HRA Fundamentals: Types, Rules, and When to Recommend Them

Health Reimbursement Arrangements (HRAs) represent one of the most flexible and underutilized tools in the small business benefits toolkit. As benefits advisors, we’ve found that many business owners don’t fully understand how HRAs work, which types exist, or when they make strategic sense for their organization. This guide breaks down HRA fundamentals so you can confidently evaluate whether an HRA is right for your clients.

What is an HRA and How Does It Work?

An HRA is an employer-funded benefit arrangement that reimburses employees for eligible medical expenses on a tax-free basis. Unlike a typical health insurance plan, an HRA is not insurance itself—it’s a reimbursement mechanism that the employer controls and funds.

Here’s the basic structure:

• Employer establishes a budget: The company decides how much to contribute annually per employee (or per employee class)
• Employee incurs expenses: Employees pay out-of-pocket for eligible medical costs
• Employee submits claims: Workers submit receipts and documentation for reimbursement
• Tax-free reimbursement: Eligible expenses are reimbursed tax-free to the employee, and the employer receives a tax deduction

The IRS defines eligible expenses broadly in IRC Section 213(d), which includes health insurance premiums, copays, deductibles, prescriptions, dental, vision, and many other medical services.

What makes HRAs particularly attractive is the employer’s ability to control costs and design. You set the annual contribution amount, determine which employees are eligible, and specify the claims process.

The Three Main Types of HRAs

Understanding the distinctions between HRA types is critical for proper recommendations.

Traditional HRA (Integrated HRA)

A Traditional HRA is integrated with a group health insurance plan. Employees must be enrolled in the employer’s health insurance to participate in the HRA.

Key characteristics: - Employees must have qualifying group coverage - HRA reimburses out-of-pocket costs above the group plan - Often used to cover deductibles, copays, and coinsurance - Coordination of benefits rules apply - Subject to HIPAA, ERISA, and ACA compliance

When it works well: - Companies offering group health insurance who want to reduce employee out-of-pocket costs - Employers seeking to attract talent by supplementing a higher-deductible plan - Organizations looking to control overall healthcare spending predictably

Example: A company offers a $2,000 individual deductible plan and funds a $1,500 HRA. Employees can use HRA funds to cover deductibles, coinsurance, and copays under the group plan.

Standalone HRA (Also Called Excepted Benefit HRA)

A Standalone HRA operates independently—employees don’t need group health insurance to participate, though they typically must have individual coverage (often ACA marketplace plans).

Key characteristics: - No group health insurance requirement - Can reimburse individual health insurance premiums and eligible medical expenses - Subject to specific notice requirements - More limited in scope than Traditional HRAs - Relatively new regulatory pathway (formalized by IRS guidance in recent years)

When it works well: - Small companies that want to help employees purchase individual plans - Organizations with high employee turnover - Remote-first companies with geographically dispersed teams - Employers wanting to exit the group insurance market entirely

Example: A 10-person company discontinues its group plan and establishes a Standalone HRA with a $4,000 annual contribution. Employees use funds to reimburse individual ACA marketplace premiums and out-of-pocket medical costs.

Individual Coverage HRA (ICHRA)

ICHRA is a newer model introduced by IRS regulations in 2019 and finalized in 2020. It represents a significant shift in how employers can approach healthcare benefits.

Key characteristics: - Employees purchase their own individual health insurance (ACA marketplace or off-exchange) - Employer provides a monthly ICHRA allowance for reimbursement - Employees choose their own coverage and providers - Highly flexible and portable - Subject to notice and eligibility rules - Cannot be integrated with group coverage

When it works well: - Employers wanting to move away from one-size-fits-all group plans - Companies with diverse workforce needs (some with spouses, others without) - Organizations prioritizing employee choice and customization - Businesses seeking to reduce administrative burden of managing group coverage - Remote and hybrid companies with employees across multiple states

Example: A 25-person company establishes an ICHRA with monthly allowances of $400/individual and $800/employee+family. Each employee selects marketplace coverage that works for their situation. The company reimburses monthly via the ICHRA.

Critical Compliance Rules for Each Type

Understanding compliance is non-negotiable for advisors recommending HRAs.

Traditional HRA requirements: - Must be written plan with plan document and summary plan description - Subject to ACA preventive care mandate - Must comply with COBRA notification - Annual claims substantiation required - Cannot have lifetime or annual limits on essential health benefits - Must coordinate properly with group insurance

Standalone HRA requirements: - Must provide required notices (including information about ACA marketplace) - Cannot be offered in conjunction with group health coverage (with exceptions) - Requires careful notice timing and format compliance - Dollar limits apply ($1,900 individual / $3,850+ family in 2024, with indexing)

ICHRA requirements: - Must issue required notices before open enrollment - All eligible employees must receive uniform allowances (though amounts can vary by class) - Cannot condition participation on enrollment in specific plan types - Must allow employees at least 60 days enrollment opportunity - State-specific variations may apply - Cannot be offered alongside group health coverage to same employees

The regulatory environment around HRAs continues to evolve. The Department of Labor and IRS have released significant guidance in recent years, so staying current on notices and proposed rules is essential for advisors.

Decision Framework: When to Recommend Each Type

Recommend Traditional HRA When:

• Client offers group health insurance and wants to make it more affordable
• The organization has meaningful claims data showing specific out-of-pocket patterns
• Risk mitigation is a priority (employer controls total spend per employee)
• Compliance expertise exists in-house or with trusted advisors
• Workforce is relatively stable

Recommend Standalone HRA When:

• Client wants to exit the group insurance market but keep some health benefit offering
• Employees have diverse coverage needs
• Company is small (under 20 employees) with limited administrative capacity
• All employees already have or can easily obtain individual coverage
• Cost predictability matters

Recommend ICHRA When:

• Client prioritizes maximum employee choice and flexibility
• Workforce is geographically diverse or remote
• Organization wants to shift from employer-driven to employee-driven benefits
• Administrative burden of managing group plans is significant
• Employees vary widely in coverage needs (some with spousal coverage elsewhere, etc.)

Common Mistakes to Avoid

In our experience advising small business owners, we see these pitfalls repeatedly:

1. Unclear plan documentation: “Informal” HRA arrangements don’t meet compliance standards. You need written plans.

2. Misunderstanding the integration rules: Traditional HRAs integrated with group coverage have strict coordination-of-benefits rules that many employers mishandle.

3. Insufficient notice and communication: ICHRA requires careful timing and content in required notices. Missing these creates liability.

4. Confusing HRAs with HSAs: These are separate tools with different rules. An HDHP with HSA is not the same as an HRA.

5. Inadequate recordkeeping: You must document claims, substantiation, and eligibility determinations. Many small employers struggle here.

Next Steps for Your Implementation

If you’re considering an HRA for a client:

1. Assess their current situation: What coverage do they have? What are pain points?

2. Model the financial impact: Compare costs and employee out-of-pocket under different HRA scenarios

3. Evaluate administrative capacity: Do they have HR infrastructure to handle claims and compliance?

4. Review compliance requirements: Ensure they understand ongoing obligations

5. Document everything: Create written plan documents before implementation

6. Communicate clearly: Employees need clear guidance on how the HRA works and how to submit claims

Conclusion

HRAs offer genuine flexibility and cost control that few other benefits tools provide. However, they’re not a one-size-fits-all solution. The right recommendation depends on your client’s specific situation, workforce composition, and organizational priorities.

As advisors, our role is to understand these nuances deeply enough to guide clients toward the approach that actually improves their benefits picture—not just the flashiest or newest option.

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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.