Shopping group health for your team
For business owners and human resources leadership in Nebraska, managing employee health benefits has historically meant navigating a rigid, defined-benefit model. The traditional fully-insured group health insurance process involves analyzing multiple carrier quotes, selecting a single plan design (or a narrow tier of options) for an entire workforce, struggling to meet carrier minimum participation requirements, and ultimately absorbing compounding annual rate increases that often exceed 10% year over year.
Health Reimbursement Arrangements (HRAs)—specifically the Individual Coverage HRA (ICHRA) and the Qualified Small Employer HRA (QSEHRA)—represent a fundamental structural departure from that traditional model. Instead of sponsoring a group plan, the employer sets a defined monthly allowance. Employees then use that allowance to purchase their own individual Affordable Care Act (ACA) compliant health insurance policies on the open market. The employer reimburses the employee up to their allowance amount, completely tax-free.
This guide provides a comprehensive, mechanics-level breakdown of how ICHRA and QSEHRA function in the state of Nebraska. It details the administrative realities, the tax implications, the legal compliance frameworks, and exactly how an employer scales these defined-contribution models to fit a dynamic workforce.
To understand why HRAs have rapidly gained traction, an employer must first understand the structural difference between defined-benefit and defined-contribution models.
In a traditional fully-insured group plan, the employer operates a defined-benefit structure. The business commits to providing a specific benefit—for example, a Silver-tier PPO with a $3,000 deductible and an 80/20 coinsurance split. The employer promises to pay a certain percentage of the premium for that specific benefit (often 50% to 100% of the employee’s cost).
The critical flaw for the employer in this model is that the cost of delivering that defined benefit is highly variable and entirely out of the business’s control. If the carrier determines that the underlying medical trend or the group’s claims experience warrants a 15% rate hike at renewal, the employer must either absorb the cost increase to maintain the benefit, pass the cost onto employees, or undergo the disruptive process of downgrading the plan design.
Furthermore, traditional group coverage forces the employer to act as the primary decision-maker for a diverse workforce. A single plan design rarely fits a 25-year-old unmarried employee in Lincoln and a 55-year-old employee with a family in Omaha equally well.
ICHRA and QSEHRA operate on a defined-contribution structure. The employer does not commit to a specific plan design, network, or deductible. Instead, the employer commits to a specific dollar amount—a defined contribution.
If a business owner sets an allowance of $450 per month per employee, that cost is fixed. The employer knows exactly what their maximum benefit liability will be for the entire plan year, regardless of what the broader insurance market does. If premiums in the Nebraska individual market rise by 10% the following year, the employer’s cost does not increase unless the employer actively chooses to raise the HRA allowance. The financial risk of medical inflation is transferred from the employer’s balance sheet to the individual consumer market.
The employee, in turn, gains ultimate choice. They take their $450 monthly allowance and shop the local individual insurance market. If an employee prefers a robust Gold plan from Blue Cross and Blue Shield of Nebraska, they can purchase it and apply their allowance, paying the difference out of pocket. If another employee prefers a lower-cost, higher-deductible plan from UnitedHealthcare or Oscar, they can purchase that instead. The individual owns the policy, making it fully portable if they ever leave the company.
Created by federal regulations that took effect in January 2020, the Individual Coverage HRA (ICHRA) was explicitly designed to unbind the HRA concept from the restrictive size limitations of previous regulatory iterations. ICHRA fundamentally altered the employer-sponsored insurance landscape because it is scalable to an enterprise of any size.
There is no maximum or minimum company size to implement an ICHRA. A startup with three employees can launch an ICHRA, and a publicly traded enterprise with 10,000 employees can deploy one. There are also no federal limits on how much an employer can contribute; an employer can set the allowance at $100 a month or $2,000 a month.
The central requirement of an ICHRA is the mandate of underlying coverage. To participate in an ICHRA and receive tax-free reimbursements, the employee must be enrolled in individual health insurance that meets the ACA’s definition of Minimum Essential Coverage (MEC), or they must be enrolled in Medicare Parts A and B or Medicare Part C.
If an employee attempts to use an ICHRA alongside a short-term limited-duration insurance policy, a fixed indemnity plan, or a health sharing ministry, the plan violates federal law. Furthermore, the employee cannot use an ICHRA if they are covered by a spouse’s traditional group health plan. The underlying coverage must be individual market coverage or Medicare.
