Shopping group health for your team
For decades, providing health insurance to employees in Maryland meant navigating the traditional small or large group market. A business owner or HR lead would work with a broker to select a single health plan—or perhaps a narrow menu of two or three options—that the entire company would share. While this “defined benefit” approach is familiar, it comes with deep structural flaws: relentless annual rate hikes, the administrative headache of managing participation rates, and the impossible task of selecting a plan network that adequately serves a 25-year-old single employee just as well as a 55-year-old employee with a family.
Health Reimbursement Arrangements (HRAs)—specifically the Individual Coverage HRA (ICHRA) and the Qualified Small Employer HRA (QSEHRA)—represent a fundamental paradigm shift. They move employer-sponsored health insurance from a defined benefit model to a defined contribution model.
Instead of buying a one-size-fits-all group policy, the employer provides employees with a fixed, tax-free monthly allowance. Employees then take that allowance to the individual market—often through the Maryland Health Connection—choose the specific health plan that fits their own doctors and lifestyle, and the employer reimburses them for the premium up to the allowance limit.
This guide provides a comprehensive, sophisticated breakdown of how ICHRA and QSEHRA function in Maryland, examining eligibility, compliance, tax implications, class structuring, and the day-to-day administrative realities for businesses ranging from small startups to enterprise-level corporations.
To understand why HRAs are reshaping the commercial health insurance landscape, you must first understand the financial mechanics of traditional group coverage and why it puts employers at a strategic disadvantage.
A traditional fully insured group health plan operates as a defined benefit. The employer promises to provide a specific benefit (e.g., a CareFirst BlueCross BlueShield PPO plan with a $2,000 deductible). The cost to provide that specific benefit fluctuates based on the insurance carrier’s annual underwriting, medical inflation, and the aggregate health risk of your specific workforce. If a few employees incur severe medical claims, the carrier may hit the employer with a 15% to 30% premium increase at the next renewal. The employer is forced to either absorb the cost, pass it onto employees, or downgrade the benefit by raising deductibles. The employer owns the financial risk of the medical market’s volatility.
An HRA operates as a defined contribution. The employer promises to provide a specific dollar amount—for instance, $500 per month per employee. The benefit itself (the exact deductible, network, and carrier) is chosen by the employee in the individual market. The cost to the employer is mathematically fixed and entirely predictable. If individual market premiums rise, the employer’s cost does not automatically rise unless the employer proactively chooses to increase the allowance. The employer is insulated from the volatility of healthcare inflation.
This is the exact same evolutionary leap that retirement benefits made decades ago, transitioning from corporate pensions (defined benefit) to 401(k) plans (defined contribution). ICHRA and QSEHRA are the 401(k)-ification of health insurance.
Created by the bipartisan 21st Century Cures Act, the QSEHRA was the federal government’s first major attempt to give small businesses a viable defined-contribution vehicle.
By strict legal definition, a QSEHRA is only available to small employers. Specifically, the business must not be an Applicable Large Employer (ALE) under the Affordable Care Act. In practical terms, this means the company must employ fewer than 50 full-time equivalent (FTE) employees. If your business crosses the 50-FTE threshold during the year, you will age out of QSEHRA eligibility for the following tax year.
To sponsor a QSEHRA, the employer cannot offer a traditional group health plan to any employee. You cannot have a legacy group plan for your executives and a QSEHRA for your rank-and-file workers. The QSEHRA must be the sole health benefit vehicle for the entire company.
Unlike traditional plans where employers can contribute whatever they want, the IRS strictly limits how much an employer can reimburse through a QSEHRA. These limits are indexed annually for inflation.
Furthermore, QSEHRA requires strict uniformity. Employers must offer the exact same allowance to all eligible full-time employees. You cannot offer $300 a month to warehouse staff and $800 a month to management. The only permissible variations in allowance size are based on:
When a Maryland employee takes their QSEHRA allowance to the state exchange, the Maryland Health Connection, they may also qualify for an Advance Premium Tax Credit (APTC) based on their household income. The QSEHRA interacts with this subsidy via a dollar-for-dollar reduction. If an employee is eligible for a $400 monthly APTC, and the employer provides a $300 monthly QSEHRA, the employee’s APTC is reduced to $100. They cannot double-dip by receiving the full federal subsidy plus the full tax-free employer allowance.
