Your team isn’t one-size-fits-all, so why should their health plan be? With remote staff, part-timers, and employees with different family needs, a traditional group plan often misses the mark. A health reimbursement arrangement (HRA) offers a more flexible approach. Instead of a single plan, you give employees tax-free funds to buy their own insurance or pay for medical costs. The benefits of an HRA health plan are clear: your team gets real choice, and you get total budget control. This article breaks down how a company HRA works, from setting allowances to the reimbursement process.

Key Takeaways

• Control Costs with a Flexible Benefits Model: HRAs let you set a fixed, tax-deductible allowance for employees, ensuring your budget is predictable. You only pay for expenses as they’re claimed, which means you avoid overspending on unused benefits.
• Empower Your Team with Personalized Health Benefits: Employees can use their tax-free funds to choose their own insurance and pay for the medical care they actually need. This freedom of choice is a powerful tool for attracting and keeping great talent.
• Smart Administration is Key to HRA Success: A successful HRA requires clear communication, compliant documentation, and a simple claims process. Partnering with an expert removes the administrative burden, ensuring a smooth experience for you and your team.

What is a Health Reimbursement Arrangement (HRA)?

If you’re looking for a more flexible and cost-effective way to offer health benefits, a Health Reimbursement Arrangement (HRA) is definitely worth your attention. Think of it as an employer-funded account that gives your employees tax-free money for qualified medical expenses. It’s a formal health benefit approved by the IRS, but it’s important to know that an HRA is not health insurance itself. Instead, it works alongside a health plan to help cover costs.

This approach gives you, the employer, more control over your benefits budget while offering your team a valuable way to pay for everything from doctor visits to dental care. For businesses in Washington State, from bustling Seattle tech firms to local non-profits, HRAs offer a modern solution to the one-size-fits-all problem of traditional group plans. Instead of being locked into a single plan with unpredictable annual increases, you decide how much to contribute. This gives you predictable costs and your employees the freedom to use the funds where they need them most. It’s a win-win that puts you back in control of your benefits strategy and helps you attract and retain top talent in a competitive market.

How an HRA is Structured

At its heart, an HRA is straightforward: it’s a promise from you to your employee to reimburse them for medical costs. The most important thing to understand is that HRAs are funded entirely by the employer. Unlike a Health Savings Account (HSA), your employees cannot contribute their own money to the account. You set the allowance, and you fund it.

Because the funds are provided by the company, the money in an HRA belongs to your employer, not the employee. This means if an employee leaves your company, any unused funds in their HRA stay with you. This feature provides significant cost control and prevents you from losing money on benefits for former team members.

Your Guide to the Main HRA Types

HRAs aren’t a single, rigid product; they come in several different forms, each designed to meet specific business needs. While we’ll explore these in more detail later, it’s helpful to know the main players. The two most common types you’ll hear about are the Qualified Small Employer HRA (QSEHRA) and the Individual Coverage HRA (ICHRA).

The QSEHRA is designed for businesses with fewer than 50 full-time employees, offering a way to reimburse for insurance premiums and out-of-pocket costs. The ICHRA is more flexible, available to employers of all sizes, and is a fantastic option for companies with diverse workforces, including remote employees or different employee classes (like full-time vs. part-time).

Who Can Offer an HRA?

Just about any business can offer an HRA, but the type you can offer might depend on your company’s size. As mentioned, the QSEHRA is specifically for small businesses, while the ICHRA is open to companies of any size. This flexibility makes HRAs an accessible option whether you’re a small non-profit or a large corporation.

One of the biggest advantages is that you, the employer, get to set the eligibility criteria. You can decide which employees qualify for the HRA based on your own guidelines, such as job title or hours worked per week. This level of customization allows you to create a benefits strategy that aligns perfectly with your business goals and budget, ensuring you’re providing meaningful support to the team you want to retain.

How Does a Company HRA Actually Work?

So, you understand what an HRA is, but how does it function day-to-day for you and your employees? It’s more straightforward than you might think. An HRA is an arrangement where you, the employer, set aside a specific amount of money each month for your employees to use on healthcare costs. Instead of you paying a premium directly to an insurance carrier for a group plan, you reimburse your team for their own medical expenses. This gives them flexibility and gives you control over your budget. It’s a shift from a one-size-fits-all plan to a personalized benefits model. Let’s walk through exactly how the money moves and what you need to do to get one started.