One of the most powerful features of an ICHRA is the ability to structure different allowances for different segments of a workforce through defined “classes.” A Nebraska employer is not legally required to offer the exact same allowance to everyone in the company. Federal rules outline 11 specific employee classes that an employer can use to customize the HRA offering:
By utilizing these classes, an employer can tailor their benefits strategy with extreme precision. For example, an employer could choose to provide a traditional fully-insured group health plan to its salaried management team (Class 3), while offering a $300/month ICHRA to its hourly workforce (Class 4). Or, an employer with locations across the state could offer a larger allowance to employees living in Rating Area 1, where healthcare costs might be higher, and a smaller allowance to employees in a different rating area.
To prevent employers from using classes to push high-risk, high-cost employees off the group plan and into the individual market (a practice known as adverse selection), federal regulators established minimum class size rules. If an employer offers a traditional group plan to one class of employees and an ICHRA to another class, the ICHRA class must meet a minimum size threshold based on the total number of employees in the company:
If an employer does not offer a traditional group plan at all and simply uses an ICHRA for the entire company, these minimum class size rules generally do not apply, provided the classes are structured strictly around allowable parameters like full-time vs. part-time or geographic location.
Even within a single class, an employer does not have to give every employee the exact same dollar amount. ICHRAs permit age-banded and family-banded contributions.
Because older employees inherently face higher premiums in the individual market, an employer can scale their contribution based on age. The law permits a maximum age-band ratio of 3:1. This means the allowance provided to the oldest employee in a class cannot exceed three times the allowance provided to the youngest employee in that same class.
For example, if an employer sets the base allowance for a 21-year-old employee at $200 per month, they can scale the allowance up for older workers, capping at a maximum of $600 per month for a 64-year-old employee. Employers can also vary the allowance based on family size (e.g., offering $400 for a single employee, $600 for an employee plus spouse, and $800 for an employee plus family).
The most complex regulatory hurdle for an enterprise considering an ICHRA is compliance with the Affordable Care Act’s employer mandate. Under Internal Revenue Code Section 4980H, an Applicable Large Employer (ALE)—defined as a business with 50 or more full-time equivalent (FTE) employees—must offer affordable, minimum value health coverage to at least 95% of its full-time workforce or face severe financial penalties.
An ICHRA can satisfy the employer mandate, but simply offering one is not enough; the allowance provided must make coverage mathematically “affordable” under IRS rules.
To determine if an ICHRA is affordable, the IRS looks at the cost of the lowest-cost Silver plan available to the employee in their local geographic rating area.
The calculation works like this:
Because an employer generally does not know an employee’s total household income, the IRS provides three safe harbors for the affordability calculation:
For a Nebraska ALE implementing an ICHRA, administration involves pulling the rating area data for every full-time employee, checking the lowest-cost Silver plan rate for their age, and reverse-engineering the required allowance to ensure it passes one of these safe harbors. If the allowance falls short and the employee goes to the exchange and receives a Premium Tax Credit (APTC), the employer will be liable for a 4980H(b) penalty.
Created by the 21st Century Cures Act in 2016, the QSEHRA (often pronounced “Q-Sarah”) was the precursor to the ICHRA. While ICHRA was built for businesses of any size, QSEHRA remains strictly isolated to the small business market.
To be eligible to sponsor a QSEHRA, a business must meet two non-negotiable criteria:
Unlike an ICHRA, which has no cap on employer generosity, a QSEHRA is subject to strict statutory contribution maximums. The IRS adjusts these caps annually for inflation.
While the exact dollar amounts shift each tax year, the regulatory framework remains constant: there is a hard maximum an employer can provide for self-only coverage, and a hard maximum for family coverage. If an employer wishes to provide an allowance that exceeds the IRS limit for a QSEHRA, they must implement an ICHRA instead.
A defining difference between the two arrangements is how they interact with federal subsidies on the ACA exchange.
If an employee is offered an ICHRA that is deemed “affordable” by the IRS, that employee is entirely disqualified from receiving any Advance Premium Tax Credits (APTC) on the exchange, regardless of their household income. If the ICHRA is deemed “unaffordable,” the employee must choose between taking the ICHRA or waiving it to claim the APTC; they cannot have both.
