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

The Financing Mechanism

#

A group Medicare Supplement provides coverage. An HRA provides financing. The 65-plus entrepreneur who operates through an LLC or S Corporation gains access to both mechanisms through a single employment relationship with their own business entity. The Health Reimbursement Arrangement converts personal health expenses into business-deductible reimbursements, producing tax savings that partially offset the cost of comprehensive coverage. Without the HRA, the Silver product is supplemental insurance purchased with after-tax dollars. With it, the product becomes a tax-optimized health benefit architecture that generates annual savings measured in thousands of dollars for the typical entrepreneur in this population.

The core HRA mechanism is consistent across employer types: the employer funds an account from which employees receive reimbursement for qualified medical expenses. Only employers contribute to HRAs; employees cannot contribute. Contributions are deductible to the employer and generally tax-free to the employee when used for qualified expenses. The HRA plan document specifies which expenses qualify for reimbursement, the annual funding level, whether unused funds roll over, and other design parameters. For the entrepreneur operating an LLC or S Corporation, the business establishes the HRA, the owner-employee participates as an employee, and the business funds the reimbursements.

Two HRA types are most relevant to the 65-plus entrepreneurial population. The Individual Coverage HRA, created by 2019 regulations and available since 2020, permits employers of any size to reimburse employees for individual health insurance premiums including Medicare. The Qualified Small Employer HRA, created by the 21st Century Cures Act in 2016, permits employers with fewer than 50 full-time equivalent employees to reimburse employees for individual coverage without offering a traditional group plan. Both integrate with Medicare under specific rules that resolve potential conflicts between HRA design and Medicare regulatory requirements.

ICHRA Integration With Medicare

#

The Individual Coverage HRA operates under regulations issued jointly by the Departments of Treasury, Labor, and Health and Human Services in June 2019. These regulations addressed a structural conflict: federal law prohibits the sale of individual health insurance that duplicates Medicare benefits, which would appear to prevent Medicare beneficiaries from participating in an HRA requiring individual coverage. The final rules resolve this conflict by treating Medicare as qualifying individual medical coverage for ICHRA purposes. Employees enrolled in Medicare Parts A and B together, or in Medicare Part C (Medicare Advantage), satisfy the ICHRA’s individual coverage requirement and are eligible for reimbursement.

ICHRA can reimburse premiums for Medicare Parts A, B, C, and D, as well as Medicare Supplement (Medigap) premiums and other qualified medical expenses. Part B premiums were $185 per month in 2025 for standard-income beneficiaries and rose to $202.90 for 2026. High-income beneficiaries pay IRMAA surcharges ranging from $74 to $443.90 per month above the standard premium based on income thresholds starting at $106,000 for individuals and $212,000 for joint filers in 2025. All of these premiums are reimbursable through ICHRA.

The Medicare Secondary Payer rules create additional complexity that the ICHRA regulations address. MSP rules generally prohibit employers from offering financial incentives to encourage employees to enroll in Medicare rather than employer-sponsored group coverage. Reimbursement of Medicare premiums might appear to violate this prohibition. The final ICHRA rules clarify that ICHRA integration with Medicare does not violate MSP rules when the ICHRA is offered to an employee class under the class-based rules that govern ICHRA design. The employer cannot limit reimbursement only to expenses not covered by Medicare (which would design the benefit around Medicare status), but the employer can offer ICHRA to a class that includes Medicare-eligible employees without creating an impermissible incentive.

For employers with fewer than 20 employees (where Medicare is primary for age-based Medicare beneficiaries regardless of employer coverage), the MSP conflict is minimal. Medicare pays first. The employer-sponsored ICHRA reimburses premiums and cost-sharing. No incentive question arises because the employee is already on Medicare as the primary payer.

ICHRA has no maximum contribution limit. The employer determines the funding level based on business objectives, employee needs, and budget constraints. This flexibility allows the 65-plus entrepreneur to fund the HRA at whatever level covers expected annual health expenses: Part B premium, Medigap premium, dental and vision premiums, Part D premium, and anticipated out-of-pocket costs. According to HRA Council data, the number of employers offering ICHRAs grew 34% among large employers and 18% among small employers between 2024 and 2025, with more than 83% of employers offering ICHRA in 2025 not having previously offered any health coverage.

