HRA Administration Services: Employer Guide | CafeHealth
What is Health Reimbursement Arrangement (HRA)?
An HRA, or Health Reimbursement Arrangement, is a benefit where your company sets aside a fixed dollar amount each year and reimburses employees tax-free for medical expenses or individual health insurance premiums. You decide the budget. Employees submit receipts or pay premiums, and they get reimbursed up to whatever limit you set. No insurance company sits in the middle deciding your rates every year, and you never pay out more than you've budgeted. That's the whole idea in one paragraph, but the details matter a lot, especially if you want to stay compliant with the IRS and the Department of Labor. This guide walks through how HRAs work, which type fits your company, what they cost, and what day-to-day administration actually looks like.
What Is an HRA and How Does It Actually Work?
An HRA is not an account like a bank account. There's no pile of cash sitting somewhere with an employee's name on it. It's a promise from your company to reimburse, up to a set dollar limit, for eligible expenses like doctor visits, prescriptions, dental work, or individual health insurance premiums. Because it's employer-funded, you decide the annual allowance, and unused funds usually stay with the company rather than becoming an employee's personal cash-out.
Here's the basic flow: you set a plan year allowance, say $4,000 for an employee. The employee pays for a covered expense out of pocket, or pays their monthly premium if the HRA is designed for that. They submit proof, usually a receipt or an Explanation of Benefits. A third-party administrator reviews it against IRS rules for what counts as a qualified medical expense under IRC Section 213(d), and if it checks out, the employee gets reimbursed, tax-free to them and tax-deductible to you as a business expense. That tax treatment is the whole reason employers like HRAs over just handing out taxable raises.
What Are the Different Types of HRAs I Can Offer?
This is where most employers get stuck, because the IRS and Department of Labor have created several flavors of HRA over the years, each with different rules about who's eligible and how much you can contribute. Picking the wrong one can create compliance headaches down the road, so it's worth understanding the differences before you commit.
QSEHRA (Qualified Small Employer HRA)
Built for businesses with fewer than 50 full-time employees that don't offer a group health plan. Employees use QSEHRA funds to buy individual coverage on the marketplace and get reimbursed for premiums and other medical costs. For 2025, the IRS caps annual reimbursements at $6,350 for self-only coverage and $12,800 for family coverage, per IRS Revenue Procedure 2024-25. Those numbers get adjusted for inflation most years, so always check the current figure before setting your plan design.
ICHRA (Individual Coverage HRA)
ICHRA has no employer size limit and no dollar cap set by the IRS, which makes it the most flexible option. You can offer it to some employee classes and not others, full-time versus part-time, salaried versus hourly, and vary the contribution amount by age and family size within the same class. Employees use the funds to buy their own individual marketplace or off-exchange plan.
GCHRA / Integrated HRA
This one only works alongside a traditional group health plan. It's often used to reduce deductibles or cost-sharing for employees enrolled in the group plan, sometimes called a deductible gap HRA.
Excepted Benefit HRA (EBHRA)
Designed to pair with a group plan even if the employee declines to enroll in it, covering things like dental, vision, or COBRA premiums. For 2025, the maximum annual contribution is $2,150, per IRS Revenue Procedure 2024-25.
●QSEHRA: for employers under 50 employees with no group plan
●ICHRA: for employers of any size, works alongside individual market coverage
●GCHRA: supplements an existing group health plan
●EBHRA: covers limited excepted benefits, capped contribution
What's In It for Me as an Employer?
The appeal of an HRA comes down to three things: cost predictability, tax treatment, and design flexibility. With a traditional group plan, your premium can jump 8%, 10%, sometimes 15% at renewal, and you have almost no say in it. With an HRA, especially ICHRA, you set the contribution amount and it doesn't move unless you decide to change it. That makes budgeting for benefits a lot less stressful, particularly for smaller companies that get hit hardest by group plan renewal shocks.