A QSEHRA operates differently. An employee can receive both a QSEHRA allowance and a Premium Tax Credit simultaneously, but the QSEHRA allowance reduces the tax credit dollar-for-dollar.
For example, if a Nebraska employee is eligible for a $400/month APTC based on their household income, and their employer offers a $250/month QSEHRA allowance, the employee must report the QSEHRA to the exchange. Their federal tax credit will be reduced from $400 to $150. The employee is kept financially whole, but the burden of paying the premium shifts partially from the federal government to the employer.
| Feature / Scenario | Traditional Group Plan | ICHRA | QSEHRA |
|---|---|---|---|
| Employer Size Limit | No limit (1+ employees) | No limit (1+ employees) | Strictly under 50 FTEs |
| Contribution Caps | No maximum | No maximum | Hard limits set annually by the IRS |
| Can Offer with Group Plan? | N/A | Yes (to different employee classes) | No. Must be the only health benefit offered. |
| Minimum Participation | Usually 70% of eligible staff | None required | None required |
| Satisfies ALE Mandate? | Yes, if affordable/minimum value | Yes, if properly structured and affordable | No (QSEHRA is for non-ALEs only) |
| Impact on Employee Tax Credits | Disqualifies employee if affordable | Disqualifies employee if affordable | Reduces tax credit dollar-for-dollar |
For an HRA model to succeed, the underlying individual insurance market must be robust. If an employer provides a generous allowance but there are no quality plans available for employees to purchase, the benefit fails operationally.
In Nebraska, employees utilizing an ICHRA or QSEHRA will turn to the federal exchange (Healthcare.gov) or work with an individual market broker to secure coverage. The Nebraska individual market is generally stable and dominated by HMO and EPO network models. Carriers actively participating in the state’s individual market include Blue Cross and Blue Shield of Nebraska, UnitedHealthcare, Medica, and Oscar.
A common logistical concern for HR departments transitioning to an HRA is timing. The individual market operates on a strict annual Open Enrollment Period (November 1st through January 15th). However, employers do not have to wait until November to launch an HRA.
Under federal rules, when an employer newly offers an ICHRA or a QSEHRA to an employee, it triggers a 60-day Special Enrollment Period (SEP). This Qualifying Life Event allows the employee to enroll in an individual market plan outside of the standard window. The employee has 60 days from the date the HRA becomes effective to select a policy and begin receiving reimbursements.
One of the most significant advantages for the employee is policy ownership. In a traditional group model, if an employee leaves the company, their insurance terminates. They are forced to elect expensive COBRA continuation coverage or scramble to find a new policy.
Under an ICHRA or QSEHRA, the employee owns the underlying individual market policy. If they resign, are terminated, or reduce their hours, they lose the employer’s HRA allowance, but they do not lose their health insurance. They simply retain the policy and become responsible for the full premium (or they can apply for ACA Premium Tax Credits based on their newly reduced income). This portability drastically reduces the friction of job transitions for the local workforce.
While the concept of giving employees tax-free money to buy their own insurance is simple, the regulatory execution is complex. Attempting to manage an ICHRA or QSEHRA manually—by having employees bring receipts to the HR department and adding the reimbursement to a paycheck—is a severe compliance risk that frequently results in ERISA and HIPAA violations.
Employers must implement these arrangements properly, which almost universally requires utilizing a specialized Third-Party Administrator (TPA) or an HRA administration software platform.
Both ICHRA and QSEHRA are technically considered employer-sponsored group health plans under the Employee Retirement Income Security Act of 1974 (ERISA), even though they exist to fund individual market coverage.
Therefore, the employer must produce and maintain formal ERISA plan documents. This includes drafting a formal Plan Document that legally establishes the HRA, outlines the eligibility classes, and dictates the allowance rules. The employer must also distribute a Summary Plan Description (SPD) to all eligible employees. Failure to maintain these documents can result in substantial Department of Labor (DOL) penalties.
Federal law mandates strict employee communication timelines. For both ICHRA and QSEHRA, the employer must provide a formal written notice to eligible employees at least 90 days before the beginning of the plan year.
