What Is an HRA? Types, Rules, and Employer Setup
An HRA is an employer-funded account that reimburses employees tax-free for medical costs. The five types, which one you can legally offer, and the setup.
What Is an HRA?
A health reimbursement arrangement is employer money, not employee money, and which version you are allowed to offer is decided by two facts about your business rather than by preference. The five types, the reimbursement that carries a six-figure excise tax, current limits, rollover rules, and what setting one up actually involves
The first time somebody explained an HRA to me, they described it as an account. It is not an account. Nothing is deposited, no balance exists anywhere, and if every employee claims nothing all year, you spend nothing. It is a promise to reimburse, and understanding that one distinction explains almost every rule that follows.
The second thing worth knowing before anything else: you do not get to pick which HRA you offer. Two facts about your business decide it for you, and most of the published comparisons skip straight past that to a feature table you cannot act on.
And the third, which is the expensive one. There is a version of this that looks obvious, costs nothing to set up, and carries an excise tax of $100 per day per employee. Small businesses walk into it every year because it is exactly what a reasonable person would do. I build the people and records tooling for businesses without an HR department at FirstHR. This is general information, not legal or tax advice, and the plan document always wins over any summary.
What an HRA Actually Is
A health reimbursement arrangement is an employer-funded arrangement that reimburses employees, tax-free, for qualifying medical expenses. The employer sets the amount, the employer funds it, and nothing is paid until an employee submits a substantiated claim. The reimbursement is excluded from the employee's income and deductible to the business.
Three properties follow from that definition and they are the ones that surprise employers coming from a flexible spending account.
Only the employer funds it. There is no salary reduction, no election, and no employee contribution of any kind. That makes an HRA a cost line rather than a payroll mechanic, and it also means it cannot be run through a cafeteria plan the way a spending account is.
It is notional rather than funded. You are not setting aside money; you are promising to reimburse up to a ceiling. If nobody claims, you pay nothing, which is why generous-looking allowances frequently cost far less than the headline figure multiplied by headcount.
And it is a group health plan, legally speaking, with the obligations that come with one. That is the part small employers underestimate, because the arrangement itself feels informal and the compliance around it is not.
The Five Types
Five arrangements are in common use, and they differ on two axes that matter more than the rest: whether you must also sponsor a group health plan, and whether the arrangement may reimburse insurance premiums.
| Type | Requires a group plan? | Reimburses premiums? | Dollar cap |
|---|---|---|---|
| Integrated HRA | Yes, and the employee must be enrolled in it | No, out-of-pocket costs only | None set federally |
| Excepted benefit HRA | Yes, but the employee need not enroll | Limited, mainly excepted coverage such as dental and vision | $2,200 newly available for plan years beginning in 2026 |
| QSEHRA | No, and you must not offer one | Yes, individual market premiums and medical costs | $6,450 self-only and $13,100 family for 2026 |
| ICHRA | No, not to the employees you cover with it | Yes, individual market and Medicare premiums | None set federally |
| Retiree HRA | No | Yes, including Medicare premiums | None set federally |
The integrated HRA is the oldest design and the one most people picture. You keep your group plan, and the arrangement absorbs some of the deductible and out-of-pocket exposure your employees would otherwise face. It only covers people actually enrolled in your plan, which is both its point and its limitation.
The excepted benefit HRA is the least known and the most useful for its size. It is capped, it sits alongside a group plan, and crucially an employee may use it even if they decline your medical coverage, which makes it a genuine option for the person on a spouse's plan who currently gets nothing from you.
QSEHRA and ICHRA are the two that replace a group plan rather than supplement one, and they are the ones most small businesses are actually choosing between.
Which One You Are Allowed to Offer
This is the question the feature comparisons skip. You do not choose freely among the five. Two facts about your business close most of the doors before preference enters into it: whether you sponsor a group health plan, and how many full-time equivalents you employ.
