Think a Health Reimbursement Arrangement (HRA) is too complicated or only works for small companies? That’s a common myth. In reality, an HRA is one of the most flexible and scalable benefits solutions available. The process only feels complex when you don’t have a clear guide. Once you understand how a health reimbursement arrangement must be established, you’ll see it’s a straightforward way to offer excellent benefits while controlling costs. The key is getting a firm grasp on the fundamental rules. This guide will bust the common myths and give you a clear roadmap for your business.

Key Takeaways

• Set a Predictable Budget and Offer Real Flexibility: An HRA lets you move away from rigid group plans by setting a defined contribution amount. This gives you control over costs while your employees gain the freedom to choose their own health insurance.
• Take Advantage of Key Tax Savings: Your HRA contributions are a tax-deductible business expense, and the money your employees receive for healthcare is completely tax-free for them, making it a highly efficient way to offer benefits.
• Simplify Administration and Ensure Compliance: Don’t risk handling sensitive health information yourself. A third-party administrator (TPA) manages the reimbursement process, keeping your plan compliant with HIPAA and other regulations so you can focus on your business.

What is a Health Reimbursement Arrangement (HRA)?

A Health Reimbursement Arrangement, or HRA, is an employer-funded health benefit used to reimburse employees for out-of-pocket medical expenses and, in some cases, health insurance premiums. Think of it as a flexible, tax-free allowance you provide to your team for their healthcare needs. Instead of locking into a one-size-fits-all group plan, an HRA gives you control over your budget while offering your employees the freedom to choose the coverage that works best for them. It’s a modern approach to benefits that can be tailored to fit the unique needs of your business, whether you’re a small group or a larger company.

How Does an HRA Work?

The process is refreshingly straightforward. First, you, the employer, decide on a monthly allowance you want to offer each employee for healthcare costs. This is a defined contribution, so you always know exactly what your benefits budget will be. Your employees then purchase their own health insurance or incur other qualified medical expenses. To get reimbursed, they simply submit proof of their expense, and you pay them back up to their allowance limit. The best part? These reimbursements are tax-free for both the employee and your business. It’s a simple, accountable system that puts you in control of costs.

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

It’s easy to get these acronyms mixed up, but they have key differences. The main distinction is who funds the account. HRAs are funded exclusively by the employer. In contrast, Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) can be funded by both the employer and the employee. An HSA is also owned by the employee and rolls over year after year, but it must be paired with a high-deductible health plan. FSAs often have a “use-it-or-lose-it” rule for funds at the end of the year. Unlike FSAs, HRAs can typically be used to pay for health insurance premiums, offering greater flexibility for your team.

Key Differences in Account Ownership

One of the most important distinctions between these accounts is who puts money in and who owns it. As we mentioned, HRAs are funded exclusively by the employer. You set the allowance, and that’s the benefit you provide. In contrast, Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) can be funded by both the employer and the employee through pre-tax payroll deductions. This also impacts what happens to the money when an employee leaves your company. Since the HRA is an employer-owned account, any unused funds stay with your business. With an HSA, the account and all the money in it belong to the employee, so they take it with them when they go.

Reimbursing Health Insurance Premiums

A major advantage of an HRA is its ability to cover a wider range of costs, including health insurance premiums. Unlike FSAs, HRAs can typically be used to pay for health insurance premiums, offering greater flexibility for your team. This is a game-changer for businesses that want to move away from a traditional group plan. By offering a Qualified Small Employer HRA (QSEHRA) or an Individual Coverage HRA (ICHRA), you can empower your employees to purchase their own insurance plan from the marketplace that fits their specific needs. This gives them true choice and portability while you maintain a predictable, fixed benefits budget. It’s a modern solution that works for many small businesses in Washington.

Coordinating HRA and FSA Benefits

While HRAs and FSAs can’t be used to reimburse the same medical expense, they can be offered side-by-side to create a more comprehensive benefits package. Both cover similar health expenses, but the key difference is that HRAs can pay for certain health plan premiums you pay after-tax (like COBRA or Medicare Part B), but FSAs cannot. For example, you could offer an HRA integrated with your group health plan to help cover deductible costs, and also offer an FSA for employees to contribute their own pre-tax dollars for other out-of-pocket expenses like dental or vision care. Structuring these benefits correctly is crucial for compliance, which is why partnering with an expert can help you design a plan that maximizes value for your team and your business.

Which Type of HRA is Right for You?

One of the best things about Health Reimbursement Arrangements is their flexibility. Unlike a one-size-fits-all group plan, HRAs come in a few different flavors, allowing you to pick the model that aligns perfectly with your company’s size, budget, and goals. Whether you’re a small startup that can’t yet afford a traditional group plan or a large company looking to give your employees more control over their healthcare, there’s likely an HRA that fits the bill. This approach moves you away from the rigid structure of traditional insurance and into a more strategic role.