This notice must explain how the HRA works, the specific allowance amount the employee is entitled to, how the HRA interacts with Premium Tax Credits, and instructions on how to secure an individual market policy. If an employer decides to implement an HRA on short notice (e.g., creating a plan that starts in 30 days), the 90-day requirement is waived for the initial abbreviated plan year, but will apply to all subsequent renewals.
For the reimbursement to be tax-free under IRS Section 105, the employer must “substantiate” that the employee actually spent the money on a qualified medical expense or premium. The employee cannot simply promise they have insurance; they must provide proof.
Typically, this involves the employee submitting a premium statement from a carrier like Blue Cross and Blue Shield of Nebraska, along with proof of payment, every single month. An employer cannot legally disburse HRA funds without this substantiation on file.
However, reviewing these documents manually exposes the HR department to Protected Health Information (PHI), creating massive HIPAA compliance liabilities. An employer should not be in the business of looking at an employee’s Explanation of Benefits (EOB) or medical receipts. A TPA handles the substantiation process, shielding the employer from PHI. The TPA collects the documents, verifies the coverage, and simply tells the employer’s payroll system, “Approve a $450 tax-free reimbursement for Employee A.”
Many employers are surprised to learn that an ICHRA is subject to federal COBRA continuation laws if the employer has 20 or more employees.
If an employee is terminated, they keep their underlying individual health insurance policy, but the employer must offer them the ability to continue the ICHRA allowance itself through COBRA. The former employee would have to pay the employer the full value of the monthly allowance, plus a 2% administrative fee, to access the allowance.
In practice, this rarely makes financial sense for the employee. Paying $510 out of pocket to access a $500 allowance is mathematically illogical, and almost all employees decline the COBRA offer. Regardless of whether the employee accepts it, the employer is legally obligated to send the COBRA election notice to maintain compliance. (Note: QSEHRAs are statutorily exempt from COBRA rules, regardless of employer size).
The rapid adoption of HRAs is heavily driven by their total tax efficiency, which aligns the interests of the CFO and the employee perfectly.
HRA reimbursements are considered a fully deductible business expense for the employer, just like premiums paid toward a traditional group health plan. More importantly, the HRA allowance is completely exempt from federal payroll taxes. The employer does not pay FICA (Social Security and Medicare) or FUTA (Federal Unemployment) taxes on the HRA dollars disbursed.
If an employer were to bypass the HRA structure and simply give employees a taxable $500 monthly “health stipend” on their paycheck, the employer would lose 7.65% immediately to payroll taxes.
For the employee, HRA reimbursements are entirely excluded from gross income. They are not subject to federal income tax, state income tax in Nebraska, or the employee’s portion of FICA payroll taxes.
Returning to the stipend comparison: If an employee in a 22% federal tax bracket receives a $500 taxable stipend, they lose 22% to federal income tax, roughly 5% to Nebraska state income tax, and 7.65% to FICA. That $500 stipend shrinks to approximately $325 in actual purchasing power. Under an ICHRA or QSEHRA, a $500 allowance delivers exactly $500 in purchasing power to the individual insurance market.
A critical compliance detail for highly compensated employees is how an HRA interacts with a Health Savings Account (HSA). Under IRS rules, an individual can only contribute to an HSA if they are enrolled in a High Deductible Health Plan (HDHP) and have no disqualifying coverage.
A standard HRA that reimburses any and all medical expenses (like copays and prescriptions) is considered disqualifying coverage. If an employer offers a standard QSEHRA or ICHRA, the employee loses their ability to contribute to an HSA, even if the individual market plan they bought is an HDHP.
To solve this, employers can design their plan as a “Premium-Only HRA.” A Premium-Only ICHRA strictly limits reimbursements to the cost of the monthly insurance premium and entirely forbids the reimbursement of out-of-pocket medical expenses. Because it only pays the premium, the IRS does not consider it disqualifying coverage, allowing the employee to utilize the employer’s tax-free allowance for the premium while still maxing out their personal HSA contributions.
One of the most overlooked advantages of an ICHRA is its utility for aging workforces. If an employee is over 65 and enrolled in Medicare, they cannot participate in a traditional individual ACA plan. However, federal rules explicitly allow ICHRA funds to be used to reimburse Medicare Part B premiums, Medicare Part D (prescription drug) premiums, and Medicare Advantage (Part C) or Medigap supplement premiums.
