HRA Administration Services for Employers | CafeHealth
A Health Reimbursement Arrangement (HRA) is an employer-funded benefit that reimburses employees tax-free for medical expenses and, in some cases, individual health insurance premiums, and HRA administration services for employers exist because running one correctly involves more paperwork, tax rules, and compliance tripwires than most HR teams have time to handle alone. You decide how much money goes in, employees submit receipts or premium invoices, and the reimbursement comes back out tax-free on both ends when it's done right. Sounds simple. The part that trips people up is picking the right HRA type, writing a compliant plan document, and keeping substantiation records straight so the IRS doesn't come knocking. This guide walks through what an HRA actually is, which flavor fits your company, what it costs versus a traditional group plan, and where outsourcing the administration to a Third Party Administrator like CafeHealth saves you from becoming an accidental compliance expert.
What Is an HRA and How Does It Actually Work?
An HRA is not insurance. It's a reimbursement account funded entirely by the employer, sitting on top of or instead of a traditional health plan. You set a contribution amount, define what expenses qualify, and employees get reimbursed after they incur eligible costs. No employee payroll deductions go into it, which is a key difference from an FSA.
Here's the basic mechanics most employers need to understand:
●The employer funds it — there's no employee contribution allowed, unlike an FSA or HSA.
●Reimbursements are tax-free to the employee when used for IRS-qualified medical expenses under Section 213(d), and they're a deductible business expense for you.
●Unused funds can roll over at your discretion, though most employers set rules limiting how much carries forward year to year.
●Substantiation is required — employees have to provide documentation (a receipt, an Explanation of Benefits, a premium invoice) before money goes out. This isn't optional; the IRS requires it to preserve the tax-free treatment.
Because the employer controls the plan design, an HRA can be layered with a high-deductible group plan to soften out-of-pocket costs, or it can stand entirely on its own and replace group coverage altogether, depending on which HRA type you choose.
What Types of HRAs Can Employers Actually Offer?
This is where most employers get stuck, because "HRA" isn't one product — it's a category with four distinct sub-types, each with its own eligibility rules and contribution caps set by the IRS.
QSEHRA (Qualified Small Employer HRA)
Built for businesses with fewer than 50 full-time equivalent employees that don't offer a group health plan at all. It lets you reimburse employees for individual health insurance premiums and out-of-pocket medical costs, tax-free, up to an annual cap. Per IRS guidance, the 2025 QSEHRA reimbursement limits are $6,350 for self-only coverage and $12,800 for family coverage, adjusted annually for inflation.
ICHRA (Individual Coverage HRA)
No employee-count limit and no reimbursement cap — you decide the allowance amount, and it can vary by employee class (full-time, part-time, salaried, by location, and more). Employees use the funds to buy their own individual marketplace or off-exchange plan. This is the most flexible option and increasingly popular with mid-size and larger employers who want to get out of the group-plan renewal cycle.
Excepted Benefit HRA (EBHRA)
A smaller, supplemental HRA that pairs with a traditional group health plan (even if the employee doesn't enroll in it) to cover things like copays, deductibles, and dental or vision costs. Per IRS Revenue Procedure guidance, the 2025 annual contribution limit for an EBHRA is $2,150.
GCHRA (Group Coverage HRA)
Sometimes called an "integrated HRA," this one only works alongside a traditional group plan and reimburses cost-sharing for employees enrolled in that plan. There's no federal dollar cap here — you set the design.
How to Choose
●If you're a small employer with no group plan today, QSEHRA is usually the easiest entry point.
●If you want to drop group coverage entirely and let employees shop for their own plan, ICHRA gives you the most control and no size restriction.
●If you already offer a group plan and want to add a low-cost supplemental perk, EBHRA fits.
●If you want to reduce out-of-pocket exposure for employees already on your group plan, GCHRA is the tool.
What's the Real Tax and Cost Advantage Here?
Employers gravitate toward HRAs for one blunt reason: cost predictability. With a traditional group plan, your premium goes up every renewal and you're locked into whatever the carrier decides. With an HRA, you set a fixed contribution and it doesn't move unless you decide to change it.
On the tax side, contributions are deductible as a normal business expense, and reimbursements employees receive for qualified medical expenses aren't subject to income or payroll tax on either side — no FICA, no FUTA, no income withholding. That's the same tax treatment an FSA or HSA enjoys, but without the employee contribution requirement.
Compare that to an FSA: an FSA is mostly employee-funded through payroll deduction (employers can add a match), it's tied to enrollment in a specific plan year with a use-it-or-lose-it structure (with a small IRS-allowed carryover), and it doesn't help with insurance premiums the way an ICHRA or QSEHRA can. An HRA gives you, the employer, the steering wheel — you decide the allowance, the eligible expense list, and the plan design, and you're not exposed to claims risk the way you would be with a self-funded group plan, because you only pay out what you've committed to reimburse.
None of that means an HRA is automatically cheaper than group coverage for every employer. It depends heavily on your workforce demographics, current premium spend, and how competitive the individual market is in your area. That's exactly the kind of modeling a good TPA should walk through with you before you commit.
What Compliance Rules Do Employers Need to Worry About?
This is the section employers underestimate, and it's the reason most companies don't run an HRA in-house for long. An HRA is a group health plan under ERISA, which means it comes with real paperwork obligations, not just a spreadsheet and good intentions.
Plan Documents and SPDs
Per U.S. Department of Labor ERISA guidance, employers offering an HRA must maintain a written plan document and distribute a Summary Plan Description (SPD) to participants describing eligibility, benefits, claims procedures, and appeal rights. Failing to have these in place is one of the most common findings in a DOL audit.