Think of it as choosing a benefits strategy rather than just a health plan. You get to define the budget and the rules, giving you more predictable costs while empowering your employees with more freedom and choice in how they manage their health. This control is a huge advantage for businesses feeling stuck with rising premiums and limited options. Understanding the key differences between the main types of HRAs is the first step in figuring out which one can best support your team. Let’s walk through the most common options available to Washington businesses.

The Individual Coverage HRA (ICHRA)

The Individual Coverage HRA, or ICHRA, is a game-changer for businesses of all sizes. Instead of offering a traditional group plan, you can provide your team with tax-free funds to purchase their own individual health insurance. The ICHRA eliminates the burden of managing a group plan and gives employees the power to choose a policy that truly works for them and their families. As long as an employee has an individual health insurance policy, they are eligible to participate. This model offers incredible flexibility, allowing you to set different allowance amounts for different employee classes, like salaried vs. hourly, while staying compliant.

Qualified Small Employer HRA (QSEHRA)

If you run a small business with fewer than 50 full-time employees and don’t offer a group health plan, the Qualified Small Employer HRA (QSEHRA) is designed for you. A QSEHRA lets small employers give money back to their employees for health care costs, and this money is tax-free for the employee. These funds can be used for a wide range of expenses, from insurance premiums to copays and prescriptions. It’s a straightforward and effective way for small groups to contribute to their employees’ well-being without the complexity of administering a traditional insurance plan.

The Group Coverage HRA (Integrated HRA)

Do you already have a traditional group health plan but want to offer more support? An Integrated HRA is the perfect solution. As the name suggests, Integrated HRAs work with a traditional group health plan to help employees cover their out-of-pocket costs. This is especially valuable if you have a high-deductible health plan (HDHP). You can use an Integrated HRA to reimburse employees for their deductibles, copayments, and coinsurance. It’s a fantastic way to make your existing benefits package more robust and help your team manage the real-world costs of healthcare while keeping your premiums in check.

Rules for Premium Reimbursement

One of the most powerful features of an HRA is its ability to reimburse employees for their health insurance premiums. To keep everything compliant and running smoothly, there are a few key rules you need to know. First, HRAs are funded entirely by you, the employer. Your employees don’t contribute a dime. This structure is what gives you complete control over your benefits budget—you set the allowance, and that’s your fixed cost. This design allows you to reimburse employees for premiums and other medical costs like copays and prescriptions, giving your team a flexible way to manage their health expenses without the complexity of a shared account.

The tax advantages are a major win for everyone. The money your employees receive for their premiums is completely tax-free, which means more of their benefit dollars go directly toward their care. For your business, these contributions are a tax-deductible expense. It’s one of the most tax-efficient ways to offer meaningful health benefits. However, for an employee to be eligible for premium reimbursement, they must be enrolled in a qualifying individual health insurance plan. This is a core requirement to ensure the funds are used correctly. The IRS outlines specific rules that employers must follow to ensure fairness and proper administration, which is why having a clear process is so important.

HRAs also offer incredible flexibility in how you structure your contributions. You can set different allowance amounts for different classes of employees, such as offering one amount for salaried staff and another for hourly workers. This allows you to tailor your benefits strategy to fit your organization’s needs while managing costs effectively. To ensure everything is handled correctly and stays compliant with privacy laws like HIPAA, most businesses work with a third-party administrator (TPA). A TPA manages the reimbursement process, verifying expenses and protecting sensitive employee health information. This takes the administrative burden off your plate and ensures your HRA is managed professionally, so you can focus on your business.

The Excepted Benefit HRA (EBHRA)

An Excepted Benefit HRA, or EBHRA, is a unique tool that allows you to reimburse employees for specific types of medical care that fall outside of a major medical plan. According to the IRS, these HRAs are considered “limited excepted benefits.” This means you can offer an EBHRA to help cover costs for dental, vision, short-term disability insurance, or COBRA premiums. What’s great is that employees can be offered an EBHRA even if they decline to enroll in your primary group health plan, making it a flexible way to provide valuable benefits to your entire team.

Special HRA Types

Retiree HRAs

Supporting your team doesn’t have to end when they clock out for the last time. A Retiree HRA is a strategic way to help your former employees manage their healthcare costs after they leave the workforce. With this arrangement, you provide tax-free funds that retirees can use for a range of qualified medical expenses, including premiums for Medicare or other individual health plans. This approach gives you, the employer, a predictable budget by setting a defined annual contribution, so there are no surprises down the road. For your retirees, it offers the freedom to choose the health plan that truly fits their needs while receiving a valuable, tax-free benefit. It’s a meaningful way to honor your team’s long-term commitment and provide tangible support during their retirement years.