Your Step-by-Step Reimbursement Guide

The HRA process follows a simple cycle. Think of it as you giving your employees a healthcare allowance that they can tap into as needed.

Here’s the breakdown of how an HRA works in practice:

1. You set the allowance. You decide on a monthly, tax-free amount for each employee. The great part is you don’t have to pre-fund an account; the money stays with you until an employee makes a claim.
2. Employees pay for care. Your team members pay for their health insurance premiums or other medical costs out-of-pocket first.
3. They submit proof. To get reimbursed, employees submit documentation (like a receipt or an explanation of benefits) showing what they paid for.
4. You reimburse them. You review the claim, and once approved, you reimburse the employee up to their allowance limit, typically through payroll.

How to Set Up Your HRA

Getting an HRA off the ground involves a few key decisions and some important paperwork. The goal is to create a plan that fits your company’s budget and your team’s needs.

First, you’ll need to choose the right type of HRA for your business. From there, you’ll set a start date and design the plan, which includes deciding on reimbursement amounts and what expenses are eligible. You’ll also need to get your legal plan documents in order to stay compliant. Finally, the most important step is communicating the new benefit to your employees and helping them understand how to use it. Partnering with an expert can make this setup process much smoother, ensuring you have a solid foundation for your new benefits plan from day one.

Customizing Your Plan Design

One of the most powerful features of an HRA is that you’re in the driver’s seat. Unlike traditional group plans, you get to tailor the benefit to fit your company’s specific needs and budget. You decide on the key details, such as how much of an allowance to offer, which medical expenses are eligible for reimbursement, and whether unused funds can roll over to the next year. This level of control means you can create a benefits package that is both meaningful for your employees and financially sustainable for your business. It’s about moving away from a rigid, one-size-fits-all approach and building a strategy that truly works for your team.

This flexibility extends to how you structure benefits for different employees. The Individual Coverage HRA (ICHRA), for example, allows you to offer different allowance amounts to various employee classes, such as full-time versus part-time staff or salaried versus hourly workers. This is a game-changer for businesses with a diverse workforce. Most importantly, you set a fixed, tax-deductible allowance, so your costs are predictable. You only pay for expenses as they’re claimed, which prevents you from overspending on unused benefits. Designing a plan that aligns with your goals is the first step, and it’s where expert guidance can help you create the perfect benefits strategy from the start.

The Documentation You’ll Need to Get Started

For the HRA to work correctly and remain compliant, your employees need to show that they’ve spent the money on a legitimate medical expense. This isn’t just a company rule—it’s an IRS requirement to ensure the reimbursement is tax-free.

Employees will need to provide proof of their medical expenses to whoever is administering the HRA. This usually means submitting a receipt, invoice, or an Explanation of Benefits (EOB) from their insurer. The documentation should clearly show the service or product, the date, and the cost. Keeping this process organized is key, which is why many businesses use a benefits administrator to handle claim verification and protect employee privacy.

Key Legal Documents: Plan Document and SPD

To keep your HRA running smoothly and legally, you need a couple of key legal documents. This isn’t just about checking boxes for compliance; it’s about creating clarity for both you and your team. The two most important documents are the formal Plan Document and the employee-friendly Summary Plan Description (SPD). Think of them as the official rulebook and the easy-to-read user guide for your health benefit. Getting these right from the start prevents confusion down the road and ensures everyone is on the same page about how the HRA works.

The Plan Document is the comprehensive, formal contract that outlines every detail of your HRA. It specifies who is eligible, what types of medical expenses are covered, and the exact procedures for submitting claims and getting reimbursed. This document is the legal backbone of your HRA, serving as the official agreement between your company and your employees. It’s the source of truth for how the plan operates, and it’s what ensures your HRA is administered consistently and fairly for everyone on your team.

While the Plan Document is the legal foundation, the Summary Plan Description (SPD) is what brings the benefit to life for your employees. The SPD translates the technical details of the Plan Document into a clear, easy-to-understand overview. It explains how the plan works, what benefits are available, and what rights your employees have. This document is essential for making sure your team feels confident using their HRA. Ensuring both documents are compliant and clearly written is critical, which is why many businesses partner with an expert to get started on the right foot and manage the details.