The 50 full-time equivalent line is the one to establish first if you are anywhere near it, because it is also the threshold for the employer mandate and it is calculated in a specific way rather than by counting heads. Part-time hours aggregate into equivalents, which regularly puts businesses over a line they assumed they were under.
The other thing worth settling early is that offering a group plan and offering an ICHRA to the same employees is not permitted. You may split by legitimate employee classes, such as full-time versus part-time or by geography, but you cannot hand the same person both and let them choose. That constraint kills a design a lot of employers think they want.
The Version That Costs $36,500 Per Employee
Here is the arrangement almost every small business owner independently invents, and it is the one that carries the largest penalty in this entire subject. An employee buys their own policy. You reimburse them for it, or pay the insurer directly, and treat it as a health benefit rather than as wages.
That is an employer payment plan. The IRS treats it as a group health plan, it fails federal market reform requirements because it imposes an annual dollar limit on essential health benefits, and the excise tax under Section 4980D runs at $100 per day per affected employee, which reaches $36,500 per employee per year (Internal Revenue Service).
Two legitimate exits exist. Route the reimbursement through a QSEHRA or an ICHRA, which is the whole reason those arrangements were created, and which converts the same dollars into a compliant tax-free benefit. Or pay the money as ordinary taxable wages with no conditions attached, which is permitted because unconditional compensation is not a health plan, though it costs both sides the tax advantage and the employer payroll tax on top.
What you cannot do is the middle position: paying the money but requiring proof of an insurance purchase. Conditioning payment on coverage is exactly what turns compensation into a health plan, and it is the detail that catches employers who thought they had structured around the problem.
Contribution Limits
Two of the five types are capped and three are not. For plan years beginning in 2026 the QSEHRA maximum is $6,450 for self-only coverage and $13,100 for family coverage, per Revenue Procedure 2025-32. The excepted benefit HRA is capped at $2,200 newly made available for the same plan years, per Revenue Procedure 2025-19. Integrated HRAs, ICHRAs, and retiree HRAs carry no federal dollar limit.
| Type | Limit for plan years beginning in 2026 | Who sets the real number |
|---|---|---|
| QSEHRA | $6,450 self-only, $13,100 family | You, up to the cap. Amounts may vary by family status but not much else |
| Excepted benefit HRA | $2,200 newly made available | You, up to the cap. Unused amounts may carry over above the cap |
| ICHRA | No federal cap | You, subject to affordability testing if you are a large employer |
| Integrated HRA | No federal cap | You, constrained by the group plan it sits on top of |
| Retiree HRA | No federal cap | You, with far fewer constraints than any active-employee version |
The absence of a cap is less liberating than it sounds. An uncapped arrangement means you set the number with no guardrail, and the number you set becomes an ongoing commitment employees budget their household around. In practice the constraint is your budget and the local cost of individual coverage, and it is worth sizing against what you already spend on benefits per employee before announcing anything.
The capped figures move every year by revenue procedure, which means an allowance expressed as a percentage of the cap needs rechecking annually and an allowance expressed as a flat dollar amount does not. Employers who set an amount once and never revisit it find the real value eroding quietly against premium inflation.
What an HRA Can Reimburse
The universe of reimbursable expenses is the same one that governs most tax-advantaged health accounts: qualifying medical care expenses as defined in the tax code, which covers diagnosis, cure, mitigation, treatment, or prevention of disease. Where the types differ is on premiums.
| Expense | Integrated HRA | QSEHRA and ICHRA | Excepted benefit HRA |
|---|---|---|---|
| Deductibles, copays, coinsurance | Yes, the core purpose | Yes | Yes |
| Prescription costs | Yes | Yes | Yes |
| Dental and vision | Depends on plan design | Yes | Yes, a primary use |
| Individual market premiums | No | Yes, the defining feature | No |
| Medicare premiums | No | Yes for an ICHRA and a QSEHRA | No |
| Continuation coverage premiums | Generally no | Yes | Yes |
| Over-the-counter items | Depends on plan design | Depends on plan design | Depends on plan design |
The employer narrows this list rather than widens it. A plan document may cover the full qualifying universe or restrict reimbursement to a specific category, and restricting it is sometimes the point: a limited purpose design covering only dental and vision is what preserves health savings account eligibility for employees on a high deductible plan.
