How Health Reimbursement Arrangements Work for Employers

A Health Reimbursement Arrangement, or HRA, is an employer-funded benefit that reimburses employees for eligible healthcare expenses. Employers use HRAs to help manage benefit costs, offer more flexibility, and support employees without relying only on a traditional group health insurance plan.

For small and mid-sized businesses, an HRA can create a more predictable benefits budget while giving employees help with qualified medical expenses. The right structure depends on the company’s size, budget, current benefits, and compliance requirements.

What Is a Health Reimbursement Arrangement?

A Health Reimbursement Arrangement is an employer-funded benefit that reimburses employees for eligible healthcare expenses. Depending on the plan design, reimbursable expenses may include medical care, prescriptions, dental care, vision care, deductibles, copayments, or individual health insurance premiums.

The business owns and funds the plan. Employees do not contribute their own money to an HRA. Instead, the employer sets the reimbursement allowance, defines eligible expenses within applicable rules, and determines how reimbursements are handled.

Because HRAs must follow specific rules, employers should not treat them as informal reimbursement accounts. They should be designed, documented, and administered properly.

HRA rules are tied to federal tax and benefits requirements, so employers should rely on properly prepared plan documents and current guidance when setting up or changing a reimbursement program.

How an HRA Works

With an HRA, the employer decides how much money will be available for reimbursement and which eligible expenses the plan will cover. Employees then submit qualifying expenses according to the plan’s process.

Once an expense is reviewed and approved, the employee is reimbursed up to the available allowance. In many cases, reimbursements are tax-advantaged when the plan is set up and administered correctly.

Employers may also decide whether unused funds can roll over from one plan year to the next. Rollover rules depend on the plan design and should be clearly explained to employees.

Common HRA Payment Designs

HRAs can be structured in different ways depending on the employer’s goals and the type of plan being offered. Some plans reimburse eligible expenses early in the year, while others require employees to meet certain out-of-pocket costs before reimbursement begins.

In a first-dollar design, the HRA may reimburse eligible expenses before the employee pays a larger share of costs. In another design, the employee may pay initial expenses first, and the HRA begins reimbursing after a certain threshold is reached.

The right structure depends on the employer’s budget, the health plan strategy, and how much cost-sharing the business wants employees to take on.

Types of HRAs Employers May Consider

Not all HRAs work the same way. Employers should understand the type of plan they are considering before deciding whether it fits their benefits strategy.

An Individual Coverage HRA, or ICHRA, can allow employers to reimburse employees for individual health insurance premiums and certain out-of-pocket medical expenses. This can be an alternative to offering a traditional group health plan when the program meets applicable requirements.

A Qualified Small Employer HRA, or QSEHRA, is designed for eligible small employers that do not offer a traditional group health plan. It allows the employer to reimburse employees for certain healthcare expenses up to allowed limits.

A key difference is that QSEHRAs are limited to eligible small employers, while ICHRAs can be available to employers of different sizes when structured correctly.

Other HRA designs may be used with group health plans or for limited types of expenses. Because the rules vary, businesses should work with a benefits advisor before choosing a structure.

Why Small Businesses Consider HRAs

Small businesses often need health benefit options that are flexible, manageable, and cost-conscious. Traditional group health insurance may not always fit the company’s budget or workforce needs.

An HRA can help a business set a defined reimbursement amount, which may make annual benefits spending easier to predict. This can be useful for companies that want to support employees without taking on an open-ended benefits commitment.

HRAs may be especially useful for businesses that want predictable reimbursement costs, have employees with different coverage needs, or are exploring alternatives to a traditional group health plan.

They can also give employees more choice, especially when the plan allows them to select individual coverage that fits their own situation. This flexibility can be helpful for teams with different healthcare needs.

Benefits of HRAs for Employers

HRAs can give businesses more control over how healthcare dollars are used. The employer sets the reimbursement structure, decides which eligible expenses are included, and determines the allowance amount.

This can make an HRA useful for companies that want a more tailored benefits strategy. Depending on the plan design, it may help support employees with premiums, deductibles, copayments, prescriptions, dental care, vision care, or other eligible expenses.

An HRA can also help a business compete for talent. While this approach may not be the right fit for every company, it can strengthen a benefits package when designed around employee needs and budget goals.

Benefits of HRAs for Employees

Employees may value an HRA because it can help reduce the cost of healthcare expenses. Depending on the plan design, workers may receive reimbursement for eligible costs they would otherwise pay themselves.

HRAs can also provide more flexibility than a one-size-fits-all approach. In some plans, employees may have more choice in how they use the benefit, as long as the expenses qualify under the plan.

Clear communication is important. Employees should understand what is covered, how to submit expenses, what documentation is required, and whether unused funds carry over.

What Employers Should Review Before Offering an HRA

Before offering an HRA, employers should review their company size, budget, current benefits package, employee needs, and compliance responsibilities. The plan should be set up with clear documents and a reliable administration process.

Employers should also consider which expenses will be eligible, how reimbursements will be approved, how employees will be notified, and how the HRA fits with any existing health plan.

They should also review compliance requirements, employee notices, substantiation rules, and how the HRA coordinates with any existing health coverage.

Because each HRA type has its own requirements, professional guidance is important before moving forward. A properly structured plan can be useful, but a poorly designed one can create confusion and compliance risk.

How JS Benefits Group Can Help

JS Benefits Group helps employers evaluate health benefits options, including Health Reimbursement Arrangements, group health insurance, and other employee benefits strategies. The goal is to help businesses understand which structure makes sense for their team, budget, and long-term needs.

For small and mid-sized employers, this guidance can be especially valuable. HRAs can offer flexibility, but they need to be designed and administered correctly.

JS Benefits Group helps employers compare available options, understand plan design tradeoffs, and coordinate benefits administration with the company’s broader health benefits strategy.

If your business is reviewing health benefits, comparing group coverage options, or considering an HRA, JS Benefits Group can help you evaluate your choices and choose a benefits strategy that fits your workforce and budget.

Frequently Asked Questions About Health Reimbursement Arrangements

What does HRA stand for?

HRA stands for Health Reimbursement Arrangement. It is an employer-funded benefit that reimburses employees for eligible healthcare expenses according to the rules of the plan.

Do employees contribute to an HRA?

No. HRAs are funded by the employer. Employees do not contribute their own money to the plan.

What expenses can an HRA reimburse?

Eligible expenses depend on the type of HRA and the employer’s plan design. They may include medical expenses, prescriptions, deductibles, copayments, dental care, vision care, or individual health insurance premiums.

Can a small business use an HRA?

Yes. Some HRA options are especially useful for small businesses, including QSEHRAs for eligible small employers and ICHRAs for employers that want to reimburse individual coverage instead of offering a traditional group health plan.

Is an HRA the same as an HSA?

No. An HRA is employer-funded and owned by the employer. An HSA, or Health Savings Account, is owned by the employee and is generally paired with a qualified high-deductible health plan.

Can unused HRA funds roll over?

Sometimes. Employers may choose whether unused funds can roll over, depending on the type of HRA and plan design. Rollover rules should be clearly explained in the plan documents.