Which Medical Expenses Does an HRA Cover?

One of the best features of an HRA is its flexibility. As the employer, you get to decide what the funds can be used for. You can design your plan to cover only health insurance premiums, or you can allow employees to be reimbursed for a wide range of out-of-pocket costs.

Commonly covered medical expenses include monthly premiums, deductibles, copays, prescriptions, and dental and vision care. Since 2020, you can even include over-the-counter medicines without a prescription. This flexibility allows you to create a benefits package that truly meets the diverse needs of your team, whether they need help covering a high-deductible plan or paying for their family’s dental check-ups.

Covering Spouses and Dependents

A common question from employees is, “What about my family?” One of the most powerful features of a Health Reimbursement Arrangement (HRA) is its ability to extend beyond the individual employee. HRA funds can be used for the medical expenses of an employee’s spouse and any dependents claimed on their federal tax return, as long as they meet the eligibility rules you set in your plan. This transforms the HRA from a personal benefit into a family-focused solution, allowing your team to use their allowance for their children’s braces or a spouse’s prescription costs. It’s a meaningful way to show you support your employees’ lives both in and out of the office.

As the employer, you can customize your HRA to define which expenses are eligible for reimbursement. You could allow funds to be used for all IRS-approved medical expenses or limit them to specific categories like dental and vision care. This flexibility helps you design a plan that fits your budget and your team’s needs. However, there’s a key compliance detail to remember: for the reimbursements to remain tax-free, the employee must be covered by a health plan that provides minimum essential coverage (MEC). This ensures the HRA works as intended alongside a qualifying insurance plan.

To keep the arrangement compliant, the IRS requires that employees provide proof of their medical expenses before they can be reimbursed. This means they’ll need to submit documentation, like a receipt or an Explanation of Benefits, for any costs incurred by their spouse or dependents, just as they would for themselves. This step is crucial for verifying that the funds are used for eligible healthcare costs and maintaining the tax-free status of the benefit. Managing this documentation is where having an expert partner can make all the difference, ensuring the process is seamless and private for your team while keeping your plan compliant. This is a core part of how we help you get started with a successful benefits strategy.

Tax Advantages for Your Business and Your Team

HRAs come with significant tax advantages for both you and your employees, making them a financially smart choice. For your business, any contributions you make or reimbursements you pay out are 100% tax-deductible as a business expense. This can lower your company’s overall tax burden while still providing a valuable benefit to your team.

For your employees, the benefits are just as compelling. The money they receive as a reimbursement is completely tax-free, as long as they maintain a basic qualifying health insurance plan. This means they get the full value of the allowance you provide, without it being counted as taxable income. It’s a win-win that puts more money toward actual healthcare and less toward taxes.

Which Type of HRA is Right for You?

Once you understand the basics of how an HRA works, it’s time to get familiar with the different types available. Not all HRAs are created equal, and the best one for your company depends on your size, whether you currently offer a group health plan, and what you want to achieve with your benefits package. Think of it like choosing a business tool—you want the one that fits your specific workflow. Let’s break down the main options so you can see which one aligns with your business goals.

Qualified Small Employer HRA (QSEHRA)

If you run a small business, the Qualified Small Employer HRA (QSEHRA) is designed just for you. According to health benefits experts at Take Command Health, this HRA is specifically for businesses with fewer than 50 full-time employees. It’s a fantastic way for small groups to step into offering health benefits, perhaps for the very first time. With a QSEHRA, you can reimburse your team for their insurance premiums and other out-of-pocket medical costs. It provides a structured, budget-friendly way to support your employees’ health without the complexity of managing a traditional group plan.

QSEHRA Contribution Limits

While a QSEHRA gives you control over your budget, there are some rules to follow. The IRS sets yearly limits on how much you can contribute to an employee’s HRA. These maximums are adjusted annually for inflation to keep up with rising healthcare costs. For example, the proposed 2026 limits are $6,450 for an individual employee and $13,100 for an employee with a family. It’s important to remember that these are the maximum allowances; you can always choose to contribute a smaller amount that fits your company’s budget. This structure ensures you have a predictable, fixed cost while still offering a meaningful benefit.

