How Does a Health Reimbursement Account Work?

A Health Reimbursement Account (HRA) is an employer-funded health benefit plan designed to reimburse employees for qualified medical expenses. Its primary goal is to offer a flexible and tax-advantaged method for addressing healthcare expenditures.

Understanding Health Reimbursement Accounts

Health Reimbursement Accounts are exclusively funded by employers; employees cannot contribute their own money. The funds within an HRA are not physical accounts, but a notional allowance set aside by the employer for each employee. Reimbursements are made directly by the employer or a third-party administrator after an employee incurs an eligible expense.

HRAs function through reimbursement: employees first pay for their medical services or products out-of-pocket. They then submit a claim with documentation to their employer or the plan administrator to receive money back from their allocated HRA balance. Employers determine an annual allowance for each participating employee, which represents the maximum amount that can be reimbursed within a plan year. While employers own the HRA funds, they do not expense these funds until actual reimbursements are paid out.

HRAs are generally tied to employment and are not portable if an employee leaves. Unused funds often revert to the employer upon termination of employment, though some plans may offer limited exceptions. The employer maintains control over the plan design, including the types of expenses covered and the annual allowance limits. This provides employers a predictable way to manage their healthcare benefit costs.

Key Types of HRAs

Several distinct types of Health Reimbursement Accounts exist, designed to meet varying employer and employee needs. These types are differentiated by their integration with other health coverage, employer size, and the specific expenses they can reimburse.

The Individual Coverage Health Reimbursement Arrangement (ICHRA) allows employers of any size to offer HRAs to employees who purchase their own individual health insurance policies. This type of HRA can reimburse employees tax-free for individual health insurance premiums and other qualified medical expenses. For applicable large employers, an ICHRA can help satisfy the Affordable Care Act’s employer mandate. Employees participating in an ICHRA must be enrolled in an individual health insurance plan, including those purchased through a Health Insurance Marketplace or Medicare Parts A or B.

The Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is exclusively for small employers with fewer than 50 full-time equivalent employees who do not offer a traditional group health plan. It allows reimbursement for qualified medical expenses and individual health insurance premiums. QSEHRAs have annual IRS contribution limits. For 2025, the limits are $6,350 for individual coverage and $12,800 for family coverage.

The Excepted Benefit Health Reimbursement Arrangement (EBHRA) supplements traditional group health plans. An EBHRA can reimburse employees for excepted benefits, such as dental or vision care, and other qualified out-of-pocket medical expenses like deductibles and copayments. This HRA allows employees to participate even if they decline their employer’s main group health plan. For plan years beginning in 2025, the annual contribution limit for an EBHRA is up to $2,150.

Integrated HRAs are commonly offered alongside a traditional group health insurance plan. They help employees cover out-of-pocket costs not fully paid by their primary insurance, such as deductibles or coinsurance. This variety in HRA types provides employers with flexibility to tailor health benefits to their workforce.

Using Your HRA for Medical Expenses

Using an HRA involves understanding qualified expenses and the claims submission process. Eligible medical expenses are generally defined by IRS guidelines, outlined in IRS Publication 502. These guidelines cover a broad range of medical services and products.

Eligible expenses include health insurance deductibles, copayments, coinsurance, prescription drugs, dental care, vision care (including eyeglasses and contact lenses), and many over-the-counter medical items. Some HRAs may also cover monthly health insurance premiums, depending on the plan design and type, such as with ICHRAs or QSEHRAs. While IRS rules establish general eligibility, employers can restrict reimbursable expenses within their plan.

The process for submitting a claim usually begins with the employee incurring an eligible medical expense and paying for it. Documentation must be gathered to substantiate the expense. This typically includes a detailed receipt from the healthcare provider or an Explanation of Benefits (EOB) from an insurance company. The documentation must clearly show the date of service or purchase, the provider’s name, the service or item provided, and the amount the employee paid.

Claims can be submitted through various channels, like an online portal, mobile application, or mail. After submission, the plan administrator reviews the claim and supporting documentation to verify eligibility. Reimbursements are typically issued within a few business days or weeks via direct deposit or check. Some plans may offer a debit card for direct payment at the point of service, simplifying the process.

HRA Tax Rules and Account Management

HRAs offer tax advantages for both employers and employees. For employees, reimbursements for qualified medical expenses are generally tax-free. This allows employees to stretch their healthcare dollars further. Employers also benefit, as their contributions to HRAs are typically tax-deductible business expenses, reducing the company’s tax liability.

Rules for unused funds vary depending on the specific HRA plan design. Some HRAs allow unused funds to roll over from one plan year to the next, providing continuous coverage. For example, unused QSEHRA and EBHRA allowances can generally roll over annually, though they remain subject to federal contribution limits. Other HRAs may operate on a “use-it-or-lose-it” basis, where any remaining balance is forfeited at the end of the plan year if not used. Employers may also implement a grace period, typically up to 2.5 months after the plan year ends, allowing employees additional time to submit claims for expenses incurred during the previous year.

HRA funds are generally not portable; they are tied to employment and are owned by the employer. If an employee leaves their job, any unused HRA funds typically revert to the employer. A limited exception may exist under COBRA continuation coverage, where remaining HRA funds could be accessible for eligible expenses during the COBRA period if offered by the employer. This non-portability is a key distinction from Health Savings Accounts (HSAs), which employees own and can take with them when changing jobs.

Employers offering certain HRAs have specific reporting obligations. For QSEHRAs, employers are required to report the total benefit amount on each eligible employee’s Form W-2, typically in Box 12 with Code FF. For ICHRAs, employers generally do not need to report the benefit on employees’ W-2 forms.