If you’re a small business benefits admin or self-employed individual managing your own individual coverage HRA (ICHRA), you may have noticed unsubstantiated reimbursements piling up or questions about whether your plan meets current eligibility rules. Auditing your HRA every 6 to 12 months reduces risk of noncompliance, ensures you’re only reimbursing eligible expenses, and avoids unexpected tax penalties for both employers and employees. This guide uses a structured audit checklist and comparison of common HRA types to simplify your review and reduce costly errors.
Two options people mix up
The vast majority of HRA audit errors stem from misclassifying the two most common HRA types for small and mid-sized businesses: Qualified Small Employer Health Reimbursement Arrangements (QSEHRA) and Individual Coverage Health Reimbursement Arrangements (ICHRA). These two plans have distinct eligibility, contribution, and reporting rules, so confirming which plan you established is the first critical step of any audit. QSEHRAs are only available to employers with fewer than 50 full-time equivalent employees that do not offer a group health insurance plan to any staff. ICHRAs are available to employers of any size, can be offered to specific employee classes (such as full-time staff only, or remote workers in a specific state), and may be paired with a group health plan for separate employee classes, as long as no employee is offered both an ICHRA and a group plan. Mixing up these rules, such as offering a QSEHRA alongside a group plan, or offering an ICHRA to employees without proof of individual qualifying health coverage, will trigger noncompliance findings in both internal and IRS audits.
Comparison table
The table below outlines key audit-relevant differences between QSEHRAs and ICHRAs to help you confirm your plan type before starting your audit:
| Audit Criteria | QSEHRA | ICHRA |
|---|---|---|
| Eligible employer size | Fewer than 50 full-time equivalent employees | No size restrictions, applicable to all employer types |
| Employee eligibility rules | Must be offered to all full-time employees; part-time employees working fewer than 1200 hours annually may be excluded | May be restricted to specific employee classes (e.g., full-time, salaried, geographic location) as long as class definitions are consistent with official plan rules |
| Annual reimbursement limits | Set annually by the IRS; separate limits for self-only and family coverage. Confirm current limits on IRS.gov | No statutory maximum reimbursement limit; employers may set their own contribution limits per employee class |
| Eligible expenses | All IRS Section 213(d) qualified medical expenses, including premiums, deductibles, copays, and eligible over-the-counter products | All IRS Section 213(d) qualified medical expenses, or employers may restrict reimbursements to health insurance premiums only, if specified in plan documents |
| Required employee notification timeline | 90 days before the start of each plan year for all eligible employees | 90 days before the start of each plan year for existing employees; 90 days before the start of coverage for new hires |
Illustrative example
Illustrative example: A 12-person B2B marketing firm established a QSEHRA for the 2023 plan year, as they do not offer a group health plan and have fewer than 50 FTEs. Their benefits admin schedules an annual audit in November 2023 to catch errors before processing end-of-year tax forms. They use the following linear HRA audit checklist to complete their review:
HRA Audit Checklist (All Qualified HRA Types)
- Confirm your HRA plan type matches your original signed plan documents and is correctly categorized as QSEHRA, ICHRA, excepted benefit HRA, or other qualified HRA type
- Cross-verify every employee who received reimbursements in the audit period meets eligibility requirements for your specific HRA type (e.g., proof of active individual health insurance for ICHRA participants, full-time status for QSEHRA participants)
- Match every reimbursement issued in the audit period to a valid, dated receipt or proof of payment for an IRS Section 213(d) eligible expense, with no reimbursements issued for non-qualified costs
- Confirm total reimbursements per employee do not exceed the applicable annual limit for your HRA type for the relevant tax year
- Verify all required pre-plan-year employee notifications were sent on schedule, per your HRA type’s rules, with dated proof of delivery if available
- Confirm the HRA is not being paired with ineligible coverage for any participant (e.g., QSEHRA paired with an employer-sponsored group health plan, ICHRA paired with a group plan for the same employee class)
- Reconcile all HRA contributions and reimbursements with your business payroll and tax records to ensure amounts are correctly reported on employee W-2s, or your individual tax forms if you are a self-employed plan holder
Continuing the illustrative example: The admin completes the checklist and finds two errors. First, two part-time employees who worked 1120 hours in 2023 were incorrectly added to the QSEHRA, and $1,200 in total reimbursements were issued to them across the plan year. Second, one employee submitted a receipt for over-the-counter acne skincare products not classified as a Section 213(d) eligible expense, and received a $140 reimbursement. The admin works with their licensed benefits broker to correct the employees’ W-2s to reflect the excess reimbursements as taxable income, and updates their pre-enrollment eligibility screening process to automatically exclude part-time employees who work fewer than 1200 hours annually for the 2024 plan year.
Limits and exceptions
The checklist above applies to standard QSEHRA and ICHRA plans, but there are key limits and exceptions to note during your audit to avoid missed gaps. First, excepted benefit HRAs, which are limited to reimbursing only non-medical-major coverage costs like dental, vision, telehealth, or copay assistance, have separate eligibility and reporting rules. If you administer an excepted benefit HRA, confirm all rules against your plan documents before completing your audit, as they do not follow the same requirements as QSEHRA or ICHRA.
Special eligibility exceptions apply for employees on COBRA continuation coverage, Medicare, or Medicaid. For example, QSEHRAs may be offered to employees on COBRA, but ICHRA eligibility for Medicare enrollees is subject to additional federal rules, so confirm these exceptions with your plan administrator or broker before disenrolling any employees or correcting reimbursements.
If you have employees working across multiple states, some state-specific rules may apply to HRA eligibility and covered expenses. Check your state’s official health insurance exchange or department of insurance for local requirements that may impact your audit findings.
Self-employed business owners are not eligible to participate in QSEHRAs, but may be eligible for ICHRA coverage if they meet all eligibility requirements. This is a common exception that leads to audit errors, so confirm your own eligibility if you are a business owner participating in your company’s HRA plan.
If you identify errors during your audit, you may be eligible to correct those errors within a specific window before filing your annual tax documents to avoid penalties. Work with your broker or tax professional to process corrections, as self-correction rules vary based on the type and severity of the error.
Bottom line
Auditing your HRA at least once per plan year, and ideally mid-year as well, reduces the risk of costly compliance penalties, avoids overpaying for non-eligible expenses, and ensures all employees meet your plan’s eligibility requirements. The most common audit errors stem from mixing up QSEHRA and ICHRA rules, so confirming your plan type first using the comparison table above will cut down on unnecessary review time. The linear checklist provides a clear, repeatable process you can use for every audit, regardless of your plan type.
This content is for educational purposes only and does not constitute insurance, tax, legal, or medical advice. Always verify all HRA rules against your official signed plan documents, and consult a licensed benefits broker or qualified tax professional before making changes to your plan or correcting any audit errors.
Important note: This page is educational and is not insurance, tax, legal, or medical advice. Confirm current rules in your plan documents or with a licensed professional.