What is an HRA (Health Reimbursement Arrangement)?

HRA definition

A Health Reimbursement Arrangement (HRA) is an IRS-recognized, employer-funded arrangement that reimburses employees, tax-free, for qualified medical expenses and — for some HRA types — individual health insurance premiums. The employer sets the rules and the budget; the funds belong to the employer until an eligible expense is reimbursed.

The defining features of every HRA: it is funded only by the employer (employees never contribute), reimbursements are tax-free when substantiated, and the employer keeps any unused funds. That makes an HRA fundamentally different from an HSA or FSA, where the employee contributes their own money.

How an HRA works

• The employer designs the HRA and sets a reimbursement allowance.
• Employees incur eligible costs — medical expenses, and for some HRA types, individual insurance premiums.
• Employees submit documentation (a receipt or proof of coverage) — the substantiation step.
• The employer reimburses them tax-free, usually through payroll.
• Unused funds stay with the employer; some HRAs allow balances to roll over year to year.

The main types of HRA

"HRA" is an umbrella term. The specific type determines the rules, who it is for, and whether it covers premiums.

• ICHRA (Individual Coverage HRA): reimburses individual insurance premiums and expenses; any company size; no contribution cap; supports employee classes.
• QSEHRA (Qualified Small Employer HRA): for businesses under 50 employees with no group plan; capped at an annual IRS limit.
• Integrated / Group-Coverage HRA (GCHRA): pairs with a group health plan to reimburse out-of-pocket costs like deductibles and copays — not premiums.
• Excepted-Benefit HRA (EBHRA): a limited-dollar HRA offered alongside a group plan; employees can use it even if they decline the group plan.
• Retiree HRA: reimburses former employees, often for Medicare premiums and medical expenses.

What an HRA reimburses

What a specific HRA covers is set by the employer within IRS limits. Some HRAs reimburse only insurance premiums; others cover the full range of IRS Publication 502 qualified medical expenses — copays, deductibles, prescriptions, dental, vision, mental health, and many over-the-counter items.

A key distinction: ICHRA and QSEHRA can reimburse individual insurance premiums, while integrated HRAs typically reimburse out-of-pocket costs rather than premiums. Always check the specific plan's rules, since employers can narrow what is eligible.

HRA vs HSA vs FSA

These are easy to confuse but work very differently. An HRA is funded and owned by the employer. An HSA is funded and owned by the employee, is portable, rolls over, and requires a qualifying high-deductible health plan. An FSA is funded by the employee through pre-tax payroll deductions, is owned by the employer, and is mostly use-it-or-lose-it.

For an employer that wants to fund health benefits without a group plan, the relevant tools are the premium-reimbursing HRAs — ICHRA and QSEHRA. HSAs and FSAs are employee-side accounts and don't replace a group plan.

Why HRA reimbursements are tax-free

Because an HRA is a formal IRS-recognized arrangement and reimbursements are tied to substantiated, qualifying expenses, they are excluded from the employee's taxable income and are not subject to payroll tax for the employer. The employer can also deduct reimbursements as a business expense.

The compliance that preserves this tax treatment — a written plan document, required notices, and substantiation — is what separates a real HRA from simply handing employees cash, which would be taxable wages.

Who can offer an HRA

Eligibility depends on the type. ICHRA can be offered by any employer with at least one eligible W-2 employee, at any size. QSEHRA is limited to employers with fewer than 50 full-time-equivalent employees that don't offer a group plan. Integrated and excepted-benefit HRAs require an accompanying group health plan.

Owner participation varies by business structure — C-corp owners generally can participate; sole proprietors, partners, and most S-corp owners generally cannot receive tax-free reimbursements, though their employees can.

Pros and cons of an HRA

• Pro: predictable, employer-controlled budget with tax-free reimbursements.
• Pro: flexible — choose the type and design that fits your workforce.
• Pro: premium-reimbursing HRAs (ICHRA/QSEHRA) need no group plan and have no participation minimum.
• Con: employees can't contribute their own money (unlike an HSA or FSA).
• Con: premium-reimbursing HRAs require employees to enroll in individual coverage and submit proof.
• Con: an affordable ICHRA can affect ACA-subsidy eligibility.

How to choose the right HRA

Start with two questions: do you want to keep a group health plan, and how many employees do you have? If you're keeping a group plan and want to help with out-of-pocket costs, an integrated HRA fits. If you're going without a group plan, it comes down to ICHRA vs QSEHRA — QSEHRA for capped simplicity under 50 employees, ICHRA for no cap, any size, and employee classes. A broker can model the options against your team and budget.

Common HRA mistakes to avoid

• Confusing an HRA with an HSA and assuming employees can contribute — they can't.
• Choosing the wrong type for your situation (e.g., a premium-only design when you meant to cover out-of-pocket costs).
• Skipping the written plan document or required notices.
• Reimbursing without substantiation, which can make payments taxable.
• Not checking how owner eligibility applies to your entity type.

How to get started

The path is the same in spirit across HRA types: confirm eligibility, pick the type and design, set an allowance, send the required notice, and reimburse tax-free with substantiation. For most small businesses without a group plan, that means choosing between ICHRA and QSEHRA — and a broker handles the plan documents, compliance, and employee guidance, often at no direct cost to you.