Small employers renewing their group health plan this fall are running into the same problem year after year: premiums keep climbing faster than payroll budgets can absorb. One option worth understanding, if you haven’t looked at it closely, is pairing your existing group plan with a health reimbursement arrangement, or HRA. Done well, this combination can lower what the business pays in premiums while still protecting employees from a big jump in out-of-pocket exposure. Done carelessly, it can just shift cost onto employees without much benefit to anyone. The difference comes down to how the numbers are structured.
What an Integrated HRA Actually Does
An HRA integrated with a group health plan is not a replacement for that plan, and it’s a different tool than the individual coverage HRA (ICHRA) or qualified small employer HRA (QSEHRA) that some small businesses use instead of a traditional group plan. An integrated HRA sits alongside your existing group coverage and reimburses employees, tax-free, for qualified out-of-pocket costs the group plan doesn’t cover, most commonly deductibles and coinsurance. The employer funds it entirely; nothing comes out of employee paychecks, and the reimbursements aren’t counted as employee income. Because it’s employer-funded and discretionary, the business only pays out what employees actually use, rather than paying the full cost as if every employee hit their deductible every year.
Where the Savings Come From
The cost-reduction mechanics are fairly straightforward. Moving from a lower-deductible group plan to a higher-deductible one typically reduces the monthly premium the business pays, sometimes substantially, because the insurance carrier is taking on less first-dollar risk. The employer then uses part of that premium savings to fund an HRA that reimburses employees for some or all of the gap between the old, lower deductible and the new, higher one. If every employee used the full HRA allowance every year, the employer wouldn’t save anything; the point is that most employees, in most years, don’t use their full deductible, so the employer is really only funding actual claims rather than the premium load an insurer would otherwise price in.
This is why the strategy tends to work better for larger and more stable small groups than for very small ones. With only a handful of employees, a single high-cost claim year can wipe out the expected savings, since the risk pool is too small to average out. Employers in the 20-to-200-employee range that this approach is often pitched to generally have enough census stability for the averaging effect to hold up over a few years, though it’s still worth stress-testing the numbers against a bad claims year before committing.
The Compliance Piece That’s Easy to Miss
Because an integrated HRA is a self-funded arrangement, it’s subject to nondiscrimination testing under Section 105(h) of the tax code. In plain terms, the plan cannot be structured, intentionally or not, so that highly compensated employees get better eligibility terms or bigger reimbursement amounts than everyone else. This matters in practice because it’s tempting to design an HRA that reimburses executives more generously, and the IRS rules are specifically there to prevent that. A plan that fails nondiscrimination testing can lose its favorable tax treatment for the highly compensated employees who benefited from it, which turns a savings strategy into a tax headache. Any employer setting up an integrated HRA should have whoever administers it run this testing before the plan year starts, not after.
There’s also a documentation requirement that’s easy to underestimate. An HRA needs a written plan document, clear rules for what’s reimbursable, and a defined claims and appeals process, similar in spirit to how a group health plan itself is documented. Employers sometimes treat the HRA as an informal add-on and skip this step, which creates real exposure if a reimbursement decision is ever challenged.
How This Compares to Just Raising the Deductible
It’s worth being honest about the alternative: an employer could simply move to a higher-deductible plan and pocket the premium savings without funding an HRA at all. That’s a cheaper option in the short term, but it pushes the entire cost increase onto employees at the point they’re sick or injured, which tends to show up later as lower plan satisfaction, higher turnover, or employees delaying care they need. The HRA is essentially a way to capture most of the premium savings from a higher-deductible plan while cushioning the part of that shift that would otherwise land directly on employees’ wallets. Whether that trade-off is worth it depends on your workforce, your claims history, and how much of a priority retention is relative to near-term cost control.
Getting the Numbers Right Before You Commit
Before making this change, it’s worth asking your broker or plan administrator to model a few different HRA funding levels against your actual claims history, not just industry averages, since the savings math depends heavily on your specific group’s utilization pattern. It’s also worth confirming how the HRA would interact with any HSA-eligible plan options you offer, since an HRA that reimburses first-dollar expenses can disqualify employees from HSA contributions under IRS rules, and that’s not always obvious upfront. Getting these details right before your renewal date, rather than after, avoids having to unwind a plan design mid-year.
This post is general information for small business owners and HR teams evaluating employee benefits. It is not legal, tax, or insurance advice, and it is not a substitute for reviewing your actual plan documents or speaking with a licensed insurance agent, benefits administrator, or tax advisor about your specific situation.
Sources
- Health Reimbursement Arrangements (HRAs) — Internal Revenue Service
- Guide to Integrated HRAs — PeopleKeep
- How Employers Are Using HRAs to Manage Rising Health Plan Costs in 2026 — Clarity Benefit Solutions
- Section 105(h) Nondiscrimination Rules — Sullivan Benefits
- Key Strategies for Reducing Small Business Health Insurance Costs — Take Command Health
- Does an HRA Require an HDHP? — PeopleKeep
- Guide to the 2026 QSEHRA Contribution Limits — PeopleKeep