Executive Summary: The HRA Reimbursement Model: Employer-Funded Premium and Cost-Sharing Support for Medicare-Covered Owners

LFP-16.04 — The Post-Medicare Market

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The group Medicare Supplement provides coverage. The HRA provides financing. The Health Reimbursement Arrangement converts personal health expenses into business-deductible reimbursements, producing tax savings that partially offset the cost of comprehensive coverage and converting the Silver product from supplemental insurance into a tax-optimized benefit architecture.

Two HRA types serve the 65-plus entrepreneurial population. The Individual Coverage HRA, available since 2020, permits employers of any size to reimburse employees for individual health insurance premiums including Medicare, with no maximum contribution limit. The 2019 final regulations resolved a structural conflict by treating Medicare Parts A and B together, or Part C, as qualifying individual coverage for ICHRA purposes, making Medicare beneficiaries eligible for reimbursement. ICHRA can reimburse premiums for all Medicare parts, Medigap premiums, and other qualified medical expenses. For employers with fewer than 20 employees where Medicare is already primary, the Medicare Secondary Payer conflict is minimal. The Qualified Small Employer HRA provides a simpler alternative for employers with fewer than 50 FTEs, with 2026 contribution limits of $6,450 for self-only and $13,100 for family coverage, covering approximately 53 percent of a typical $12,000 annual expense load.

For the typical 65-plus entrepreneur, annual reimbursable expenses sum to $8,000 to $15,000: Part B premiums ($2,435 annually at the 2026 standard rate), Medigap premiums ($2,400 to $3,600), Part D premiums ($400 to $800), dental premiums ($400 to $1,200), and out-of-pocket expenses ($1,500 to $4,000). The economic value of routing these expenses through an HRA depends on entity structure. For an S Corporation shareholder-employee with $12,000 in annual health expenses, the HRA reimbursement flows through W-2 wages and produces an offsetting self-employed health insurance deduction, reducing taxable income by $12,000 and saving approximately $4,200 at a 35 percent marginal rate. The effective cost of $12,000 in expenses becomes approximately $7,800. For sole proprietors and partners, HRA participation requires an employee relationship the owner does not have with their own business, though workarounds exist including hiring a spouse as an employee or electing S Corporation tax status.

The HRA is not a coverage product. It is financing infrastructure that makes coverage products economically attractive. The roughly 35 percent reduction in effective cost at typical marginal rates is the mechanism that makes Silver competitive: the entrepreneur pays for coverage with pre-tax rather than after-tax dollars, stretching each dollar 35 to 45 percent further.