If you’ve heard of an “HRA” and weren’t sure what it actually is, or you’ve seen mentions of ICHRAs and QSEHRAs and want to understand where they fit, you’re in the right place. Health reimbursement arrangements have quietly become one of the most flexible tools small businesses have for offering health benefits, especially in the years since the IRS expanded the rules to allow employer-funded individual market coverage.

Here’s the plain-English guide to health reimbursement arrangements: what they are, the types you’ll encounter, how the tax treatment works, and when each one makes sense for an employer.

What is a health reimbursement arrangement?

A health reimbursement arrangement (HRA) is an employer-funded, IRS-approved account that reimburses employees for qualified medical expenses on a tax-free basis. The employer decides:

  • How much to contribute (within IRS limits, which vary by HRA type)
  • What expenses qualify (within IRS guidelines)
  • Whether unused balances roll over to the next year or are forfeited
  • Whether different employee classes get different amounts

Employees pay for qualified care out of pocket, submit a receipt or claim, and get reimbursed tax-free up to the HRA’s annual amount. The IRS treats the reimbursement as excluded from the employee’s gross income and not subject to payroll taxes.1

Critically, HRAs are employer-funded only. Unlike HSAs, employees cannot contribute their own money to an HRA. The employer puts in the money; the employee uses it.

How HRAs differ from HSAs and FSAs

The three account types get confused all the time. Here’s the clean comparison:

FeatureHRAHSAFSA
Who funds itEmployer onlyEmployer + employeeEmployer + employee
Plan requirementDesigned by employer; varies by typeMust be paired with HSA-qualified HDHPMust be offered as part of a Section 125 plan
Account ownershipEmployerEmployeeEmployer
PortabilityNo (stays with employer)Yes (employee keeps it)No (typically forfeited at job change)
Year-end rolloverEmployer decidesAlways rolls overLimited rollover (typically “use it or lose it”)
Tax treatmentReimbursements tax-freeTriple-tax-advantagedPre-tax contributions, tax-free withdrawals
IRS contribution limitsVaries by HRA typeAnnual IRS limits1Annual IRS limits

The choice between them isn’t either/or. Many employers offer combinations (e.g., an Integrated HRA alongside a group plan, or an HSA-compatible HDHP with an Excepted Benefit HRA for dental/vision).

The four types of HRAs small employers care about

There are several HRA variants in the IRS rules. The four that matter most for small and mid-sized employers:

1. Integrated HRA (sometimes called a “Group Coverage HRA”)

An Integrated HRA is paired with a traditional group health plan. The employer offers a group plan and uses the HRA to reimburse employees for cost-sharing items (deductibles, copays, coinsurance) that the group plan doesn’t fully cover.

Best for: Employers who already offer a group plan and want to cushion employee out-of-pocket exposure without redesigning the underlying coverage.

Key rule: Must be paired with the employer’s group plan; the HRA can’t be the only coverage.

2. ICHRA (Individual Coverage HRA)

An ICHRA (introduced in 2020) lets the employer give employees a defined monthly allowance to buy individual market coverage (including ACA exchange plans). The employer contributes pre-tax dollars; the employee selects their own plan; reimbursements flow tax-free.

Best for: Employers who want to offer benefits without sponsoring a group plan, especially distributed workforces, very small employers, or businesses with diverse employee situations.

Key rule: Cannot be offered to the same class of employees alongside a traditional group plan; employees must enroll in qualifying individual coverage.

ICHRA Explained: The Complete Employer’s Guide covers this one in depth.

3. QSEHRA (Qualified Small Employer HRA)

A QSEHRA is a simpler HRA variant designed specifically for employers with fewer than 50 full-time employees who don’t offer a traditional group plan. Created by the 21st Century Cures Act in 2016, it predates the ICHRA and has IRS-set annual contribution limits that are lower than what an ICHRA can offer.

Best for: Very small employers who want a tax-advantaged way to help employees with healthcare costs but don’t want the complexity of a group plan or full ICHRA.

Key rule: Available only to employers with fewer than 50 full-time-equivalent employees who don’t offer a group health plan. The IRS publishes annual contribution limits.1

4. Excepted Benefit HRA

An Excepted Benefit HRA is a limited-purpose HRA that covers things like dental, vision, and certain limited services. It can be offered alongside a group health plan as a supplemental benefit and doesn’t count as primary health coverage.

Best for: Employers who want to add a dental/vision benefit without administering full standalone dental/vision plans.

Key rule: Annual contribution is capped at an IRS-defined amount, and the HRA can only cover excepted benefits (not major medical).

How HRAs work in practice

The mechanics of any HRA follow a similar pattern:

  1. Plan design. The employer (with a benefits advisor or HRA admin vendor) defines the HRA structure: type, contribution amount, eligible expenses, employee classes, rollover rules.
  2. Documentation. The employer adopts a written plan document that meets IRS requirements. This is where the legal structure lives.
  3. Funding. The employer designates an account or simply tracks the obligation; the employer doesn’t need to actually pre-fund a separate bank account in most cases.
  4. Employee uses care. Employee pays out of pocket for qualified medical care.
  5. Reimbursement. Employee submits a claim with documentation through the HRA admin (often a vendor). The vendor verifies and pays the employee tax-free up to the HRA’s available balance.
  6. Year-end. Depending on plan design, unused balances either roll over or are forfeited.