Substantiation is the operational reality behind all of it. Every reimbursement needs proof that the expense was incurred and qualifies, and paying without that proof converts a tax-free reimbursement into taxable wages. This is the workload that makes people hire an administrator, and it is the failure mode that turns a well-meaning informal arrangement into a payroll correction.
Rollover, and What Happens to Money Nobody Claims
Rollover in an HRA is entirely the employer's decision, and that is a genuine advantage over a flexible spending account, where the rules are fixed and the carryover is capped by the IRS. Your plan document can allow a full carryover, a partial one, or none at all.
Because the arrangement is notional rather than funded, a generous rollover is cheaper than it looks. Nothing has been set aside, so carrying an unused allowance forward costs nothing at all unless and until somebody actually claims against it. The real exposure is the tail: a long-tenured employee accumulating several years of unused allowance and then having an expensive year.
When someone leaves, the unused amount stays with you. There is no payout, no vesting, and nothing to transfer, because the employee never owned it. Some plans allow a departing employee a defined window to submit claims for expenses incurred while covered, and setting that window explicitly avoids an argument at exactly the moment nobody wants one.
HRA vs FSA vs HSA
These three get discussed as alternatives, and functionally they answer different questions. An HRA is employer money. A flexible spending account is employee money routed pre-tax. A health savings account is employee-owned and portable, and it requires a specific type of medical plan to exist at all.
| Feature | HRA | Health FSA |
|---|---|---|
| Employer funds it | ||
| Employee can contribute through payroll | ||
| Employer decides the rollover rules | ||
| Full annual amount available from day one | ||
| Money leaves with the employee | ||
| Can reimburse insurance premiums | ||
| Requires a written plan document |
The fourth row is the one employers should read twice. A health FSA obliges you to make the whole annual election available on day one, before the employee has funded any of it, and you absorb the shortfall if they leave. An HRA has no equivalent exposure, because reimbursement is capped by what has actually been made available under the plan terms rather than by an annual election.
The sixth row is the one that decides most small business designs. If the goal is to help people buy coverage rather than to soften the cost of coverage you already provide, only an HRA can do it, and only in its QSEHRA or ICHRA form. Everything else in this comparison is secondary to that.
The three also combine rather than compete. A high deductible plan with a health savings account, plus a limited purpose arrangement for dental and vision, is a common and entirely sensible stack for a small team, and it is worth thinking through alongside the rest of your benefits mix.
How to Set One Up
Setting up an HRA takes four to eight weeks, and the binding constraint is the 90-day notice rather than anything administrative. Start counting backwards from the plan year start date rather than forwards from today.
The record-keeping layer under all of this, the plan document, the dated notices, the coverage attestations, is unglamorous and it is what an audit actually looks at. Keeping it with the rest of the employee file rather than in somebody's inbox is the part FirstHR is built to carry.
Where Small Employers Get This Wrong
The failures cluster in a narrow band, and almost all of them happen before the first reimbursement is ever paid.
Reimbursing individual premiums without a QSEHRA or an ICHRA is first, largest, and the reason it leads this list. It is the intuitive move, it carries the $100 per day exposure, and there are two legal routes to the same outcome sitting right next to it.
Paying without substantiation is second. It is the most common way a properly designed arrangement still fails, and it turns tax-free reimbursement into wages that should have had withholding on them.
Missing the 90-day notice is third, and it is purely a calendar failure. It has its own penalty, it is entirely avoidable, and it is the single most common reason a first-year arrangement has to be delayed by a full plan year.
Offering an ICHRA and a group plan to the same people is fourth. Employers reach for it because it sounds like choice, and it is not permitted for the same class of employees. Splitting by legitimate class is the compliant version of the same instinct.
