Employer HRA Design and Administration

Health Reimbursement Arrangements (HRAs) are employer-funded accounts governed primarily by the Internal Revenue Service and the Departments of Labor, Health and Human Services, and Treasury. This page covers the structural design choices employers face when establishing an HRA, the administrative mechanics that govern reimbursement flows, and the regulatory constraints that define each plan variant. Understanding these boundaries is essential for employers seeking to offer tax-advantaged health benefits without inadvertently triggering excise tax liability or ACA non-compliance penalties.

Definition and scope

An HRA is a defined-contribution health benefit funded exclusively by employer dollars — employees may never contribute to an HRA (IRS Publication 969). Reimbursements made from an HRA for qualified medical expenses are excluded from the employee's gross income under Internal Revenue Code §105, and employer contributions are deductible as a business expense under IRC §162.

The scope of an HRA program is shaped by three foundational parameters set at plan inception:

Account type — which statutory variant (traditional, QSEHRA, ICHRA, or Excepted Benefit HRA) governs the plan
Eligible expense definition — whether the plan reimburses premiums, medical expenses, or both
Carry-forward and forfeiture rules — whether unused balances roll to subsequent plan years or revert to the employer

The broader framework for understanding how HRAs interact with HSAs, FSAs, and ACA market rules is documented at /regulatory-context-for-health-savings.

Employers are not required to offer any HRA, but those that do must operate under a written plan document that satisfies ERISA requirements (for employers subject to ERISA) and must distribute a Summary Plan Description to covered participants.

How it works

HRA reimbursement follows a defined five-phase cycle:

Employer establishes the plan document — specifying contribution amounts, eligible expenses, participant classes (for ICHRA), and the plan year dates. The plan document is the controlling legal instrument.
Annual employer contribution is credited — the employer sets a dollar amount per employee, per plan year. For a Qualified Small Employer HRA (QSEHRA) in 2024, the IRS caps contributions at $6,150 for self-only coverage and $12,450 for family coverage (IRS Notice 2023-75). ICHRA and traditional HRAs have no statutory contribution ceiling.
Employee incurs a qualified expense — the employee pays out of pocket for a medical service, premium, or other covered expense and retains documentation.
Reimbursement request is submitted — the employee submits an itemized receipt or explanation of benefits (EOB) to the plan administrator or third-party administrator (TPA).
Administrator reviews substantiation and issues reimbursement — approved amounts are paid tax-free; unsubstantiated claims are rejected or pended. Employers bear fiduciary responsibility for ensuring substantiation standards are met.

Unlike HSAs, HRA funds are not held in a custodial account accessible to the employee. The employer maintains a notional ledger; actual cash transfers occur only at the point of approved reimbursement.

Common scenarios

Scenario 1 — Small employer replacing group coverage with QSEHRA
An employer with fewer than 50 full-time employees that does not offer a group health plan may use a QSEHRA to fund employee individual market premiums. The employee purchases a qualifying individual plan through the ACA marketplace or directly from an insurer, submits monthly premium statements, and receives tax-free reimbursement up to the plan's annual cap. Employees must hold Minimum Essential Coverage (MEC) to participate (IRS Notice 2017-67).

Scenario 2 — Large employer segmenting workforce with ICHRA
An employer with 500 employees may offer traditional group coverage to salaried full-time workers while funding an Individual Coverage HRA (ICHRA) for part-time or hourly workers classified under a distinct employee class. Under final regulations issued by the Departments of HHS, Labor, and Treasury in 2019 (84 FR 28888), 11 permissible classes allow employers to segment offerings without violating discrimination rules — provided class minimum-size requirements are met.

Scenario 3 — Retiree-only HRA
Employers may establish a stand-alone HRA exclusively for retirees without triggering ACA market reform requirements. Retiree HRAs are explicitly exempt from the prohibition on annual dollar limits (45 CFR §147.126). Contribution levels are entirely at employer discretion and may be designed to bridge coverage between retirement age and Medicare eligibility at 65.

Scenario 4 — Excepted Benefit HRA paired with group coverage
An Excepted Benefit HRA, capped at $2,100 per year (indexed; see IRS Notice 2023-75), supplements existing group coverage by reimbursing cost-sharing or limited dental and vision expenses. Employees must be offered traditional group coverage — they need not enroll in it — and the EBHRA must be available on the same terms to all similarly situated employees.

The full taxonomy of HRA structures is outlined in the site's overview of health savings resources and detailed further at types-of-hras-qsehra-ichra-and-traditional.

Decision boundaries

Employers choosing among HRA variants must evaluate four structural constraints that determine which design is legally available:

Factor	QSEHRA	ICHRA	Traditional HRA	Excepted Benefit HRA
Employer size limit	Fewer than 50 FTEs	None	None	None
Group coverage offered	Cannot offer group plan	Can offer to other classes	Must integrate with group plan	Must offer group plan
Contribution ceiling	Statutory annual cap	None	None	$2,100/year (indexed)
Employee MEC required	Yes	Yes	Depends on plan design	No

A traditional integrated HRA — the legacy structure predating QSEHRA and ICHRA — must be offered alongside a group health plan and satisfies ACA market reform requirements only when properly integrated under HHS guidance (CMS FAQ on HRA Integration). Stand-alone traditional HRAs offered to active employees violate ACA annual limit prohibitions and expose employers to excise tax liability of $100 per affected employee per day under IRC §4980D.

Employers offering an ICHRA to employees who could otherwise qualify for ACA premium tax credits must ensure the ICHRA offer is deemed "affordable" under a safe harbor calculation tied to the employee's primary residence rating area and the lowest-cost silver plan available in that area. Failure to satisfy affordability thresholds means the employee remains eligible for marketplace subsidies, creating potential ACA employer mandate liability for employers with 50 or more full-time equivalents.

Administrative complexity scales with plan design. ICHRA programs with multiple employee classes, variable contribution amounts, and geographic premium variation typically require a dedicated TPA with integration into payroll systems. QSEHRA programs for small employers are comparatively simpler but require strict adherence to the statutory cap and prohibition on concurrent group plan offerings.

References

The law belongs to the people. Georgia v. Public.Resource.Org, 590 U.S. (2020)