Contributions are generally deductible as an ordinary business expense, and reimbursements employees receive for qualified medical expenses are tax-free to them, so there's no payroll tax hit on either side. That's a meaningfully different tax picture than giving someone a taxable stipend to go buy their own coverage.
Design flexibility is the other big draw. You can vary contributions by employee class under ICHRA, structure a QSEHRA for a lean startup budget, or layer an EBHRA on top of a skinny group plan to sweeten the deal without a full plan redesign. None of that is possible with a one-size-fits-all fully insured group plan.
What Compliance Boxes Do I Need to Check?
HRAs are welfare benefit plans under ERISA, and that comes with paperwork whether you like it or not. The Department of Labor's Employee Benefits Security Administration expects most employer HRAs to have a written plan document and a Summary Plan Description that employees can actually read and understand, not just a memo from HR.
●Plan document: spells out eligibility, contribution amounts, reimbursement rules, and claims procedures
●Summary Plan Description (SPD): the employee-facing explanation of the plan, required under ERISA Section 102
●Form 5500: generally required annually once a plan has 100 or more participants at the start of the plan year, per DOL EBSA guidance; smaller unfunded plans are often exempt
●ACA affordability rules for ICHRA: if you're an applicable large employer, the ICHRA contribution needs to make the lowest-cost silver plan "affordable" relative to the employee's household income, using the IRS's annual affordability percentage, set at 9.02% for 2025 under IRS Revenue Procedure 2024-35
There's also the HSA coordination question, which trips up a lot of employers. A general purpose HRA is not compatible with HSA eligibility unless it's structured as a limited-purpose or post-deductible HRA. If your employees are contributing to HSAs and you layer on a general HRA that reimburses first-dollar medical expenses, you can accidentally disqualify them from HSA contributions for the year. This is exactly the kind of detail a competent administrator should be flagging before it becomes a mid-year mess.
How Does Day-to-Day HRA Administration Actually Work?
Setting up the plan document is step one. Running the plan month after month is where most of the real work, and most of the mistakes, happen. A properly administered HRA generally follows this cycle:
1.Enrollment: employees are notified of their allowance and how to submit claims or premium documentation
2.Claims substantiation: every reimbursement request has to be checked against IRS rules for qualified medical expenses under Section 213(d), which means reviewing receipts, EOBs, or premium invoices, not just rubber-stamping requests
3.Reimbursement processing: approved claims get paid out, usually via direct deposit, on a regular schedule
4.Ongoing communication: employees need reminders about deadlines, run-out periods, and what documentation actually qualifies
5.Reporting: employers need visibility into utilization, remaining balances, and year-end totals for tax and compliance purposes
None of this is conceptually hard, but it's tedious and unforgiving. A missed substantiation step can turn a tax-free reimbursement into taxable income for the employee, and inconsistent record-keeping is exactly what gets flagged in a DOL audit. This is the part of the job most in-house HR teams underestimate until they're three months into running it themselves.
How Much Does All This Cost to Run?
Beyond the reimbursement dollars themselves, there's an administrative cost to running any HRA correctly. Most employers pay a per-employee-per-month (PEPM) administration fee to a TPA, which typically covers plan document drafting, claims processing, compliance monitoring, and employee support. That fee is usually a lot less than the internal cost of an HR person spending hours each month chasing receipts and answering questions, and it's far less than the cost of getting an IRS or DOL compliance issue wrong. Compare that to a fully insured group plan, where administrative costs are baked invisibly into your premium and you have zero say in how they're spent.
Why Work With a TPA Like CafeHealth Instead of DIY?
You can technically run an HRA yourself with a spreadsheet and good intentions. Plenty of small employers try. What usually happens is claims substantiation gets sloppy, the plan document doesn't get updated when IRS limits change, and nobody notices the HSA-eligibility conflict until an employee's HSA contribution gets flagged by their tax preparer. A dedicated TPA handles the plan document drafting, the SPD, the claims review, the reimbursement processing, and the reporting, all in one place, so you're not stitching together payroll, HR, and a benefits broker to keep the plan legal.
