What is an HRA and How Does It Save You Money on Health Insurance?

Understanding HRA: Your Tax-Free Health Deduction Strategy

If you’re self-employed, you’ve probably heard the term “HRA” thrown around. Maybe a health insurance agent mentioned it. Maybe you saw it in a forum. But what exactly is it? And more importantly—does it actually save you money?

The answer is yes. And it might be one of the biggest tax advantages you’re not using right now.

Let me break down what an HRA is, how it works, and whether it makes sense for your situation.

What Is an HRA?

HRA stands for “Health Reimbursement Arrangement.” It’s a formal document created under IRS Section 105 that allows you to reimburse yourself (or your employees) for medical expenses tax-free.

Think of it this way: instead of paying medical bills out of your pocket after taxes, you set up a reimbursement plan that lets you deduct those expenses before taxes hit.

The core rules:

• You establish a written plan document (usually 1-2 pages)
• You set aside funds (or budget) to reimburse medical expenses
• When you pay a qualified medical expense, you reimburse yourself from the plan
• That reimbursement is not taxable income
• You claim it as a business deduction

It sounds simple because it is. But the tax impact is massive.

HRA vs HSA—What’s the Difference?

People confuse HRAs and HSAs all the time. They’re related but different tools.

HSA (Health Savings Account):

• Requires a high-deductible health plan (HDHP)
• You contribute up to $4,400/year (2026)
• You own the account; it’s yours forever
• Triple tax advantage (deductible, grows tax-free, withdrawals tax-free)
• Can invest the money if you want

HRA (Health Reimbursement Arrangement):

• Works with any health plan—no HDHP requirement
• You set the reimbursement amount (no legal limit)
• Employer-owned (you can’t take it with you if business changes)
• Only reimburses actual expenses (doesn’t accumulate like HSA)
• More flexible on what qualifies as “medical expense”

Here’s the key: you can use both at the same time. Many self-employed people do.

How Does an HRA Work for Self-Employed?

Let’s say you’re a freelancer earning $75,000/year. You have a private health plan that costs $300/month ($3,600/year). Beyond that, you have medical expenses:

• Doctor visits: $500
• Prescriptions: $400
• Dental work: $1,200
• Glasses: $300
• Total out-of-pocket: $2,400

Without an HRA:

• Health plan premium: $3,600 (deductible above-the-line)
• Medical expenses: $2,400 (not deductible unless you itemize, and most don’t)
• Total deductible health costs: $3,600
• Tax savings at 25% bracket: $900

With an HRA:

• Health plan premium: $3,600 (deductible above-the-line)
• HRA reimbursement for medical expenses: $2,400 (deductible business expense)
• Total deductible health costs: $6,000
• Tax savings at 25% bracket: $1,500

The HRA saves you $600/year in taxes—on top of your regular health insurance deduction.

What Counts as a Qualified Medical Expense?

Under IRS rules, HRA reimbursements cover a broad range of medical expenses. Broader than you might think.

Definitely covered:

• Health insurance premiums (if you don’t already deduct them separately)
• Copays and deductibles
• Prescriptions and over-the-counter medications
• Doctor and specialist visits
• Dental care (cleanings, fillings, root canals, orthodontics)
• Vision (glasses, contacts, exams)
• Hearing aids and audiology
• Physical therapy and chiropractic
• Mental health and therapy
• Labs and diagnostic tests
• Medical equipment (crutches, wheelchairs, CPAP machines)

Usually not covered:

• Cosmetic procedures (unless reconstructive)
• Gym memberships (unless medically prescribed)
• Vitamins (unless prescribed by doctor)
• Travel for treatment (though the treatment itself qualifies)

The key test: if it’s medically necessary and prescribed by a healthcare provider, it almost certainly qualifies.

How to Set Up an HRA

If you’re self-employed as a sole proprietor, the process is straightforward:

Step 1: Create a Plan Document

This is a written statement that says: “I have established a Health Reimbursement Arrangement under IRC Section 105. I will reimburse myself for qualified medical expenses.” That’s essentially it. You can make it fancier, but that’s the core.

