How Does a Health Reimbursement Account (HRA) Work?

A Health Reimbursement Account (HRA) serves as an employer-funded health benefit designed to help employees manage medical expenses. This arrangement allows employers to provide financial assistance for healthcare costs without necessarily offering traditional health insurance. An HRA is not a health insurance plan itself, but rather a mechanism through which employers can reimburse employees for eligible out-of-pocket medical expenditures. Through an HRA, employers set aside funds to cover qualified healthcare costs, offering a valuable benefit that supports financial wellness.

What is an HRA?

A Health Reimbursement Account (HRA) is an employer-established, tax-advantaged arrangement used to reimburse employees for qualified medical expenses and, in some instances, health insurance premiums. Unlike a Health Savings Account (HSA) or a Flexible Spending Account (FSA), only the employer can contribute to an HRA. The funds within an HRA are not physical cash held in a separate bank account but rather a “notional account,” meaning the employer only pays out reimbursements after an employee incurs and submits an eligible expense.

HRAs offer significant tax advantages for both employers and employees. Employer contributions to an HRA are typically tax-deductible for the business. For employees, reimbursements received from an HRA for qualified medical expenses are generally tax-free. While HSAs allow employees to own and carry over funds indefinitely, and FSAs typically have “use-it-or-lose-it” rules, HRAs are employer-owned, and the carryover of funds depends entirely on the specific plan design.

Funding and Eligible Expenses

Employers determine the annual allowance, or maximum reimbursement amount, each employee can receive. This allowance can vary based on factors like employee class, such as full-time versus part-time status. The employer does not pre-fund these allowances; instead, they reimburse employees directly after approved medical expenses are incurred.

Eligible expenses for HRA reimbursement generally align with what the Internal Revenue Service (IRS) defines as qualified medical expenses under IRS Publication 502. These typically include deductibles, co-pays, prescription medications, and costs for dental and vision care. The specific list of reimbursable expenses is determined by the employer, and employees should consult their plan documents.

Regarding unused funds, HRA plans can be designed to allow funds to roll over from year to year, or they may impose a “use-it-or-lose-it” rule where unused amounts are forfeited at the end of the plan year. If an employee leaves their job, any remaining HRA funds are typically forfeited, as the employer owns the account. This contrasts with HSAs, which are portable and belong to the employee.

Common HRA Types

One prominent type is the Qualified Small Employer HRA (QSEHRA), designed for small employers with fewer than 50 full-time employees who do not offer a traditional group health insurance plan. A QSEHRA allows these employers to reimburse employees for individual health insurance premiums and other qualified medical expenses. The IRS sets annual contribution limits for QSEHRAs, which are updated periodically.

Another flexible option is the Individual Coverage HRA (ICHRA), available to employers of any size. An ICHRA allows employers to reimburse employees for individual health insurance premiums and qualified medical expenses. A key feature of the ICHRA is that an employer cannot offer an employee both an ICHRA and a traditional group health plan simultaneously.

The Excepted Benefit HRA (EBHRA) is specifically designed to be offered in conjunction with a traditional group health plan. This HRA can reimburse employees for excepted benefits, such as dental and vision insurance premiums, or short-term, limited-duration insurance. It also covers other qualified medical expenses not fully covered by the primary health plan, like deductibles or co-pays. EBHRAs typically have lower annual contribution limits compared to other HRA types.

Managing Your HRA Account

Employees manage their HRA account by submitting claims for reimbursement after incurring eligible medical expenses. The process begins with gathering necessary documentation, including itemized receipts from healthcare providers or pharmacies. For services covered by an insurance plan, an Explanation of Benefits (EOB) statement from the insurer is often required, detailing what the primary plan paid and the remaining patient responsibility. In some cases, a doctor’s note may be needed for certain over-the-counter items or services.

Claim submission methods commonly include online portals, dedicated mobile applications, or traditional mail and fax. Employees access their account through these platforms to upload or send their documentation. The administrator then reviews the submission to ensure the expense is qualified under the plan rules and that sufficient funds are available in the employee’s allowance.

Once a claim is approved, reimbursement is typically issued directly to the employee. This can occur via direct deposit to a linked bank account or through a physical check. The timeframe for receiving reimbursement usually ranges from a few business days to a couple of weeks, depending on the administrator’s processing times. Employees can monitor their HRA balance and view their claim history through the same online portal or mobile app used for submissions, providing transparency regarding their available funds and past reimbursements.

A third-party administrator often manages the HRA on behalf of the employer. This administrator handles the complexities of claims processing, eligibility verification, and record-keeping, ensuring compliance with applicable regulations. Their role streamlines the experience for both the employer and the employee, allowing for efficient management of the health benefit.