Substantiation Rules
Every reimbursement needs documentation tying it to an eligible Section 213(d) medical expense. You can't just Venmo an employee $200 and call it an HRA reimbursement — the IRS requires a process, and if you skip it, the payments could be reclassified as taxable wages.
ACA Considerations for ICHRA
If you're using an ICHRA to satisfy Applicable Large Employer obligations under the ACA, the contribution has to be considered "affordable" using an IRS-published percentage of employee income. Per IRS Revenue Procedure guidance, the 2025 ACA affordability threshold is 9.02% of household income, and getting this calculation wrong can trigger employer shared responsibility penalties.
Other Requirements to Track
●Nondiscrimination testing for certain HRA designs to make sure the benefit doesn't disproportionately favor highly compensated employees.
●COBRA continuation rights apply to most HRAs, meaning terminated employees may be entitled to continue the benefit at their own cost.
●Form 5500 filing may be required depending on plan size and structure.
●Coordination with Medicare and other coverage to avoid disqualifying an employee's HSA eligibility if they're also contributing to one.
Why Outsource HRA Administration Instead of Running It Yourself?
You could technically run an HRA with an internal spreadsheet, a shared inbox for receipts, and a lot of manual review. Plenty of small employers start that way. The problem shows up at renewal time, during an audit, or the first time an employee disputes a denied reimbursement and you realize your process wasn't documented well enough to defend it.
A dedicated HRA administration partner takes on the operational and compliance load that HR teams usually aren't staffed to carry:
●Plan document drafting and SPD distribution handled correctly the first time, aligned with the specific HRA type you've chosen.
●Claims intake and substantiation review so every reimbursement has the paper trail the IRS expects.
●ACA affordability calculations for ICHRA designs, so you're not guessing at the percentage or doing manual math against IRS tables.
●COBRA coordination when employees terminate, since HRAs typically fall under continuation coverage rules.
●Employee support so your HR team isn't fielding "where's my reimbursement" emails all week.
CafeHealth handles HRA administration alongside COBRA, FSA, HSA, ICHRA, LSA, and commuter benefits, which matters because most employers aren't offering just one benefit in isolation — they're stacking several, and having one administrator coordinate them means fewer gaps between systems and fewer compliance blind spots. If you're in Arizona or working with a broker there, our HRA administration services in Phoenix page walks through how local employers have structured their plans.
How Do You Actually Design and Launch an HRA Program?
Launching an HRA isn't a one-meeting decision. Here's roughly how the process should go if you're doing it with a TPA rather than piecing it together yourself:
1.Assess your current spend and workforce. Look at what you're paying today for group coverage (if any), how many employees you have, and whether their needs vary enough to justify employee classes under an ICHRA.
2.Pick the HRA type. Based on employee count, whether you want to keep a group plan, and your budget, decide between QSEHRA, ICHRA, EBHRA, or GCHRA.
3.Set contribution amounts and classes. Decide the dollar allowance, whether it varies by age, family size, or job classification, and confirm it fits within any applicable IRS caps.
4.Draft the plan document and SPD. This is the legal backbone of the benefit — get it done before open enrollment, not after.
5.Communicate to employees. Especially for ICHRA, employees need enough lead time to shop the individual marketplace, since there's a required notice window before the plan year starts.
6.Open enrollment and onboarding. Employees enroll, submit documentation of their coverage or expenses, and the reimbursement cycle begins.
7.Ongoing administration. Claims processing, substantiation review, COBRA notices, and annual limit updates continue for the life of the plan.
Most employers find the biggest time sink isn't the initial design — it's the ongoing month-to-month administration, which is exactly why so many hand it off to a TPA after the first year of doing it themselves.
FAQ: HRA Administration Questions Employers Actually Ask
What is an HRA and how does it work?
It's a pot of money you as the employer set aside to reimburse employees, tax-free, for medical expenses or individual insurance premiums, depending on the HRA type. You decide the amount, employees submit proof of expenses, and reimbursements go out through payroll or a separate process, but it's always employer-funded — employees never contribute their own paycheck dollars into it.
What's the difference between an HRA and an FSA?
An FSA is mostly funded by employee payroll deductions (with an optional employer match) and follows a use-it-or-lose-it calendar tied to your plan year. An HRA is funded entirely by the employer, and you control the rules around rollover, eligible expenses, and how much unused money carries forward. FSAs also can't reimburse individual insurance premiums the way a QSEHRA or ICHRA can.
How much can an employer contribute to an HRA?
It depends on the type. QSEHRA has an IRS-set annual cap — $6,350 for self-only and $12,800 for family coverage in 2025, per IRS guidance. Excepted Benefit HRAs are capped at $2,150 for 2025. ICHRA and GCHRA don't have a federal dollar cap; you set the contribution amount based on your budget and employee classes.
Is an ICHRA the same thing as an HRA?
An ICHRA is a specific type of HRA, not a separate product. Think of HRA as the umbrella category, with ICHRA, QSEHRA, EBHRA, and GCHRA as the different models under it. ICHRA is the one that lets employees use employer funds to buy their own individual health insurance plan, with no employer size limit.
Do employees pay taxes on HRA reimbursements?
No, as long as the reimbursement is for a qualified medical expense under IRS Section 213(d) and the employer follows proper substantiation procedures. If documentation isn't collected correctly, the IRS can treat those payments as taxable wages, which is one of the biggest reasons employers outsource the administration piece.
Can a small business really offer an HRA instead of a group health plan?
Yes — that's literally what QSEHRA was built for. If you have fewer than 50 full-time equivalent employees and don't offer group coverage, a QSEHRA lets you reimburse employees for individual premiums and medical costs without ever sponsoring a group plan. A lot of small employers use this as their first real health benefit.
