Shopping group health for your team
A Health Reimbursement Arrangement (HRA) fundamentally changes how a business pays for employee healthcare. Instead of purchasing a single, fully insured group health plan and forcing every employee to accept its specific carrier network and deductibles, the employer provides a fixed, tax-free monthly allowance. Employees take that allowance, shop the individual Texas health insurance market, and select the policy that best fits their personal medical needs and preferred doctors.
For the business owner or HR lead, an HRA represents a shift from a “defined benefit” model to a “defined contribution” model. You define exactly what the business will spend per employee, per month, and your financial obligation stops there. You are entirely insulated from the arbitrary, double-digit rate hikes that plague traditional group health renewals when a single employee incurs a high-cost medical claim.
This guide details the two specific types of HRAs that allow for this setup—the Individual Coverage HRA (ICHRA) and the Qualified Small Employer HRA (QSEHRA)—and walks through the precise legal, administrative, and strategic mechanics required to implement them effectively in Texas.
To understand why HRAs like ICHRA and QSEHRA were created, it is necessary to understand the structural flaw in traditional fully insured small and mid-sized group plans.
Traditional group health insurance is a defined benefit. The employer selects a plan—perhaps a Gold-tier PPO—and agrees to pay a percentage of the premium. The carrier sets the price of that plan based on the collective health risk of the entire workforce. If one employee develops a chronic illness or has a premature infant, the collective risk profile of the company increases. At the end of the plan year, the insurance carrier delivers a renewal rate that accounts for those claims. The employer may face a 15%, 20%, or even 30% premium increase just to maintain the exact same level of coverage. The employer has no control over the cost of the benefit they defined.
An HRA reverses this dynamic. An HRA is a defined contribution. The employer does not select a health plan, does not negotiate with a carrier for a group rate, and does not carry the burden of the group’s collective health risk. Instead, the employer creates a formal, tax-advantaged arrangement that says: “The company will reimburse up to $500 per month for any qualified health insurance premium or medical expense.”
If individual market health insurance premiums rise the following year, the employer’s cost does not automatically rise. The employer’s liability is capped at the $500 monthly allowance. The business can choose to increase the allowance to help employees absorb the premium hike, but the employer makes that decision on their own budget cycle, not at the mandate of an insurance carrier.
For the employee, the defined contribution model provides unprecedented portability and choice. In a traditional group plan, an employee who prefers a specific hospital system in Houston or Dallas must hope the employer chooses a carrier network that includes it. Under an HRA, the employee shops the individual market and selects the exact plan that covers their specific doctors. Furthermore, because the employee owns the individual policy, they do not lose their coverage on the day they leave the company; they simply lose the employer’s monthly subsidy. They can continue paying the premium themselves without dealing with COBRA administration.
The Individual Coverage HRA (ICHRA) is the most flexible and widely adopted defined-contribution vehicle available today. Authorized by federal regulations that took effect in 2020, the ICHRA removed the barriers that previously prevented mid-sized and large employers from utilizing HRAs for premium reimbursement.
There is no size cap on an ICHRA. It is legally available to businesses of any size, from a small Texas LLC with three employees to an enterprise corporation with tens of thousands of workers.
The defining rule of an ICHRA is integration. To receive a single dollar of tax-free reimbursement from an ICHRA, the employee must be actively enrolled in individual health insurance that qualifies as Minimum Essential Coverage (MEC).
MEC generally means a comprehensive health insurance policy that complies with the Affordable Care Act (ACA). This includes individual plans purchased through the federal marketplace (HealthCare.gov), plans purchased directly from a carrier off-exchange, and Medicare (Parts A and B, or Part C).
If an employee attempts to use a short-term health insurance plan, a fixed-indemnity policy, or a health sharing ministry, they cannot participate in the ICHRA. Those products do not meet the statutory definition of MEC. If an employee drops their qualified individual coverage mid-year, their access to the ICHRA funds terminates on the exact date their coverage ends.
A traditional group health plan usually forces an employer to treat all employees uniformly. The ICHRA introduces the concept of statutory employee classes, allowing an employer to vary the monthly contribution allowance—or even offer different benefits entirely—based on objective, predefined categories.
Federal regulations permit employers to divide their workforce into 11 specific classes. The most commonly utilized classes include:
You can scale your ICHRA allowances based on these classes. For example, an employer could provide $600 per month to salaried employees and $300 per month to hourly employees. You can also vary the allowance based on employee age or family size, acknowledging that a 55-year-old with a spouse faces higher premium costs than a 26-year-old single employee.
The geographic classification is particularly powerful for businesses spread across Texas. The ACA divides Texas into 26 distinct geographic rating areas. Premium costs vary significantly between these areas. The cost of a Silver plan in the Austin-Round Rock metro area (Rating Area 14) is fundamentally different from the cost of a similar plan in the El Paso metro area (Rating Area 9).
