How to Set Up a Health Reimbursement Arrangement

A Health Reimbursement Arrangement (HRA) offers employers a flexible way to help employees with healthcare costs. An HRA is an employer-funded, tax-advantaged health benefit plan designed to reimburse employees for approved medical expenses and, in some cases, health insurance premiums. Employers retain control over funds until used, and reimbursements are generally tax-free for employees. Employers can often claim a tax deduction for contributions. The specific design and rules of an HRA depend on the model chosen, each catering to different employer sizes and benefit strategies.

Understanding HRA Models

Employers can choose from several HRA models. The Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is for smaller businesses not offering a traditional group health plan. To qualify, an employer must have fewer than 50 full-time equivalent employees and not offer any group health plan.

A QSEHRA allows employers to reimburse employees for qualified medical expenses, including individual health insurance premiums, up to specific annual limits. For 2025, QSEHRA limits are $6,350 for single employees and $12,800 for family coverage. Employees must maintain Minimum Essential Coverage (MEC) to receive tax-free reimbursements.

The Individual Coverage Health Reimbursement Arrangement (ICHRA) offers greater flexibility and is available to employers of any size. An ICHRA allows employers to reimburse employees for individual health insurance premiums and other qualified medical expenses. There are no annual contribution limits for ICHRAs, allowing employers to offer varying amounts based on employee classes like full-time or part-time. Employees participating in an ICHRA must be enrolled in individual health insurance coverage, which can be purchased through the Health Insurance Marketplace or directly from an insurer. The ICHRA can also integrate with Medicare coverage.

A Group Coverage Health Reimbursement Arrangement (GCHRA), also known as an integrated HRA, works with a traditional group health insurance plan. This model allows employers to reimburse employees for out-of-pocket medical expenses not covered by the primary group health plan, such as deductibles, co-pays, and co-insurance. Employees must be enrolled in the employer’s group health insurance plan to be eligible. Employers can customize a GCHRA to meet specific needs, offering different allowance amounts to various employee classes like salaried or hourly workers.

Key Policy Decisions for HRA Design

Employee Eligibility

Employers must define employee eligibility, specifying which groups will be covered. While generally available to W-2 employees, employers can exclude categories like part-time or seasonal workers, or those with less than 90 days of service. For an ICHRA, employers can use up to 11 different employee classes to vary eligibility and contributions, including full-time, part-time, or employees in different geographic regions. QSEHRAs must be offered on the same terms to all eligible employees.

Contribution Amounts

Employers establish the maximum amount an employee can be reimbursed annually. This can be a fixed amount for all eligible employees or vary by employee class, in compliance with non-discrimination rules. For QSEHRAs, amounts must remain within IRS-mandated annual limits. ICHRAs do not have federal contribution limits, providing employers flexibility in setting allowance levels. GCHRAs also allow for customized allowance amounts based on employee classes.

Eligible Expenses

Employers must decide which eligible expenses will be reimbursable. Internal Revenue Code Section 213(d) defines qualified medical expenses, including costs for diagnosis, treatment, or prevention of disease. This encompasses services and products, including:
Doctor visits
Prescriptions
Dental care
Vision care
Health insurance premiums

While IRS Publication 502 provides a comprehensive list, employers can limit the scope of reimbursable expenses within their HRA plan.

HRA Integration

HRA integration with primary health coverage is a foundational design element. A QSEHRA is an alternative to group health insurance; employers cannot offer a QSEHRA if they also offer a group plan. An ICHRA requires employees to purchase individual health insurance coverage to participate, serving as a replacement for group plans. A GCHRA supplements an existing group health plan, covering costs not fully paid by that plan.

Carryover Rules

Carryover rules affect how unused funds are handled at the end of a plan year. Employers can allow unused HRA funds to carry over to the next plan year, implement a “use it or lose it” policy, or adopt a hybrid approach. These provisions should be outlined in the HRA plan document.

Third-Party Administrator (TPA) Selection

Selecting a third-party administrator (TPA) is a practical decision for managing an HRA. TPAs specialize in HRA administration, offering expertise in plan design, compliance, and claims processing. They handle administrative tasks, reducing employer burden and ensuring adherence to regulatory requirements. Engaging a TPA can streamline HRA setup and ongoing management.

