Defined contribution health plans for employers

The two federal designs most small employers use for this are an ICHRA and a QSEHRA. Other employer-funded accounts, including an excepted benefit HRA, use a defined contribution as well, but they sit next to a traditional group medical plan rather than replacing it.

What it is

In an ICHRA, the employer reimburses employees in a permitted class for individual health coverage that meets the arrangement's rules, up to the amount the employer sets. An ICHRA can be offered by an employer of any size. A class that is offered an ICHRA is not also offered a traditional group medical plan.

In a QSEHRA, an eligible small employer that does not offer a group health plan to any employees reimburses individual coverage and eligible medical expenses, up to the statutory cap for the year. The QSEHRA page carries the current IRS limits and the eligibility tests.

Both arrangements are HRAs: employer-funded, account-based group health plans, with notice and substantiation rules. They are not salary-reduction plans. A QSEHRA may not be funded by salary reduction. An ICHRA has its own rules for when an employee's remaining premium can be paid pre-tax, described on the ICHRA page.

A traditional small-group or large-group policy is a defined-*benefit* medical plan in this vocabulary: the plan's covered services are defined, and the employer's cost is the premium or the claims cost of that plan, not a fixed allowance chosen first.

Who it fits

A defined contribution design is often a fit when the company wants to set a budgeted allowance, when employees work in more than one state, or when a single group policy is hard to issue because of participation, contribution, or owner-and-family facts — including some 2-employee, LLC, and family business groups. It is also a fit for some employers that are growing toward or past the applicable large employer line, as described on the ICHRA page.

A traditional group plan is often a fit when the census, the state, and the issuer rules support a group policy and you want everyone in a class in the same plan. Each approach is legitimate. The ICHRA vs QSEHRA page is the side-by-side for the two HRA designs.

How it works for employers

You choose the arrangement, the classes (for an ICHRA), the allowance, and the effective date. Employees obtain individual coverage that the arrangement accepts, or, in a QSEHRA, may also be reimbursed for other eligible medical expenses, and they substantiate premiums and expenses. We will help you stand up the arrangement, employee communications, and the coordination with a Section 125 plan where the rules allow it, and we will compare it with a group policy on the same proposal.

Affordability and, for applicable large employers, the shared-responsibility rules, are part of an ICHRA discussion. Official percentages are cited on the ICHRA page when a revenue procedure has published them. We will not invent a savings figure here.

Class design is the practical work in an ICHRA. Federal rules allow different classes — for example, full-time and part-time employees, or employees at different work locations — to have different structures, with conditions, including a class-size rule in some cases. The same class may not be offered a choice between an ICHRA and a traditional group medical plan. We will use the ICHRA and ICHRA vs QSEHRA pages as the detailed rulebook and use this page as the overview of the defined-contribution idea.

How it compares

A defined contribution HRA sets the employer's amount first. A group medical plan sets the covered benefit first. An excepted benefit HRA or an integrated HRA is a defined contribution that sits *beside* a group medical plan. A health FSA is an employee salary-reduction account, not an employer HRA. We will put the designs that actually fit on one recommendation, and we will not describe a defined contribution as cheaper in the abstract.