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A Health Reimbursement Arrangement (HRA) Plan is a formal employer-funded benefit document that establishes the terms under which a company reimburses employees tax-free for qualifying out-of-pocket medical expenses and, depending on the plan type, individual health insurance premiums. Authorized under IRC Sections 105 and 106, an HRA is funded entirely by the employer β employees make no contributions β and the reimbursements are excluded from the employee's taxable income when the plan is properly documented and administered. The three primary types are the Qualified Small Employer HRA (QSEHRA), the Individual Coverage HRA (ICHRA), and the integrated HRA used alongside an existing group health plan, each with distinct eligibility rules, contribution limits, and coverage requirements.
Without a written HRA plan document adopted before the plan year begins, every reimbursement the employer makes is treated by the IRS as ordinary taxable wages β triggering income tax withholding and FICA obligations for both the employee and the employer. The plan document is not optional formality; it is the legal instrument that creates the tax exclusion. Beyond IRS compliance, a complete plan document prevents disputes over which expenses are eligible, what documentation employees must submit, and what happens to unused balances when someone leaves mid-year. For QSEHRA employers specifically, the written notice obligation β which must reach employees at least 90 days before the plan year β cannot be satisfied without a finalized plan document in hand. This template gives you a structured, compliant starting point that covers every required element, so you can establish a meaningful health benefit without the cost of building a group insurance plan from scratch.
| If your situation is⦠| Use this template |
|---|---|
| Employer has fewer than 50 full-time employees and no group health plan | QSEHRA Plan Document (Qualified Small Employer HRA) |
| Employer wants to reimburse employees for individual insurance premiums regardless of company size | ICHRA Plan Document (Individual Coverage HRA) |
| Employer offers a group health plan and wants to supplement with out-of-pocket reimbursements | Integrated HRA Plan Document |
| Employer wants to offer reimbursement only for dental and vision expenses | Limited-Purpose HRA Plan Document |
| Employer wants a tax-advantaged account funded by both employer and employee contributions | Health Savings Account (HSA) Policy |
| Employer wants to offer pre-tax employee salary deferrals for medical expenses | Flexible Spending Account (FSA) Plan Document |
| Employer is formalizing all health and welfare benefits in a single document | Section 125 Cafeteria Plan Document |
Why it matters: IRS rules require the plan to be formally established before any reimbursements are made. Retroactive adoption disqualifies those reimbursements as tax-free, making them subject to income and payroll taxes.
Fix: Execute and date the plan document before the first day of the plan year, and keep a signed original on file to demonstrate timely adoption.
Why it matters: Reimbursements above the IRS annual QSEHRA cap (updated each year) are treated as taxable wages, triggering income tax and FICA obligations for both the employee and employer.
Fix: Check the IRS Revenue Procedure each November for the updated QSEHRA limits and adjust your plan contribution amount before the new plan year begins.
Why it matters: Employers offering a QSEHRA must give written notice at least 90 days before each plan year begins. Missing this deadline exposes the employer to IRS penalties of $50 per employee per day of noncompliance.
Fix: Calendar the 90-day notice requirement each year (around October 1 for a January 1 plan year) and use a written notice template that includes all IRS-required elements.
Why it matters: The IRS requires objective substantiation for HRA reimbursements to remain tax-free. Reimbursements based solely on employee statements, without receipts or EOBs, are treated as taxable compensation.
Fix: Update the claims procedure section to require a dated third-party receipt or EOB for every reimbursement request, and train whoever processes claims to reject incomplete submissions.
Why it matters: Without a run-out period, employees who leave mid-year forfeit claims for expenses already incurred but not yet submitted β creating goodwill problems and potential disputes over earned benefits.
Fix: Add a 30-to-60-day post-termination run-out period allowing former employees to submit claims for expenses incurred before their separation date.
Why it matters: An outdated plan document that references superseded contribution limits or pre-CARES Act expense lists creates a gap between written policy and actual practice β which the IRS treats as a plan defect.
Fix: Assign a calendar reminder each November to review the IRS Revenue Procedure for updated limits and revise the plan document before the next plan year begins.