Who Can Participate in an HRA?

One of the best things about a Health Reimbursement Arrangement (HRA) is its flexibility, but that flexibility comes with a few key rules about who can participate. It’s not as simple as just offering it to everyone on payroll. Both your business and your employees have to meet certain criteria to make it work. Think of it as a partnership: your company offers the HRA, and your employees secure their own health coverage to use it.

This structure is what gives your team the freedom to choose their own health plan while still getting financial support from you. For your business, it means you can offer a meaningful health benefit without being locked into a one-size-fits-all group plan. Let’s walk through exactly what’s required from both sides so you can see how an HRA might fit into your benefits strategy.

How to Define Employee Eligibility

For an employee to use the funds in an HRA, they must first be enrolled in a qualifying health insurance plan. This is a non-negotiable rule. They can’t just use the HRA money for medical expenses without having underlying health coverage. This ensures that the HRA acts as a supplement to a comprehensive health plan, not a replacement for one.

Your employees can purchase their own individual health insurance plan from the state marketplace or directly from a private insurance company. Once they have proof of coverage, they can submit claims for reimbursement from the HRA you’ve set up for them. This gives them the power to pick a plan that truly fits their life, whether they need a low-deductible plan for a growing family or a simple catastrophic plan.

Minimum Essential Coverage (MEC) for QSEHRA

When you offer a Qualified Small Employer HRA (QSEHRA), there’s one rule that’s especially important: your employees must have a health plan that provides Minimum Essential Coverage, or MEC. This isn’t just a suggestion; it’s the requirement that allows them to receive their reimbursements completely tax-free. If an employee doesn’t have MEC, any money you give them through the QSEHRA becomes taxable income, which defeats one of the biggest advantages of the plan. As the employer, it’s your responsibility to collect proof of MEC from your team each year. This is a critical compliance step for any small business using a QSEHRA, ensuring the benefit works as intended and stays on the right side of IRS rules.

Does Your Business Qualify to Offer an HRA?

Most businesses can offer an HRA as long as they have at least one W-2 employee. The key is that HRAs are designed for employees, so self-employed owners generally can’t participate unless their spouse is a W-2 employee of the business. This makes HRAs a viable option for a wide range of companies, from small startups to large corporations and non-profits.

The type of HRA you choose also affects eligibility. For example, a Qualified Small Employer HRA (QSEHRA) is specifically designed for companies with fewer than 50 full-time employees that don’t offer a group health plan. This gives small groups a fantastic way to offer competitive benefits without the administrative burden of a traditional plan.

Using Waiting Periods and Employee Classes

HRAs allow you to customize your benefits strategy by creating different “employee classes.” This means you can offer different HRA contribution amounts to different groups of employees, as long as the distinctions are based on legitimate job-based criteria. For example, you could create separate classes for salaried versus hourly employees, full-time versus part-time staff, or employees in different geographic locations.

This feature gives you incredible control over your benefits budget. However, it’s crucial that these rules are applied fairly and consistently to everyone within a class. You can’t offer one salaried manager a different amount than another. You can also set a waiting period before new hires become eligible for the HRA, which is a common practice. Thinking through these details is a key step in getting started with your HRA design.

Dependent and Spouse Eligibility

A great health benefit should support the whole family, and an HRA is designed to do just that. You can structure your plan to include coverage for an employee’s spouse and eligible dependents, making it a robust family-friendly option. The most important rule to remember is that everyone using the HRA funds must be enrolled in a qualifying health insurance plan. This applies to the employee, their spouse, and their dependents. Once that requirement is met, your employees can submit claims for their family’s eligible medical expenses, from doctor’s visits to prescriptions. Best of all, these reimbursements are completely tax-free, which makes the HRA an incredibly efficient way to help your team manage their family’s healthcare costs.

Covering Domestic Partners

This is one area where the rules get very specific, and it’s important to be clear. While spouses are generally eligible for HRA coverage (as long as they have a qualifying health plan), domestic partners are treated differently under IRS guidelines. For an HRA to reimburse a domestic partner’s medical expenses, that partner must legally qualify as the employee’s tax dependent. If the domestic partner does not meet the IRS definition of a tax dependent, their expenses are not eligible for reimbursement. This is a critical distinction for compliance, as federal regulations state that HRAs cannot reimburse a non-tax dependent partner’s health expenses. Communicating this rule clearly to your employees is key to avoiding any confusion or compliance issues down the road.

How Do HRA Contributions and Reimbursements Work?