QSEHRA as an Alternative Mechanism

#

The Qualified Small Employer HRA provides a simpler pathway for employers with fewer than 50 full-time equivalent employees who do not offer a group health plan. Unlike ICHRA, QSEHRA has annual contribution limits set by the IRS: for 2025, the limits were $6,350 for self-only coverage and $12,800 for family coverage; for 2026, the limits increased to $6,450 for self-only and $13,100 for family coverage. These limits constrain the benefit but simplify administration and eliminate the class-based design requirements that govern ICHRA.

Medicare beneficiaries can participate in QSEHRA under the same general framework as ICHRA. The employee must have minimum essential coverage to receive reimbursements, and Medicare qualifies as minimum essential coverage. QSEHRA can reimburse Medicare premiums, Medigap premiums, Part D premiums, dental and vision premiums, and qualified out-of-pocket expenses up to the annual limit.

The QSEHRA annual limits produce a different economic calculation than unlimited ICHRA funding. For the 65-plus entrepreneur with annual health expenses exceeding the QSEHRA cap, QSEHRA provides partial financing while ICHRA can finance the full expense load. The 2026 QSEHRA limit of $6,450 for self-only coverage covers approximately 53% of an annual expense total of $12,000 (combining Part B premium, Medigap premium, dental, vision, and out-of-pocket costs). The remaining expenses come from personal after-tax dollars unless structured through an alternative mechanism.

One consideration for employers choosing between ICHRA and QSEHRA is the interaction with premium tax credits. Employees offered QSEHRA can still receive premium tax credits through the ACA marketplace, though the credit is reduced by the QSEHRA allowance amount. Employees offered ICHRA generally cannot receive premium tax credits unless the ICHRA is unaffordable under IRS affordability standards. For the 65-plus Medicare beneficiary, premium tax credits are not available for Medicare coverage, so this distinction has limited practical impact.

What the HRA Can Reimburse

#

The HRA plan document defines reimbursable expenses. For the Medicare-covered entrepreneur, the typical design includes several categories.

Medicare premiums: Part B premium (standard or IRMAA-adjusted), Part A premium (if applicable for beneficiaries without sufficient work history for premium-free Part A), and Part D premium for prescription drug coverage.

Supplemental insurance premiums: Medigap or group Medicare Supplement premium, dental insurance premium, vision insurance premium, and hearing coverage premium if separate coverage exists.

Out-of-pocket medical expenses: deductibles (Part A hospital deductible of $1,676 per benefit period in 2025, Part B deductible of $257 in 2025), coinsurance (20% of Part B charges for services without supplemental coverage), copayments, prescription drug cost-sharing under Part D, and provider charges for services not covered by Medicare (dental procedures, routine vision exams, hearing aids).

The IRS maintains a list of qualified medical expenses under IRC Section 213(d) that defines the universe of reimbursable expenses. Most health-related expenses fall within this definition. The HRA plan document can narrow reimbursable expenses to a subset (premiums only, for example) but cannot expand beyond Section 213(d) expenses without losing the tax-advantaged treatment.

For the typical 65-plus entrepreneur, annual reimbursable expenses sum to significant figures. Part B premium: approximately $2,435 annually at the 2026 standard rate ($202.90 times 12). Medigap Plan G premium: approximately $2,400 to $3,600 annually depending on state, carrier, and rating method. Part D premium: approximately $400 to $800 annually. Dental premium: approximately $400 to $1,200 annually. Vision premium: approximately $150 to $300 annually. Out-of-pocket medical and dental expenses: variable, but $1,500 to $4,000 annually is common for this age cohort. Total annual expenses in the $8,000 to $15,000 range are typical, with higher figures for those with IRMAA surcharges or significant dental needs.

The Economic Value of Tax-Advantaged Reimbursement

#

The HRA converts personal after-tax expenses into business-deductible reimbursements. The economic value depends on the entrepreneur’s marginal tax rate and entity structure.

For an LLC taxed as a sole proprietorship, the owner deducts health insurance premiums under the self-employed health insurance deduction on the personal return. This deduction applies to premiums, not to out-of-pocket expenses (which may be deductible only if they exceed 7.5% of AGI and the taxpayer itemizes). The HRA mechanism is constrained for this entity type because the owner is not technically an employee.

