HRA and Health Plan Integration: What Advisors Must Clarify for Clients

Introduction

In my years advising small business owners on health benefits, I’ve noticed a pattern: Health Reimbursement Arrangements (HRAs) generate more questions than almost any other benefit strategy. Business owners often approach with genuine enthusiasm—they like the flexibility and perceived cost savings. But beneath that enthusiasm, there’s usually confusion about what an HRA actually is, how it integrates with health plans, and what rules must be followed to stay compliant.

As advisors, our job isn’t just to recommend benefits. It’s to clarify misconceptions before they become costly mistakes. This guide walks you through the critical HRA eligibility rules and integration requirements you should be explaining to your clients.

Understanding What an HRA Actually Is

Before discussing integration, let’s establish a baseline. An HRA is an IRS-approved benefit arrangement where employers set aside money to reimburse employees for qualified medical expenses. It’s not insurance—it’s a reimbursement account funded entirely by the employer.

This distinction matters because it shapes everything about how HRAs work and who can participate. Unlike a Health Savings Account (HSA), which employees can own and carry between jobs, an HRA is employer-owned. The employer controls the rules, funds the account, and owns any unused balances at year-end.

Your client takeaway: An HRA is a tax-advantaged reimbursement tool, not health insurance itself.

The Integration Rule: The Foundation of HRA Compliance

Here’s where I see advisors and business owners stumble: the integration requirement.

In its simplest form, the integration rule states that an HRA cannot be the only health coverage offered to employees. An HRA must be integrated with other health coverage—typically a group health plan.

The IRS recognizes several acceptable integration scenarios:

HRA + Group Health Plan This is the most common structure. The employer offers a traditional PPO, HMO, or HDHP alongside an HRA. The HRA supplements the group plan by reimbursing cost-sharing items like deductibles, copays, and coinsurance.

HRA + Individual Health Insurance Some small employers coordinate an HRA with employees’ individual marketplace plans. This setup has specific rules and documentation requirements.

HRA + Medicare/TRICARE For employees eligible for Medicare or military coverage, an HRA can supplement these government programs, but strict rules apply.

Multiple HRAs Employers can offer different HRA types to different classes of employees (e.g., a traditional HRA for full-time staff and a limited-purpose HRA for part-time employees), but each must be integrated appropriately.

Critical advisor note: A standalone HRA—one offered without any other health coverage—is not compliant under current IRS guidance. I’ve seen small business owners attempt this, thinking they can save money by offering only an HRA. This creates immediate compliance risk.

Eligibility Rules: Who Can and Cannot Participate

One of the most commonly misunderstood aspects of HRAs involves eligibility restrictions. Here’s what you need to clarify with clients:

Class-Based Eligibility

Employers can limit HRA participation to specific employee classes. These classes must be defined by reasonable, non-discriminatory criteria such as:

• Full-time vs. part-time status
• Salaried vs. hourly
• Department or location
• Job category or title

What clients often miss: The eligibility classes must be identical to those used for the group health plan. If an employee is eligible for the health plan, they’re eligible for the HRA. You cannot offer the health plan to all full-time employees but limit the HRA to only management—that’s discriminatory.

Waiting Periods

Employers can impose waiting periods before new hires become eligible for an HRA. However, the waiting period rules are complex:

• The waiting period cannot exceed 90 days under the Affordable Care Act
• The waiting period for the HRA must align with the group health plan’s waiting period
• How you count the 90 days matters—calendar days, hours of service, or employment conditions

I always recommend clients keep waiting period documentation meticulous. When an audit occurs, waiting period compliance gets scrutinized closely.

Part-Time Employee Considerations

This is where I see real confusion. Many small business owners think they can exclude part-time employees entirely from HRAs to control costs. The reality is more nuanced:

If part-time employees are offered the group health plan, they must be offered the HRA on the same terms. If you exclude part-time employees from both, that’s acceptable. But you cannot offer selective benefits to part-time workers.

Coverage Coordination and Contribution Limits

When integrating an HRA with a health plan, contribution limits matter significantly.

The Key Rule

An HRA cannot reimburse expenses already covered by another plan at a lower cost-sharing rate. For example:

If the group health plan covers preventive care at 100% (no copay), the HRA cannot reimburse a $20 preventive care copay—because the group plan covers it fully. The HRA reimbursement would essentially create out-of-pocket costs where none exist under the primary plan.

Practical application: Many clients use HRAs to reimburse deductibles and coinsurance under high-deductible health plans (HDHPs). This is compliant because the group plan doesn’t cover these costs—the HRA fills the gap.

Annual Contribution Limits

While HRAs don’t have statutory contribution caps like HSAs ($4,150 for individual coverage in 2024), the contributions must be reasonable and documented. The IRS looks at whether contributions create a discrimination issue—for instance, if owners receive substantially more HRA funding than rank-and-file employees.

Common Misconceptions Worth Addressing

Misconception #1: “We can use an HRA instead of a group health plan to save money”

Reality: No. An HRA is supplemental, not a replacement. Without an integrated health plan, the HRA fails compliance testing.

Misconception #2: “We can offer different HRA amounts to different employees at will”

Reality: Contribution amounts must follow non-discrimination rules. You can’t pay owners $5,000 in HRA funding while giving employees $500.

Misconception #3: “Employees own the HRA money like an HSA”

Reality: The employer owns the HRA and any unused balance. Upon termination or year-end, unused funds revert to the employer (unless the plan document specifies carryover).

Misconception #4: “Our HRA replaces health insurance deductibles”

Reality: An HRA supplements cost-sharing but doesn’t eliminate the deductible. The employee still has a health plan with defined cost-sharing; the HRA helps pay those costs.

Documentation and Compliance: What Advisors Should Verify

When implementing or reviewing an HRA for a client, verify these documents exist:

• HRA Plan Document – Clearly defines eligibility, contribution amounts, covered expenses, and integration method
• Summary of Benefits and Coverage (SBC) – Shows how the HRA and health plan coordinate
• Eligibility Determination – Documents which employees qualify and when
• Integration Documentation – Explicitly states which health plan(s) the HRA integrates with

My recommendation: Don’t assume the previous advisor or broker left this documentation in order. I’ve walked into situations where clients had an HRA with no written plan document—just a vague verbal understanding. That’s a compliance disaster waiting to happen.

Red Flags That Suggest Compliance Issues

Watch for these warning signs when reviewing a client’s HRA:

• No written HRA plan document exists
• HRA eligibility differs from health plan eligibility
• Contributions vary significantly among employees without a documented, defensible reason
• The HRA is the only health coverage offered
• No one can clearly explain how the HRA integrates with the health plan
• The client hasn’t reviewed the HRA in over two years

Conclusion

HRA compliance doesn’t have to be complicated, but it requires clarity. As advisors, our role is to demystify how HRAs work, set realistic expectations about their benefits, and ensure our clients implement them correctly from day one.

The cost of non-compliance—penalties, required corrections, and remediation—far exceeds the upfront investment in proper setup and documentation. When you’re confident in your client’s HRA structure, you’re protecting their business and their employees’ benefits.

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Nexus Benefit Solutions is an independent employee benefits advisory firm based in West Michigan. Questions? Reach out at jason@nexusbenefitsolutions.com or call 616-425-9740.