The real magic of an HRA lies in its mechanics—how money moves from your business to cover your employees’ healthcare costs. Unlike some other benefits accounts, you aren’t just handing over a lump sum. Instead, you set a budget and then reimburse your team as they incur eligible expenses. This gives you incredible control over your benefits spending while providing your employees with a valuable, flexible way to pay for their care. It’s a straightforward process that puts you in the driver’s seat of your company’s health benefits strategy.

Setting Your Annual Contribution Limits

As the employer, you decide how much you want to contribute to your employees’ HRAs each year. This allowance is the maximum amount an employee can be reimbursed for their medical expenses. Some types of HRAs, like the Qualified Small Employer HRA (QSEHRA), have annual contribution limits set by the IRS that you’ll need to follow. For others, like the Individual Coverage HRA (ICHRA), there are no limits, giving you complete flexibility. Setting these limits is a key step in your benefits planning, allowing you to create a budget that aligns with your financial goals while still offering a competitive package to your team.

QSEHRA Contribution Limits

The Qualified Small Employer HRA is specifically designed for simplicity, and that extends to its contribution rules. The IRS sets annual limits on how much you can offer, which makes budgeting predictable for your business. For 2023, the maximum allowance is $5,850 for an employee with self-only coverage and $11,800 for an employee with family coverage. These amounts are adjusted each year for inflation, so it’s a good practice to check for the updated figures annually. These contributions are a tax-deductible expense for your business and are received completely tax-free by your employees, making it a financially smart way for small groups to offer meaningful health benefits.

EBHRA Contribution Limits

The Excepted Benefit HRA also has a straightforward annual limit set by the IRS. For 2023, the maximum you can contribute to an employee’s EBHRA is $1,950. This type of HRA is a great tool for supplementing your main health plan by helping employees pay for things like dental care, vision expenses, or COBRA premiums. Because the limit is consistent for all employees, it simplifies your benefits administration and keeps costs under control. Just like with other HRAs, these tax-advantaged contributions are deductible for your company and tax-free for your team, adding extra value to your benefits package without a major impact on your bottom line.

How Employer Funding Works

One of the most appealing features of an HRA is that it’s funded solely by you, the employer—employees cannot contribute. But here’s the best part: you don’t pre-fund the accounts. An HRA is a “notional” arrangement, which means the money only leaves your business account after an employee submits a valid claim for reimbursement. This pay-as-you-go model is fantastic for managing cash flow. You budget for the total potential cost, but you only pay for the healthcare your employees actually use. This eliminates the risk of funding accounts for employees who may not use their full allowance.

What Medical Expenses Can an HRA Cover?

So, what can your employees use their HRA funds for? The money can cover a wide range of IRS-defined “qualified medical expenses”. This includes things like health insurance premiums, co-pays for doctor visits, prescription drugs, dental care, and vision expenses. The flexibility is a huge win for your team, as it allows them to use the funds for the specific care they and their families need. You can also choose to limit the scope of reimbursable expenses, though most employers stick to the broad IRS-approved list to give their employees the most value.

Eligible Over-the-Counter Items

One of the most convenient features of an HRA is its ability to cover everyday health needs. Employees no longer need a doctor’s prescription to get reimbursed for many over-the-counter (OTC) medicines and products. This means your team can use their HRA funds for things they buy at the local pharmacy, like cold medicine, cough drops, sleep aids, and pain relievers. It also covers a wide range of medical supplies, including bandages, crutches, and pregnancy tests. This flexibility makes the HRA an even more valuable benefit, helping your employees manage their health with funds that are easy to access and use for practical, day-to-day expenses.

Common Ineligible Expenses

While HRAs are incredibly flexible, they can’t be used for everything. The IRS has clear guidelines on what constitutes a “qualified medical expense,” and some common items don’t make the cut. Generally, expenses for personal hygiene or general wellness are not eligible. This includes things like toothpaste, vitamins for general health, and gym memberships. Cosmetic procedures are also excluded. The key distinction is whether the expense is primarily for medical care—to diagnose, treat, or prevent a specific health condition. Understanding these boundaries helps you set clear expectations for your team and ensures your HRA plan remains compliant.

Rules for Reimbursing Premiums

This is a critical rule to understand: for an employee to use HRA funds, they must be enrolled in a qualifying health insurance plan. An HRA is designed to supplement health coverage, not replace it. For an ICHRA or QSEHRA, this means the employee must have an individual health plan to get their premiums reimbursed. For an Integrated HRA, which pairs with a group plan, the funds are used to cover out-of-pocket costs like deductibles and copays, not the premiums you already contribute to. Setting up these rules correctly is essential for compliance and is a key part of the HRA design process we help businesses with when they’re getting started.