For an LLC taxed as an S Corporation, or for a direct S Corporation, the HRA treatment follows different pathways depending on the expense type. Health insurance premiums paid or reimbursed by the S Corporation for a 2%-plus shareholder-employee are included in W-2 Box 1 wages and then deducted by the shareholder under the self-employed health insurance deduction (IRC Section 162(l)). The net effect is equivalent to a tax-free benefit: the S Corporation deducts the expense as compensation, and the shareholder deducts it as the self-employed health insurance deduction. For out-of-pocket medical expenses reimbursed through an HRA, the IRS position (reflected in guidance and practice) is that similar W-2 inclusion and personal deduction treatment applies to 2%-plus shareholders.

The practical calculation for an S Corp owner with $12,000 in annual health expenses (premiums plus out-of-pocket):

Without HRA or business deduction: $12,000 paid from personal after-tax funds. At a 35% combined federal and state marginal rate, the pre-tax income required to generate $12,000 after-tax is approximately $18,462.

With HRA through S Corporation: the S Corp reimburses $12,000, includes it in W-2 wages, and deducts it as compensation. The shareholder-employee receives the W-2 income and deducts the health insurance portion under Section 162(l). Net tax effect: the $12,000 expense reduces taxable income by $12,000, producing tax savings of approximately $4,200 at a 35% marginal rate. The effective cost of $12,000 in health expenses becomes approximately $7,800.

This economic advantage, roughly 35% reduction in effective cost at typical marginal rates, is the financing mechanism that makes the Silver product competitive. The entrepreneur is not receiving free coverage. The entrepreneur is paying for coverage with pre-tax rather than after-tax dollars, which stretches each dollar 35% to 45% further depending on tax bracket.

Design Parameters for the Entrepreneurial Population

#

The HRA for a 65-plus entrepreneur requires specific design choices.

Funding level should match expected annual expenses. Unlike traditional employer HRAs designed with utilization uncertainty, the entrepreneur as both employer and employee knows the expected expense profile. Setting funding at the expected premium total plus a reasonable out-of-pocket buffer ensures the HRA covers all reimbursable expenses.

Rollover provisions allow unused funds to carry forward to future years. For the entrepreneur, rollover is largely irrelevant when funding matches expected expenses, but including rollover in the plan document provides flexibility for years with lower-than-expected utilization.

Eligible expenses should be defined to include all expected expense categories: Medicare premiums, supplemental premiums, dental, vision, prescription drugs, and qualified out-of-pocket medical expenses. Restricting eligible expenses unnecessarily limits the tax advantage.

Documentation requirements must comply with IRS substantiation rules. The HRA administrator (or the entrepreneur if self-administering) must verify that expenses meet plan document criteria before issuing reimbursement. For premium expenses, documentation is simple: the premium invoice or payment confirmation. For out-of-pocket medical expenses, documentation includes provider statements, EOBs, and receipts showing the service and amount paid.

For businesses with other employees, nondiscrimination rules under IRC Section 105(h) apply to self-insured medical reimbursement plans including HRAs. These rules limit the ability to favor highly compensated employees in benefit design. Exceptions exist for certain HRA types and employer sizes. The 65-plus entrepreneur whose business has no other employees or only family employees may face simplified compliance requirements, but the plan document should be designed with Section 105(h) awareness.

The HRA as Product Infrastructure

#

The HRA is not a coverage product. It is financing infrastructure that makes coverage products economically attractive. The group Medicare Supplement from 16.03 provides coverage completion. The dental, vision, and hearing benefits fill specific Medicare gaps. The international care component serves the mobile population. The HRA finances all of it through tax-advantaged reimbursement.

For the Silver product design, the HRA produces two outcomes. First, it reduces the entrepreneur’s effective cost of comprehensive coverage by approximately 30% to 45% depending on marginal tax rate. Second, it consolidates the entrepreneur’s health expenses through a single business-administered mechanism, creating a touchpoint for concierge navigation services to optimize across Medicare, supplemental coverage, pharmacy, and dental/vision care.

An entrepreneur without HRA access might purchase the same underlying coverage products and achieve the same clinical coverage. The economic outcome would be substantially worse: paying after-tax for expenses that could have been pre-tax, leaving thousands of dollars annually on the table. The HRA is what converts Silver from a product offering into a tax-optimized benefit strategy.