While QSEHRA was a leap forward for micro-businesses, it was legally unavailable to mid-market and enterprise employers, and its strict allowance caps and uniformity rules frustrated business owners who wanted more control over their benefits strategy. In 2020, federal regulations established the Individual Coverage HRA (ICHRA), effectively solving every limitation of the QSEHRA.
The defining feature of an ICHRA is that it is available to employers of any size. Whether you have 3 employees, 300 employees, or 3,000 employees in Maryland, you can implement an ICHRA. It was explicitly designed to scale up to the enterprise level.
Unlike QSEHRA, there are no IRS-mandated caps on how much an employer can contribute to an ICHRA. An employer can offer $200 a month, or they can offer $2,000 a month. The employer sets the budget completely at their own discretion.
The most potent strategic tool within an ICHRA is the ability to divide your workforce into legally distinct “classes” and offer different benefit structures to each class. The IRS allows employers to define classes based on 11 specific criteria, the most common being:
Using these classes, an employer can highly customize their budget. For example, a Maryland manufacturing company could offer a $600/month ICHRA allowance to salaried management, a $400/month ICHRA allowance to full-time hourly line workers, and no allowance to part-time workers.
Perhaps the most complex but valuable feature of ICHRA is that it does not require you to abandon traditional group health insurance entirely. An employer can offer a traditional fully insured group health plan to one class of employees, and an ICHRA to another class of employees.
The Golden Rule of Mixing: You can never offer a single individual a choice between a traditional group plan and an ICHRA. The offering must be dictated by the class. You can offer a traditional CareFirst plan to your salaried workers, and an ICHRA to your hourly workers. However, to prevent employers from pushing all their sickest employees off the traditional group plan and into the individual market—a practice known as adverse selection—the IRS mandates strict minimum class sizes if you choose to mix a traditional plan with an ICHRA.
Choosing the right structure requires a clear view of the legal constraints and financial mechanics of each option.
| Feature | QSEHRA | ICHRA | Traditional Group Health |
|---|---|---|---|
| Employer Size Limit | Under 50 FTEs only | No limit (Small, Mid, Enterprise) | No limit |
| Contribution Caps | Yes, set annually by the IRS | None. Employer decides. | None. |
| Vary Allowances by Class? | No. Must be uniform for all full-time staff. | Yes. Can vary by salaried, hourly, etc. | Yes, via distinct plan tiers. |
| Offer with Group Plan? | No. Strictly prohibited. | Yes, provided it is to a separate class. | N/A |
| Satisfies ACA Mandate? | No (N/A for under 50 FTEs) | Yes, if deemed "affordable." | Yes. |
| Employee Choice | Unlimited individual market choice | Unlimited individual market choice | Restricted to the 1-3 plans selected by the employer |
Because ICHRA and QSEHRA rely on employees purchasing their own health insurance, understanding the individual marketplace is critical for any HR lead administering these benefits.
In Maryland, the individual health insurance market is robust and state-run, operating through the Maryland Health Connection. Major carriers, including CareFirst BlueCross BlueShield, Kaiser Permanente, and UnitedHealthcare, offer comprehensive ACA-compliant individual policies through this exchange.
Usually, individuals can only buy health insurance during the annual Open Enrollment period (which typically runs from November 1 through January 15 in Maryland). However, when a business launches an ICHRA or a QSEHRA, the formal offer of that HRA triggers a Special Enrollment Period (SEP) for the eligible employees.
This means an employer can transition their company to an ICHRA at any point during the calendar year—April 1st, July 1st, or October 1st. The employees will have a 60-day window to log onto the Maryland Health Connection or utilize a licensed broker to secure individual coverage, regardless of the time of year.
One of the most significant strategic considerations for an employer transitioning to an HRA is the difference in provider networks. Traditional large group health plans often utilize vast Preferred Provider Organization (PPO) networks, offering extensive out-of-network coverage and national access.
