How Does a Health Reimbursement Arrangement (HRA) Work?

A Health Reimbursement Arrangement (HRA) is an employer-funded health benefit plan designed to help employees manage their healthcare costs. This arrangement allows employers to reimburse employees for qualified medical expenses and, in some cases, health insurance premiums. An HRA is not a health insurance policy, but a flexible tool employers use to support employee financial needs. It provides a tax-advantaged way for employees to pay for various healthcare services.

Core Functionality of HRAs

Employers establish and fund Health Reimbursement Arrangements, determining the annual amount available to each employee. The funds within an HRA are owned by the employer, meaning they are not considered an employee’s personal asset until reimbursement occurs. Employees cannot withdraw funds in advance; they must first incur an eligible expense and then submit it for reimbursement.

Employees access HRA funds by submitting proof of qualified medical expenses. The typical process involves the employee incurring a healthcare cost, then submitting a claim along with supporting documentation, such as receipts or an Explanation of Benefits (EOB), to the HRA administrator. Once the claim is reviewed and approved, the employer or administrator reimburses the employee for the expense.

HRAs offer tax advantages for both employers and employees. Employer contributions to HRAs are tax-deductible as a business expense, and these contributions are also exempt from payroll taxes. For employees, reimbursements received from an HRA for qualified medical expenses are tax-free, meaning they do not pay federal, state, or payroll taxes on these amounts, which effectively increases their disposable income for healthcare.

HRA plans can be designed to allow or disallow carryover of balances to the next plan year. If a plan permits carryover, unused amounts may roll over, providing continuous coverage. However, if rollovers are not allowed, unused funds typically expire at the end of the plan year. HRA funds generally stay with the employer if an employee leaves the company, as the HRA is not portable like a Health Savings Account (HSA).

Different HRA Models

Various HRA models exist, each tailored to different employer needs and integration with health coverage. The Individual Coverage HRA (ICHRA) offers substantial flexibility, allowing employers of any size to reimburse employees for individual health insurance premiums and qualified medical expenses. Employers offering an ICHRA must generally provide it on the same terms to all employees within specific classes, though allowances can vary based on criteria like age or family size.

The Qualified Small Employer HRA (QSEHRA) is designed specifically for smaller employers who do not offer a group health plan. A QSEHRA enables these employers to reimburse employees for individual health insurance premiums and qualified medical expenses. For 2025, the maximum annual contribution for a QSEHRA is $6,350 for self-only coverage and $12,800 for family coverage, with these limits prorated if an employee becomes eligible mid-year.

The Group Coverage HRA (GCHRA), also known as a Standard or Integrated HRA, works in conjunction with an employer-sponsored group health plan. This type of HRA helps cover out-of-pocket costs such as deductibles, co-pays, and co-insurance that are not fully covered by the primary group health insurance. Employees must be enrolled in the employer’s group health plan to participate in a GCHRA, and this model does not typically reimburse for health insurance premiums.

Beyond these primary models, specialized HRAs serve niche purposes. Retiree HRAs, for example, are offered to former employees to help cover eligible medical expenses and, in some cases, health insurance premiums during retirement. Another type is the Limited Purpose HRA, which is specifically designed to reimburse only certain expenses, such as dental and vision care, and can often be paired with a Health Savings Account (HSA).

Qualified Expenses and Reimbursement Procedures

Most HRAs reimburse expenses deemed “qualified medical expenses” by the Internal Revenue Service, as generally outlined in IRS Publication 502. These typically include a broad range of healthcare services and products necessary for the diagnosis, cure, mitigation, treatment, or prevention of disease. Common examples include doctor visits, prescription medications, dental care, and vision care, such as eyeglasses and contact lenses.

Reimbursement for health insurance premiums is a specific feature available under certain HRA models, such as the Individual Coverage HRA (ICHRA) and Qualified Small Employer HRA (QSEHRA). This allows employees to receive tax-free funds to help pay for their monthly health insurance costs, particularly for individual health plans. In contrast, Group Coverage HRAs (GCHRAs) generally do not reimburse for health insurance premiums, focusing instead on out-of-pocket medical costs.

For employees to receive reimbursement, careful documentation of expenses is required. This typically involves gathering detailed receipts, an Explanation of Benefits (EOB) from their insurance provider, or other proof of payment for the incurred medical service or product. The documentation must clearly show the date of service, the type of service, the amount paid, and the recipient of the payment.

The process for submitting claims generally involves using an online portal, a mobile application, or a paper form provided by the HRA administrator. Employees input the required information and upload or attach their supporting documents. While processing timelines can vary by administrator, reimbursements are often issued within a few business days or weeks once the claim is approved. Maintaining thorough records of all submitted claims and reimbursements is important for tax purposes, even though the reimbursements are generally tax-free.