How to Set Up and Run an ICHRA or QSEHRA: The 2026 Employer Compliance Guide

Deciding to fund individual coverage instead of buying a group plan is the easy part. The hard part starts the next morning, when you have to build the thing: a plan document, an eligibility definition, a legally timed notice, proof of coverage from every participant every year, an affordability calculation that shifts with each employee's age and ZIP code, and reimbursements that reach people without becoming taxable wages. Most HRAs that go wrong go wrong here, in operations, not in the original decision.

This is a setup-and-run guide for employers who have already ruled out a traditional group plan and now have to operate a Qualified Small Employer HRA (QSEHRA) or an Individual Coverage HRA (ICHRA). It covers the build in the order you actually have to do it, with the 2026 figures you need. Limits and rules change, so confirm every number against current IRS and CMS guidance before you commit.

Start with the four decisions that lock in everything else

Settle four things in writing before anyone drafts a document. Everything downstream derives from them.

1. Which vehicle. QSEHRA if you are under 50 full-time-equivalent employees and offer no group plan to anyone; ICHRA if you need to exceed the cap, vary contributions by class, or sit at 50 FTEs or more. This guide does not re-litigate that choice — if you are still weighing it, start with our employer guide to group vs ICHRA vs QSEHRA, then come back to build it.
2. The plan year. Run a calendar year unless you have a strong reason not to. Individual coverage renews January 1 and Marketplace open enrollment lines up with it; an off-cycle year forces employees onto a special enrollment period.
3. Who is eligible. For an ICHRA, name your classes. For a QSEHRA, pick which statutory exclusions you will use.
4. The dollar amount and how it varies. Flat, or scaled by age and family size. It is the input to the affordability test, so settle it first.

Then work backward from the effective date. Notice is due at least 90 days before the plan year starts, so a January 1 launch means notices go out in early October — before open enrollment opens, not during it.

Employee classes and the ICHRA minimum class size rule

An ICHRA can offer different amounts to different groups, but only groups the regulations recognize: full-time, part-time, seasonal, collectively bargained employees, employees in a waiting period, non-resident aliens with no U.S.-source income, salaried, hourly, temporary staffing-firm employees, employees in the same insurance rating area, and combinations of those. You cannot invent one. "The sales team" and "everyone except Dave" are not classes.

Within a class the offer must be on the same terms. Two variations are allowed: you may increase the amount by age, capped so the oldest participant's allowance is no more than three times the youngest's, and by family size. You cannot offer one class both an ICHRA and a group plan.

The minimum class size rule applies in only one situation: when you offer a group plan to some employees and an ICHRA to others along certain lines (salaried, hourly, sub-state rating areas, and combinations involving those). Then the ICHRA class must clear a floor — broadly 10 employees if you have under 100 employees, 10 percent in the 100-to-200 range, and 20 above that. Offer an ICHRA company-wide with no group plan and the rule never applies. A separate provision lets you route new hires into an ICHRA while grandfathering existing staff on the group plan.

QSEHRA has no classes at all. You offer it on the same terms to every eligible employee, and your only lever is the statutory exclusion list: under 90 days of service, under age 25, part-time, seasonal, collectively bargained, and certain non-resident aliens. Amounts vary by family size and age only as the price of a reference individual policy varies. If you need carve-outs beyond that list, QSEHRA is the wrong vehicle.

The plan document and the advance notice

An ICHRA is a group health plan, which pulls in the usual machinery: an ERISA plan document and summary plan description, a named plan administrator, Form 5500 past 100 participants, COBRA at 20 or more employees, and HIPAA duties over the claims data you touch. Congress carved QSEHRA out of the group health plan definition, so it generally escapes COBRA and the ICHRA-specific group-plan requirements — but it still needs written terms, and you should confirm your own situation with counsel.

The document should state the plan year, eligibility and classes, allowance amounts and variation, the reimbursement submission deadline, the substantiation procedure, carryover treatment, termination handling, and the opt-out procedure.

Notice timing, and what happens if you miss it

Both arrangements require a notice at least 90 days before each plan year. For employees who become eligible mid-year it is due no later than the date coverage can first take effect, so it belongs in the onboarding packet. For a brand-new HRA that physically cannot give 90 days, the deadline is the date the plan takes effect.

The ICHRA notice must state the amount available, that the employee must be enrolled in individual coverage or Medicare, that the ICHRA may make them ineligible for a premium tax credit, and that they may opt out. The QSEHRA notice must state the permitted benefit, tell the employee to report it when applying for subsidies, and explain the consequence of dropping minimum essential coverage.

Missing the QSEHRA notice carries a statutory penalty under Internal Revenue Code section 6652(o) of $50 per employee per failure, capped at $2,500 per calendar year. ICHRA has no standalone fine, but the damage is worse — employees who were not told cannot make an informed subsidy decision, and you usually end up making someone whole out of pocket.

Substantiation: proving employees actually have coverage

This is the requirement most self-administered HRAs fail, and it has two layers.

• Annual substantiation. Before the plan year, or before the first reimbursement, each participant must document that they and every covered dependent are or will be enrolled in individual coverage or Medicare. An insurance card, a Marketplace confirmation, or a carrier letter works. Re-collect it every year, not once at hire.
• Per-reimbursement substantiation. Every request needs proof coverage was in force for that month. A short written attestation is permitted, which is why good administrators build a one-click monthly attestation into their portal instead of demanding a fresh card each time.

Skipping this is not a paperwork foot-fault. Reimbursing someone who is not enrolled can disqualify the arrangement, and a disqualified HRA turns tax-free reimbursements into taxable wages for the entire participant population, not just that one employee.

