Reimbursing Employee Premiums from the Exchange? Avoid Regulatory Pitfalls

On December 17, the U.S. House of Representatives voted to advance the Lower Health Care Premiums for All Americans Act, which aims to provide options for small businesses to help their employees with health insurance costs.  The Senate will not reconvene until the new year (and some are saying the bill is “dead on arrival”), so the bill is on hold for now… 

But notably missing from the House’s package?  Extended enhanced premium tax credits under the Affordable Care Act (“ACA”), which are set to expire on December 31, 2025.

Given the impending loss of these subsidies – and an increase in 2026 plan year premiums on the ACA Marketplace Exchange as a result – employers have been scrambling to find ways to help employees with their health insurance costs.  But simply agreeing to reimburse employees for their health insurance premiums will inadvertently create an employer-sponsored “group health plan” for regulatory purposes and implicate a complicated web of laws with which compliance is nearly impossible.

Fortunately, employers have a couple of options for reimbursing employees for their health-related expenses and avoiding regulatory pitfalls: qualified small employer health reimbursement arrangements (“QSEHRAs”) and individual coverage health reimbursement arrangements (“ICHRAs”).

QSEHRAs

Eligible small employers can reimburse employees – on a tax-free basis – for their individual coverage premiums (and certain other qualifying medical expenses) using a QSEHRA, up to certain limits.  The reimbursement limit for self-only coverage in 2026 is $6,450; the limit for family coverage in 2026 is $13,100. 

QSEHRAs are available only to small employers that are not subject to the ACA’s employer-shared responsibility provisions: those with fewer than 50 full-time equivalent employees.  Eligible small employers may only offer a QSEHRA if they do not maintain any other group health plan, and QSEHRAs may only be funded with employer contributions (in other words, no employee salary reduction contributions are permitted).

ICHRAs

Employers of any size can establish an ICHRA that reimburses – on a tax-free basis – individual coverage premiums and other qualifying medical expenses.  Unlike QSEHRAs, ICHRAs are not subject to statutory limits on the tax-free reimbursement amount (though many employers impose a limit for administrative and budgeting purposes).

Similarly to a QSEHRA, an ICHRA is only available to employees who have individual coverage, and employers sponsoring an ICHRA cannot offer a traditional group health plan to the same class of employees that is offered the ICHRA.  Unlike QSEHRAs, however, an ICHRA can be offered in conjunction with a cafeteria plan, allowing employees to use pre-tax dollars to pay the portion of individual coverage premiums not covered by the ICHRA.

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Both QSEHRAs and ICHRAs are exempt from many of the group health plan requirements under the Internal Revenue Code, ERISA, COBRA, and the ACA.  But while many regulatory exemptions apply, QSEHRAs and ICHRAs are subject to the general compliance requirements of welfare benefit plans under ERISA, including many of the plan document, reporting, and notice requirements.  Accordingly, employers wishing to establish a QSEHRA or ICHRA must have a legal plan document in place, must notify eligible employees of the arrangement, may be subject to reporting requirements, and should consult with their benefits counsel to ensure all applicable legal requirements are met. 

While both arrangements require employees to find and purchase their own health insurance, QSEHRAs and ICHRAs can be good options for employers who are unable to afford group medical coverage but still want to help employees with their health insurance