Should Unused HRA Funds Roll Over?

What happens if an employee doesn’t use their full HRA allowance by the end of the year? That’s another decision you get to make. Typically, any unused funds stay with the company. However, you have the option to design your plan to allow some or all of the remaining balance to roll over into the next year. Allowing funds to roll over can be a great incentive for employees to be mindful of their healthcare spending. Whether you choose a “use-it-or-lose-it” approach or a rollover option, it’s another way you can customize your HRA to fit your company’s culture and financial strategy.

Rollover Rules for QSEHRA

When you offer a Qualified Small Employer HRA (QSEHRA), you get to decide what happens to any funds an employee doesn’t use by the end of the plan year. The default rule is that the money stays with your company, which is great for your bottom line. However, you also have the flexibility to allow some or all of the unused balance to roll over to the next year. This can be a smart strategic move. Offering a rollover can encourage your team to be more thoughtful about their healthcare spending, knowing that what they save can be used for future needs. It’s another way a QSEHRA allows you to design a benefit that reflects your company culture and financial goals.

Handling Funds After Employment Ends

Since an HRA is an employer-funded arrangement, the funds are not portable in the way a 401(k) or Health Savings Account (HSA) is. When an employee leaves your company, they forfeit any remaining HRA allowance for that year. The money stays with your business. This is a critical distinction that protects your company’s finances—you aren’t paying out benefits to former employees. It reinforces that the HRA is a reimbursement plan, not a savings account owned by the employee. This structure provides a clean break and simplifies offboarding, ensuring your benefits dollars are spent only on your current team. Understanding these details is key to managing your plan effectively.

HRA Portability Explained

While the HRA funds themselves are not portable, the health insurance plan your employee chooses is. This is one of the most powerful features of an HRA. Because your employees purchase their own individual health insurance policies, that coverage belongs to them, not your company. If they leave their job, they can take their health plan with them without interruption, as long as they continue to pay the premiums. This provides a level of stability and personal ownership that traditional group plans simply can’t offer. It’s a modern approach to benefits that gives your team security in their healthcare choices, making it a highly attractive perk for retaining top talent.

Employee-Owned Health Plans

The shift to an employee-owned health plan is the core of how models like the ICHRA and QSEHRA work. Your role as the employer changes from being the plan provider to the financial facilitator. Your employees are empowered to shop on the individual market to find a plan that fits their life perfectly—whether they need to search for a specific network of doctors or want a certain deductible level. They own their policy and make their own choices. This model gives your team incredible autonomy over their healthcare decisions, and it frees you from the annual headache of choosing a single group plan that might not be the right fit for everyone.

Understanding the Tax Rules for HRAs

One of the most compelling reasons to offer a Health Reimbursement Arrangement is the significant tax advantages it provides for both you and your employees. When structured correctly, an HRA is a tax-efficient tool that allows you to offer meaningful health benefits while managing costs. Unlike simply increasing salaries to cover medical expenses (which would be taxable for everyone), HRA funds are specifically earmarked for healthcare and come with special tax treatment.

This setup creates a win-win situation: your team gets tax-free money to pay for their health needs, and your business gets a tax deduction for providing it. However, accessing these benefits means following specific IRS guidelines. It’s not as simple as handing out cash for medical bills; you need a formal plan document and clear administrative processes. Let’s walk through what you need to know about the tax rules to ensure your HRA is both beneficial and compliant.

Tax Benefits for Your Employees

For your employees, the primary tax benefit is straightforward and powerful: any reimbursement they receive from the HRA for eligible medical expenses is 100% tax-free. This means the money they get for things like insurance premiums, co-pays, or dental work isn’t considered taxable income. It’s a genuine health benefit, not just extra pay. This is a key difference from a Health Savings Account (HSA), which can be funded by both the employer and the employee. An HRA is entirely funded by you, the employer, allowing you to design a plan that fits your budget while providing real value to your team without adding to their tax burden.

Tax Advantages for Your Business

Your business also sees significant tax advantages. The contributions you make to your employees’ HRAs are considered business expenses and are generally 100% tax-deductible. This allows you to lower your company’s taxable income while directly supporting your team’s health and well-being. It’s important to note that the amount you contribute can sometimes affect an employee’s eligibility for premium tax credits if they purchase a plan on the Health Insurance Marketplace. Navigating these details is crucial for ensuring the benefit works as intended for everyone, which is where having an expert partner can make all the difference.