Identify whether you are setting up a QSEHRA (fewer than 50 employees, no group plan), an ICHRA (any size employer, reimburses individual premiums), or an integrated HRA (supplement to an existing group health plan). The HRA type determines eligible expenses, IRS limits, and employee eligibility rules.
π‘ QSEHRA and ICHRA cannot coexist β if you offer an ICHRA to any employee class, you cannot also offer that class a QSEHRA.
Enter the plan year start and end dates. Most plans follow a calendar year (January 1 β December 31), but a fiscal year is permissible. The effective date must precede the first reimbursement.
π‘ Adopt the plan document before the first day of the plan year β retroactive adoption is not permitted for HRAs.
Specify which employment classes are covered (full-time, part-time, salaried, hourly) and any excluded classes. For ICHRA plans, you may offer different contribution amounts by employee class as long as all employees in the same class receive the same terms.
π‘ Document your eligibility classes in writing before the plan year begins β mid-year class changes can trigger nondiscrimination testing issues.
Enter the maximum dollar amount available per employee per plan year. For QSEHRAs, confirm the current IRS annual limit (updated each fall for the following year) and do not exceed it. For ICHRAs, there is no federal dollar cap, but document your chosen amount.
π‘ For QSEHRA plans, check the IRS Revenue Procedure issued each November for the updated self-only and family contribution caps β exceeding them converts reimbursements to taxable wages.
Reference IRC Section 213(d) as the baseline for eligible medical expenses. If your plan reimburses individual insurance premiums (ICHRA or QSEHRA), explicitly include minimum essential coverage premiums in the eligible expense list.
π‘ Consider whether to include over-the-counter medications and menstrual care products β both are eligible under IRC 213(d) following the CARES Act of 2020 and should be listed explicitly.
Specify the required documentation (receipts, EOBs, or premium statements), the submission deadline in days after the expense is incurred, and how employees submit requests β paper form, email, or a third-party HRA administration portal.
π‘ If you use a third-party HRA administrator (e.g., Take Command, PeopleKeep, or Thatch), reference the portal URL here and attach their claim form as an exhibit.
Decide whether unused year-end balances roll over to the next plan year or are forfeited. Add a run-out period (30β90 days) to allow employees to submit late claims for the prior plan year regardless of your rollover decision.
π‘ Forfeiture with a 60-day run-out is the most common structure for small employers β it limits long-term liability while giving employees a reasonable window to submit final claims.
Have an authorized officer execute the plan document. Distribute a summary to all eligible employees before the plan year begins and retain the executed original for at least 6 years for ERISA compliance purposes.
π‘ For QSEHRA plans, you must provide written notice to eligible employees at least 90 days before the start of the plan year β or at time of hire for new employees.
A Health Reimbursement Arrangement is an employer-funded benefit that reimburses employees tax-free for qualifying out-of-pocket medical expenses and, depending on the HRA type, individual health insurance premiums. Unlike an HSA, an HRA is funded entirely by the employer β employees make no contributions. The tax exclusion is authorized under IRC Sections 105 and 106 and is available to employers of virtually any size.
A QSEHRA is available only to employers with fewer than 50 full-time employees who do not offer a group health plan, and is subject to annual IRS dollar caps. An ICHRA is available to any employer regardless of size or whether they also offer a group plan, has no federal dollar cap, and allows employers to vary contribution amounts by defined employee classes. The right choice depends on your company size, whether you currently offer group coverage, and how much flexibility you want in structuring the benefit.
Yes. A written plan document must be formally adopted before any reimbursements are made for those reimbursements to be excluded from employees' taxable income. Without a written plan, the IRS treats payments as ordinary wages subject to income and payroll taxes. The document must identify the employer, eligible employees, covered expenses, contribution limits, and the claims process.
Yes, provided the plan document is properly adopted and the expenses meet the IRC Section 213(d) definition of qualifying medical care. Reimbursements that are properly substantiated are excluded from the employee's gross income and are not subject to FICA or federal income tax withholding. Employers also deduct the reimbursements as a business expense.
