How to Set Up an HRA for Your Small Business

As a small business owner, offering healthcare benefits can feel like a balancing act between cost and compliance. One popular option is a Health Reimbursement Arrangement (HRA), a tax-advantaged benefit that allows you to reimburse employees for qualified medical expenses. If you’ve wondered about how to set up an HRA for small business purposes, whether you can set up your own HRA, or the rules around QSEHRA IRS compliance, this guide breaks it all down.

What Is a Section 105 HRA Plan?

A Section 105 HRA plan is an employer-funded arrangement that reimburses employees for healthcare expenses on a tax-free basis. Here’s what you should know:

Section 105: Under IRS Code Section 105, employers can design health reimbursement plans where payments are tax-free for employees and tax-deductible for employers. These plans include HRAs, self-funded plans, medical expense reimbursement plans (MERPs), and flexible spending accounts (FSA). Many small employers choose an HRA plan because it’s one of many important fringe benefits and employer might offer their employees.

Can I Set Up My Own HRA?

If you’re asking, “Can I set up my own HRA?” the answer depends on your business structure:

 

• • C-Corporation Owners: Typically, c-corp owners can participate in the HRA and receive tax-free reimbursements.
  • S-Corporation Owners: Shareholders who own more than 2% are restricted from benefiting directly, but can still offer HRAs to employees. (See our guide on S-Corporation payroll for more details.)
  • Sole Proprietors and Partnerships: Generally, partnerships and sole proprietors cannot use HRAs for themselves but may offer them to employees.

So, while a business owner can have an HRA in some cases, professional guidance ensures compliance.

How to Set Up an HRA For My Small Business

If you’re ready to move forward, here’s how to set up an HRA for my employee and ensure compliance with IRS rules. This step-by-step approach works for most HRA small business plans:

 

• Decide on the type of HRA.
  • QSEHRA (Qualified Small Employer HRA): A QSEHRA allows tax-free reimbursement of health premiums and qualified expenses — up to annual limits. Here are the full rules, but here’s few quick, important distinctions:
    • A company must have fewer than 50 full-time employees.
    • They must not officer a group health plan like SHOP coverage.
    • They must provide the arrangement on the same terms to all full-time employees.
  • ICHRA (Individual Coverage HRA): Employers of any size can make a tax-free contribution to employees’ individual health insurance.
  • Group Coverage HRA (Integrated HRA):This is for employers who want to offer a traditional group plan with additional coverage for their employees with an HRA.
  • EBHRA (Excepted Benefit HRA): An EBHRA is an employer-funded benefit that allows reimbursements (up to an annual IRS-set limit, $2,100 in 2025) for supplemental healthcare costs such as COBRA premiums, dental, vision, and other “excepted benefits.” Employees must be offered a traditional group health plan, though they don’t have to enroll in it, and unlike QSEHRAs or ICHRAs, EBHRAs cannot be used to pay for individual health insurance premiums.
  • Retiree HRA: A Retiree HRA is a type of Health Reimbursement Arrangement that provides tax-free funds to former employees to help cover eligible medical expenses and, in many cases, health insurance premiums during retirement. Employers fund the account, and retirees can use it to offset healthcare costs without it counting as taxable income.

• • Draft a formal plan document. This outlines eligibility, reimbursement rules, and qualifying expenses.
  • Set the reimbursement amounts. Choose annual limits that comply with IRS rules, especially for QSEHRA IRS requirements.
  • Notify employees. Provide clear written communication so employees know how to use the benefit.
  • Establish a claims process. Use a compliant system to review and reimburse expenses.

Stay current on compliance. HRAs are governed by IRS rules and reporting requirements, so periodic reviews are essential. Use the Department of Labor’s Health Benefits Advisor to learn more about compliance.

Is There a Downside to an HRA?

When weighing HRA for small business owners, it’s fair to ask: is there a downside to an HRA?

• • Administrative Responsibility: HRAs require plan documents, claim reviews, and compliance monitoring.
  • Coverage Limits: QSEHRA and other types of HRAs have annual reimbursement caps.
  • Owner Restrictions: Not all business owners can participate, especially S-Corporation shareholders.

Still, for many small businesses, the tax savings and employee satisfaction outweigh these challenges.

Important Tax Considerations

When setting up a Section 105 HRA plan or QSEHRA, keep these tax points in mind:

• Employer Benefits: Contributions are typically tax-deductible.
• Employee Benefits: Properly structured reimbursements are tax-free.
• Compliance Risks: Noncompliance with IRS rules may result in taxable benefits or penalties.
• Recordkeeping: Maintain thorough documentation to support deductions.

A properly structured HRA can deliver significant tax savings while supporting employee health — a win-win for small business owners.

Setting up an HRA may seem complex, but it’s one of the best ways to provide tax-efficient healthcare support. Whether you’re considering a QSEHRA IRS plan or exploring how to setup a Section 105 HRA plan, working with a knowledgeable CPA ensures you maximize benefits while staying compliant