Employee Notice Requirements

Clear communication is essential when you introduce a new benefit, and with a QSEHRA, it’s also a legal requirement. You must provide a written notice to your employees at least 90 days before the plan year begins. For new hires, this notice must be given before they become eligible to participate. This document needs to clearly state the employee’s annual reimbursement amount and explain how the QSEHRA could impact their eligibility for premium tax credits if they buy insurance on the marketplace. This ensures your team has all the information they need to make smart decisions about their healthcare coverage.

Who Can Be Excluded from a QSEHRA?

A QSEHRA must be offered to all full-time employees, but the rules do provide some flexibility. You can legally exclude certain types of employees from the plan, which can be helpful for businesses with a diverse workforce. These exclusions typically include part-time and seasonal employees, team members who have been with the company for less than 90 days, employees under the age of 25, and union employees (if health benefits were part of a collective bargaining agreement). This allows you to tailor your benefits offering to your core team while staying fully compliant.

Acceptable Health Coverage for Employees

For the reimbursements from a QSEHRA to be tax-free, your employees must have a qualifying health insurance plan. This is known as having “minimum essential coverage,” or MEC. An MEC-compliant plan can be purchased through the individual marketplace, from a private insurer, or even through a spouse’s group plan. The key takeaway is that a QSEHRA is not health insurance itself; it’s a way to help employees pay for a plan they’ve chosen. Verifying that your employees have MEC is a critical step in administering the HRA correctly and ensuring both you and your team receive the tax advantages.

The Individual Coverage HRA (ICHRA)

The Individual Coverage HRA (ICHRA) offers incredible flexibility and is available to employers of all sizes. This is a game-changer if you have a remote workforce or different types of employees with varying needs. An ICHRA allows you to set different allowance amounts for different “classes” of employees (like salaried vs. hourly, or staff in different locations). To use the funds, employees must be enrolled in their own individual health insurance plan. This HRA lets you reimburse them for their individual plan premiums and other medical expenses, giving them the power to choose the coverage that works best for them.

Using an ICHRA for Medicare Premiums

One of the standout features of an ICHRA is its ability to support employees across different life stages, including those eligible for Medicare. This is a huge advantage for companies with a multi-generational workforce. If you have valuable, experienced team members who are enrolled in Medicare, you can use an ICHRA to reimburse them for their premiums, such as for Medicare Part B, and even for some supplemental plans. The IRS has clear rules that permit this, allowing you to offer a consistent and equitable health benefit to your entire team. This flexibility ensures your older employees feel just as supported as your younger ones, making it easier to design a compliant plan that truly works for everyone.

The Group Coverage HRA (GCHRA)

Do you already offer a traditional group health plan? Then the Group Coverage HRA (GCHRA) might be the perfect fit. This type of HRA is designed to supplement your existing plan. It’s exclusively for employees who are enrolled in your company’s group health insurance, and it helps them cover out-of-pocket costs like deductibles and copays. One of the biggest advantages for large groups is that there are no limits on how much you can contribute. A GCHRA is an excellent tool for making a good benefits package even better by reducing the financial burden of healthcare for your team.

Rules for Paying Group Plan Premiums

When you add a Group Coverage HRA (GCHRA) to your existing group plan, a few key rules keep everything running smoothly. First, the GCHRA is exclusively for employees who are enrolled in your company’s health insurance—it’s designed to supplement the plan you already offer. This allows you to reimburse them for out-of-pocket costs like premiums and deductibles. One of the biggest advantages is the flexibility; there are no federal limits on how much you can contribute, giving you complete control over your budget. Plus, every dollar you reimburse is a tax-deductible business expense. The reimbursement process itself is straightforward: your employee pays for a medical cost, submits proof of payment, and you reimburse them up to their allowance. Staying on top of this documentation is key for compliance, which is why a streamlined benefits administration system is so valuable.

The Excepted Benefit HRA (EBHRA)

Sometimes, you want to offer benefits beyond a standard medical plan. That’s where the Excepted Benefit HRA comes in. This HRA is designed to help employees pay for non-major medical coverage that might not be included in your primary health plan, such as dental or vision care. It’s a great way to provide a more comprehensive benefits package and show your employees you care about their overall well-being. By offering an Excepted Benefit HRA, you can provide valuable perks without being subject to the same regulations that govern major medical plans, making it a simple yet impactful addition.