The individual market heavily favors Health Maintenance Organization (HMO) and Exclusive Provider Organization (EPO) network structures. These networks are often localized and require employees to stay strictly in-network to receive coverage (except in emergencies). If an employer is moving from a rich group PPO to an ICHRA, educating employees on how to navigate HMO/EPO networks and verifying that their current primary care physicians are in-network on the individual exchange is the single most important element of a successful rollout.
For mid-sized and enterprise employers (those with 50 or more FTEs), the Affordable Care Act mandates that you must offer “affordable, minimum value” health insurance to at least 95% of your full-time workforce, or face severe financial penalties known as the Employer Shared Responsibility Payment (ESRP).
Because QSEHRA is capped at businesses under 50 employees, the mandate does not apply. But for large employers using ICHRA, compliance with the ACA mandate requires precise mathematical calculations.
An ICHRA satisfies the ACA mandate only if the allowance provided makes individual market coverage “affordable” for the employee. The IRS dictates that coverage is affordable if the employee’s required contribution for the lowest-cost Silver plan available to them does not exceed a specific, annually adjusted percentage of their household income.
Because an employer does not know an employee’s total household income, the IRS allows businesses to use one of three “safe harbors” to calculate affordability:
Individual insurance premiums vary by geography. A Silver plan in Montgomery County may cost differently than the exact same Silver plan in Wicomico County. When calculating ICHRA affordability to satisfy the mandate, an employer must base the calculation on the lowest-cost Silver plan in the rating area where the employee resides or where the primary site of employment is located. This requires rigorous initial modeling by a broker or HRA administrator to ensure the allowances set for the year will shield the business from ESRP penalties.
When properly documented and administered under Section 105 of the Internal Revenue Code, HRAs offer the highest tier of tax efficiency available in the US tax code.
Every dollar an employer contributes to an employee’s ICHRA or QSEHRA is treated as a fully tax-deductible ordinary business expense. Furthermore, because these are not wage compensations, the employer does not pay payroll taxes (FICA and FUTA) on these amounts. For a company distributing hundreds of thousands of dollars in health benefits annually, the exemption from the 7.65% payroll tax represents massive operational savings compared to simply giving employees a taxable stipend.
For the employee, the reimbursements received for health insurance premiums and qualified medical expenses are entirely excluded from gross income. They do not pay federal income tax, state income tax in Maryland, or their portion of FICA taxes on this money.
Employers have the choice to design their ICHRA or QSEHRA in two ways:
Crucial Note for HSA Compatibility: If your employees utilize High Deductible Health Plans (HDHPs) and wish to contribute to a Health Savings Account (HSA), the HRA must be designed strictly as a “premium-only” HRA. If the HRA reimburses first-dollar out-of-pocket medical expenses, it legally disqualifies the employee from making HSA contributions.
Use this checklist to determine which defined-contribution model aligns with your company's structural and legal reality.
| Business Profile | Best HRA Fit |
|---|---|
| Under 50 FTEs, flat budget for all full-time staff, no group plan. | QSEHRA |
| Under 50 FTEs, wants to give hourly workers different amounts than salaried. | ICHRA |
| 50+ FTEs (Applicable Large Employer), replacing group coverage entirely. | ICHRA |
| Any size, wants to keep group plan for management but offer HRA to part-time or hourly. | ICHRA (Subject to minimum class sizes) |
While the financial theory of an HRA is elegant, the actual operational execution requires discipline. You cannot simply hand an employee cash and tell them to buy insurance; doing so constitutes a taxable stipend and violates ACA market reforms, triggering massive compliance penalties.
To legally run an ICHRA or QSEHRA, the business must establish formal plan documents and utilize a mechanism to substantiate that the funds are actually being spent on qualifying health insurance.
Under the Employee Retirement Income Security Act (ERISA) and IRS rules, the employer must draft a formal written Plan Document that outlines the terms of the HRA, who is eligible, the allowance amounts, and the claims procedure.
Furthermore, employers are required by law to provide eligible employees with a formal written notice at least 90 days before the start of the QSEHRA plan year, or before the start of an ICHRA. This notice explains how the HRA interacts with premium tax credits and provides the employee with the information they need to secure a Special Enrollment Period through the Maryland Health Connection.