The Legal Basis for HRA Tax Benefits

The tax advantages of an HRA aren’t just a convenient perk; they are firmly established in the U.S. Internal Revenue Code (IRC). This legal foundation is what makes an HRA a stable and reliable benefits tool, not a loophole that could disappear next year. Having this framework in place gives you the confidence to build a long-term benefits strategy around an HRA, knowing that the tax savings for both your company and your employees are secure. Understanding this legal basis helps you appreciate why a formal plan is necessary and how it protects the integrity of the benefit you’re offering to your team.

Understanding IRC Section 106

The core provision that makes HRA benefits tax-free for your employees is IRC Section 106. In simple terms, this section of the tax code states that employer contributions to accident and health plans are not counted as part of an employee’s gross income. This is the legal mechanism that makes the whole system work. When you reimburse an employee for a qualified medical expense, that money is considered an employer contribution to their health plan. Because of Section 106, it’s a non-taxable event for them. This is what provides the tax-exclusion for contributions and ensures your team receives the full value of the benefit you provide.

Your IRS Reporting Checklist

To secure these tax benefits, your HRA must be set up as a formal group health plan that follows IRS and Affordable Care Act (ACA) rules. You can’t just informally agree to pay for medical bills; you need official plan documents that outline the terms of the arrangement. This formal structure is non-negotiable for compliance. Furthermore, you must consider your responsibilities under HIPAA’s privacy and security rules. This includes having written policies, training employees on privacy, securing your IT systems, and distributing a Privacy Notice to participants. Keeping clear records and adhering to these reporting requirements ensures your plan remains compliant and that the tax advantages are protected.

Keeping Your HRA Compliant: A Quick Guide

Health Reimbursement Arrangements offer incredible flexibility for businesses, but that flexibility comes with a set of rules you need to follow. Staying on top of HRA regulations is non-negotiable—it keeps your plan fair, protects your employees’ privacy, and saves your business from potential penalties. Think of these rules not as roadblocks, but as the guardrails that keep your benefits program running smoothly and effectively.

Navigating compliance can feel like a lot, especially when you’re also running a business. The good news is you don’t have to do it alone. Partnering with an expert can help you manage the details, from initial setup to ongoing administration. Let’s walk through the key areas of compliance you’ll need to address to keep your HRA in good standing.

Key HRA Regulations to Know

The world of health benefits is guided by a few key federal regulations, and HRAs are no exception. These rules are in place to ensure that health plans are administered fairly and that employees’ sensitive health information is protected. While terms like ERISA, COBRA, and HIPAA might sound intimidating, they are simply the framework that makes these benefits work. Understanding the basics is crucial for any employer, as it ensures your plan is not only effective but also fully compliant. Think of it as learning the rules of the road before you start driving—it keeps everyone safe and moving in the right direction.

The 2019 Final Rules

A major shift in the HRA landscape happened in 2019 when federal agencies introduced new regulations that dramatically increased flexibility for employers. These rules paved the way for the Individual Coverage HRA (ICHRA), allowing businesses to offer tax-free funds that employees can use to buy their own health insurance plans. This was a game-changer, moving benefits away from a rigid, one-size-fits-all group plan. The new rules also allow you to set different allowance amounts for various employee classes, like full-time vs. part-time staff. To keep things fair, employers must ensure their HRA offer meets affordability standards, a calculation that an expert partner can help you manage. The core tax advantages remain a huge benefit: your contributions are tax-deductible, and the reimbursements employees receive are tax-free.

Meeting ACA Affordability Rules

If you offer an Individual Coverage HRA (ICHRA), one of the most important rules to follow is the Affordable Care Act’s (ACA) affordability standard. In simple terms, your HRA is considered “affordable” if the amount you contribute is enough to ensure an employee’s cost for a standard health plan is less than a certain percentage of their income. This benchmark is based on the lowest-cost silver plan available to them on the health insurance marketplace.

Getting this calculation right is crucial. If the HRA offer isn’t deemed affordable, your business could face penalties. The affordability percentage is adjusted annually, so it’s something you’ll need to monitor each year to ensure your contributions remain compliant and your employees can access reasonably priced coverage.

Using Affordability Safe Harbors

Trying to figure out the exact cost of the lowest-priced silver plan for every single employee can be a major administrative burden. Thankfully, the IRS provides a few shortcuts called “affordability safe harbors” to make this much easier. These methods allow you to use information you already have on hand—like an employee’s W-2 wages, their rate of pay, or the Federal Poverty Line—to confirm your HRA offer is affordable. By using one of these safe harbors, you can be confident that your plan is compliant without having to do complex, individualized calculations for your entire team. Choosing the right safe harbor is a critical part of your benefits strategy, and it’s a key step in designing a plan that works for both you and your employees.

