Shopping group health for your team
For decades, offering employer-sponsored health insurance in Washington meant exactly one thing: selecting a fully-insured group health plan, absorbing whatever annual premium increases the carrier dictated, and hoping the single network you chose worked for all your employees. Business owners and HR leaders were forced to navigate a “defined benefit” model, where the primary focus was on managing an unpredictable, escalating liability.
Health Reimbursement Arrangements (HRAs)—specifically the Individual Coverage HRA (ICHRA) and the Qualified Small Employer HRA (QSEHRA)—represent a fundamental shift in how businesses can offer health benefits. They move employer-sponsored insurance from a defined benefit model to a defined contribution model.
Under a defined contribution arrangement, you do not buy an insurance policy for your workforce. Instead, you grant your employees a fixed, tax-free monthly allowance. The employee takes that allowance, shops on the individual market (such as the Washington Healthplanfinder), selects the exact carrier and plan tier that fits their household’s medical needs, and uses your allowance to pay the premium.
This guide provides a comprehensive, sophisticated breakdown of how ICHRA and QSEHRA work, the legal and tax mechanics that govern them, the administrative burden they require, and how businesses in Washington are deploying them to cap costs while improving employee choice.
To understand why HRAs are gaining massive traction among Washington employers, you first have to understand the systemic problem with traditional group health insurance.
Traditional group coverage is a defined benefit. The employer defines the benefit (e.g., a specific Silver-tier HMO from a specific carrier) and promises to provide it. The challenge is that the cost of providing that defined benefit fluctuates wildly from year to year. When the carrier announces a 15% rate hike at renewal, the business owner must either absorb the cost, pass it onto the employees, or degrade the benefit by moving to a plan with higher deductibles or a narrower network.
Furthermore, traditional group coverage forces a one-size-fits-all approach. A 25-year-old single employee in Seattle has vastly different healthcare needs than a 55-year-old employee with a family in Spokane. Choosing one plan that satisfies both is often impossible.
ICHRA and QSEHRA flip this model. They are defined contribution arrangements. The employer defines the financial contribution (e.g., $400 per month) and leaves the benefit selection to the employee.
By doing this, the employer completely insulates the business from annual insurance carrier rate hikes. If the cost of individual insurance goes up in Washington, the employer’s budget does not automatically increase. The employer controls the allowance amount and only increases it when the business’s financial strategy allows it.
For the employee, the advantage is radical personalization. If they want a high-deductible plan that costs exactly $400, they pay nothing out of pocket. If they prefer a premium Gold-tier PPO that costs $600, they use the $400 allowance and pay the remaining $200 out of their own paycheck. When they leave the company, they keep the policy; they simply lose the employer’s monthly contribution toward it.
Created by the 21st Century Cures Act, the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) was the first major legislative vehicle designed to allow small businesses to reimburse employees for individual health premiums tax-free.
A QSEHRA is highly regulated and comes with rigid boundaries. It is designed explicitly for small businesses that find traditional group health insurance entirely out of reach but still want to offer a formal, tax-advantaged health benefit.
To offer a QSEHRA in Washington, a business must meet very specific statutory criteria:
When administered correctly, a QSEHRA is heavily tax-advantaged. The money the employer contributes is completely tax-deductible as a standard business expense. Because it is not considered gross income for the employee, it bypasses federal income tax, state taxes, and FICA (payroll taxes).
However, there is a critical caveat regarding premium tax credits (subsidies) on the Washington Healthplanfinder. If an employee is eligible for an Advance Premium Tax Credit (APTC) based on their household income, participating in a QSEHRA will reduce their subsidy dollar-for-dollar by the amount of the QSEHRA allowance.
For example, if an employee would normally receive a $300 monthly subsidy on the exchange, but the employer offers a $200 QSEHRA allowance, the employee’s subsidy drops to $100. This coordination prevents double-dipping into federal tax advantages.
While QSEHRA opened the door for small businesses, the Individual Coverage Health Reimbursement Arrangement (ICHRA) knocked the entire wall down. Introduced via administrative rule and available for plan years starting in 2020, ICHRA is drastically more flexible, scalable, and powerful than QSEHRA.
ICHRA was engineered to solve the limitations of QSEHRA. It has no employer size limit, no maximum contribution caps, and it allows employers to segment their workforce into classes, offering different benefits to different groups.
ICHRA can be utilized by a five-person startup in Olympia or a five-thousand-person tech enterprise in Seattle. The rules governing ICHRA are complex, but they offer immense strategic utility for HR leaders.
The single most powerful feature of an ICHRA is the ability to segment employees into legally defined classes. Under IRS and Department of Labor rules, an employer can offer different ICHRA allowance amounts to different classes, or offer a traditional group plan to one class and an ICHRA to another.
