How Does a Health Reimbursement Arrangement Work for a Small Business?

A health reimbursement arrangement (HRA) lets an employer reimburse employees for certain healthcare costs under a defined set of rules. Instead of choosing and paying for one group health plan, a small business may set a monthly allowance and reimburse eligible employees for qualifying expenses, such as individual health insurance premiums or other eligible healthcare expenses—depending on the type of HRA.

That flexibility can be useful when a company is too small for a group plan, has employees in different locations, or wants to set a more predictable benefits budget. But an HRA is not simply “give employees cash for medical bills.” The arrangement must follow federal rules, and the details affect who can participate, what the employer can reimburse, and how employees document expenses.

Before comparing prices, ask the practical question I always start with: Who is in-network for our employees’ ZIP codes? A plan that looks affordable on paper can be a poor benefit if employees’ doctors and nearby hospitals are out of network—or if remote employees have different network options.

Why Small Businesses Look Beyond the Public Marketplace

The public health insurance marketplace exchange is primarily a place for individuals and families to shop for their own coverage. Employees can compare available plans, check whether their doctors are in network, and find out whether they qualify for income-based premium tax credits. Employers can also use the Small Business Health Options Program (SHOP) in some states and circumstances, though plan availability and requirements vary.

For a small employer, the marketplace is not always a single, straightforward group-benefits solution. A business may find that:

Available individual plans vary by employee ZIP code, making one company-wide plan difficult.
Group-plan contributions and participation requirements may be hard to meet with a small, changing workforce.
Premiums may be difficult to budget when the employer is expected to contribute a set share of each employee’s coverage.
Employees have different doctors, prescription needs, family situations, and preferences.
Remote employees live in areas where the employer’s preferred group plan has a narrow or unfamiliar network.

An HRA can give an employer a fixed contribution budget while allowing employees to choose their own individual coverage. That does not automatically make it better than group insurance. Individual plans can have different networks, deductibles, and out-of-pocket limits, and an employee’s available choices depend on where they live. The right comparison is between actual plan options and employee needs—not just the monthly premium.

What Is a Health Reimbursement Arrangement?

A health reimbursement arrangement is an employer-funded benefit that reimburses employees for qualified medical expenses, subject to the rules of the particular HRA. Employees generally submit documentation showing that an expense was incurred and that it qualifies under the plan. The employer or its administrator reviews the claim and reimburses it if it meets the plan’s requirements.

Unlike a health savings account, an HRA is not an employee-owned account. The employer sets up and funds the arrangement, establishes its terms within the rules that apply, and decides how to administer claims. Employees do not contribute salary deductions to fund the HRA, and they cannot withdraw money for any purpose they choose. Reimbursement is generally tax-free when the arrangement and claim meet applicable requirements.

Two arrangements commonly considered by small employers are the Qualified Small Employer HRA (QSEHRA) and the Individual Coverage HRA (ICHRA). They are different benefits with different eligibility, contribution, and interaction rules.

Feature QSEHRA ICHRA Designed for Generally, eligible small employers that do not offer a group health plan Employers of various sizes that want to reimburse individual coverage Employer allowance Subject to annual federal contribution limits No federal annual contribution cap, though the employer sets the allowance Employee coverage Employees generally need minimum essential coverage for reimbursements to be tax-free Employees generally must have qualifying individual health insurance coverage or Medicare, as applicable Group plan relationship Cannot be offered alongside a group health plan by the same employer May be offered alongside a group plan to different employee classes, subject to class and other rules

This table is a starting point, not a complete eligibility checklist. Federal limits can change each year, and rules may depend on employer size, employee class, and other benefits offered. Have a qualified benefits professional or tax adviser confirm which arrangement fits before you promise a benefit.

How HRA Reimbursement Works in Practice

In a typical setup, the employer chooses an HRA type, establishes its written plan, sets an allowance, and determines how claims will be handled. The allowance is a maximum—not necessarily a payment employees receive automatically. Employees submit eligible claims, and the employer reimburses approved expenses up to the available allowance.

Choose the arrangement. Decide whether a QSEHRA or ICHRA is an option based on the company’s size, current benefits, workforce, and goals.
Set the terms. Establish the monthly or annual allowance and define which expense categories the plan covers, within the applicable rules.
Give employees required information. Provide notices and plan documents on time, and explain how the benefit works before employees select coverage.
Employees select coverage. Employees can compare available individual plans, including plans on the public marketplace exchange, with attention to network, cost sharing, and premium.
Verify coverage and expenses. Employees provide required proof of coverage and documentation for claims. The precise process depends on the HRA.
Reimburse approved claims. The employer or a third-party administrator processes eligible claims up to each employee’s available allowance.

For example, a business might offer an employee a monthly allowance of $400. If the employee submits $350 in approved expenses for that month, the employer reimburses $350—not the full $400 automatically. Whether unused amounts carry forward, and how they are treated at year-end or when employment ends, depends on the plan’s terms and applicable rules.

What Counts as Eligible Healthcare Expenses?

