The Ultimate Guide to Health Reimbursement Arrangements (HRAs): A Win-Win for Employers and Employees

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Introduction: What If Your Health Benefits Could Be Smarter, Not Harder?

For decades, the standard model for employer-sponsored health coverage was simple: the company picks a group health insurance plan, pays a portion of the premium, and employees take it or leave it. But what if there was a more flexible, tax-advantaged, and cost-effective way to provide health benefits?

Enter the Health Reimbursement Arrangement (HRA) — an IRS-approved, employer-funded health benefit that is revolutionizing how small businesses, nonprofits, and even large corporations approach employee healthcare.

In this guide, we’ll break down everything you need to know about HRAs: what they are, how they work, the different types, the pros and cons for both employers and employees, and how to set one up.

Part 1: What Exactly Is a Health Reimbursement Arrangement (HRA)?

A Health Reimbursement Arrangement (HRA) is not an insurance plan. Instead, it’s an account-based health plan funded solely by an employer. Employers set aside a fixed monthly allowance of tax-free money that employees can use to pay for eligible medical expenses, insurance premiums, or both.

Key characteristics:

  • Employer-owned: The funds belong to the employer. If an employee leaves the company, unused money typically reverts to the employer (unless the plan specifies otherwise).

  • Tax-free: Reimbursements to employees are tax-deductible for the employer and tax-free for the employee.

  • No employee contributions: Employees cannot put their own pre-tax dollars into an HRA. Only employers fund it.

  • Reimbursement model: Employees pay for eligible expenses out of pocket, submit proof, and the employer reimburses them tax-free.

Think of an HRA as a “healthcare allowance” that your employer gives you, but with strict IRS rules on what you can spend it on.

Part 2: Types of HRAs – One Size Does Not Fit All

The IRS recognizes several types of HRAs. Choosing the right one depends on your company size, budget, and existing health insurance offerings.

1. QSEHRA – Qualified Small Employer HRA

  • For: Employers with fewer than 50 full-time employees who do not offer a group health plan.

  • Allowance limits (2025): Up to $6,150 for individuals, $12,450 for families (indexed annually).

  • Best for: Small businesses that want to help employees buy individual health insurance (on or off the Marketplace).

2. ICHRA – Individual Coverage HRA

  • For: Employers of any size (including large companies) who want to reimburse employees for individual market premiums and medical expenses.

  • No dollar limit: Employers set their own allowance (must be the same for all employees in a class, e.g., full-time, part-time, seasonal).

  • Best for: Companies transitioning away from traditional group plans, or those with diverse employee needs.

3. GCHRA – Group Coverage HRA (also called Integrated HRA)

  • For: Employers who already offer a traditional group health plan.

  • Purpose: Covers out-of-pocket costs like deductibles, copays, and coinsurance.

  • Best for: Filling the gaps in a standard PPO or HMO plan.

4. Excepted Benefit HRA (EBHRA)

  • For: Employees enrolled in a group plan (covers limited, excepted benefits like vision, dental, or short-term disability).

  • Allowance: Up to $1,950 per year (2025 limit).

  • Best for: Adding extra perks without affecting ACA compliance.

5. Retiree HRA

  • For: Reimbursing medical expenses for retired former employees (often used to cover Medicare premiums).

Part 3: How an HRA Works – A Step-by-Step Example

Let’s walk through a real-world scenario using an ICHRA.

Company: ABC Marketing (20 employees)
Offer: No group health plan. Instead, ABC sets up an ICHRA with a $500/month allowance per employee.

Step 1: Employee Jane buys a Silver plan on the state Marketplace for $450/month.
Step 2: Jane pays her premium directly to the insurance company.
Step 3: Jane submits proof of payment (a receipt or statement) to ABC’s HRA administrator.
Step 4: ABC reimburses Jane $450 tax-free from the HRA.
Step 5: Jane’s remaining $50 allowance for that month rolls over (if plan allows) or is forfeited.

If Jane has a doctor visit with a $40 copay, she can also submit that for reimbursement. The HRA pays for both premiums and medical care.

Important: With an ICHRA or QSEHRA, employees must have minimum essential coverage (MEC) to receive tax-free reimbursements. Otherwise, reimbursements become taxable income.

Part 4: Why Employers Love HRAs (And You Will Too)

✅ For Employers:

  1. Predictable costs – You set a fixed monthly allowance per employee. No surprise premium hikes.

  2. No more one-size-fits-all – Different employee classes (full-time, part-time, remote, seasonal) can get different allowances.

  3. Tax savings – Employer contributions are 100% tax-deductible.

  4. No ACA employer mandate penalty – ICHRAs satisfy the Employer Shared Responsibility Payment (ESRP) if designed properly.

  5. Attract and retain talent – Especially small businesses can compete with larger companies by offering a health benefit without managing a group plan.

  6. Minimal administration – Many third-party HRA software platforms (PeopleKeep, TakeCommand, HealthEquity) automate reimbursements and compliance.

✅ For Employees:

  1. Choice – You pick your own doctor, plan, and coverage level from the individual market.

  2. Portability – Your HRA doesn’t follow you, but your individual insurance plan does (when you leave the job, you keep your policy).

  3. Tax-free money – Reimbursements are not counted as taxable income.

  4. Covers many expenses – Premiums, deductibles, copays, prescriptions, dental, vision, and even some over-the-counter items (with a prescription).