An employer with multiple locations can set up their ICHRA to offer a $500 monthly allowance to employees in the Dallas rating area, and a $400 allowance to employees in the San Antonio rating area, aligning the benefit with the actual cost of living and insurance realities of those specific regions.
One of the most strategic uses of an ICHRA is offering it alongside a traditional fully insured group health plan. However, you cannot offer the same employee a choice between the two. You must separate the workforce by class.
For example, a business might offer a traditional Blue Cross Blue Shield group plan to its salaried management team, and offer an ICHRA to its hourly workforce. To prevent employers from deliberately carving out their sickest employees and pushing them onto the individual market, the IRS enforces a Minimum Class Size rule when an ICHRA is offered alongside a traditional group plan.
If you are using the full-time, part-time, salaried, hourly, or geographic classes to separate employees between a group plan and an ICHRA, the ICHRA class must meet a minimum size threshold based on the total size of your company:
If the class does not meet this minimum threshold, you cannot legally offer the ICHRA to that specific group while maintaining a traditional plan for the rest of the company.
The Qualified Small Employer HRA (QSEHRA) predates the ICHRA. Established in 2017, the QSEHRA was designed specifically to give small businesses a tax-advantaged way to reimburse medical premiums before the broader ICHRA regulations existed. Today, it remains a viable option, but it is bound by much stricter federal limitations.
The QSEHRA is strictly limited to small employers—specifically, businesses that do not qualify as Applicable Large Employers (ALEs) under the ACA. This generally means the business must have fewer than 50 full-time equivalent (FTE) employees. If your business crosses the 50 FTE threshold during the year, you lose eligibility to offer a QSEHRA for the following plan year.
Furthermore, an employer offering a QSEHRA cannot offer any group health plan to any employee. You cannot have a QSEHRA for hourly workers and a traditional plan for salaried workers. The prohibition is absolute.
Unlike the ICHRA, which allows an employer to set the monthly allowance as high as they want, the QSEHRA is subject to strict maximum contribution limits set by the IRS. These limits are adjusted annually for inflation.
While exact figures change every tax year, the structure remains consistent: the IRS sets a hard dollar cap for self-only coverage and a separate hard dollar cap for family coverage. An employer cannot offer a QSEHRA allowance that exceeds these statutory limits, regardless of how much they want to subsidize their employees’ healthcare costs.
The QSEHRA lacks the flexible employee class structure of the ICHRA. A QSEHRA must be offered on the exact same terms to all eligible employees. You cannot offer management $400 a month and entry-level staff $200 a month.
The only permissible variations in QSEHRA allowance amounts must be tied mechanically to age or family size. For example, you can design a QSEHRA that reimburses up to $300 for single employees and $600 for employees with dependents, because the variation is tied directly to the cost structure of the underlying health insurance policies.
Like the ICHRA, employees utilizing a QSEHRA must have Minimum Essential Coverage to receive tax-free reimbursements. However, the QSEHRA allows for slightly broader integration. While an ICHRA requires the employee to be the primary policyholder on an individual plan (or Medicare), a QSEHRA allows an employee to be reimbursed if they are covered as a dependent on their spouse’s group health plan.
| Feature | ICHRA | QSEHRA |
|---|---|---|
| Employer Size Limit | None (Available to enterprise and small business) | Under 50 FTEs only (Non-ALEs) |
| Contribution Caps | No limit | Capped by annual IRS statutory limits |
| Employee Classes | Allowed (11 specific classes, minimum size rules may apply) | Not allowed (Must be uniform for all eligible employees) |
| Group Plan Integration | Can be offered alongside a group plan (to different classes) | Cannot be offered if ANY group plan is sponsored |
| Spousal Group Plan | Cannot reimburse premiums for a spouse's group plan | Can reimburse premiums for a spouse's group plan |
For Texas businesses with fewer than 50 FTEs, ACA compliance is relatively simple: you are not required to offer health insurance, so any ICHRA or QSEHRA allowance is purely a competitive benefit.
For Applicable Large Employers (ALEs)—businesses with 50 or more FTEs—compliance is highly complex. Under Section 4980H of the Internal Revenue Code (the ACA employer mandate), an ALE must offer “affordable” Minimum Essential Coverage to at least 95% of its full-time employees or face severe tax penalties.
Because an ICHRA is a group health plan under the legal definition of the Employee Retirement Income Security Act (ERISA), offering an ICHRA satisfies the mandate’s requirement to offer coverage. However, the employer must still prove that the ICHRA allowance makes individual health insurance affordable for the employee.
Affordability is not based on the plan the employee actually chooses. Affordability is calculated based on the lowest-cost Silver plan available to the employee in their specific geographic rating area on the Texas ACA marketplace.
