Health Reimbursement Arrangement (HRA)

An HRA is an employer-funded arrangement that reimburses employees tax-free for medical expenses and, in some versions, insurance premiums: deductible to the business, tax-free to the employee, and free of payroll taxes on both sides. Small employers use two main flavors. The QSEHRA lets businesses with fewer than 50 employees and no group plan reimburse premiums and medical costs up to indexed annual caps. The ICHRA (individual coverage HRA) has no dollar cap and reimburses individual-market premiums, but employees must actually carry individual coverage. The one-employee HRA (often a Section 105 plan) is a classic sole proprietor strategy: employ your spouse, cover the family through the spouse's HRA, and convert personal medical costs into business deductions that also reduce self-employment tax. HRAs require a written plan document and cannot discriminate in favor of owners in most entity structures; S corporation owners over 2% generally cannot participate tax-free themselves.