HRAs: § 105 Plans, QSEHRAs, and ICHRAs

Health Reimbursement Arrangements (HRAs) are employer-funded medical reimbursement plans that, when properly structured, provide a tax-free benefit to employees under § 105(b) and a deductible expense to the employer under § 162. Three principal structures dominate the small/mid market: § 105 self-insured medical reimbursement plans, QSEHRAs under the 21st Century Cures Act, and Individual Coverage HRAs (ICHRAs) under the 2019 final regulations.

§ 105 plans: self-insured medical reimbursement

A § 105(h) self-insured medical reimbursement plan, often used by sole proprietors with spouse-employees, allows tax-free reimbursement of family medical expenses. The owner-employer hires the spouse as a bona fide employee; the spouse elects family coverage under the plan; the family (including the owner) is covered as dependents of the spouse-employee.

Nondiscrimination under § 105(h)(3) and § 105(h)(4): the plan must not discriminate in favor of highly compensated individuals. Discriminatory benefits are taxable to the HCIs. For a one-employee plan (spouse only), nondiscrimination is structurally moot.

Practical defenses: bona fide employment of the spouse (employment agreement, defined duties, reasonable compensation, payroll records); written plan document; plan in place at the time of expense; no plan benefits to the owner directly (only to the spouse-employee and family dependents).

QSEHRAs — § 9831(d)

Qualified Small Employer HRAs are available to employers with fewer than 50 full-time-equivalent employees that do not offer a group health plan. 2025 limits: $6,350 self-only, $12,800 family (indexed annually). All eligible employees must be offered the same terms (with limited variation by family size and age). Reimbursements are excluded under § 9831(d)(2)(C) if the employee has minimum essential coverage.

Notice requirements: written notice to employees 90 days before each plan year (or before eligibility for new hires). Reporting on Form W-2 box 12 code FF for the year’s permitted benefit.

>2% S corp shareholders are not eligible to receive tax-free QSEHRA benefits. They may still receive the benefit but it is W-2 wages.

ICHRAs — § 9831(d)(3) and Treas. Reg. § 54.9802-4

Individual Coverage HRAs are available to employers of any size. Employees must be enrolled in individual health insurance coverage (marketplace, off-marketplace, or Medicare) and must attest annually. Class-based design under § 54.9802-4(d) permits offering different terms to different classes (full-time, part-time, salaried, hourly, etc.), subject to a class-size minimum where the employer offers a traditional group health plan to another class.

An employee covered by an ICHRA is not eligible for premium tax credits unless the ICHRA is unaffordable. Affordability under § 54.9802-4(c)(4) follows the § 36B framework: the lowest-cost silver plan premium net of HRA contribution must not exceed the affordability percentage (9.02% for 2025) of household income.

Notice requirements: 90 days before the start of the plan year. Substantiation: employee must submit proof of coverage and substantiate each reimbursed expense.

Excepted-benefit HRAs — § 54.9831-1(c)(3)(viii)

A separate excepted-benefit HRA can supplement an existing traditional group health plan. 2025 max contribution around $2,150. Useful for clients with group coverage looking to add dental/vision/short-term disability reimbursement.

Practitioner notes

1. Plan document. Required for all HRAs. Restatement triggered by regulatory changes.
2. S corp shareholder workaround. Employ a non-shareholder spouse in the operating business (or in a separate but related entity) to access § 105 family coverage; defensible if bona fide employment is documented.
3. ACA reporting. ICHRA offers may trigger ALE-related Forms 1094/1095-B obligations depending on coverage classifications.
4. § 125 cafeteria plan interaction. Pre-tax salary reductions for individual market premiums are not permitted under § 125; ICHRA serves this role instead.
5. Family attribution. The § 318 attribution net pulls in spouses, children, grandchildren, and parents of the >2% shareholder; structuring around it requires care.