How does an HRA work?

By Holly Bengfort on August 24, 2026 at 9:00 AM

Offering traditional group health benefits has grown increasingly difficult for small and mid-sized organizations. It can often be too costly, complex, or rigid in structure.

For those reasons, many employers find that a health reimbursement arrangement (HRA) is the better option for stretching health benefit dollars. It allows employers to offer their employees tax-free dollars they can use on eligible medical expenses. With a stand-alone HRA, this includes monthly health insurance premiums.

In this article, we'll go beyond the basic structure of an HRA by exploring the types of HRAs available and how you can manage your health benefit.

In this blog post, you'll learn:

• What an HRA is and how it works.
• The differences between an HRA and an HSA.
• The three most common types of HRAs and how to choose the right one.

What is an HRA?

An HRA, often mistakenly called a health reimbursement account or health reimbursement agreement, isn't health insurance. It's an employer-funded health benefit.

With an HRA, employers can reimburse participating employees tax-free for:

• Individual premiums for health, dental, and vision insurance (for those with stand-alone HRAs)
• Dental expenses, such as exams
• Vision expenses, such as contact lenses
• Prescription medicines
• Over-the-counter medicines
• Doctor visits

There are more than 200 HRA-eligible healthcare costs in Internal Revenue Code Section 213(d), as listed in IRS Publication 502¹ and extended by the CARES Act².

What is the basic structure of an HRA?

Every type of HRA follows a simple, five-step process. First, employers offer their employees a monthly allowance dedicated to health spending. Employees then enroll in qualifying health coverage. They pay for medical care or other eligible expenses out of pocket. Employees then submit proof of their qualified medical expenses for tax-free reimbursement. Once the employer or HRA administrator approves the expense, the employer reimburses employees up to their set allowance amount.

Let's look at the steps in more detail in the sections below.

The employer sets an allowance amount

The organization offering the HRA chooses a monthly benefit allowance of tax-free money to offer each employee. Depending on the type of HRA, the organization may be able to offer different allowance amounts to different employees based on bona fide job criteria. Employers don't need to pre-fund these allowances.

This gives employers a cost-effective way to take care of their employees. The employer can design the plan to meet the organization's unique needs and budget. Whether they offer $500 or $1,500 each month, their employees can put that money to good use. Plus, employers can decide which expenses they want to reimburse.

Employees enroll in qualifying health coverage

Each type of HRA has its own rules for participation. With a traditional or integrated HRA, employees must enroll in the employer’s traditional group health insurance plan to participate in an HRA. For a stand-alone HRA, employees will enroll in their own qualifying individual health insurance coverage. We’ll cover the specific requirements for each type of HRA later in the article.

Employees use their allowance on the medical expenses that matter most to them

Depending on the HRA offered, its flexibility allows employees to pay for the qualifying care, treatment, supplies, and insurance premiums that work best for them. As mentioned above, the employer will outline which expenses qualify for reimbursement.

No two employees are alike. They have different wants, needs, lifestyles, and health concerns. It's easier to support diversity and inclusivity with an HRA than a one-size-fits-all traditional group health insurance plan. By offering this well-rounded health benefit, each employee has the freedom to choose the medical services and local healthcare providers that best meet their needs.

For employers, stand-alone HRAs are a great way to eliminate many of the administrative headaches associated with group health insurance while offering a comprehensive health benefit. This also makes it easier for multi-state employers and remote companies to offer a benefit that works for everyone.

Employees submit proof of purchase

After the employee incurs an eligible expense, they submit documented proof of the expense to their organization or HRA administrator. This documentation must include a description of the product or service, the expense amount, and the date the employee incurred it. Invoices or receipts satisfy this requirement, as does an explanation of benefits (EOB) from the employee's insurer. Employees may need a doctor's note for certain expenses to prove medical necessity.

The employer reimburses employees

The organization reviews the employee's submission and, if it qualifies, reimburses the employee from the monthly allowance for that benefit. The organization must follow a declined claims and appeals process outlined in its HRA plan documents if the expense doesn't qualify. Typically, employers include the reimbursement in the employee's next regular paycheck without treating it as gross income or applying payroll taxes. As long as the employee has minimum essential coverage (MEC) through the required type of health insurance for their specific HRA, they will not need to report this money as income at the end of the year.

HRA vs. health savings account (HSA)

An HRA is often confused with a health savings account (HSA), and that could be because they sound so similar. HRAs and HSAs can help cover healthcare costs by using tax-advantaged funds to pay for employees' medical expenses. However, these two health benefits differ in many ways.

Here are a few primary differences between an HSA and HRA:

What are the different HRA types?

Several types of HRA plans are available, each offering tax benefits and budget control. Three popular options are the individual coverage HRA (ICHRA), the qualified small employer HRA (QSEHRA), and the integrated HRA, also known as a group coverage HRA (GCHRA).

When choosing the right HRA for your organization, here's a rough guideline to follow:

• ICHRA: An ICHRA is an HRA that reimburses employees for qualifying individual health insurance premiums and out-of-pocket medical expenses. Use an ICHRA if you want the flexibility to differ benefit eligibility with employee classes, such as full-time employees or part-time employees. You can also vary allowances by employee class, age, and family size. You can't offer a group health plan and an ICHRA to the same class of employees.
• QSEHRA: A QSEHRA is a type of HRA that reimburses employees for qualifying individual health insurance premiums and out-of-pocket medical expenses. Employees need a qualifying plan with MEC to participate. Use a QSEHRA if you're an organization with fewer than 50 full-time equivalent employees (FTEs) looking for easy-to-manage, simple-to-deploy health benefits. You can't offer a QSEHRA alongside a group plan, including group dental or vision plans.
• GCHRA: Use a GCHRA if you want to supplement an existing group health insurance plan by reimbursing employees for out-of-pocket expenses such as deductibles.