Eligible healthcare expenses depend on the HRA type and the employer’s plan terms. Some arrangements may reimburse individual health insurance premiums as well as other qualified medical expenses; others may limit reimbursement to a narrower set of costs. Expenses commonly addressed in plan documents can include premiums, deductibles, copayments, prescription drugs, and certain medical services or supplies. Not every healthcare-related purchase automatically qualifies.

Employees should not assume that an expense is eligible just because they paid for it out of pocket. The plan administrator may require an itemized receipt, an explanation of benefits, proof of premium payment, or other documentation. A claim may be denied if it is outside the plan’s coverage, lacks adequate substantiation, or exceeds the available allowance.

Small-Group Plan Eligibility and Participation Rules

Before deciding that an HRA is the only option, check whether the business can obtain small-group coverage. Eligibility definitions, minimum employer contributions, and employee participation rules can depend on state law, carrier rules, and the way the group is classified. A company may need to meet rules about how many eligible employees enroll or how much of the premium the employer pays. Some employees may be join chamber for health insurance excluded from participation calculations under specific circumstances, but the details are not universal.

Ask a broker or carrier to confirm the rules for your state and the exact business—not just describe a typical case. In particular, clarify:

Which owners and employees count as eligible group members?
Are part-time, seasonal, waiting-period, or recently hired employees treated differently?
What minimum employer contribution is required?
What enrollment percentage or participation threshold applies?
How are employees with other coverage, such as a spouse’s plan, counted?
Are the rules different during open enrollment or for a newly formed group?

Do not wait until the end of shopping to ask these questions. Participation rules can determine whether a group plan is available at all, and they can change the comparison between group coverage and an HRA.

Broker vs. Direct-to-Carrier Shopping

A broker can help compare carriers, explain enrollment requirements, and flag differences in networks and plan design. For a small employer with little time to research benefits, a broker can also help coordinate quotes and enrollment. Ask how the broker is compensated, which carriers they represent, and whether they can compare an HRA with small-group coverage rather than steering the conversation toward one option.

Shopping directly with a carrier can be useful if you already know which insurers are relevant locally or want a second quote. A direct conversation may give you a clear answer about that carrier’s products, but it may not provide a complete comparison across the market. In either case, ask for the plan documents and verify provider networks for each employee’s ZIP code. Network directories can be incomplete or change, so confirm with both the insurer and the provider before enrolling.

Use a one-page comparison sheet for every carrier call. Keep the same questions in front of you so a low premium does not overshadow a narrow network, high deductible, or participation requirement.

Compare Questions to record Network Which doctors, hospitals, and pharmacies are in network for each employee’s ZIP code? Plan costs What are the premiums, deductibles, copays, coinsurance, and out-of-pocket maximums? Eligibility What employer contribution and participation rules apply? HRA administration What expenses can be reimbursed, what proof is required, and who processes claims? Employee impact How could the benefit affect marketplace premium tax credits or other coverage?

Marketplace Coverage and HRA Coordination

Employees considering individual coverage can use the public health insurance marketplace exchange to review plans and determine whether they may qualify for premium tax credits. An employer-funded HRA can affect an employee’s eligibility for those credits. The effect depends on the type of HRA, the affordability of the offer, and the employee’s circumstances. Employees should use official marketplace resources or speak with a qualified tax or benefits professional before making a decision based on an assumed subsidy.

Employers should explain the benefit clearly without telling employees which plan to buy or guaranteeing how a tax credit will apply. Provide the required HRA notices and encourage employees to compare total costs, networks, and coverage—not just the premium after an estimated subsidy.

Is an HRA a Good Fit for Your Business?

An HRA may suit a business that wants a defined benefits budget, has employees spread across different ZIP codes, or cannot make a group plan work under local participation rules. It can also give employees more choice. In exchange, the employer takes on plan setup, notice, substantiation, and ongoing administration—and employees must navigate individual plan options themselves.

Before choosing, compare at least three practical scenarios: a small-group plan, a QSEHRA if the business qualifies, and an ICHRA if its rules fit the workforce. Estimate employer costs and employee costs separately. Review actual networks, confirm eligibility and participation rules, and ask how reimbursement claims will be handled.

The best benefit is not automatically the cheapest one. It is the option employees can use, the company can administer, and the business can afford consistently. A written comparison and a careful review of eligible healthcare expenses, HRA reimbursement procedures, and marketplace interactions will make the decision far less guesswork-driven.

Keep Up with Reliable Benefits Information

For current federal guidance, start with official sources such as the IRS, the U.S. Department of Labor, and HealthCare.gov, and https://bizzmarkblog.com/employee-eligibility-for-health-benefits-what-counts-as-eligible/ confirm state-specific insurance requirements with your state insurance department or a licensed benefits professional. If you use Google, you can follow or add trusted publications through Google’s “Preferred Sources” prompt when it appears in Search. Treat that as a way to surface sources you choose—not as a substitute for checking the original guidance, especially when contribution limits or rules may have changed.