Setting an allowance once and never revisiting it is fifth. Premium costs move, the capped figures move annually, and an allowance that was meaningful three years ago quietly becomes a gesture without anyone deciding to make it one. Reviewing it during open enrollment each year takes an hour.
Frequently Asked Questions
What is an HRA in simple terms?
An HRA is a health reimbursement arrangement: an employer-funded arrangement that reimburses employees tax-free for qualifying medical expenses, and in some versions for individual health insurance premiums. Only the employer funds it, so employees cannot contribute through payroll the way they can with a flexible spending account. It is a promise to reimburse rather than a pot of money sitting somewhere, which is why nothing is paid out until an employee submits a substantiated claim. Reimbursements are excluded from the employee’s taxable income and are deductible to the business.
What are the different types of HRAs?
There are five in common use. An integrated HRA sits alongside your group health plan and covers out-of-pocket costs for people enrolled in it. An excepted benefit HRA is a small capped arrangement offered alongside a group plan that employees can use even if they decline the plan. A QSEHRA is for employers under 50 full-time equivalents with no group plan. An ICHRA reimburses individual market premiums and is open to employers of any size that do not offer those employees a group plan. A retiree HRA covers former employees only.
Can an employer just reimburse an employee for their health insurance?
Not outside a QSEHRA or an ICHRA. Paying or reimbursing an employee for an individual market policy creates what the IRS calls an employer payment plan, which is treated as a group health plan and fails federal market reform requirements. The consequence is an excise tax of $100 per day per affected employee, which reaches $36,500 per employee per year. Paying the amount as ordinary taxable wages with no strings attached is permitted, because it is compensation rather than a health plan, but it loses the tax advantage entirely.
What are the HRA contribution limits?
It depends on the type. An integrated HRA and an ICHRA have no federal dollar cap, so the employer sets the amount. A QSEHRA is capped: for 2026 the maximum is $6,450 for self-only coverage and $13,100 for family coverage, per IRS Revenue Procedure 2025-32. An excepted benefit HRA is capped at $2,200 newly made available for plan years beginning in 2026, per Revenue Procedure 2025-19. The capped figures adjust for inflation annually, so confirm the current numbers before communicating any amount to employees.
Does unused HRA money roll over?
That is the employer’s decision, and it is one of the real advantages over a flexible spending account. The plan document may allow unused amounts to carry into the next plan year, may allow a partial carryover, or may forfeit the balance at year end. Because the money is only a promise to reimburse rather than a funded account, a generous rollover costs nothing until somebody actually claims against it. Whatever you choose, unused amounts stay with the employer and never become the employee’s property, and nothing leaves with them when they go.
Can an employee have an HRA and an HSA?
Only if the HRA is designed not to interfere. A general purpose HRA that reimburses medical expenses before the deductible is met is disqualifying coverage and blocks health savings account eligibility. A limited purpose HRA restricted to dental and vision, or a post-deductible HRA that pays nothing until the statutory minimum deductible is satisfied, is compatible. If anyone on your team contributes to a health savings account, resolve this at the design stage, because the fix afterwards is a plan amendment rather than a conversation.
Is an HRA better than offering group health insurance?
It is a different trade rather than a straight upgrade. A group plan gives employees one negotiated policy and gives you renewal increases you do not control. A QSEHRA or an ICHRA gives you a fixed, predictable budget and gives employees the job of choosing their own policy, which some find liberating and others find stressful. For a business that cannot get a usable small-group quote, or that has employees spread across several states, the reimbursement route is frequently the only realistic option rather than the preferred one.
Do employees pay tax on HRA reimbursements?
No, provided the arrangement is properly structured and the expense is substantiated. Qualifying reimbursements are excluded from the employee’s gross income and are not subject to income tax or payroll tax, and the employer deducts them as a business expense. Two things break that treatment: paying without substantiation, which converts the payment into taxable wages, and reimbursing someone who does not carry the coverage their arrangement requires. Both failures are administrative rather than structural, which is why the substantiation workflow matters more than the plan design.