The IRS states that coverage is affordable if the employee’s required contribution—the cost of the lowest-cost Silver plan minus the employer’s ICHRA allowance—does not exceed a specific percentage of the employee’s household income. (This percentage is updated annually by the IRS).
Because employers do not know an employee’s total household income, the IRS provides three safe harbors:
For an ALE using an ICHRA in Texas, the affordability calculation requires pinpoint accuracy regarding location. The lowest-cost Silver plan for an employee living in Harris County (Houston) will have a different premium than the lowest-cost Silver plan for an employee living in Tarrant County (Fort Worth).
To avoid employer mandate penalties, the HR department or the plan’s Third-Party Administrator (TPA) must look up the lowest-cost Silver premium for every single full-time employee based on their residential zip code and age, and mathematically ensure the ICHRA allowance is large enough to trigger one of the affordability safe harbors. If the allowance is too low, the coverage is deemed unaffordable, and the employer faces Section 4980H(b) tax penalties.
A critical factor for the employee experience is how an HRA interacts with the Advance Premium Tax Credit (APTC)—the federal subsidies that lower the cost of individual health insurance on HealthCare.gov based on household income.
An employee cannot “double dip” by receiving tax-free employer money and full federal subsidy money for the same health insurance premium.
If an employer offers an ICHRA that is deemed “affordable” under ACA rules, the employee is strictly disqualified from receiving any Premium Tax Credits on the marketplace, regardless of how low their household income is. The employer’s affordable offer legally overrides federal subsidy eligibility.
If the employer’s ICHRA offer is deemed “unaffordable,” the employee faces a choice. They can accept the ICHRA allowance and forfeit their APTC, or they can formally “opt out” of the ICHRA entirely and claim their APTC on the marketplace. Employers utilizing an ICHRA must provide a formal notice to employees 90 days before the plan year begins, explicitly detailing the allowance amount so the employee can take that document to HealthCare.gov to determine their subsidy eligibility.
The QSEHRA interacts with subsidies differently. Because a QSEHRA is not subject to the strict affordability definitions of the employer mandate, an employee who receives a QSEHRA allowance can still claim the APTC, but the federal subsidy is reduced dollar-for-dollar by the QSEHRA amount.
If an employee qualifies for a $500 monthly subsidy on HealthCare.gov, and their employer provides a $300 monthly QSEHRA allowance, the marketplace will reduce their federal subsidy to $200. The net financial reality for the employee remains the same, but the funding source is split between the employer and the federal government.
The overarching tax advantage of an HRA is that the employer’s contributions are entirely tax-deductible as a business expense, and the reimbursements are entirely tax-free to the employee (exempt from federal income tax, state tax, and FICA payroll taxes).
However, this tax-free treatment relies on the participant legally qualifying as a W-2 employee. Business owners and their immediate families often face restrictions based on how their business is incorporated.
C-Corporations: Owners of C-Corps are legally considered W-2 employees of the corporation. They can participate in an ICHRA or QSEHRA and receive tax-free reimbursements just like any other employee.
S-Corporations: The IRS treats individuals who own more than 2% of an S-Corporation as partners rather than employees for fringe benefit purposes. A >2% shareholder generally cannot receive tax-free reimbursements from an ICHRA or QSEHRA. Their family members (spouse, children, parents) are also subject to attribution rules and are similarly excluded from tax-free participation.
Partnerships and LLCs: Partners in a partnership, and members of an LLC taxed as a partnership, are considered self-employed. They draw self-employment income, not W-2 wages. Therefore, they are not eligible to participate in an HRA tax-free.
Sole Proprietorships: A sole proprietor is the business. They cannot be an employee of themselves, and therefore cannot participate in an HRA.
For S-Corps, Partnerships, and Sole Proprietorships, an HRA remains a highly effective way to provide health benefits to rank-and-file staff, but the owners must handle their own health insurance premiums through self-employed health insurance deductions on their personal tax returns, entirely outside the HRA structure.
An HRA is not a casual stipend added to an employee’s paycheck. If an employer simply gives an employee an extra $300 a month and says “use this for health insurance,” that is a taxable cash stipend, subject to FICA taxes and income tax.
To maintain the tax-advantaged status of an HRA, the plan must comply with ERISA, the Internal Revenue Code (specifically Section 105 and 106), and HIPAA privacy regulations. This requires rigorous daily administration, which is almost entirely handled by specialized Third-Party Administrators (TPAs) or HRA software platforms.
An HRA must be established with a formal written Plan Document that outlines the eligibility rules, contribution amounts, and claims procedures. The employer must also distribute a Summary Plan Description (SPD) to all eligible employees. Without these legal documents in place before the start date, the arrangement violates ERISA.