EBHRA Contribution Limits

While the Excepted Benefit HRA offers great flexibility for supplemental coverage, it’s important to know that there are annual contribution limits set by the IRS. For 2024, the maximum contribution is $2,100 per employee. This amount is indexed for inflation, so you can expect it to adjust slightly in future years. This cap ensures the EBHRA remains focused on “excepted benefits” like dental and vision, rather than replacing a comprehensive health plan. It’s a straightforward way to offer meaningful perks while keeping your benefits budget predictable and compliant.

Retiree-Only HRAs

Supporting your team doesn’t have to end when they retire. Retiree-only HRAs are a specific type of HRA that allows employers to provide health benefits to retired employees. These arrangements can be used to reimburse retirees for their medical expenses, including Medicare premiums, helping them manage healthcare costs in retirement. Offering a Retiree-Only HRA is a powerful way to reward long-term loyalty and demonstrate a lasting commitment to your team’s well-being. It’s a highly valued benefit that can help you stand out as an employer of choice and give your dedicated, long-serving employees peace of mind as they transition out of the workforce.

Weighing the Pros and Cons of an HRA

Deciding on the right health benefits for your team involves weighing your options carefully. A Health Reimbursement Arrangement (HRA) offers a flexible and cost-effective alternative to traditional group plans, but it’s important to understand both its strengths and its potential drawbacks. Looking at an HRA from both the employer and employee perspective can help you determine if it’s the right fit for your company’s benefits strategy.

An HRA can be a powerful tool for small groups and large corporations alike, providing a way to offer valuable health benefits while maintaining control over the budget. It gives you a structured way to help employees with their medical costs without committing to a one-size-fits-all group plan. Let’s break down what you can expect when you offer an HRA.

Why Employers Love Offering HRAs

For many business owners, the biggest advantage of an HRA is budget predictability. You decide on the allowance amount for your employees, so you know exactly what your maximum health benefit spending will be for the year. Better yet, you only pay for what your employees actually use. If an employee doesn’t use their full allowance, the money stays with your company.

Beyond cost control, the funds you contribute to an HRA are tax-deductible for your business, creating a nice financial incentive. You also have the flexibility to decide which medical expenses are eligible for reimbursement, allowing you to design a plan that aligns with your company’s goals. This level of customization is a key reason many businesses choose to work with us.

What’s in It for Your Employees?

Your team will appreciate the freedom and flexibility an HRA provides. Instead of being locked into a single group plan, employees can choose an individual health insurance plan that best fits their personal or family needs. They can then use their tax-free HRA funds to get reimbursed for a wide range of medical costs, including monthly premiums, deductibles, and other out-of-pocket expenses.

This autonomy allows employees to take control of their healthcare spending. They get to decide how to allocate their allowance based on what’s most important to them. The reimbursement process is straightforward, and because the money they receive is tax-free, it feels like a genuine addition to their compensation package, helping you attract and retain top talent.

Are There Any Downsides to an HRA?

While HRAs offer great benefits, they do come with some administrative responsibilities. Managing reimbursements, verifying expenses, and ensuring compliance can be time-consuming, especially for businesses without a dedicated HR department. If an HRA isn’t managed correctly, it can lead to compliance issues or tax complications down the road.

It’s also worth noting that some employees, particularly those accustomed to traditional group plans, might prefer a benefit that covers costs more directly without a reimbursement step. That’s why clear communication is key. When you’re ready to explore your options, our team can help you get started and handle the administrative lift, so you can focus on your business.

Can Employees Take Their HRA With Them?

This is a common question, and the answer is simple: no. The money in an HRA belongs to the employer, not the employee. This is a fundamental difference between an HRA and a Health Savings Account (HSA), where the funds are owned by the individual. If an employee leaves your company, any remaining funds in their HRA stay with the business. You’ll want to make this clear to your team when you roll out the benefit to ensure everyone understands how the arrangement works from the start.

How to Manage Your HRA Effectively

Once you’ve set up an HRA, the day-to-day management is surprisingly straightforward. The key is establishing clear, simple processes for your team to follow. When employees understand how to use their HRA, they can take full advantage of the benefit, and your administrative workload stays light. A well-managed HRA runs smoothly in the background, giving your team the support they need without creating headaches for you.

