How a Health Reimbursement Arrangement (HRA) Works

A Health Reimbursement Arrangement (HRA) is an employer-funded, tax-advantaged benefit plan designed to reimburse employees for qualified medical expenses. Unlike traditional health insurance, an HRA does not directly provide health coverage; instead, it offers a structured method for employers to financially support their employees’ healthcare expenditures.

Core Principles of an HRA

An HRA is exclusively funded by the employer, meaning employees do not contribute their own money. The funds within an HRA are notional, existing as an accounting entry rather than a physical account owned by the employee. Employees cannot withdraw funds in advance; instead, they must first incur an eligible expense and then seek reimbursement. The employer maintains ownership of these funds, and they are generally not portable if an employee leaves the company.

Employers retain significant control over the HRA’s design, including the total amount of funds made available to employees annually and the specific types of expenses eligible for reimbursement, all within Internal Revenue Service (IRS) guidelines. While some HRAs are designed to integrate with a traditional group health insurance plan, others can be paired with individual health insurance coverage. Access to HRA funds is contingent upon the submission and approval of legitimate claims for qualified medical expenses.

Eligible Expenses and Reimbursement Process

The Internal Revenue Service (IRS) provides guidance in Publication 502, defining medical expenses as costs for the diagnosis, cure, mitigation, treatment, or prevention of disease. Common examples often covered by HRAs include deductibles, co-payments, prescription medications, dental care, and vision care expenses. Depending on the HRA type, health insurance premiums may also be eligible for reimbursement.

The reimbursement process begins when an employee incurs a qualified medical expense. The employee then submits a claim, which can be done through an online portal, a mobile application, or a paper form. Proper documentation is crucial, often requiring receipts, invoices, or an Explanation of Benefits (EOB). The employer or a designated third-party administrator reviews the submitted claim and supporting documentation to ensure it meets the HRA’s specific eligibility criteria before approving and issuing the reimbursement.

Key Operational Rules

Reimbursements received by employees for qualified medical expenses are generally tax-free. For employers, contributions made to HRAs are typically tax-deductible business expenses, which can reduce the company’s overall tax liability. This dual tax advantage makes HRAs an attractive benefit for both parties.

Employers establish annual limits on the amount of funds available for reimbursement. The treatment of unused HRA funds at the end of a plan year varies based on the employer’s plan design. Some employers may allow a full or partial carryover of unused funds to the subsequent year, while others may implement a “use-it-or-lose-it” policy where funds are forfeited if not used by the deadline. Since the employer owns the HRA funds, they are generally not portable; if an employee terminates employment, the remaining balance typically reverts to the employer.

Variations of HRA Functionality

HRAs vary across different types. One variation is the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), specifically for small employers with fewer than 50 full-time equivalent employees who do not offer a group health plan. QSEHRAs allow employers to reimburse employees for individual health insurance premiums and other qualified medical expenses. For 2025, QSEHRA limits allow reimbursements up to $6,350 for individual coverage and $12,800 for family coverage.

Another type is the Individual Coverage Health Reimbursement Arrangement (ICHRA), which can be offered by employers of any size. ICHRAs are designed to reimburse employees for individual health insurance premiums and other medical expenses. Employers can establish different “classes” of employees and offer varying allowances to each class, though employees within the same class generally receive the same terms. Employees must be enrolled in individual health insurance coverage to utilize an ICHRA.

The traditional Group Health Plan HRA, also known as an Integrated HRA, works in conjunction with an employer-sponsored group health plan. This type of HRA is used to help employees cover out-of-pocket costs such as deductibles, co-payments, and co-insurance, rather than individual health insurance premiums. Unlike QSEHRAs and ICHRAs, which serve as alternatives to group plans, an Integrated HRA supplements the primary group coverage, focusing on specific cost-sharing elements of the health plan.