The federal government strictly defines the permitted classes to prevent employers from discriminating based on health status. The allowed ICHRA classes include:
Strategic Application of Classes in Washington: Imagine a manufacturing business with its corporate headquarters in Seattle and a production facility in Spokane. The company could establish a traditional group health plan for its salaried corporate employees in Seattle, while offering an ICHRA to its hourly production workers in Spokane.
Or, a company could simply vary the ICHRA allowance by geography, recognizing that the cost of an individual health plan in the Seattle metro area might be slightly higher than in rural Washington. The employer could define two geographic classes and offer a $600 allowance to the Seattle class and a $500 allowance to the rural class.
To prevent employers from creating ultra-specific classes just to push a handful of high-risk (sick) employees off the traditional group plan and onto the individual market, the rules impose a minimum class size requirement when an employer offers both a traditional group plan and an ICHRA.
If you are mixing traditional group and ICHRA, a class must generally contain at least 10 employees for employers with fewer than 100 staff, 10% of the workforce for employers with 100-200 staff, and 20 employees for employers with more than 200 staff. (If you only offer an ICHRA and no traditional group plan, these minimum class size rules do not apply).
Review these criteria to determine whether QSEHRA or ICHRA fits your legal and operational profile.
| Business Requirement | QSEHRA | ICHRA |
|---|---|---|
| Over 50 FTEs (ALE) | Not Permitted | Permitted |
| Mix with Traditional Group Plan | Not Permitted | Permitted (by class) |
| Vary Allowances by Job Type | Not Permitted | Permitted (using classes) |
| Exceed IRS Maximum Caps | Not Permitted | Permitted (No caps) |
For businesses with fewer than 50 full-time equivalent employees, deciding the ICHRA allowance amount is purely a budgetary exercise. You offer what the business can afford.
However, for Applicable Large Employers (ALEs)—businesses with 50 or more FTEs—the calculation is drastically different. Under the Affordable Care Act (ACA), ALEs are subject to the Employer Shared Responsibility Payment, commonly known as the employer mandate. ALEs must offer “affordable” health insurance that provides “minimum value” to at least 95% of their full-time employees, or face severe tax penalties.
An ICHRA can be used to satisfy the ACA employer mandate, but only if the ICHRA allowance makes the individual coverage “affordable” under IRS rules.
Because the employer does not know exactly which plan the employee will buy on the Washington Healthplanfinder, the IRS provides a safe harbor calculation. To avoid ACA penalties, the employer’s ICHRA contribution must be large enough that the remaining premium for the lowest-cost Silver plan available to the employee on the local exchange does not exceed a set percentage of the employee’s household income. (The IRS sets this affordability percentage annually).
Since an employer generally does not know an employee’s total household income, they can rely on three affordability safe harbors to prove compliance:
This calculation is highly technical. If you are an ALE in Washington looking to deploy an ICHRA, this requires sophisticated plan modeling. You must determine the cost of the lowest-cost Silver plan in every geographic rating area where your employees live, map that against their salaries, and calculate the minimum allowance required to shield the business from ACA penalties.
An ICHRA is only as good as the individual health insurance market where the employees reside. If a state has a collapsing individual market with only one carrier and narrow, substandard networks, an ICHRA is a terrible idea, because employees will have nothing viable to buy with their allowance.
Washington State, however, boasts one of the most robust, stable individual health insurance markets in the country, managed through the state-based exchange: the Washington Healthplanfinder.
One of the unique features of the Washington individual market is the “Cascade Care” initiative. Cascade Care introduced standardized health plans across all participating carriers.
For an employee utilizing an ICHRA, shopping for insurance can initially seem daunting. Standardized plans dramatically simplify this process. Because the deductibles, copays, and out-of-pocket maximums are identical across all standard plans within a specific tier (e.g., all standard Silver plans have the exact same deductible), the employee only needs to compare three things: the carrier’s network, the carrier’s premium, and the quality of customer service.
This reduction in complexity makes the employee experience under an ICHRA much smoother in Washington than in states that rely on the federal fallback exchange and non-standardized plan designs.
Washington’s individual market enjoys strong carrier participation, including major regional networks, HMOs, and EPOs. Because of this, an employee given an ICHRA allowance in Spokane has multiple competing options to choose from, as does an employee in Olympia or Seattle. This competitive pressure helps stabilize premiums and provides genuine choice—the primary selling point of the defined contribution model.
| Scenario | Traditional Group Plan | QSEHRA | ICHRA |
|---|---|---|---|
| Employer Size | Any | Under 50 FTEs only | Any |
| Budget Predictability | Low (Carrier dictates rate) | High (Employer dictates allowance) | High (Employer dictates allowance) |
| Employee Choice | Limited (1 or 2 options) | Unlimited (Any exchange plan) | Unlimited (Any exchange plan) |
| Administrative Complexity | Moderate (Renewals, census) | Low (Once established) | High (Affordability testing, substantiation) |
When structuring an ICHRA or QSEHRA, the business must decide what types of expenses the arrangement will reimburse. Legally, the arrangement is governed by Section 105 of the Internal Revenue Code, which deals with amounts received under accident and health plans.
