavily subsidized coverage. The employer must carefully manage this opt-out process and document the employee’s decision, as an employee claiming a PTC will generate an IRS flag that the employer must defend against using their affordability calculations.
Transitioning a workforce from a defined benefit group plan to a defined contribution ICHRA requires immense communication. The employee experience changes drastically. Instead of receiving a single ID card from HR during open enrollment, the employee becomes a consumer.
When an employer newly offers an ICHRA or QSEHRA, it triggers a 60-day Special Enrollment Period (SEP) for the employee. The employee is not forced to wait until the national November Open Enrollment window to buy a plan. They are granted a window to immediately enter the individual market and secure coverage.
In Virginia, employees will utilize the state marketplace or work with a licensed broker to browse plans from carriers operating in their specific county. A worker in Alexandria might have a robust selection of HMO and EPO options from CareFirst, Kaiser Permanente, or Anthem, while a worker in a rural Southwestern Virginia county might have a much narrower selection of carriers.
The employee must purchase Minimum Essential Coverage (MEC). This is a critical legal threshold. Short-term medical plans, fixed indemnity plans, and health care sharing ministries do not qualify as MEC. If an employee attempts to use their ICHRA allowance to buy a non-compliant plan, the employer is legally forbidden from reimbursing them.
The employer dictates the scope of the HRA. An employer can design the ICHRA to reimburse only medical premiums, or they can expand it to reimburse dental premiums, vision premiums, and out-of-pocket Section 213(d) medical expenses (such as deductibles, copayments, and prescription costs) up to the limit of the allowance.
Crucially for businesses with an aging workforce, ICHRA seamlessly integrates with Medicare. If an employee is over 65, they can use their ICHRA allowance to reimburse themselves for Medicare Part A, Part B, Part C (Medicare Advantage), and Part D premiums, as well as Medigap policies. This solves a major pain point for businesses that struggle to coordinate traditional group coverage with Medicare-eligible workers.
The largest operational mistake a Virginia business can make is attempting to administer an ICHRA or QSEHRA internally using a spreadsheet. The compliance burdens are immense, and failure to execute them perfectly results in the HRA losing its tax-advantaged status, converting all reimbursements into taxable income and triggering ACA non-compliance penalties.
Under both ICHRA and QSEHRA rules, an employer cannot simply deposit $500 into an employee’s paycheck. The employer must acquire proof—substantiation—that the employee actually holds an active, qualifying individual health insurance policy.
This substantiation must occur initially before the first reimbursement, and then every single month thereafter. If an employee stops paying their individual premium in July and the policy is canceled, the employer must instantly halt the HRA reimbursement. If the employer fails to catch the cancellation and continues paying the allowance, the employer has violated federal tax law. Because an internal HR department demanding monthly health insurance receipts from employees creates massive HIPAA privacy liabilities, virtually all successful ICHRA implementations utilize specialized Third-Party Administrators (TPAs) whose software platforms handle the substantiation loop automatically via carrier API integrations or automated receipt scanning.
Despite being a mechanism to buy individual insurance, an ICHRA is legally classified as a group health plan under the Employee Retirement Income Security Act (ERISA). This means the employer must generate and maintain formal Plan Documents and a Summary Plan Description (SPD), and distribute them to employees.
Furthermore, ICHRAs are subject to the Patient-Centered Outcomes Research Institute (PCORI) fee. The employer must file IRS Form 720 annually and pay the associated fee based on the number of covered lives in the ICHRA. Finally, ICHRA coverage triggers COBRA obligations. If an employee is terminated, the employer must offer them the opportunity to continue receiving their ICHRA allowance via COBRA (the employee pays the employer 102% of the allowance value, and in return, the employer continues to reimburse their individual market premiums).
For the corporation (C-Corp, LLC, or Partnership), HRA reimbursements are fully tax-deductible as a standard business expense. For the employee, the reimbursements are received 100% tax-free, entirely exempt from federal income tax, state income tax, and FICA payroll taxes.
However, structural exclusions apply to business owners. Under IRS rules, individuals who are considered self-employed are generally ineligible to participate in a tax-free HRA because they are not common-law employees. This exclusion actively applies to:
An S-Corp owner in Virginia cannot use an ICHRA to reimburse their own premiums tax-free, though they can absolutely sponsor the ICHRA for their W-2 staff.
Transitioning from a traditional group plan to an ICHRA is not a universal upgrade; it is a strategic decision that relies heavily on the demographic makeup of your workforce and the health of the individual insurance market in the geographies where your employees live.
An ICHRA excels in the following scenarios:
An ICHRA struggles in the following scenarios:
Our licensed advisors can help you model an ICHRA budget, structure employee classes, and compare defined-contribution costs directly against traditional fully-insured renewals.
Get a Free ConsultationTransitioning to an HRA model requires rigorous financial modeling. A competent broker will conduct an impact analysis, comparing your current group renewal against the LCSP rates in your employees’ actual zip codes. By modeling the precise tax implications, administrative fees, and employee out-of-pocket exposure, a Virginia business can determine whether the defined-contribution revolution is the correct financial lever for their specific operational needs.