The IRS requires strict substantiation. Every single month, before an employer can reimburse an employee tax-free, the employer must have proof that the employee actually paid a premium for a qualifying individual health plan.
Handling this manually is disastrous for HR departments. It requires collecting receipts, reviewing policy documents, and inadvertently exposing the business to Protected Health Information (PHI) under HIPAA, which carries its own massive compliance liabilities.
For this reason, effectively 100% of successful ICHRA and QSEHRA deployments utilize a Third-Party Administrator (TPA) software platform. These HRA administration platforms act as a firewall between the employer and the employee’s medical data. The employee uploads their premium receipt to the software via an app, the TPA verifies it meets IRS guidelines, and the TPA syncs with the employer’s payroll system to generate a tax-free reimbursement line item on the employee’s paycheck.
The hardest part of an HRA rollout is not the math; it is the human element. Most employees do not understand how to shop for health insurance. They are accustomed to HR doing the work for them.
When you implement an HRA, you are shifting the responsibility of plan selection onto the employee. If HR simply announces, “Here is $500, go buy insurance,” the initiative will fail. A successful launch requires structured, broker-led or TPA-led onboarding sessions. Employees need dedicated support to understand how to navigate the Maryland Health Connection, how to search for their specific doctors in HMO networks, and how to understand deductibles. When employees are given the proper tools to navigate the individual market, satisfaction rates with HRAs are remarkably high, as individuals realize they can finally choose a plan tailored to their exact medical needs, rather than settling for the generic company plan.
Because an HRA is an employer-sponsored health benefit, it is subject to federal regulatory frameworks that HR leads must track closely.
An ICHRA is considered a group health plan and is entirely subject to ERISA regulations. This means the employer must act as a fiduciary, supply Summary Plan Descriptions (SPDs), and file Form 5500s if the plan covers 100 or more participants. A QSEHRA, by contrast, is statutorily exempt from COBRA and many standard ERISA group plan requirements, greatly reducing the compliance load for very small businesses.
If an employee with an ICHRA is terminated or loses eligibility, the ICHRA is subject to COBRA rules. However, because COBRA applies to the group health plan, the employer is only required to offer the employee the ability to continue accessing the HRA allowance by paying a COBRA premium (usually the value of the allowance plus a 2% admin fee), which makes very little financial sense for the employee. In reality, an employee losing their job triggers a Special Enrollment Period for them to adjust their individual market coverage and apply for income-based subsidies, meaning almost no one elects COBRA for an ICHRA. QSEHRA is exempt from COBRA entirely.
Under the ACA, sponsors of self-insured health plans must pay an annual Patient-Centered Outcomes Research Institute (PCORI) fee. Because HRAs are legally classified as self-insured plans, employers sponsoring an ICHRA must file IRS Form 720 annually and pay the associated fee (a few dollars per covered life).
The decision to migrate from a traditional fully insured group plan to an HRA model should be based on your company’s demographic realities, budget constraints, and risk tolerance.
You should consider an ICHRA if:
You should consider a QSEHRA if:
You should stay with a Traditional Group Health Plan if:
Deploying an ICHRA or QSEHRA is not a DIY project. The penalties for violating ACA market reforms, failing nondiscrimination testing, or bungling an affordability safe harbor calculation are severe.
To execute this strategy properly, a business should partner with a licensed benefits consultant who understands the intersection of commercial group dynamics and the Maryland individual marketplace. A proper implementation begins with a full census analysis. The broker will model the exact cost of individual premiums across the state based on your employees’ home ZIP codes and ages, calculate the required allowances to meet mandate affordability, and compare that bottom-line cost directly against your traditional group renewal quote.
From there, selecting a technology-forward TPA to handle the legal documentation and the monthly receipt substantiation ensures that the HR department is completely removed from the compliance liability of managing the arrangement, allowing the business to finally step off the unpredictable rollercoaster of annual insurance renewals.
Our licensed brokers can model exactly how an ICHRA or QSEHRA compares to your current group renewal, ensuring total ACA compliance for your Maryland workforce.
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