CafeHealth handles this full workload for employers, including plan design consultation to figure out whether QSEHRA, ICHRA, GCHRA, or EBHRA actually fits your company size and budget, not just whichever one a broker happens to sell. You can see how the service works specifically in Arizona on our HRA administration services in Phoenix page.
Is There Anything Special About Running an HRA in Phoenix or Arizona?
The federal rules, IRS limits, ERISA plan document requirements, ACA affordability percentages, apply the same whether you're in Phoenix, Boston, or anywhere else. What changes locally is the insurance marketplace your employees are shopping in if you go the ICHRA or QSEHRA route. Arizona's individual marketplace has its own carrier mix and premium levels, and that affects how far a given contribution amount actually stretches for your team. A TPA with local Arizona experience can help you set contribution amounts that are realistic for what employees will actually pay for coverage in the Phoenix market, rather than picking a number that sounds reasonable on paper but leaves employees underinsured. That local knowledge, paired with the same federal compliance work every HRA needs no matter where the employer is based, is why plenty of Arizona employers work with a Phoenix-based administrator even if they also have remote staff in other states.
If you're weighing HRA administration services for your company, whether that's a first-time QSEHRA for a five-person shop or an ICHRA rollout across multiple employee classes, it helps to talk through the actual numbers with someone who does this daily instead of guessing from a blog post. Book a free consultation with Shannon and she'll walk through your census, your budget, and which HRA type actually makes sense for your team.
Frequently Asked Questions About HRA Administration
What is a health reimbursement arrangement (HRA) and how does it work?
It's an employer-funded account-like benefit where your company sets a dollar limit each year and reimburses employees tax-free for qualified medical expenses or, in some designs, individual insurance premiums. There's no actual cash sitting in an account; it's a reimbursement promise administered against IRS rules for eligible expenses under Section 213(d).
What's the difference between an HRA, HSA, and FSA?
An HRA is fully employer-funded and the employer controls the plan design and unused funds. An HSA is an employee-owned account that requires enrollment in a qualifying high-deductible health plan, and the funds roll over and travel with the employee forever, even after they leave the job. An FSA is typically employee-funded through payroll deductions with an employer match option, and it's generally use-it-or-lose-it each plan year, subject to IRS carryover or grace period rules.
Can an employee have an HRA and an HSA at the same time?
Sometimes, but it depends on the HRA design. A general-purpose HRA that reimburses first-dollar medical expenses will typically disqualify someone from contributing to an HSA. To keep HSA eligibility intact, the HRA needs to be structured as limited-purpose (covering only dental and vision) or post-deductible (only reimbursing after the HSA-qualifying deductible is met). This is a detail worth confirming with your administrator before enrollment, not after.
How much can an employer contribute to an ICHRA or QSEHRA?
ICHRA has no IRS-imposed dollar cap, so you set the contribution amount based on your budget and employee classes. QSEHRA does have a cap: for 2025 that's $6,350 for self-only coverage and $12,800 for family coverage, per IRS Revenue Procedure 2024-25. These limits typically adjust for inflation each year, so double check the current figure before finalizing your plan.
Do small businesses need a third-party administrator to offer an HRA?
Legally, no one requires you to hire a TPA. Practically, most small businesses do, because running claims substantiation, plan documents, and ERISA reporting correctly takes real time and specialized knowledge most HR teams don't have sitting around. The cost of a TPA is usually much lower than the cost of an employee losing tax-free reimbursement status or an employer facing a DOL compliance question because the paperwork wasn't kept up.
What happens to unused HRA funds at the end of the plan year?
That depends entirely on how you design the plan. Employers can choose to let unused amounts roll over to the next plan year, cap the rollover amount, or have funds simply expire at year-end. Whatever you decide has to be spelled out clearly in the plan document so employees know the rule going in, not after they've lost access to money they thought they still had.
