HRAs and the Affordable Care Act

An insurance agent recently asked me the following question: can a small business that currently offers insurance to its employees drop the insurance and instead form a Health Reimbursement Arrangement (HRA, sometimes called a “Section 105 plan”) to reimburse employees for medical expenses?

The short answer to the question is: NO.


HRAs have existed since the 1950s. Under an HRA, an employer reimburses employees for medical expenses, up to a certain dollar amount. For example, an employer could say that they will reimburse up to $1,000/year of an employee’s medical expenses.

In the past, HRAs could be offered as a stand-alone plan, or as an additional benefit in addition to employer-provided health insurance.

The Affordable Care Act has made stand-alone HRAs a thing of the past (with 1 exception).

The New Landscape

Effective January 1, 2014, an employer can only offer an HRA if 1) the employer also offers group health insurance, and 2) only employees enrolled in the group plan can be a part of the HRA.


An employer with one employee (such as a sole proprietor who employs his or her spouse) can have a stand-alone HRA without having group health insurance. If a business has 2 or more employees, the business cannot have a stand-alone HRA. The penalty for non-compliance is $100/employee/day.

IRS Guidance

IRS Notice 2013-54 provides further details.

As with anything relating to the Affordable Care Act, there are nuances and oddities that are impossible to fully cover in a blog post. If you have an HRA, you are best advised to seek the counsel of your accountant or a third-party administrator for guidance on your specific situation.