Let's dive into each option to give you a better idea of how they work.

How does an individual coverage HRA (ICHRA) work?

On June 20, 2019, the IRS published Health Reimbursement Arrangements and Other Account-Based Group Health Plans³. This formalized President Trump's 2017 executive order to create new HRAs. In addition to expanded coverage for short-term plans, these rules created the ICHRA and the excepted benefit HRA (EBHRA), which employers could begin offering to employees on January 1, 2020.

The ICHRA places no limits on the allowance amount employers can set. In addition, employers can set different allowance amounts based on job classifications (e.g., full-time, part-time, salaried, or hourly) or by location.

Employers can also offer an ICHRA alongside a group health insurance plan, as long as the class of employees offered an ICHRA is not also offered group health insurance or given a choice between the two.

Employees using an ICHRA must have qualified individual health insurance plans that provide MEC. They must purchase a plan through the HealthCare.gov site, their state's individual insurance exchange, or a private exchange. Employees who qualify for premium tax credits must forgo their tax credits if their employer offers an ICHRA allowance that's considered affordable according to IRS rules. If the allowance is considered unaffordable, they may keep their premium tax credits and opt out of the ICHRA.

The ICHRA is ideal for organizations of any size that want the flexibility to offer different benefits to different classes of employees and to provide a greater allowance than the QSEHRA allows. It can also satisfy the Affordable Care Act’s (ACA) employer mandate for applicable large employers (ALEs) with 50 or more FTEs.

How does a qualified small employer HRA (QSEHRA) work?

When Congress passed the ACA, it essentially limited HRAs to pairing only with group plans. That changed in December 2016 when Congress made a formal exception for small business HRAs with the passage of the 21st Century Cures Act. The law created the QSEHRA, a personalized health benefit for organizations with fewer than 50 FTEs.

The QSEHRA allows small businesses and nonprofits to reimburse employees for health insurance premiums and other eligible medical expenses. Any employee with a qualifying plan with MEC can get tax-free reimbursements, including those on a parent's or spouse's group plan.

There are annual limits on employer contributions with a QSEHRA. In 2026, annual employee allowances are limited to $6,450 for self-only employees and $13,100 for employees with a family. The IRS has yet to release limits for 2027.

Employers must offer allowances on the same terms to all eligible employees, and an organization can't offer different allowance amounts to different employees unless those differences are based on age or family status. Additionally, QSEHRA participants must coordinate their allowance with any premium tax credits. If an employee's QSEHRA allowance is affordable, they can't collect any tax credits. If their allowance is unaffordable, they must reduce their tax credit by the amount of their QSEHRA allowance.

A QSEHRA is ideal for small organizations with fewer than 50 FTEs that want an affordable, easy-to-manage health benefit.

How does a group coverage HRA (GCHRA) work?

The GCHRA enables employers to supplement a group health insurance plan. These HRAs are available to organizations of all sizes and can enhance your benefits.

An organization offering a GCHRA can choose to offer different allowance amounts to different employees based on bona fide job criteria. Eligibility is limited to employees also participating in the organization's group health insurance policy.

Employers can reimburse employees for eligible out-of-pocket expenses, though they may choose to limit what they reimburse. Employees with a GCHRA can't receive reimbursement for any insurance premiums.

Employers may require an EOB from their group carrier to obtain reimbursement for out-of-pocket medical costs.

A GCHRA is ideal for employers who have an existing group health insurance plan they want to supplement, either to take the bite out of a high-deductible plan or to enhance a feature-rich health benefits package.

Why should you use an HRA administrator to manage your benefit?

While each HRA operates slightly differently, all are subject to many of the same federal requirements, including the Health Insurance Portability and Accountability Act of 1996 (HIPAA), the Employee Retirement Income Security Act (ERISA), and the Internal Revenue Code (IRC). Since these requirements can be challenging to follow, many small business owners choose to implement their HRA benefits through HRA administration software.

PeopleKeep by Remodel Health makes it easy to manage your employee benefits with our cloud-based administration platform. We take the hard work out of offering an HRA by performing documentation reviews for all employee expense submissions, providing customer support, and generating your plan documents to help avoid compliance and privacy complications.

With PeopleKeep, small and midsize organizations can ensure they deploy a compliant health benefit that they can manage in just minutes each month. Larger organizations can use ICHRA+ by Remodel Health, our parent company.

Conclusion

As the cost of traditional health plans grows, health reimbursement arrangements (HRAs) are becoming increasingly popular among small businesses. There are several types of HRAs available, including the ICHRA, QSEHRA, and GCHRA.

Offering an HRA is a cost-effective way employers can help stretch healthcare dollars. By reimbursing eligible healthcare expenses, employers make it easier for their employees to afford the medical care they need. Plus, adding an HRA to your benefits package also makes it easier to recruit and retain talented employees. Schedule a call today to learn which HRA is the best fit for your organization!

This post was originally published on February 22, 2018. It was last updated on August 24, 2026.

References

1. IRS Publication 502
2. IRS outlines changes to health care spending available under CARES Act
3. Federal Register: Health Reimbursement Arrangements and Other Account-Based Group Health Plans
4. Congress.gov: H.R.34 - 21st Century Cures Act