The IRS strictly forbids an HRA from dispensing tax-free money without proof that the money was spent on qualified medical expenses. Every single premium payment and out-of-pocket medical expense must be substantiated.
For premiums, the employee must provide proof of active coverage (a carrier statement or marketplace enrollment confirmation) and proof of payment (a bank statement, credit card receipt, or payroll deduction record if utilizing a pre-tax cafeteria plan).
For medical expenses (if the employer designs the HRA to cover Section 213(d) out-of-pocket costs like copays, deductibles, and prescriptions), the employee must submit an Explanation of Benefits (EOB) or a detailed provider receipt.
If an HR department attempts to manage this internally, they immediately collide with HIPAA. HR managers should not be receiving, reviewing, or storing employees’ personal medical receipts, EOBs, or prescription histories.
This is why nearly all HRAs are managed by a TPA. The TPA provides a secure portal or mobile app where employees upload their receipts. The TPA’s compliance team verifies that the expense qualifies under IRS Section 213(d), confirms the employee maintains active MEC, and issues the reimbursement via direct deposit. The employer never sees the medical data; they only see a consolidated monthly invoice from the TPA.
The success of an HRA depends entirely on the stability and quality of the individual health insurance market where the employees reside. When moving to an ICHRA or QSEHRA, the employer is shifting the plan selection burden onto the employee. The HR lead must clearly understand what products are actually available to their Texas workforce.
The individual ACA market in Texas (HealthCare.gov) is robust, with multiple carriers participating in every county. However, the network structure is fundamentally different from large group plans.
Traditional fully insured group health plans in Texas are frequently Preferred Provider Organization (PPO) networks, offering broad access to out-of-network benefits and national coverage footprints.
The individual ACA market in Texas is dominated by Health Maintenance Organization (HMO) and Exclusive Provider Organization (EPO) networks. HMOs require the employee to select a Primary Care Physician (PCP) and obtain referrals to see specialists. EPOs do not require referrals, but strictly enforce their network boundaries, providing zero coverage for out-of-network care unless it is a life-threatening emergency.
If an employer transitions from a traditional Blue Cross Blue Shield group PPO to an ICHRA, the employees must be educated on how to navigate HMOs and EPOs. An employee who blindly picks an individual plan without checking if their current doctors are in-network will face severe frustration. A successful HRA implementation requires robust enrollment support—often utilizing specialized insurance brokers who assist the employees one-on-one with navigating the Texas marketplace.
An employee cannot simply buy individual health insurance at any time of the year. The marketplace only allows enrollment during the annual Open Enrollment Period (November 1 through January 15) or when triggered by a Special Enrollment Period (SEP).
Crucially, an employer initiating an ICHRA or QSEHRA mid-year automatically triggers a 60-day SEP for their employees. This allows the workforce to legally enter the individual market and purchase coverage on the exact date the HRA becomes active, regardless of what month the employer launches the plan.
When drafting the Plan Document for an ICHRA or QSEHRA, the employer must decide exactly what expenses the HRA will reimburse.
Premium-Only HRA: The allowance can only be used to reimburse the cost of the individual health insurance premium. If the allowance is $400 and the employee’s premium is $350, the employee is fully reimbursed, but the remaining $50 stays with the employer. This is the simplest design, easiest to substantiate, and provides total predictability.
Premium Plus Out-of-Pocket (Section 213(d)): The allowance can be used for premiums, and any remaining balance can be used to reimburse qualified out-of-pocket medical expenses, such as doctor copays, deductibles, dental work, vision care, and prescriptions. If the allowance is $400 and the premium is $350, the employee can use the remaining $50 to buy prescription medication or pay a dental bill.
This design maximizes the value of the benefit for the employee but significantly increases the volume of substantiation paperwork the TPA must process, as they are reviewing individual pharmacy receipts rather than just a monthly premium statement.
Implementing a defined-contribution strategy is not an overnight process. Because it shifts the burden of plan selection to the employee, communication and timing are paramount.
The IRS requires a 90-day written notice be provided to employees before an ICHRA takes effect. This notice must explain how the ICHRA interacts with Premium Tax Credits, provide the exact allowance amount, and explain the employee’s obligation to maintain Minimum Essential Coverage.
To execute this, the employer must typically finalize the allowance amounts, select a TPA, and draft the Plan Documents 100 to 120 days before the target launch date. During the 90-day notice window, the employer or their designated broker must hold educational sessions with the workforce, explaining how to use HealthCare.gov, how to search for their doctors in HMO/EPO networks, and how to upload their premium receipts to the TPA portal.
When executed correctly, an HRA breaks the cycle of unpredictable group health renewals, giving the business owner total control over their healthcare budget while offering employees a tax-free avenue to purchase the exact coverage they need.
Speak with a licensed advisor to determine if an ICHRA or QSEHRA is the right financial and compliance fit for your business.
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