What Is a Health Reimbursement Arrangement (HRA)?

Understanding the Basics of an HRA

A Health Reimbursement Arrangement (HRA) is an employer-funded benefit account that reimburses employees for qualified medical expenses and, in some cases, individual health insurance premiums. Unlike a traditional group health plan where the employer pays insurers directly, an HRA allows the organization to set aside a defined amount of money that workers can use tax-free to cover eligible health costs. Because the money belongs to the employer until a claim is made, HRAs give companies flexibility and predictability while still easing the financial burden of care for employees.

How Does an HRA Work?

Every HRA starts with a formal plan document that outlines who is eligible, what the annual allowance will be, and which expenses are covered. Once the plan year begins, employees pay out of pocket for medical services, submit substantiated receipts or Explanation of Benefits (EOBs), and then receive tax-free reimbursement up to their available balance. Unused funds typically roll over to the next plan year at the employer’s discretion, though they remain the property of the company if the employee leaves. Because reimbursements are not subject to income or payroll taxes, both employers and employees realize significant savings compared with taxable wage increases.

Key Types of HRAs

The federal government has introduced several HRA variations to meet diverse workforce needs. Understanding the main options helps employers choose the right fit.

• Qualified Small Employer HRA (QSEHRA): Designed for businesses with fewer than 50 full-time employees that do not offer group health insurance. Employers can reimburse premiums and qualified medical expenses up to an annual limit set by the IRS.
• Individual Coverage HRA (ICHRA): Available to employers of any size, the ICHRA can be offered instead of traditional group health coverage. Employees must be enrolled in individual health insurance to receive reimbursements, and allowances can vary by employee class.
• Excepted Benefit HRA (EBHRA): Offered alongside a traditional group plan, the EBHRA lets employers reimburse ancillary costs such as dental, vision, COBRA premiums, or short-term plans, up to a capped amount.
• Integrated HRA (GCHRA): Sometimes called a group coverage HRA, this arrangement supplements a high-deductible or core group health plan, reimbursing deductibles, copays, and coinsurance.

Main Benefits for Employers

HRAs appeal to companies seeking to stabilize budgets without sacrificing talent retention. By setting a predictable reimbursement cap, employers know exactly how much they could pay in any given year. Plans can be tailored by class—such as full-time, part-time, or seasonal workers—allowing businesses to offer differentiated benefits that fit operational needs. Administrative platforms automate compliance with IRS substantiation rules, reducing paperwork. Finally, because reimbursements are exempt from payroll taxes, employers may see 7.65 percent savings on every dollar reimbursed compared with a gross salary increase.

Main Benefits for Employees

From the employee perspective, an HRA stretches household health dollars. Reimbursements are free of federal income and payroll taxes, which can effectively reduce medical costs by 20–40 percent depending on the tax bracket. Workers also gain greater choice: with a QSEHRA or ICHRA they can shop the individual marketplace and select a plan that meets their doctors, prescriptions, or budget rather than accepting a one-size-fits-all group plan. Many platforms provide a debit card or simple mobile app, simplifying the submission process for receipts and EOBs.

Eligibility and Participation Rules

Eligibility rules differ by HRA type, but employers must apply them consistently within each designated class. For example, an ICHRA cannot be offered to one full-time employee and withheld from another unless they belong to different classes defined by the regulations. Employees generally must be covered by minimum essential coverage (MEC) to receive reimbursements, and proof of coverage may be required annually. Companies must provide written notice at least 90 days before the plan year begins (or upon hire) so employees understand their rights and responsibilities.

HRA vs. HSA vs. FSA

While HRAs, Health Savings Accounts (HSAs), and Flexible Spending Accounts (FSAs) all help pay for medical expenses with tax advantages, they differ in ownership, funding, and portability. An HRA is owned and funded solely by the employer; employees cannot contribute, and unused funds usually revert to the business when employment ends. An HSA is individually owned, can accept both employer and employee contributions, requires a high-deductible health plan, and grows tax-free investment earnings that stay with the worker forever. An FSA is typically employee-funded through salary deferral and follows a “use-it-or-lose-it” rule each year, though employers may allow limited carryover. Many savvy benefits packages pair an HRA with an HSA or FSA to complement coverage gaps.

Setting Up an HRA: Steps for Employers

Launching an effective HRA involves several key steps:

1. Choose the appropriate HRA type based on company size, existing health benefits, and budget goals.
2. Determine annual allowance amounts and any rollover rules.
3. Create a formal plan document and summary plan description (SPD) to comply with ERISA requirements.
4. Select a benefits administration platform or third-party administrator (TPA) to handle substantiation, reimbursements, and reporting.
5. Provide required employee notices detailing eligibility, allowance, and interaction with premium tax credits.
6. Monitor reimbursements, adjust budgets for future plan years, and file IRS Forms 1094/1095 if offering an ICHRA to 50+ full-time employees.

Tax Implications to Keep in Mind

For employers, reimbursements are 100 percent tax-deductible as a business expense. For employees, reimbursements are excluded from federal income and payroll taxes, and most states follow suit. However, if an employee receives a premium tax credit on the Health Insurance Marketplace, their credit amount will be reduced—or in some cases eliminated—by the HRA allowance. Employers must include the annual allowance on Form W-2 in Box 12 with code FF for informational purposes only; it is not taxable income.

Frequently Asked Questions

Do unused HRA funds roll over? Employers may allow full, partial, or no rollover. The plan document must spell out the policy in advance.

Can an employee have both an HRA and an HSA? Yes, but the HRA must be structured as “limited-purpose” or “post-deductible” so it does not disqualify HSA eligibility.

Is an HRA subject to COBRA? Integrated HRAs and some EBHRAs are subject to COBRA continuation, while QSEHRAs and ICHRAs generally are not.

Conclusion: Is an HRA Right for Your Business?

A well-designed Health Reimbursement Arrangement offers a win-win solution: predictable costs for employers and meaningful, tax-free health benefits for employees. Whether you are a small startup exploring a QSEHRA, a mid-sized firm considering an Integrated HRA, or a large employer seeking the flexibility of an ICHRA, these arrangements provide a modern alternative to the rising expense of traditional group health insurance. By understanding the rules and leveraging specialized administration tools, businesses can offer competitive benefits that attract talent while maintaining fiscal control.