Avoiding Discrimination Issues

Fairness is a cornerstone of employee benefits, and the IRS has rules to enforce it. HRA plans must not discriminate in favor of highly compensated employees (HCEs). This means you can’t offer more generous allowances or better terms to your top earners while providing less to the rest of your team.

The rules apply to both eligibility and the benefits themselves. While you can group employees into different classes (like full-time vs. part-time), the contribution amounts must be consistent for everyone within a specific class. These non-discrimination rules ensure that your HRA provides meaningful benefits to your entire workforce, not just a select few.

Giving Employees Written Notice

Clear communication is key to a successful benefits program, and it’s also a legal requirement for HRAs. You must provide your employees with a written notice explaining the details of the HRA. This notice should cover the terms of the plan, the allowance amount, and how it coordinates with other health coverage.

For ICHRAs, this is especially important. You’re required to provide this notice at least 90 days before the start of the plan year. This gives your team members enough time to review their options and shop for a qualifying health plan on the marketplace. Timely and transparent communication ensures your employees can make informed decisions about their healthcare.

Following HIPAA Privacy Rules

Because an HRA involves handling your employees’ personal health information (PHI), it falls under the Health Insurance Portability and Accountability Act (HIPAA). This means you have a legal responsibility to protect the privacy and security of your employees’ medical data. You can’t ask for specific details about their medical treatments or claims.

To comply, you’ll need to implement safeguards, such as distributing a HIPAA Privacy Notice that explains how their information is protected. Many businesses choose to work with a third-party administrator (TPA) to handle reimbursements and documentation. This creates a firewall that helps you maintain HIPAA compliance and protects your employees’ sensitive information.

Why Clear Record-Keeping Matters

When it comes to compliance, good documentation is your best friend. You need to keep clear, organized records for your HRA plan. This includes your official plan documents, written notices sent to employees, enrollment forms, records of reimbursement requests, and proof that expenses were eligible.

These records are your proof of compliance in the event of an audit by the IRS or the Department of Labor. Maintaining meticulous files from the start will save you headaches down the road and ensure your plan administration is transparent and defensible. If you’re just getting started with an HRA, establishing a solid record-keeping process should be a top priority.

Clearing Up Common HRA Myths

Health Reimbursement Arrangements can feel like a new frontier in benefits, and with anything new comes a lot of chatter and a few misunderstandings. It’s easy for myths to take root when you’re trying to figure out the best way to support your team. Let’s clear the air and tackle some of the most common misconceptions about HRAs. Getting the facts straight is the first step toward building a benefits strategy that truly works for your business and your employees. Think of this as your official HRA fact-checking guide.

Myth: HRAs Aren’t “Real” Health Benefits

This is one of the biggest myths out there, and it’s simply not true. An HRA is a genuine, employer-funded health benefit that provides real value to your employees. Unlike Health Savings Accounts (HSAs), which are funded by both employers and employees, HRAs are funded entirely by you, the employer. This structure gives you complete control over your budget. You can design an HRA that provides meaningful health benefits without the unpredictable costs of a traditional group plan. It’s a formal, tax-advantaged way to help your team pay for their medical care, making it a very real and appreciated benefit.

Myth: HRAs Are Only for Small Businesses

While it’s true that some types of HRAs, like the Qualified Small Employer HRA (QSEHRA), were created specifically for smaller companies, the world of HRAs is much bigger than that. The Individual Coverage HRA (ICHRA), for example, is available to businesses of all sizes. Whether you’re a startup with a handful of employees or a large group with hundreds, there’s likely an HRA model that fits. This flexibility allows you to offer competitive benefits that can scale with your company, rather than being locked into a one-size-fits-all solution that no longer meets your needs as you grow.

Myth: HRAs Limit Employee Choice

This couldn’t be further from the truth. In reality, HRAs do the exact opposite—they offer incredible flexibility and put the power of choice directly into your employees’ hands. Instead of being limited to a single group plan that may not fit everyone’s needs, employees can use their HRA funds to purchase an individual health insurance plan that’s perfect for them and their families. They get to choose their network, their deductible, and their coverage level. This kind of personalization is a powerful advantage and a modern approach to benefits that many employees prefer.

Myth: Unused Funds Are Always Forfeited

The old “use-it-or-lose-it” rule doesn’t always apply to HRAs. As the employer, you have the flexibility to decide what happens to unused funds at the end of the year. You can absolutely design your plan to allow a portion or even all of the remaining balance to roll over for the employee to use in the following year. This feature makes the benefit even more valuable and less stressful for your team, as they don’t have to worry about losing money they didn’t spend. When you get started with an HRA, deciding on rollover rules is one of the key ways you can customize the plan to fit your company culture.

