Quick answer: An HRA is an employer-funded account that reimburses employees tax-free for qualified medical expenses and health insurance premiums. The employer sets an annual allowance, employees purchase their own coverage or pay medical bills, then submit receipts for reimbursement up to the limit. The business deducts the reimbursements; employees receive them tax-free. No premiums, no minimum group size requirements (for ICHRA), and the employer controls costs precisely.
The Three Main Types of HRA
QSEHRA (Qualified Small Employer HRA): For businesses with fewer than 50 employees that don't offer group health. 2024 limits: $6,150/individual, $12,450/family. Employees must have qualifying health coverage to participate. ICHRA (Individual Coverage HRA): Available to any size employer; no contribution limits; employees must be enrolled in individual health insurance. Can be offered to different classes of employees at different levels. Integrated HRA: Only available alongside a group health plan; used to reimburse deductibles and out-of-pocket costs. ICHRA has become the most flexible option for small business owners wanting to offer health benefits without the administrative burden of a traditional group plan.
Why Small Businesses Use HRAs Instead of Group Insurance
Traditional group health insurance requires a minimum participation rate, locks you into a fixed plan structure, and has unpredictable renewal increases. An ICHRA lets each employee choose their own ACA marketplace plan — selecting coverage that fits their family situation — while the employer provides a defined monthly allowance ($400–$800/person is common). The employer's cost is fixed and predictable. Employees with marketplace plans may also be eligible for premium tax credits, though only on the portion of premiums not reimbursed by the ICHRA. For a 5-person business paying $800/month per employee, that's $48,000/year in tax-deductible health benefits with zero administrative hassle compared to group coverage.
S-Corp Owners and HRA Participation
More-than-2% S-corp shareholders cannot participate in an HRA on a tax-free basis — the same restriction that applies to most tax-advantaged benefits in an S-corp. The health insurance premium deduction for 2%+ shareholders must instead go through the W-2 inclusion / self-employed health insurance deduction route (Form 1040, Schedule 1). This is an important planning consideration: if you're setting up an ICHRA for your employees, your own health costs are handled separately. Work with a CPA to ensure you're claiming your self-employed health insurance deduction correctly and that your HRA plan document excludes 2%+ shareholders to avoid compliance issues.
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