The right partner can make all the difference in setting up these systems. At WHIA, we help you build a framework for claims, documentation, and communication so your HRA is a success from day one. Let’s walk through the essential components of managing your plan effectively.

How to Submit and Track HRA Claims

The reimbursement process is the heart of how an HRA works for your employees. It’s a simple cycle: an employee pays for a qualified medical service or item out-of-pocket first. Then, they submit proof of that expense to you or your designated HRA administrator for review. Once the expense is verified and approved, you reimburse the employee for that amount, typically through their next paycheck.

The best part? That reimbursement is completely tax-free for the employee, which is a fantastic perk. Establishing a clear and consistent system for submitting and approving these claims is crucial. Whether you use a dedicated online portal or a simple email submission process, make sure your team knows exactly what steps to take. We can help you get started with a streamlined process that works for your business.

Required Information for Reimbursement

To keep everything above board and ensure reimbursements are tax-free, employees must provide proof of their medical expenses. This isn’t just a company rule—it’s an IRS requirement. Employees will need to submit documentation that clearly shows what they paid for, the date of the service, and the cost. The most common forms of proof are a receipt from the provider, an itemized invoice, or an Explanation of Benefits (EOB) from their insurance carrier. This step is crucial for verifying that the funds are used for a legitimate medical expense. Having a clear system for collecting this information protects both you and your employees, and using a benefits administrator can help manage this process securely and efficiently.

Keeping Your HRA Documentation in Order

Proper documentation is non-negotiable when it comes to HRAs. To comply with IRS rules, every reimbursement must be backed by proof that the funds were used for a legitimate medical expense. Employees need to provide a receipt or an Explanation of Benefits (EOB) from their insurer that clearly shows what service or product they purchased, how much it cost, and the date of the transaction.

Keeping these records organized is essential for both you and your employees. A great way to handle this is through an online benefits administration system, which allows for easy digital uploads and tracking. This not only cuts down on paperwork but also creates a clear, accessible record for everyone involved. It’s one of the top reasons to choose us—we provide the tools to make administration simple.

Do HRA Funds Roll Over Each Year?

One of the most common questions about HRAs is what happens to unused funds at the end of the plan year. The answer is simple: it’s up to you as the employer. You have the flexibility to decide whether you’ll allow the remaining funds to roll over into the next year. You can permit the full amount to roll over, set a cap on the rollover amount, or have the funds reset to zero.

If you choose the last option, any unused money simply returns to the company. This feature gives you significant control over the plan’s costs. Whatever you decide, it’s vital to communicate your rollover policy clearly to your employees when they enroll. This transparency prevents any surprises and helps them plan their healthcare spending accordingly. You can find answers to more common questions on our FAQ page.

Special Rollover Rules for QSEHRAs

The QSEHRA operates under a similar framework of flexibility, but it’s tailored specifically for the needs of small businesses. As the employer, you still hold the reins on the rollover policy. You can choose to let employees carry over their full unused balance, cap the rollover at a specific amount, or have the allowance reset completely at the end of the year. If you opt for a reset, any leftover funds simply return to the company, which is a powerful feature for managing your budget. The key is to make this decision upfront and communicate it clearly in your plan documents. This transparency ensures your team understands the rules from the start and can plan their healthcare spending effectively, preventing any year-end surprises.

What Happens When an Employee Leaves?

Unlike a Health Savings Account (HSA), where the funds belong to the employee, an HRA is an employer-owned account. This means if an employee leaves your company for any reason, any unused money in their HRA stays with you. The funds are not portable, and the former employee cannot “cash out” their remaining allowance.

This is an important distinction that provides a layer of financial protection for your business. It ensures that the funds you’ve set aside for employee health benefits are used exclusively by your current team. This feature is particularly beneficial for small groups looking for predictable and manageable healthcare solutions. Be sure to explain this clearly in your benefits documentation so employees understand how the HRA works upon their departure.

Offering a Grace Period for Claims

When an employee leaves, their access to HRA funds doesn’t have to end on their last day. You can offer a grace period, which is a set window of time—often up to 90 days—for them to submit claims for medical expenses that happened before their employment ended. This is a simple way to show goodwill and support your team through their transition, reinforcing a positive company culture. The key is to clearly define this policy when you first design your benefits plan. This ensures everyone understands the timeline and avoids any confusion, making the offboarding process smoother for both your departing employee and your administrative team.