  5. No paycheck deduction – Unlike HSAs or FSAs, you never contribute; the employer pays 100%.

Part 5: Potential Drawbacks to Consider

Nothing is perfect. Here’s what to watch out for with HRAs.

For Employers:

  • Class discrimination rules – With ICHRAs, you can vary allowances only by bona fide job classes (full-time, part-time, seasonal, etc.), not by individual health status.

  • Notice requirements – You must provide employees with a written HRA plan document and an annual notice.

  • Coordination with premium tax credits – Employees who receive an ICHRA offer may lose eligibility for Marketplace premium tax credits (unless the HRA is unaffordable).

For Employees:

  • Use-it-or-lose-it (sometimes) – Some HRAs allow rollover; others don’t. Unused funds typically go back to the employer.

  • No accumulation – Unlike an HSA, you can’t build a long-term health savings nest egg.

  • Employer can change or cancel – HRAs are not guaranteed benefits. Your employer can reduce allowances or terminate the plan with proper notice.

  • Must maintain qualifying coverage – For ICHRAs and QSEHRAs, you must have your own individual health plan to receive tax-free reimbursements.

Part 6: HRA vs. HSA vs. FSA – What’s the Difference?

This is where people get confused. Let’s clarify:

Feature HRA HSA FSA
Who funds it? Employer only Employee + Employer Employee + Employer
Ownership Employer Employee Employer
Account type Reimbursement Savings account Reimbursement
Rollover of unused funds Sometimes (employer decides) Yes, indefinitely Limited ($610 rollover or 2.5-month grace period)
Requires high-deductible plan? No Yes No
Interest/investment growth No Yes No
Portability after job change No (employer keeps funds) Yes (employee keeps funds) No (generally forfeited)

Bottom line: If you want long-term savings and investment, choose an HSA. If you want employer-funded flexibility without a high deductible, choose an HRA.

Part 7: Compliance – The Non-Negotiable Rules

HRAs are governed by complex IRS, ACA, and ERISA rules. Here’s what you must get right:

  1. Written Plan Document – Every HRA must have a formal legal document.

  2. Summary Plan Description (SPD) – Give employees a clear explanation of their HRA.

  3. No Discrimination – ICHRAs cannot discriminate in favor of highly compensated employees (HCIs) when it comes to allowance amounts within the same class.

  4. Affordability Testing (for ICHRAs) – If the HRA is unaffordable (employee’s required premium for self-only coverage exceeds ~9.12% of their household income), the employee can opt out and take a Marketplace tax credit.

  5. COBRA – In some cases, former employees must be offered continued access to unused HRA funds.

Warning: Failure to comply can result in IRS penalties of $100/day per employee. Always use a qualified HRA administrator.

Part 8: Is an HRA Right for Your Business?

You should consider an HRA if:

  • You have 2 to 50 employees and cannot afford traditional group insurance (QSEHRA).

  • Your employees work in different states (individual plans vary by state, but group plans may not be available everywhere).

  • You have part-time, seasonal, or remote workers who don’t fit a one-plan-fits-all model (ICHRA).

  • You already offer a high-deductible health plan (HDHP) and want to help with out-of-pocket costs (GCHRA).

  • You want to stop managing open enrollment for a group plan and let employees choose their own coverage.

You should NOT consider an HRA if:

  • Your employees earn low wages and may qualify for large Marketplace premium tax credits (the HRA could make them ineligible).

  • You want employees to have lifetime savings for retirement healthcare (use an HSA instead).

  • Your workforce strongly prefers a traditional PPO with a single network (group insurance still wins for simplicity).

Part 9: Real-Life Case Study – How a Small Bakery Saved $30,000

The Bakery: Sweet Rise Bakery, 12 employees, located in Texas.
The problem: Group health insurance premiums were $1,200/month per employee. Total annual cost: $172,800.
The solution: Switched to a QSEHRA with a $450/month allowance per employee.
The result:

  • Employees bought their own Marketplace plans (average premium: $380/month).

  • Bakery reimbursed actual premiums up to $450.

  • Total annual cost: $64,800 ($450 x 12 x 12).

  • Savings: $108,000 per year.

  • Employee satisfaction: Up 40% because everyone could choose their own doctor.

Part 10: How to Set Up an HRA in 5 Simple Steps

  1. Choose the type – QSEHRA, ICHRA, or GCHRA based on your size and existing coverage.

  2. Set your allowance – Decide monthly or annual amounts per employee class.

  3. Select an administrator – Use a specialized platform (e.g., PeopleKeep, TakeCommand, Health Equity, or your payroll provider like Gusto or Rippling).

  4. Notify employees – Provide a written HRA plan document and instructions for submitting expenses.

  5. Manage reimbursements – Employees submit receipts; you reimburse tax-free via payroll or direct deposit.

Conclusion: The Future of Employer Health Benefits is Flexible

The old days of “take this one group plan or nothing” are fading. Health Reimbursement Arrangements put control back where it belongs—in the hands of employees to choose their own care, while giving employers predictable budgets and tax savings.

Whether you’re a startup, a family-owned restaurant, or a regional manufacturing firm, an HRA can be customized to fit your culture, your budget, and your people.

Before you renew your group plan next year, ask yourself:

Are we offering health benefits that truly serve our team—or just checking a box?

If it’s time for a change, explore the HRA. Your employees (and your CFO) will thank you.

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