How Does a Health Reimbursement Arrangement (HRA) Work?

A Health Reimbursement Arrangement (HRA) is an employer-funded health benefit plan designed to help employees with healthcare costs. Employers establish these plans to reimburse employees for qualified out-of-pocket medical expenses, and in some cases, health insurance premiums. Unlike Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs), HRAs are solely funded by the employer, and employees cannot contribute their own money. This arrangement provides a structured way for businesses to support employee healthcare needs.

Understanding HRA Fundamentals

Health Reimbursement Arrangements operate as employer-funded benefits, meaning funds are allocated by the employer and are not deducted from an employee’s pay. These are notional accounts, which means the money remains with the employer until a qualified expense is incurred and reimbursed. The employer sets the rules for the HRA, including the maximum reimbursement limits and whether unused funds can roll over from one plan year to the next. Unused amounts cannot be cashed out by the employee.

Among the various types of HRAs, the Qualified Small Employer HRA (QSEHRA) is specifically designed for smaller businesses. An employer can offer a QSEHRA if they have fewer than 50 full-time employees and do not offer a traditional group health plan. Employees use QSEHRA funds to cover individual health insurance premiums and other qualified medical expenses, with annual limits set by the IRS. For 2025, the maximum reimbursement limits are $6,350 for individual coverage and $12,800 for family coverage.

The Individual Coverage HRA (ICHRA) offers greater flexibility and can be offered by employers of any size. With an ICHRA, employers reimburse employees for individual health insurance premiums and other qualified medical expenses. A key requirement for employees to participate in an ICHRA is that they must be enrolled in individual health coverage or Medicare Parts A and B, or Part C. Employers can customize ICHRA offerings by creating different classes of employees, such as full-time versus part-time, allowing for varied allowances based on factors like age or number of dependents.

Another type, the Excepted Benefit HRA (EBHRA), serves a more limited purpose. It is designed for employers who already offer a traditional group health plan to their employees. An EBHRA can reimburse employees for “excepted benefits” like dental and vision care, or for out-of-pocket medical expenses such as deductibles and co-payments, but generally not for individual health insurance premiums. This type of HRA supplements a primary group health plan rather than replacing it. A Group Coverage HRA (GCHRA), also known as an Integrated HRA, works similarly by supplementing a traditional group health insurance plan, covering out-of-pocket expenses not paid by the group plan.

Employer Setup and Administration

Establishing a Health Reimbursement Arrangement involves careful planning and adherence to regulatory requirements. Employers design the HRA plan, determining eligibility criteria for employees and annual reimbursement limits. They also define which qualified medical expenses, as defined by IRS guidelines, will be eligible for reimbursement. This design process also addresses whether unused funds can roll over to subsequent years or are forfeited.

Legal and regulatory compliance is a fundamental aspect of HRA administration. Employers must ensure their HRA plan complies with various federal laws, including the Employee Retirement Income Security Act (ERISA), the Health Insurance Portability and Accountability Act (HIPAA), and IRS regulations. Formal plan documents are legally required to outline the HRA’s structure, benefits, eligibility, and claims procedures, and these documents must be kept updated.

HRAs are solely funded by employer contributions; employees cannot contribute to their HRA accounts. The employer makes reimbursements directly to the employee after a claim is approved, or through a third-party administrator (TPA). This funding structure allows employers to control healthcare costs by setting predictable contribution limits annually.

Many employers choose to work with a TPA to manage their HRA. TPAs handle various administrative tasks, including processing employee claims, verifying the eligibility of expenses, and ensuring the plan remains compliant with IRS, ERISA, and HIPAA regulations. Utilizing a TPA can simplify the administrative burden for employers.

Employee Reimbursement Process

For employees, utilizing a Health Reimbursement Arrangement involves understanding the specific parameters set by their employer’s plan. Employees identify what expenses are considered eligible for reimbursement under their particular HRA. While qualified medical expenses are broadly defined by IRS guidelines, the employer’s HRA plan document specifies which of these, such as deductibles, co-pays, prescriptions, or individual health insurance premiums, are covered. Employees should review their plan’s summary or contact their HRA administrator for clarity.

Once an eligible expense is incurred, the employee initiates the reimbursement process by submitting a claim. This typically requires providing proof of the expense, such as a detailed receipt, an Explanation of Benefits (EOB) statement from an insurance provider, or a premium statement for individual health coverage. Some HRAs may also allow for reimbursement via a debit card at the point of service.

The employer or the TPA then reviews the submitted claim for verification and approval. This review ensures that the expense is eligible under the HRA’s specific rules and that proper substantiation has been provided. If the claim meets all requirements, it is approved for reimbursement.

Upon approval, employees receive their reimbursement, typically through direct deposit into their bank account or via a check. Employees can generally monitor their available HRA balance and view their claims history through an online portal or by contacting their plan administrator.

Tax Considerations for HRA Participants

Health Reimbursement Arrangements offer tax advantages for both employers and employees. For employees, qualified reimbursements received from an HRA are generally tax-free. This applies as long as the expenses are qualified medical expenses under IRS guidelines.

Employers also benefit from favorable tax treatment. Contributions made to HRAs are typically considered tax-deductible business expenses. The employer’s contributions are also exempt from payroll taxes.

Specific reporting requirements apply, particularly for certain types of HRAs. For instance, employers offering a Qualified Small Employer HRA (QSEHRA) must report the annual benefit amount on the employee’s Form W-2.

The interaction between HRAs, especially QSEHRAs and Individual Coverage HRAs (ICHRAs), and Premium Tax Credits is an important consideration. If an employer offers a QSEHRA or ICHRA, it can affect an employee’s eligibility for or the amount of premium tax credits they might receive if purchasing coverage through a health insurance marketplace. Employees offered an ICHRA must generally enroll in individual health coverage that meets affordability standards, as the offer of an ICHRA can count as an offer of coverage under the Affordable Care Act’s employer mandate.