Most small employers use a third-party HRA administrator (Take Command, Gusto, ADP, Paylocity, and others all offer HRA admin) because the documentation and substantiation requirements are non-trivial.

The tax treatment

Properly structured, HRA reimbursements are:2

  • Excluded from the employee’s gross income — not taxed federally
  • Excluded from FICA/Medicare — saving 7.65% on the employer side and 7.65% on the employee side
  • Deductible to the employer as a business expense

This is the same favorable tax treatment that applies to traditional employer-paid health benefits, which is why HRAs are an attractive way to deliver compensation. A dollar of HRA contribution is generally worth more after-tax to the employee than a dollar of equivalent salary.

An HRA is one of the few tools that lets a small employer offer meaningful, tax-advantaged health benefits without the cost and complexity of sponsoring a full group plan. For the right business, it’s a better fit than the traditional model.

When an HRA is the right fit

The HRA structure works especially well for:

  • Very small employers (under 10 employees) where group plan economics get expensive per head
  • Distributed workforces where employees live in many states and a single carrier’s network can’t serve them all
  • Employers with diverse employee situations — different family stages, different coverage needs
  • Businesses that value cost predictability — the employer’s HRA commitment is capped at the contribution amount
  • Companies that already offer a group plan but want supplemental coverage (Excepted Benefit or Integrated HRA)

It works less well when:

  • Most employees would benefit from one specific plan and the employer has the scale to negotiate good group rates
  • The employee population is highly homogenous (similar age, geography, family stage)
  • The employer wants the recruiting signal of “we offer health insurance” (though ICHRAs are increasingly accepted as such)

For a small business deciding between a group plan and an HRA-based approach, Health Insurance for Small Businesses with Under 10 Employees walks through the comparison.

How to evaluate offering an HRA

If you’re considering whether an HRA fits your business, the practical evaluation:

Step 1: Define the goal. Are you offering primary coverage (ICHRA, QSEHRA), supplementing existing coverage (Integrated HRA), or adding ancillary benefits (Excepted Benefit HRA)?

Step 2: Pick the type. The IRS rules are specific about which type fits which scenario. A benefits advisor can model the options; the IRS HRA guidance is the primary source.

Step 3: Set the contribution. Within IRS limits, decide how much to contribute per employee per month. This is your committed cost.

Step 4: Choose an administrator. The documentation, substantiation, and ACA reporting requirements make a third-party HRA admin nearly essential. Compare a few vendors on cost, employee experience, and integration with your existing HRIS or payroll.

Step 5: Communicate to employees. HRAs work best when employees actually understand them. Plan enrollment communication accordingly. Enrollment Communications That Actually Work covers this for any benefits change.

Common HRA myths

“HRAs aren’t ‘real’ health insurance.” They’re not insurance per se; they’re a reimbursement structure. But properly designed, they deliver the same tax-advantaged employer-funded healthcare experience as traditional benefits. Many employers find ICHRAs or QSEHRAs more flexible than the group plans they replaced.

“Only big companies use HRAs.” The opposite is closer to true. ICHRAs and QSEHRAs are explicitly designed for smaller employers; large companies usually have economies of scale that make traditional group plans more efficient.

“Employees won’t like getting reimbursements instead of a card.” Modern HRA administrators issue debit cards or instant-reimbursement systems that mirror the experience of using an FSA or HSA. The friction is much lower than it used to be.

“HRAs disqualify employees from ACA premium tax credits.” It’s nuanced. ICHRA participation does generally disqualify employees from receiving exchange subsidies for that coverage, though the math typically still favors the ICHRA for most employees. QSEHRA rules are different — employees may still be eligible for tax credits in some scenarios, though the credit is reduced by the QSEHRA amount. A benefits advisor familiar with the rules can model this for specific employees.

Start here

Health reimbursement arrangements are one of the most flexible, tax-advantaged tools small employers have for offering health benefits. The four types — Integrated, ICHRA, QSEHRA, and Excepted Benefit — cover most use cases, from supplementing a group plan to replacing one entirely.

For employers who haven’t seriously evaluated HRAs in the past few years, it’s worth a fresh look. The 2020 ICHRA rules and the QSEHRA option together opened up real alternatives to traditional group coverage — alternatives that fit a lot of small businesses better than the group plan they may have defaulted to.

If you’re evaluating any of these structures, the first decision is which type fits your business. Start with ICHRA Explained if you’re considering replacing or augmenting a group plan, HRA vs HSA if you’re choosing between funding mechanisms, or ICHRA vs QSEHRA if you’re choosing between the two HRA variants for a small business.

Want help modeling whether an HRA fits your business? We can walk through the four types, run the numbers against your current spend, and identify whether an HRA-based approach would deliver better economics or coverage. Talk to us.

Footnotes

  1. IRS, Publication 969 — Health Savings Accounts and Other Tax-Favored Health Plans, and IRS guidance on Health Reimbursement Arrangements. The IRS publishes annual contribution limits for QSEHRA and Excepted Benefit HRAs, and detailed rules for ICHRA design and administration. Refer to current-year IRS guidance for specific dollar limits. ↩ ↩2 ↩3

  2. IRS guidance on HRAs and the tax treatment of employer-provided health coverage. Properly structured HRA reimbursements are excluded from gross income under IRC §105 and not subject to FICA, FUTA, or Medicare taxes when the employer follows the documentation and substantiation requirements. ↩