Running the affordability test against the lowest-cost silver plan

ICHRA affordability is a formula, and it runs employee by employee. Take the monthly premium of the lowest-cost silver plan for self-only coverage available to that employee in their location, subtract your monthly allowance, and compare the remainder to 9.96 percent of one-twelfth of household income for 2026. That percentage is indexed annually, so verify it each year. At or below the threshold, the offer is affordable and the employee cannot claim a premium tax credit; above it, they may opt out and pursue the credit instead.

Because the silver benchmark is both age-rated and geographically rated, one flat allowance can land on both sides of that line inside a single office:

That is the argument for age-banded contributions over one flat number. Since you do not know household income, use the published safe harbors — W-2 wages, rate of pay, or the federal poverty line — plus the location safe harbor, which lets you use the primary worksite rather than a home address, and the calendar-year safe harbor, which lets you rely on the prior January's silver premium so you can set rates before new data lands. Document which you used. QSEHRA has no test of this kind; its subsidy interaction runs on a different mechanic.

The premium tax credit opt-out, handled employee by employee

An ICHRA must let participants opt out and waive future reimbursements at least annually, and again at termination if the plan allows a post-termination spend-down. The opt-out only helps employees whose offer is genuinely unaffordable. If your ICHRA is affordable, opting out does not restore the credit — it just leaves the employee with nothing.

So do one thing well: give every employee, in writing and before the deadline, their own lowest-cost silver premium, their allowance, and the resulting monthly remainder, so they can take a real number to the exchange. Capture the waiver in writing and file it. Employees generally cannot switch mid-year outside a permitted change event, so a rushed October decision sticks for twelve months.

QSEHRA needs no opt-out. The employee reports the permitted benefit on their Marketplace application and any advance credit is reduced accordingly; forget to report it and the bill comes back at tax time. One caution for 2026: enhanced premium tax credits expired at the end of 2025 and the 400 percent of poverty cliff is back, which raises the stakes of these conversations. Legislative status can shift, so confirm where things stand before counseling anyone.

New hires, mid-year changes, terminations, and unused balances

A new HRA offer generally triggers a special enrollment period in the individual market, typically 60 days, so a new hire can buy coverage outside open enrollment. Put the notice in the offer letter or first-day packet; a late notice can cost someone that window. QSEHRA allowances must be prorated for employees who become eligible partway through the year.

At termination, decide in advance whether the balance is forfeited or available for a spend-down period. If you allow spend-down, the plan must let the departing employee waive it — otherwise those months of nominal coverage block their premium tax credit while they are unemployed. An ICHRA also triggers COBRA at 20 or more employees, and the COBRA premium for an HRA is its own calculation; do not improvise it.

Unused balances are notional. You never fund an account, so unspent money stays in the business. Carryover is permitted, but for QSEHRA any carried amount counts against the following year's cap, which is $6,450 self-only and $13,100 family for 2026. ICHRA has no dollar cap. Never pay an unused balance out as cash — that converts the whole arrangement into taxable compensation.

Payroll, taxes, and the W-2 difference

HRA reimbursements are excluded from income as employer-provided medical benefits: no federal income tax withholding, no Social Security, Medicare, or FUTA, and deductible to the business. They run as expense reimbursements, not gross pay. Add the money to paychecks as a "health stipend" instead and you have created taxable wages, you owe employer payroll tax on it, and the employee nets far less. This is the most common way small employers destroy the value of the benefit.

The reporting difference is worth restating. QSEHRA carries an explicit W-2 requirement: report the permitted benefit — the amount made available, not the amount actually reimbursed — in Box 12 with code FF. ICHRA has no parallel Box 12 code, but applicable large employers report ICHRA offers on Forms 1094-C and 1095-C using the ICHRA-specific offer codes, which need age and ZIP data. One more trap: an employee can pay a leftover premium through a Section 125 cafeteria plan only if the policy was bought outside the Exchange.

Picking an administrator, and the mistakes that actually bite

A very small QSEHRA can be run in-house if you are disciplined about notices, substantiation, and records. An ICHRA realistically cannot. A third-party administrator charges a modest per-employee-per-month fee and earns it. Ask candidates directly: do you draft the plan document and SPD; do you send notices on the legal timeline and keep proof of delivery; do you hold current lowest-cost silver plan data and run affordability per employee; do you handle annual and per-claim substantiation in a portal; do you produce the W-2 file and, for an applicable large employer, the 1095-C data; and will you sign a HIPAA business associate agreement?

The failures that generate real letters are mundane: paying a taxable stipend instead of running a real HRA; blowing the 90-day notice; reimbursing without substantiation; offering one class both an ICHRA and a group plan; inventing classes that are not on the permitted list; assuming a flat allowance is affordable for everyone when it only works for the youngest; forgetting to prorate a mid-year QSEHRA; leaving a terminated employee on an un-waivable spend-down that blocks their subsidy; and pushing Marketplace premiums through a cafeteria plan.

The bottom line

An HRA is a benefit plan, not a reimbursement habit. Once the vehicle is chosen, the work is a sequence: set the plan year, define eligibility or classes within the rules, get a real written document, send the notice at least 90 days out, collect substantiation before the first dollar moves, run affordability per employee for an ICHRA, capture opt-outs and waivers in writing, and pay reimbursements through the right side of payroll so they stay tax-free.

Get that sequence right and both arrangements are low-drama to run year after year. Get the notice or the substantiation wrong and you can turn a tax-free benefit into taxable wages for your whole team. Budget for a competent administrator, confirm the 2026 figures and the current status of Marketplace subsidy rules against the official sources, and have a benefits attorney read your plan document once. This is general information, not tax or legal advice for your situation.