Step 2: Keep Records

Save receipts and documentation for any expense you reimburse. The IRS wants to see:

• Description of the expense
• Date incurred
• Amount paid
• Proof that it was medical

Step 3: Reimburse Yourself

Pay the medical expense from your personal account. Then write a check from your business to yourself (or document the reimbursement in your books). Claim it as a business deduction on Schedule C.

Step 4: Report on Taxes

The HRA reimbursement goes on Schedule C as a business deduction. It reduces your self-employment income, which lowers your taxes on both income tax and self-employment tax.

The Self-Employment Tax Advantage

This is where an HRA gets really valuable for self-employed people. Not only does it reduce your income tax—it also reduces self-employment tax.

Example:

Self-employed person, $75,000 net income.

• Self-employment tax (15.3%): $11,475
• Income tax (25% bracket): $18,750
• Total tax on that income: $30,225

Now apply a $5,000 HRA deduction:

• Taxable income reduced to $70,000
• Self-employment tax (15.3% on $70,000): $10,710 (saves $765)
• Income tax (25% on $70,000): $17,500 (saves $375)
• Total tax savings from HRA: $1,140

That $1,140 is on top of the normal tax deductions. Most people have no idea they can do this.

HRA Limitations You Should Know

1. Plan Document Required

You need a written plan. A casual arrangement doesn’t qualify. But it doesn’t have to be complicated—a one-page statement is usually fine.

2. No Profit-Sharing

If you have employees, all employees must be eligible for the same benefits under the plan. You can’t set it up just for yourself and exclude them. (Though you can structure it as owner-only if you have no employees.)

3. Reimbursement Only

Unlike an HSA, an HRA doesn’t let you save money year-to-year. You reimburse actual expenses. At year-end, unused amounts are forfeited (though some plans allow a small carryover).

4. S-Corp Gotcha

If you’re set up as an S-Corporation, you can’t deduct owner HRA reimbursements if you’re a shareholder-employee. (You’d need to take them as W-2 wages.) Sole proprietors and partnerships don’t have this issue.

Should You Use an HRA?

Use an HRA if:

• You’re self-employed (sole proprietor or partnership)
• You have regular medical expenses ($1,000+ per year)
• You want to maximize tax deductions
• Your income is stable enough to estimate medical expenses

Skip it if:

• You’re an S-Corp or C-Corp shareholder-employee
• You have virtually no medical expenses
• You already use an HSA and don’t need the extra deduction
• Your business structure is too complex to manage a plan document

Pro tip: You can pair an HRA with an HSA. Contribute to the HSA, use the HRA for out-of-pocket expenses. Maximum tax efficiency.

Real-World Scenario

Let’s say you’re a consultant earning $100,000/year. You have a high-deductible private plan ($200/month = $2,400/year) and another $4,000 in annual medical expenses (copays, prescriptions, therapy, dental).

With HRA + HSA:

• Health insurance deduction: $2,400
• HSA contribution (max): $4,400
• HRA reimbursement: $4,000
• Total deductible health costs: $10,800
• Effective tax bracket: 32% (25% federal + 7% self-employment)
• Tax savings: $3,456/year

You’re paying $10,800 in actual health costs but saving $3,456 in taxes. That’s real money.

Work With a Tax Professional

While HRAs are straightforward, it pays to set them up correctly. Your accountant or a health insurance professional (like me) can help you establish a proper plan document and make sure you’re claiming everything correctly.

The investment is worth it. A $500 consultation to set up your HRA correctly might save you $2,000-$3,000 in taxes over the next few years.

Final Thoughts

An HRA is one of the most underutilized tax strategies for self-employed people. It’s not complicated. It’s not aggressive. It’s exactly what the IRS allows.

If you have medical expenses, you’re essentially choosing between two options: pay taxes on them, or deduct them through an HRA and pay less taxes. The choice seems obvious.

As a licensed health insurance advisor specializing in self-employed coverage, I help clients structure their health insurance and HRA plans to minimize taxes while maximizing coverage. It’s a conversation worth having.

Ready to Set Up Your HRA?

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Calvenn Starre is a licensed health insurance agent specializing in self-employed and small business owner coverage. This article is for informational purposes only and does not constitute tax, legal, or financial advice. Consult a qualified tax professional or certified health insurance agent for advice specific to your situation.