Employers have two primary options for how they design the reimbursement scope:
The vast majority of employers structure their ICHRA or QSEHRA as a “premium-only” arrangement. The monthly allowance can only be used to reimburse the cost of the employee’s individual health insurance monthly premium. If the employee chooses a plan that costs less than the allowance, the remaining funds remain with the employer (the employee does not get to cash out the difference).
Alternatively, the employer can allow the funds to be used for the premium and for qualified medical expenses as defined by IRS Section 213(d).
Under a 213(d) arrangement, if an employee has a $500 monthly ICHRA allowance and their premium is only $400, they have $100 left over each month. They can use that remaining $100 to reimburse themselves for doctor copays, prescription medications, dental work, vision care, or even eligible over-the-counter medical supplies.
While offering 213(d) reimbursements is highly attractive to employees, it dramatically increases the administrative burden for the employer, as every single medical receipt must be reviewed, verified for tax-compliance, and adjudicated.
It is a common misconception among small business owners that they can manage a QSEHRA or ICHRA internally using a spreadsheet and adding a line item to their payroll software. In reality, attempting to self-administer an HRA is a direct path to severe tax penalties, Department of Labor violations, and HIPAA breaches.
HRAs are formal, legally recognized group health plans under the Employee Retirement Income Security Act (ERISA), even though they are used to buy individual insurance. You are required to maintain strict compliance with federal laws. Because of this, virtually all Washington employers utilize a Third-Party Administrator (TPA) or an HRA software platform to manage the program.
Here is what administration actually entails:
To maintain the tax-free status of the reimbursements, the employer must possess documentary evidence that the employee is actually enrolled in a qualified health plan. If an employee cancels their policy but continues to receive tax-free HRA reimbursements, the employer is committing tax fraud.
A TPA automates this entire process, verifying documents and collecting digital attestations before releasing funds to payroll.
The law requires employers to provide written notice to eligible employees at least 90 days before the beginning of the plan year for an ICHRA or QSEHRA. This notice must contain specific statutory language detailing how the allowance affects their eligibility for premium tax credits on the exchange. Failing to distribute this notice properly and on time can result in IRS penalties of $50 per employee, per incident.
If you allow 213(d) out-of-pocket expense reimbursements, employees will be submitting receipts for doctor visits, specific medications, and psychiatric care to justify the reimbursement. Business owners and HR managers should not possess this protected health information (PHI). A TPA acts as a HIPAA-compliant buffer, reviewing the receipts and simply telling the employer “approve” or “deny” without exposing the underlying medical data.
If the business is an Applicable Large Employer (50+ FTEs) utilizing an ICHRA, the employer must still complete the ACA employer mandate reporting at the end of the year. Filling out Forms 1094-C and 1095-C to prove that the ICHRA offer met the affordability safe harbors is incredibly complex. A specialized TPA will generate these forms automatically based on the plan data.
Transitioning a workforce from traditional group coverage to an ICHRA or QSEHRA requires substantial employee education. Employees who are accustomed to simply ticking a box during open enrollment must now take an active role in purchasing their own insurance.
Individual health insurance can normally only be purchased during the annual Open Enrollment Period (November 1 through January 15 in Washington). However, when an employer formally offers a new ICHRA or QSEHRA, it triggers a Special Enrollment Period (SEP) for the eligible employees.
This SEP gives employees a 60-day window to apply for an individual health plan on the Washington Healthplanfinder or directly through a carrier, regardless of what month the business launches the HRA.
Successful HRA implementation requires providing employees with a shopping resource. Many businesses partner with an insurance broker who specializes in the individual market to hold educational seminars for the staff, answer questions, and assist employees in navigating the Healthplanfinder. Since standard HR teams cannot legally recommend specific individual health plans, relying on a licensed producer ensures employees choose plans that cover their specific providers and prescriptions.
Our licensed producers can help you model ICHRA allowances, test for ACA affordability, and implement defined-contribution benefits for your workforce.
Get a Free ConsultationIf you are a business owner or HR lead in Washington evaluating a move to an ICHRA or QSEHRA, the process requires structured execution. You cannot build this on the fly.
Moving to a defined contribution model is highly strategic, but missteps in the regulatory environment can be costly. When auditing HRA programs, regulators typically look for these common failures:
For Washington businesses exhausted by the volatile, unpredictable cost of traditional group health insurance, the shift toward a defined contribution model represents structural financial relief.
QSEHRA provides a protected, tax-advantaged on-ramp for small businesses under 50 employees that previously offered nothing. ICHRA provides a highly sophisticated, infinitely scalable solution for mid-market and enterprise businesses that need to control budgets while still satisfying the ACA employer mandate.
By leveraging the robust individual market of the Washington Healthplanfinder, employers can divorce themselves from carrier rate hikes, fix their benefit costs on their own terms, and give employees the ultimate flexibility to choose the healthcare coverage that fits their actual lives.