What is a Health Reimbursement Account (HRA)?
For business owners looking to control healthcare costs while still providing meaningful benefits, the Health Reimbursement Account (HRA) can be a powerful option. Unlike other accounts such as HSAs and FSAs, HRAs are fully employer-funded and designed to reimburse employees for medical expenses.
But how do HRAs work, and why might they be the right choice for your company? Let’s explore.
Introduction to HRAs
A Health Reimbursement Account (HRA) is an employer-funded benefit that reimburses employees for qualified medical expenses and, in some cases, insurance premiums. Unlike HSAs or FSAs, employees cannot contribute to HRAs—funding comes entirely from the employer.
How Does a Health Reimbursement Account Work?
Employer-Funded Benefit
Employers set aside a specific allowance of tax-free money each year that employees can use for healthcare costs.
Eligible Expenses
HRAs can cover a wide range of medical expenses, including:
- Deductibles and copays
- Prescription medications
- Vision and dental care
- Health insurance premiums (depending on the type of HRA)
Different Types of HRAs
- Qualified Small Employer HRA (QSEHRA): For businesses with fewer than 50 employees.
- Individual Coverage HRA (ICHRA): Allows businesses to reimburse employees for individual health insurance premiums.
- Group Coverage HRA: Pairs with a traditional group health plan to cover additional expenses.
Why Business Owners May Choose an HRA Plan
Cost Containment
HRA’s can be used by Employers to control costs of their benefits package while limiting employee’s financial exposure. HRAs can be paired with higher deductible health plans to decrease the overall plan cost to the employer while delivering the same financial protection to employees by reimbursing them for a portion of their deductible or out of pocket maximum. Employers benefit from the lower monthly premiums and employees still maintain lower financial risk when reimbursed by the HRA.
Flexibility in Plan Design
Employers decide how much to contribute and what expenses qualify, giving them more control.
Tax Advantages for Employers
Contributions are tax-deductible for the business and tax-free for employees when used on eligible expenses.
Boosting Employee Recruitment and Retention
Offering an HRA demonstrates commitment to employee health and helps small to mid-sized businesses stay competitive in attracting top talent.
Advantages of an HRA
- Employer Control and Flexibility – Employers decide funding amounts and eligible expenses.
- No Employee Contributions Required – All funds are provided by the employer.
- Tailored Benefits – Employers can design different allowances for different groups of employees.
Disadvantages of an HRA
- Employer-Only Funding – Employees cannot contribute their own money.
- Complexity in Administration – HRAs often require careful recordkeeping and compliance with IRS rules.
- Limited Portability for Employees – Funds generally don’t move with employees when they change jobs.
HRAs vs. HSAs vs. FSAs
| Feature | HRA | HSA | FSA |
| Funding Source | Employer only | Employer & Employee | Employer & Employee |
| Ownership | Employer | Employee | Employer |
| Portability | No | Yes | No |
| Contribution Limits | Employer-defined | $4,150 / $8,300 (2025) | $3,200 (2025) |
| Investment Options | No | Yes | No |
FAQs About Health Reimbursement Accounts
1. Who funds an HRA?
HRAs are entirely employer-funded employees cannot contribute.
2. Can HRAs cover insurance premiums?
Yes, certain types of HRAs, like ICHRAs and QSEHRAs, allow reimbursement for premiums but traditional HRAs do not.
3. What happens if an employee doesn’t use all HRA funds?
Unused funds may roll over depending on the employer’s plan design.
4. Are HRA reimbursements taxable?
No, reimbursements for qualified expenses are tax-free for employees.
5. Can HRAs work for small businesses in Arkansas?
Absolutely—HRAs are favored by small businesses because of the savings they deliver employers and protection provided to employees.
6. How can a business know if HRAs are the right choice?
Consulting with an employee benefits expert is the best way to evaluate if an HRA fits your goals and budget.
Conclusion
A Health Reimbursement Account (HRA) is a flexible, tax-advantaged way for employers to support their employees’ healthcare needs while keeping costs under control.
If you’re a business owner in Arkansas, now’s the perfect time to explore your options. Contact Stepka and Associates today to speak with an expert and find out if an HRA-compatible health plan is the right choice for your business.