Are HRAs Worth It for Small Employers? Benefits, Downsides, and Use Cases

Offering health benefits can be challenging for small businesses. For many, they may not have the budget or staff to support the benefit. Thankfully, small employers have options. Health reimbursement arrangements (HRAs) have become a practical alternative to traditional group health insurance. Instead of committing to strict participation requirements and unpredictable premiums, HRAs allow employers to offer a flexible, budget-friendly health benefit.

In this article, we'll help you decide if an HRA is the right fit for your organization.

In this blog post, you'll learn:

• What an HRA is and how it works.
• How the individual coverage HRA (ICHRA) and qualified small employer HRA (QSEHRA) compare.
• The key benefits and potential drawbacks of using an HRA.

What is an HRA?

A health reimbursement arrangement (HRA), sometimes mistakenly referred to as a health reimbursement account, is an employer-funded benefit. It allows you to reimburse employees tax-free for more than 200 eligible medical expenses listed in IRS Publication 502¹ and the CARES Act².

Additional eligible medical expenses include:

• Individual health insurance premiums (for stand-alone HRAs)
• Individual premiums for vision or dental coverage
• Dental and vision expenses (dental exams or contact lenses)
• Prescription drugs
• Over-the-counter medication
• Doctor visits

With an HRA, you set a monthly allowance for your employees. They purchase the healthcare coverage and medical services they need, depending on the type of HRA, then submit proof of their out-of-pocket healthcare expenses for reimbursement.

Unlike traditional group health insurance, HRAs are a defined contribution benefit, meaning you control how much you spend every month. No unpredictable claims. No annual rate hikes. No surprises.

Types of stand-alone HRAs

You offer a stand-alone HRA in place of a group health insurance plan. These types of HRAs allow employees to use their HRA contribution on the individual health insurance plans that work best for their needs.

Two of the most popular options are:

• The individual coverage HRA (ICHRA): The ICHRA is for employers of all sizes. With no annual contribution limits, you can offer your employees any allowance you want. You can also vary allowances using 11 employee classes, or by employee age and family size.
• The qualified small employer HRA (QSEHRA): The QSEHRA is only for small employers with fewer than 50 full-time equivalent employees (FTEs). The Internal Revenue Service sets annual limits on employer contributions for the QSEHRA. You can vary allowances by employee age and family size.

Why are small employers turning to HRAs?

Employer-sponsored insurance is out of budget for most small employers. For decades, the cost of group health plan coverage has surpassed inflation.

KFF³ found that the average employer-sponsored family premium increased by 6% in 2025, while overall inflation remained under 3%. Family coverage was about $27,000 per year. Employers covered most of the premium, but families were still left with out-of-pocket medical costs.

Individual health insurance premiums are also cheaper than small group coverage in many places. Ideon⁴ found that bronze individual plans are cheaper than small group plans in the following counties:

HRAs give small employers a way to care for their people without draining their resources.

The benefits of HRAs

HRAs offer several advantages that make them especially appealing for small employers navigating rising healthcare costs. Below are some of the key benefits that set them apart from traditional group plans.

Pros of HRAs:

• Cost control. With an HRA, you choose your contribution amount.
• Tax advantages. Reimbursements are tax-free for employees. HRA funds are tax-deductible for employers.
• Flexibility. Employees choose the health plan that works best for them. This flexibility can lead to higher employee satisfaction.
• Entry point to offering benefits. If you’ve never offered health benefits before, HRAs make it easier to get started.

The downsides of HRAs

While HRAs offer many advantages, they may not be the right fit for every employer. It’s important to understand the potential drawbacks before deciding if this approach aligns with your team’s needs.

Cons of HRAs:

• Employees must choose their own medical plans. Employees are responsible for selecting their own health coverage, which can feel overwhelming without guidance. However, many HRA administrators, like PeopleKeep by Remodel Health, provide tools and support to simplify the process.
• Less uniformity across your team. Since employees choose their own plans, their experiences may vary. Some employers prefer the consistency of a single group plan.
• Requires guidance. HRAs are still unfamiliar to many employees. Strong onboarding and communication are key to success. PeopleKeep provides materials to make the process easier.

HRA pros and cons comparison chart

The comparison chart below breaks down the advantages and disadvantages of HRAs.

When is an HRA worth it?

Now that you understand the benefits and potential drawbacks of HRAs, you can better determine whether this approach fits your organization’s goals and budget.

HRAs tend to be a strong fit in the following scenarios:

• You’re priced out of group health insurance. If your renewal costs are unsustainable, an HRA offers a way to continue providing benefits.
• You’re not offering benefits. HRAs provide a simple, cost-controlled way to start offering coverage for the first time.
• You want predictable healthcare spending. Defined contribution allows you to set and maintain a consistent budget.
• Your employees have diverse healthcare needs. Individual plan choice works well for teams with varying ages, family sizes, and medical needs.

How PeopleKeep by Remodel Health can help

Whether you’re offering benefits for the first time or moving away from a traditional group plan, PeopleKeep by Remodel Health makes it easy to deliver a personalized health benefit to your team.

We relieve the administrative burden of offering an HRA by:

• Setting up and customizing your HRA to fit your budget and goals
• Automating reimbursements and staying compliant with IRS regulations
• Giving your employees an easy-to-use experience for submitting expenses
• Offering an in-house shopping experience for your employees
• Providing guidance and resources to help your employees choose the right coverage

With PeopleKeep by Remodel Health, you get the tools and support you need to launch and manage your benefit with confidence.

Conclusion

For small employers, offering health benefits used to mean choosing between two difficult options: offering an expensive group plan or offering nothing at all. Health reimbursement arrangements (HRAs) provide a new way forward.

By shifting from a one-size-fits-all plan to a defined contribution approach, you can offer a meaningful, tax-advantaged benefit while keeping your budget under control. At the same time, your employees gain the flexibility to choose coverage that fits their individual needs.

Considering adding an HRA to your benefits package? Schedule a call with an HRA specialist today!

References

1. IRS Publication 502
2. IRS outlines changes to health care spending available under CARES Act
3. KFF: 2025 Employer Health Benefits Survey
4. ICHRA Insights, Powered by Ideon