Health Reimbursement Arrangement: How Businesses Are Cutting Employee Costs

The CFO looked at the spreadsheet for a long time before speaking. We were spending $2.4 million per year on employee health benefits, and the renewal quote was coming in 18% higher than last year. He asked me a simple question: is there a better way?

That was the day I discovered health reimbursement arrangements — and how most companies have no idea they exist.

What an HRA Actually Is

A Health Reimbursement Arrangement (HRA) is an employer-funded benefit where the company sets aside a specific amount of money each year to reimburse employees for qualified medical expenses. Unlike health insurance, where the employer buys a group policy, an HRA is essentially the employer saying: we will pay you back for your medical costs, up to a certain limit.

The key difference from HSA (which is employee-owned) is that an HRA is employer-controlled. The employer decides how much to contribute, what expenses are eligible, and whether unused funds roll over year to year.

Victoria Chen, a benefits consultant in Chicago who specializes in alternative health benefit structures, told me she has helped companies save 30-50% on their health benefit costs by switching to HRA-based designs. The savings come from giving employees a fixed budget and letting them make cost-conscious decisions rather than using a flat insurance card with no skin in the game.

The Two Main Types of HRA

Integrated HRA: This is paired with a high-deductible health plan (HDHP). The employer contributes to the HRA, and employees use those funds to pay their deductible and other qualified medical expenses. When the HRA funds are exhausted, the employee pays out of pocket until they hit the deductible, after which insurance kicks in.

Standalone HRA: This is not integrated with any specific health plan. The employer sets a monthly allowance (say, $500 per month), and employees submit claims for reimbursement of premiums, deductibles, prescriptions, and other qualified expenses. Employees can use the standalone HRA to reimburse premiums on any health plan they purchase individually.

The standalone HRA has become particularly popular since 2020, when the Trump administration expanded the types of expenses that can be reimbursed and made it easier for small businesses to offer this benefit.

The Defined Contribution Advantage

The traditional approach to employer health benefits is defined benefit: the employer commits to providing a certain level of coverage, and costs are unpredictable year to year. The insurance carrier absorbs the risk, but the employer ultimately pays the premiums.

With an HRA, the employer shifts to defined contribution: you set a budget (say, $3,000 per year per employee), and you know exactly what your maximum exposure is. If employees are healthy and do not use much healthcare, you save money. If they have expensive claims, the exposure is capped at your contribution limit.

My company switched to an integrated HRA with an HDHP in 2021. Our annual contribution is $2,500 per employee. The first year, average employee claims were $1,800, so we came in under budget. The second year, claims averaged $2,100. Still under our $2,500 limit. Our total cost was predictable and capped, while employees had meaningful coverage for their actual healthcare needs.

The Employee Perspective

Critics of HRA designs argue that shifting costs to employees is just another way to reduce benefits. This is partially true if the HRA is poorly designed with insufficient contribution amounts. But well-designed HRAs actually benefit employees in certain ways.

First, employees with low medical needs come out ahead. Under traditional insurance where costs are pooled, healthy employees subsidize sicker colleagues. With an HRA, if you are healthy and do not use your allowance, you are not subsidizing anyone else is claims.

Second, employees can choose their own health plan rather than being locked into whatever the employer offers. With a standalone HRA, an employee can shop the individual market and find a plan that fits their specific situation, rather than accepting whatever option the employer selected.

Third, the transparency forces cost awareness. When employees see real dollar amounts for procedures rather than just a copay, they make smarter decisions about where to get care and whether certain procedures are actually necessary.

What Most Employers Do Not Know

The biggest obstacle to HRA adoption is simply awareness. Most small business owners and HR directors have never heard of HRAs, or they have heard the term but do not understand how they work or how to set one up.

The truth is that HRAs are particularly powerful for small businesses that cannot afford comprehensive group health insurance but want to provide meaningful benefits to employees.

For example, a small manufacturing company with 15 employees might pay $12,000 per month for group health insurance ($144,000 annually for 15 employees = $9,600 per employee). By switching to an HRA plus HDHP structure, they might contribute $4,000 per employee per year ($60,000 total), allowing employees to buy their own individual plans on the marketplace and have significant funds to cover deductibles and other expenses.

The administrative cost of setting up an HRA is minimal. There are third-party administrators that handle the reimbursement process, handle compliance documentation, and ensure the arrangement meets IRS requirements. The total cost is typically $10-20 per employee per month — far less than the savings achieved.

What I Learned After Implementation

After we switched to an HRA-based benefit structure, our total health benefit costs went from $2.4 million (and climbing) to $1.8 million in the first year. Employee satisfaction actually increased, not decreased, because employees appreciated having more control over their healthcare choices and understanding what they were actually paying for.

The CFO is spreadsheet has not changed — we still track the numbers the same way. But now the trend line is flat instead of climbing at 15% per year. We are not trying to predict insurance renewal increases; we are setting our own budget and making decisions accordingly.

Health reimbursement arrangements will not work for every company. If you have a workforce with significant health issues, the defined contribution cap might leave employees under-insured. But for most companies, the HRA option provides a way to offer meaningful benefits at predictable, manageable costs — something that has become impossible with the traditional insurance market.