How Small Employers Use HRAs to Cut Benefit Costs

Cut benefit costs while keeping coverage accessible

Small payrolls shouldn't force you to drop employee health benefits. HRAs let employers control benefit spending while keeping employees covered.

According to the IRS, a Health Reimbursement Arrangement (HRA) is an employer-funded, tax-advantaged plan that reimburses employees for qualified medical expenses.

IRS guidance for small-employer HRAs explains that employers own and fund these accounts. Employees may not contribute their own pre-tax dollars to an HRA.

Read on to learn which HRA types suit small firms, practical budgeting and design tactics, and a simple implementation checklist.

Match an HRA to your workforce and budget

Not every HRA fits every small business. The choice turns on whether you already offer a group health plan and how much design flexibility you need.

The Qualified Small Employer HRA, or QSEHRA, is built for very small employers. IRS guidance says QSEHRAs are available only to employers with fewer than 50 full‑time equivalent employees. They must be used by employers that do not offer a traditional group health plan. QSEHRAs reimburse individual premiums and qualified medical expenses and require uniform contributions across eligible employees. IRS on QSEHRA

An Individual Coverage HRA, or ICHRA, works for employers of any size. It reimburses individual insurance premiums and lets you set different allowance levels for bona fide employee classes, like full‑time versus part‑time or by location. There is no IRS‑mandated contribution cap, so ICHRAs scale as you grow. IRS on ICHRA

Excepted Benefit HRAs are designed to top up a traditional group plan. They typically cover limited‑scope benefits such as dental and vision and must be offered alongside a group health plan. IRS on EBHRA

A Group Coverage HRA must be integrated with your employer’s group health plan. It helps employees pay out‑of‑pocket costs like deductibles, copays, and coinsurance. IRS on Group Coverage HRAs

• QSEHRA: Simple and low administrative burden, but only for employers with fewer than 50 FTEs that do not offer a group plan.
• ICHRA: Very flexible and scalable, since you can vary allowances by employee class and face no IRS contribution cap.
• EBHRA: Useful to add dental or vision on top of a group plan, but it cannot replace that group coverage.
• Group Coverage HRA: Best when you want to directly lower employees' out‑of‑pocket costs under your existing plan.
• Compliance note: Most HRAs count as group health plans and can trigger ERISA, ACA market rules, or COBRA; QSEHRA has limited statutory exceptions. Department of Labor on ERISA and health plans

Want practical setup tips and admin checklists for any of these HRAs? See our detailed guide for small employers on HRA design and implementation. What small employers should know about HRAs today

Cap your liability and forecast savings with a defined‑contribution HRA

Want to stop unpredictable premium hikes from wrecking your benefits budget? Switching to a defined contribution HRA lets you cap monthly or annual employer liability.

Contributions are employer-funded and generally tax-deductible, while employee reimbursements for qualified expenses are usually tax-free. The IRS explains HRAs are tax‑advantaged when properly designed and administered. IRS on ICHRA and HRAs

Picking contribution levels that fit your budget

Start by treating benefits as a defined contribution line item you control. A firm allowance gives you a predictable monthly cost instead of annual premium surprises.

• Set a firm monthly or annual allowance so your maximum liability is known.
• Use employee classes to vary allowances by role, hours, or location while following same‑terms rules.
• Document eligibility and qualifying expenses, and use a simple claims flow or a TPA for secure, compliant administration.
• See concrete budgeting examples in our guide to small-business benefit packages for practical contribution ideas. Budget-focused benefit packages under $200

A simple ROI model to compare HRA vs. fully insured

Build a side-by-side forecast that captures fixed allowances, admin fees, and expected premium trends. That lets you see whether the HRA or a fully insured plan costs less over three years.

• Direct cost: project current fully insured spend and expected renewals, remembering recent premium trends.
• Tax savings: include payroll tax avoidance at roughly 7.65% on every HRA dollar.
• Admin and retention: compare TPA or software fees against likely savings from steadier costs and better retention.
• Demographics: younger workforces often see bigger HRA savings, while older groups may benefit from community-rated group plans.

The bottom line: an HRA replaces renewal roulette with a predictable budget line you control. Clear design, good communication, and a simple admin process help employees adopt coverage and keep your costs steady.

Implementation checklist to set up an HRA that stays compliant

Want to roll out an HRA without compliance surprises or frustrated employees? Start with a short, practical checklist so nothing important gets missed.

According to the IRS, you must pick the HRA type that fits your size and strategy, create written plan documents, and give required notices at least 90 days before the plan year.

Must-have legal documents and employee notices

• Adopt a formal written plan document that details eligibility, benefits, claims rules, and appeals procedures.
• Prepare a clear summary plan description for employees that explains how reimbursements work and any coordination with premium tax credits.
• Send required written notices on time, including the 90-day pre‑year notice for eligible employees and hire‑date notices for new hires.
• Keep records and receipts for substantiation and audits, and retain documentation per IRS guidance.

Payroll, claims rules, and vendor selection

Decide whether you will reimburse through payroll or use a TPA or software platform. Using an administrator reduces manual work and supports audit-ready records.

• Set up payroll coding to report permitted benefits properly on Form W-2 when required.
• Choose vendors with automated substantiation, mobile receipt capture, audit trails, and payroll or HRIS integration.
• Confirm the vendor understands ERISA, COBRA, HIPAA, and state rules to avoid discriminatory design or notice failures.

Communications and sample materials to prepare

Clear employee communication drives uptake and reduces confusion. Plain language and multiple formats work best.

• One‑page overview that answers what the HRA pays for and how to get reimbursed.
• Step‑by‑step reimbursement instructions with a receipt checklist and screenshots of the portal.
• FAQ addressing marketplace premium tax credits, affordability, and whether the HRA affects eligibility.
• A short welcome email and scheduled Q&A or webinar during open enrollment to handle questions live.

Follow these steps and prioritize an experienced administrator or broker. That lowers compliance risk and makes the program easy for employees to use.

Deciding if an HRA Fits Your Small Business

An HRA can be the right move when you want budget predictability, tax-advantaged employer contributions, and more flexible local plan choices for employees.

That often applies to distributed teams, high-turnover workforces, part-time staff, or employers with limited reserves.

But HRAs bring real risks you must manage. Manage substantiation, required notices, and how the HRA affects employees' marketplace premium tax credit eligibility.

Evaluate employee demographics, turnover, wage levels, and your administrative bandwidth before choosing a path. Run a three-year cost model that includes allowances, admin fees, and payroll tax savings to compare HRA and fully insured scenarios.

If you'd like help modeling options or launching an HRA, we can help. Route 66 Health Insurance & Beyond serves clients across 26 states. Call us at (312) 420-3396 or email jevans@myrt66ins.com.