How Do HRAs Compare to Other Health Plans?

The world of health benefits is full of acronyms, and it’s easy to get them mixed up. Understanding how HRAs stack up against other popular options like Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) is key to building a benefits package that truly works for your company. Let’s break down the main differences so you can see where an HRA might fit into your strategy.

HRA vs. HSA: What’s the Difference?

The biggest distinction between an HRA and an HSA comes down to two things: who puts money in and who owns that money. An HRA is funded entirely by you, the employer. You own the funds, and you decide if any unused money rolls over to the next year. In contrast, an HSA is a savings account that the employee owns. Both you and your employee can contribute to it, the funds always roll over, and the employee takes it with them if they leave the company. An HSA functions much like a personal bank account specifically for medical expenses.

Do HRA Funds Earn Interest?

Another key difference is that HRA funds do not earn interest. This is because an HRA isn’t a traditional bank account where money is deposited and held. Instead, it’s a reimbursement promise from you to your employee. The funds you’ve allocated for the HRA remain part of your company’s general assets until an employee submits a valid claim. Since the money isn’t sitting in a separate, interest-bearing account under the employee’s name, there’s no opportunity for it to grow. This design is a core part of what gives you financial control; you only pay for the healthcare your team actually uses, and you don’t have to worry about managing a complex investment account for employee benefits.

HRA vs. FSA: How Do They Compare?

An HRA and an FSA can seem similar, but again, the funding and rollover rules set them apart. As we covered, HRAs are funded by the employer. An FSA, on the other hand, is funded by the employee through pre-tax deductions from their paycheck. The most significant difference is that FSAs typically have a “use it or lose it” rule, meaning employees forfeit most or all of the unused funds at the end of the year. HRAs offer more flexibility, as you can choose to let the full unused balance roll over.

Can You Combine an HRA with Other Benefits?

Yes, you absolutely can. HRAs are designed to be flexible and can often be paired with other benefits to create a comprehensive health plan. For example, a Group Coverage HRA is specifically designed to work alongside a traditional group health insurance plan, helping employees cover out-of-pocket costs like deductibles and copays. Depending on the specific rules, it’s also possible to structure your benefits so that an HRA can be used with an FSA. This layering approach allows you to build a more robust and customized benefits package that meets the diverse needs of your employees.

How to Choose the Right Fit for Your Business

Deciding on the right benefits mix depends entirely on your company’s goals and your employees’ needs. If your main objective is to control costs while still offering a meaningful health benefit, an HRA can be an excellent choice, especially for small groups. It gives you budget predictability since you only pay for expenses as they are incurred. The key to success is clearly defining the rules—like allowance amounts and eligible expenses—in your plan documents. This ensures your team understands exactly how to use their benefit, and getting started with the right plan design is where expert guidance can make all the difference.

Your HRA Implementation Checklist

Setting up an HRA is a fantastic step toward offering flexible, valuable health benefits. But like any new initiative, a successful launch comes down to thoughtful planning. Getting the details right from the start ensures your HRA runs smoothly for both you and your team. Think of this as your roadmap to a seamless implementation. By checking these key items off your list, you can build a plan that fits your budget, stays compliant, and is genuinely appreciated by your employees. Let’s walk through the essential steps to get your HRA up and running.

How Much Should You Contribute?

One of the best features of an HRA is its flexibility. As the employer, you get to decide how much you’ll contribute to each employee’s account. This gives you complete control over the costs, allowing you to design a benefits package that aligns perfectly with your company’s budget. You can set a monthly or annual allowance that your team can use for their qualified medical expenses. This predictability makes financial planning easier for your business while still providing a meaningful benefit that empowers employees to manage their own healthcare spending. It’s a win-win that offers both cost control for you and choice for them.

Staying Compliant with HRA Rules

While HRAs offer great flexibility, they are also regulated by federal laws, including the Affordable Care Act (ACA). It’s essential to make sure your plan documents and administration processes are fully compliant to avoid any potential penalties. These rules can get complicated, covering everything from plan design to employee notifications. For many business owners, keeping up with the legal requirements can feel like a full-time job. That’s why partnering with an expert is so important. We can help you make sense of the regulations and ensure your HRA is set up correctly from day one, giving you total peace of mind.