How to Set Up Your Health Reimbursement Arrangement

Setting up a Health Reimbursement Arrangement might seem complex, but it breaks down into a few clear, manageable steps. With a solid plan, the right partner, and clear communication, you can launch a benefits program that truly supports your team. Think of it as a project with a clear beginning, middle, and end. Here’s how to approach it.

Step 1: Plan Your HRA Implementation

First things first, you need a roadmap. A successful HRA launch depends on careful planning and timing, especially when it comes to legal notices. For any current employees, you are required to provide a written notice 90 days before the start of each new plan year. For new hires, you’ll need to give them notice as soon as they become eligible to participate. This isn’t just a suggestion—it’s a federal requirement. Mapping out these key dates will help you work backward and create a realistic timeline for choosing a plan, partnering with an administrator, and preparing your team for the change.

Step 2: Choose a Third-Party Administrator

This is a step you don’t want to skip. While it might be tempting to manage the HRA in-house to save money, doing so can put your company at risk. Federal privacy rules under HIPAA are strict, and handling employee medical receipts directly could lead to serious compliance issues and fines. That’s why it’s best practice to use a third-party administrator (TPA). A TPA is a company that specializes in managing HRAs. They handle the reimbursements, verify expenses, and ensure everything stays compliant, so you don’t have to. This protects your employees’ privacy and frees you up to focus on your business.

Step 3: Announce the New Plan to Your Team

Once the technical details are sorted, it’s time to share the good news with your employees. Clear, simple communication is key. Your team will have questions, so prepare to explain how the HRA works, what expenses are eligible, and how they can get reimbursed. The official written notice you provide is especially important. Make sure your employees understand they need the information in that letter to shop for a plan on the marketplace and see if they qualify for additional savings. An open-door policy for questions will make the transition smooth and show your team you’re invested in their well-being.

Step 4: Manage Your HRA Long-Term

Your HRA isn’t a “set it and forget it” benefit. After the launch, you’ll need a system for ongoing administration. This is another area where your TPA is invaluable. They will manage the day-to-day tasks, like processing reimbursement requests and tracking funds. They also help you stay on top of any regulatory changes that could affect your plan. Having a dedicated expert partner means your employees have a reliable resource for their questions, and your HR team isn’t burdened with benefits administration. This continuous support ensures your HRA program runs smoothly for years to come. When you’re ready to explore your options, our team is here to help you get started.

Related Articles

• How Does an HRA Work? A Simple Guide for Employers
• HRA Reimbursement Rules: The Ultimate Guide
• The Ultimate Guide to HRA Rules for Employers
• How Does an HRA Work? A Step-by-Step Explanation
• HRA for Small Business: A Complete 2025 Guide

Frequently Asked Questions

Can I switch from my current group health plan to an HRA? Yes, you absolutely can. Many businesses move from a traditional group plan to an HRA to gain more control over their budget and offer employees more choice. The process involves canceling your group plan at the end of its term and setting up the HRA to begin right after. The most important part is giving your employees plenty of notice—at least 90 days is required—so they have time to shop for their own individual health insurance plans before the switch happens.

Is an HRA complicated for my employees to use? Not at all, especially when it’s managed well. From your employee’s perspective, the process is quite simple. They choose and purchase their own health insurance plan, pay for a medical expense, and then submit proof of that expense for reimbursement. A good third-party administrator provides an easy-to-use online portal or app for submitting claims, which makes getting their money back fast and painless. It empowers them to manage their own healthcare without adding a lot of administrative work to their plate.

How does an HRA give me more control over my budget than a group plan? An HRA puts you in complete control of your benefits spending because you decide exactly how much you want to contribute. You set a fixed monthly allowance for each employee, so your maximum potential cost is predictable from day one. Unlike a traditional group plan where you’re subject to annual rate hikes, your HRA costs don’t change unless you decide to change them. Plus, you only pay out funds when an employee makes a claim, which is great for your company’s cash flow.

What’s the real difference between an ICHRA and a QSEHRA for my small business? The main differences come down to size and flexibility. A QSEHRA is specifically for businesses with fewer than 50 employees and has annual contribution limits set by the government. An ICHRA, on the other hand, is for businesses of any size and has no contribution limits, giving you total freedom in how much you offer. An ICHRA also allows you to offer different allowance amounts to different classes of employees, such as salaried versus hourly, providing a greater degree of customization.

Do I really need a third-party administrator (TPA) to manage my HRA? While it might not be legally required, it is the smartest and safest way to run your HRA. Handling reimbursement requests yourself means you would be viewing your employees’ private health information, which can easily lead to HIPAA violations and serious penalties. A TPA acts as a privacy shield, managing all the claims and documentation confidentially. This protects your employees, keeps your business compliant, and takes a significant administrative burden off your shoulders.