Compliance Considerations

HRAs are subject to various federal laws, including the Employee Retirement Income Security Act (ERISA), the Health Insurance Portability and Accountability Act (HIPAA), the Affordable Care Act (ACA), and the Consolidated Omnibus Budget Reconciliation Act (COBRA). These regulations dictate requirements for plan documentation, participant disclosures, privacy of health information, and continuation of coverage. While a TPA assists with compliance, employers remain responsible for ensuring their HRA design aligns with these legal frameworks.

Implementing Your HRA

HRA Setup

After making key policy decisions, the next phase involves setting up the HRA. Engaging a third-party administrator (TPA) is often the first step, formalizing the partnership through service agreements. The employer provides the TPA with HRA design parameters, including eligibility criteria, contribution amounts, and eligible expenses. The TPA uses this information to configure the administrative system that manages the HRA.

Plan Document Creation

A foundational element of HRA implementation is creating the formal plan document. This legal document outlines all rules and policies governing the HRA, based on the employer’s design decisions. The plan document specifies details like the plan administrator, benefit descriptions, eligibility requirements, and claims procedures. A TPA typically assists in drafting this document, ensuring it meets legal requirements and communicates the HRA’s terms.

Employee Communication

Introducing the HRA to employees requires clear communication. Employers should provide materials explaining how the HRA works, its benefits, and the claims submission process. This onboarding might include informational meetings, written guides, and online resources. For ICHRAs, a 90-day notice must be provided to eligible employees before the plan year begins, detailing the HRA’s terms and its interaction with premium tax credits.

Employee Data Provision

Employers must provide employee data to the TPA for proper administration. This includes employee names, identification numbers, eligibility dates, and chosen coverage tiers. The TPA uses this data to enroll employees, track allowances, and process reimbursements. Data exchange is often facilitated through secure online portals.

Reimbursement Mechanisms

Establishing reimbursement mechanisms is a core part of implementation. The TPA sets up the system for employees to submit claims and receive reimbursements. This often involves an online portal for uploading receipts or explanations of benefits (EOBs). Reimbursements are typically processed via direct deposit.

Managing Your HRA

Ongoing Management

Ongoing HRA management involves supporting employees, processing reimbursements, and maintaining compliance. Employees typically submit claims through an online portal provided by the TPA. The TPA verifies expense eligibility against plan rules and the employee’s available balance. Employers should direct specific claim issues or questions to the TPA, as they handle these details and protect sensitive health information.

TPA Processing

The TPA processes reimbursement requests, ensuring expenses are qualified medical expenses as defined by the IRS and the employer’s plan. This involves substantiating the expense with documentation like receipts or EOBs. Once approved, the TPA disburses funds to the employee, commonly through direct deposit.

Compliance Monitoring

Compliance monitoring is an ongoing responsibility, with the TPA ensuring the HRA adheres to evolving regulations. This includes adherence to ERISA, HIPAA, and ACA provisions, which govern plan documentation, privacy, and non-discrimination. Employers should stay informed about regulatory changes and provide the TPA with information needed to maintain compliance.

Reporting and Recordkeeping

Accurate reporting and recordkeeping are essential for tax purposes and audits. The TPA provides regular reports on HRA utilization, contributions, and reimbursements. These reports help employers track benefits spending and verify compliance. Employers must retain detailed documentation of all transactions and plan changes.

Annual Review

An annual review of HRA performance allows employers to assess its effectiveness and make adjustments. This review might involve evaluating employee utilization, cost-effectiveness, and alignment with overall benefits strategy. Employers can adjust contribution amounts or eligible expenses for the upcoming plan year based on this assessment. Any changes to the HRA design should be communicated to employees in advance of the new plan year.

Tax Advantages

HRAs offer tax advantages for both employers and employees. Employer contributions to an HRA are generally tax-deductible. Reimbursements received by employees for qualified medical expenses are typically tax-free. For a QSEHRA, the total permitted benefit amount must be reported on an employee’s Form W-2 in Box 12, using code FF, even if the employee did not use the full amount. There are no W-2 reporting requirements for an ICHRA.