IRS Affordability Rules for ICHRAs

If you have 50 or more full-time employees and offer an Individual Coverage HRA (ICHRA), you’ll need to meet the ACA’s affordability requirements. This rule ensures the health benefit you’re offering is genuinely accessible to your team. In simple terms, your ICHRA contribution must be large enough that an employee’s cost for the cheapest silver-level health plan in their area doesn’t exceed a certain percentage of their household income. Since you don’t know their household income, the IRS provides several affordability safe harbors you can use, such as one based on their W-2 wages. This allows you to confirm your HRA is affordable using information you already have, keeping you compliant without invading employee privacy.

Annual Non-Discrimination Testing (NDT)

To maintain the tax-free status of your HRA, you must perform annual non-discrimination testing. This is a yearly check to confirm your plan doesn’t unfairly favor highly compensated employees over the rest of your team. The rules for non-discrimination testing ensure that benefits like eligibility and contribution amounts are applied equitably across your workforce. Failing this test can lead to serious consequences, including the loss of the plan’s tax advantages for your highly compensated staff. While it sounds technical, NDT is a standard part of HRA administration. With proper plan design and documentation, it’s a straightforward process that ensures your benefits are both fair and compliant.

Handling the Administrative Side of Your HRA

Once your HRA is live, there are ongoing tasks to manage, like reviewing and approving claims, tracking balances, and answering employee questions. While it’s possible to handle this in-house, many businesses find it much easier to work with a dedicated partner. A broker or third-party administrator can take this work off your plate, ensuring everything is handled efficiently and correctly. This not only saves you valuable time but also provides your employees with a better support system. At WHIA, we act as your dedicated account manager, so you can focus on your business while we handle the benefits administration.

Tips for a Smooth HRA Rollout

A new benefit is only as good as your team’s ability to use it. Clear communication is the key to a successful HRA launch. Before you roll out the plan, prepare easy-to-understand materials that explain how the HRA works, what the allowance amounts are, and which expenses are eligible for reimbursement. Host a meeting or send out a detailed guide explaining how employees can submit claims and where they can go for help. When your team feels confident using their new benefit, they’re more likely to appreciate its value. For more guidance, you can always check our FAQs or reach out to our team.

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• Frequently Asked Questions

Frequently Asked Questions

How much control do I have over what the HRA covers? You have a great deal of control, which is one of the main attractions of an HRA. You can design your plan to be as broad or as specific as you like. For example, you could set it up to reimburse only for health insurance premiums, or you could allow it to cover a wide range of out-of-pocket costs like deductibles, copays, dental visits, and prescription drugs. This flexibility allows you to create a benefit that fits your budget and your team’s most common needs.

Do I have to manage all the claims and paperwork myself? While you certainly can manage the HRA in-house, you don’t have to. Most business owners choose to partner with a broker or a third-party administrator to handle the day-to-day tasks. This ensures that employee privacy is protected, claims are verified correctly, and all the compliance requirements are met without adding to your workload. It’s a simple way to offer a great benefit without getting bogged down in the administrative details.

Can my employees use their HRA to buy any health insurance plan they want? For HRAs that are designed to work with individual health insurance, like the ICHRA, your employees do have the freedom to choose their own plan from the marketplace. This is a huge advantage, as they can pick coverage that best suits their family’s needs and budget. The only requirement is that the plan they choose must be considered qualifying health coverage under government rules for them to receive the tax-free reimbursements.

What happens if an employee has a medical bill that costs more than their HRA allowance? The HRA is designed to reimburse employees up to the specific allowance amount you set for the month or year. If a medical expense exceeds that available balance, the employee is responsible for paying the difference out-of-pocket. This is why setting a meaningful allowance is so important—it provides a significant financial cushion, even if it doesn’t cover every single dollar of a large expense.

Is an HRA a good option if my business has never offered health benefits before? Yes, an HRA is an excellent starting point for businesses new to offering health benefits. It allows you to provide valuable support to your team without the cost commitment and complexity of a traditional group health plan. Because you set the budget and only pay for what employees use, it’s a predictable and scalable way to begin building a competitive benefits package that helps you attract and keep great people.