This makes the ICHRA an exceptionally powerful tool for retaining senior talent. Instead of an employer forcing an older worker onto an expensive traditional group plan, the employee can transition to Medicare, and the employer can use the ICHRA allowance to cover their Medicare premiums tax-free.
Transitioning from a traditional defined-benefit group plan to a defined-contribution HRA is a major structural shift. An employer should evaluate their operational realities against the specific strengths of the ICHRA or QSEHRA model.
1. Determine Your Regulatory Status Count your Full-Time Equivalent (FTE) employees. If you have 50 or more FTEs, you are an Applicable Large Employer. QSEHRA is legally off the table; you must evaluate an ICHRA. If you have fewer than 50 FTEs, you can choose either.
2. Analyze Your Historical Renewals If your company routinely receives 12% to 15% rate increases from your group carrier, and your HR department spends weeks every year shopping for a new carrier just to shave off a few percentage points, the financial predictability of an ICHRA allowance may be the solution to stabilizing your benefits budget.
3. Evaluate Your Minimum Participation Hurdles Traditional fully-insured group plans in Nebraska typically require at least 70% of eligible employees to enroll (after valid waivers). If your company employs a large number of lower-wage workers who routinely decline the group plan because the payroll deductions are too high, you risk failing the participation audit and losing coverage entirely. HRAs have absolutely zero minimum participation requirements; a company with 100 employees can launch an ICHRA even if only 5 employees decide to use it.
4. Assess Workforce Geography and Diversity If you operate a paving or landscaping company with crews in Omaha, Lincoln, and Kearney, trying to find a single traditional group PPO network that adequately covers all those territories is exceedingly difficult. An ICHRA solves network friction instantly. The Omaha employee buys an Omaha-centric HMO, and the Kearney employee buys a policy optimized for rural Nebraska providers.
5. Consider the High-Compensated Executive Constraint The one scenario where an HRA struggles is when a business is dominated by highly compensated executives who prioritize access to Platinum-tier, ultra-broad national PPO networks (like those offered in the large-group market). The individual ACA market in Nebraska is dominated by HMOs and EPOs. If your key executives demand out-of-network benefits and national coverage parity, shifting them to the individual market via an ICHRA may result in pushback. In this scenario, leveraging the class rules to offer a traditional group plan to executives while offering an ICHRA to the broader workforce is the optimal compliance strategy.
Our licensed producers can help you model ICHRA classes, run ALE affordability calculations, and compare defined-contribution structures against traditional group plans.
Get a Free ConsultationAs these models gain market share, several dangerous compliance misconceptions have emerged among small business owners.
“An HRA is just a Health Savings Account (HSA).” This is factually incorrect. An HSA is an employee-owned bank account used to save pre-tax money for medical expenses. An HRA is a notional, employer-owned arrangement. The employer does not pre-fund an HRA or deposit cash into a bank account for the employee; the employer simply reimburses the employee after the expense has occurred. If the employee does not incur an expense, the employer’s money never leaves the corporate bank account.
“We don’t need a formal HRA, we’ll just pay for their individual plan directly.” If an employer writes a check directly to Blue Cross and Blue Shield of Nebraska or UnitedHealthcare to pay for an employee’s individual market premium without using a compliant HRA structure, they are operating an “Employer Payment Plan.” Under ACA rules, this is a non-compliant group health plan, and the IRS can levy a penalty of $100 per day, per affected employee ($36,500 per employee, per year) under Section 4980D. The formal ICHRA or QSEHRA structure is legally mandatory to provide tax-free premium assistance.
“QSEHRA is better because it’s simpler.” While QSEHRA was designed for small businesses, its rigid contribution caps and its inability to be offered alongside any other group benefit make it inflexible. Many Nebraska employers with 20 or 30 employees are bypassing QSEHRA entirely and implementing an ICHRA because it allows for class-based segregation, has no contribution limits, and integrates more cleanly with employees’ tax situations.
By transferring the burden of network selection and medical inflation from the employer to the individual market, while maintaining total tax efficiency, ICHRAs and QSEHRAs offer a highly sophisticated alternative to the traditional group renewal cycle. For Nebraska employers willing to modernize their administrative approach, the defined-contribution model provides ultimate budget control without sacrificing employee satisfaction.