Whether unused funds roll over depends entirely on what your plan document says. Employers may allow full rollover, partial rollover up to a dollar cap, or complete forfeiture at year-end. Most small employers choose forfeiture with a 30-to-90-day run-out period. If your plan is silent on rollover, consult your plan administrator β the default treatment varies by HRA type and plan design.
For an ICHRA, employees must be enrolled in individual health insurance that provides minimum essential coverage β reimbursements without proof of coverage are not permitted. For a QSEHRA, employees must hold minimum essential coverage for reimbursements to be tax-free. Integrated HRAs require employees to be covered under the employer's group health plan. Verify coverage status before processing any reimbursement.
Most employer-sponsored HRAs are subject to ERISA, which means they must have a written plan document, provide employees with a Summary Plan Description, follow claims and appeals procedures, and retain plan records for at least six years. Small church plans and certain governmental employer plans may be exempt. Confirm your ERISA status with your benefits advisor before finalizing the plan document.
Sole proprietors, partners in a partnership, S-corporation shareholders owning more than 2% of shares, and members of LLCs taxed as partnerships are generally not eligible to receive tax-free HRA reimbursements for their own medical expenses under IRC Section 105(h) self-employed rules. These individuals may have access to other tax deductions for medical expenses but cannot participate in the HRA they sponsor for their employees.
An HRA is funded solely by the employer, requires no employee contribution, and has no statutory dollar cap for most types. An HSA is owned by the employee, allows both employer and employee contributions, and requires enrollment in a High-Deductible Health Plan. An FSA is funded by employee salary deferrals (with optional employer contributions), has an IRS use-it-or-lose-it rule (with limited rollover), and does not require HDHP coverage. Each serves a different design goal β HRAs offer maximum employer control; HSAs maximize employee portability.
A group health insurance plan pools risk across employees and involves the employer selecting and partially funding a carrier's plan. An HRA gives each employee a fixed reimbursement allowance to spend on the coverage they choose. HRAs offer more cost predictability and flexibility for employers; group plans offer a more uniform benefit experience across the workforce.
An HSA is employee-owned, portable, and requires enrollment in a High-Deductible Health Plan. An HRA is employer-owned and funded, does not require HDHP enrollment for most types, and is not portable on separation. HRAs suit employers who want full control over the benefit; HSAs suit employees who want to accumulate and invest health funds long-term.
An FSA is funded primarily through employee pre-tax salary deferrals and is subject to IRS use-it-or-lose-it rules with limited rollover. An HRA is funded entirely by the employer with no employee contribution required. FSAs are better suited to employees who want to offset predictable out-of-pocket costs; HRAs are better suited to employers who want to set a fixed annual health benefit budget.
A Section 125 Cafeteria Plan is an umbrella plan document that allows employees to pay for benefits β including FSA contributions and insurance premiums β with pre-tax salary dollars. An HRA operates independently of Section 125 and requires no employee salary reduction. Many employers maintain both: a Section 125 plan for FSA and premium conversion, and an HRA for employer-funded reimbursements.
Law firms, accounting firms, and consultancies with fewer than 50 employees commonly use QSEHRA plans as a cost-controlled alternative to small-group health insurance premiums.
High-turnover industries use HRAs with forfeiture-at-termination provisions to limit accumulated liability while still offering a health benefit that aids recruitment.
Remote-first tech companies use ICHRA plans to reimburse employees purchasing individual coverage in their own states, eliminating the need to manage a multi-state group plan.
Contractors and trade employers with seasonal or variable headcounts use HRAs with defined eligibility classes to offer benefits to full-time staff without covering seasonal workers.
| Path | Best for | Cost | Time |
|---|---|---|---|
| Use the template | Employers with straightforward QSEHRA or integrated HRA needs and a single employee class | Free | 1β2 hours to complete and distribute |
| Template + professional review | Employers setting up an ICHRA with multiple employee classes, or any employer subject to ERISA filing requirements | $300β$800 for a benefits attorney or TPA review | 3β5 business days |
| Custom drafted | Large employers, employers with complex multi-state workforces, or those integrating HRA with a Section 125 plan and existing group coverage | $1,000β$3,000+ for a benefits attorney or third-party administrator | 2β4 weeks |
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