How Does a Health Reimbursement Arrangement (HRA) Work?

A Health Reimbursement Arrangement (HRA) is an employer-funded health benefit plan designed to assist employees with their healthcare costs. These arrangements allow employers to reimburse employees for qualified medical expenses on a tax-free basis. HRAs offer a flexible, tax-advantaged method for managing healthcare expenses and enhancing employee benefits.

Understanding the Core Principles of HRAs

Health Reimbursement Arrangements are exclusively employer-funded; employees do not contribute their own money. The employer determines the amount available to employees each plan year and maintains ownership of the funds. Unlike other health savings options, HRA funds are not portable; employees cannot take them if they leave employment. This distinguishes HRAs from personal savings accounts, as funds are not physically held by the employee.

An HRA operates as a “notional” or “phantom” account, meaning there is no physical cash balance, but a promise from the employer to reimburse eligible expenses up to a set limit. This design offers employers predictable budget control over healthcare benefits. Employers can deduct their contributions to HRAs as a business expense, which reduces their overall taxable income and lowers tax liability. For employees, reimbursements for qualified medical expenses are typically tax-free, increasing their disposable income for healthcare needs.

HRAs often integrate with a health insurance plan to cover out-of-pocket costs not fully addressed by the primary plan, such as deductibles, co-pays, and co-insurance. The specific design of an HRA determines how it integrates with an employee’s health coverage. Employers have discretion over whether unused funds carry over to subsequent plan years or are forfeited at year-end. If carryover is not permitted or employment terminates, unused HRA balances typically revert to the employer.

Eligible Expenses and the Reimbursement Process

Eligible expenses for HRA reimbursement are defined by IRS Publication 502, which outlines qualified medical and dental expenses. Common examples include deductibles, co-payments, co-insurance amounts, and prescription drugs. Employers can further restrict reimbursable expenses beyond IRS guidelines, tailoring the HRA to their specific benefit strategy. The Coronavirus Aid, Relief, and Economic Security (CARES) Act in 2020 expanded eligible items to include over-the-counter medicines without a prescription and menstrual care products.

The reimbursement process typically begins after an employee incurs an eligible medical expense. The employee then submits a claim, which can often be done through an online portal or a physical form. Required documentation for claims includes an itemized receipt, invoice, or Explanation of Benefits (EOB) from the insurance company. This documentation must clearly show the provider’s name, date of service, service description, and amount paid.

After submission, the employer or a third-party administrator reviews and approves the claim to ensure it meets the HRA’s eligibility requirements. Reimbursement is then issued to the employee, commonly through direct deposit or a check. Processing time for claims varies, typically ranging from a few days to a couple of weeks, depending on the administrator and documentation completeness. Employees must ensure their documentation is accurate to avoid delays or denials.

Common HRA Structures and Their Applications

HRA application varies significantly depending on its specific structure, each designed to meet different employer and employee needs. One such structure is the Qualified Small Employer HRA (QSEHRA), which is available to small employers with fewer than 50 full-time equivalent employees who do not offer a group health plan. A QSEHRA allows employers to reimburse employees for individual health insurance premiums and other qualified medical expenses on a tax-free basis. Employees must have minimum essential coverage (MEC) to receive these tax-free reimbursements.

The Individual Coverage HRA (ICHRA), available since 2020, can be offered by employers of any size. An ICHRA allows employers to reimburse employees for individual health insurance premiums and other qualified medical expenses. This structure provides flexibility, enabling employees to choose their own individual health plans, whether through the Health Insurance Marketplace or directly from an insurer. Employers can offer different ICHRA amounts to various employee classes, such as full-time or part-time, provided certain rules are followed.

The Group HRA, also known as a Traditional or Integrated HRA, integrates with a traditional group health plan offered by the employer. This HRA typically covers out-of-pocket costs, such as deductibles, co-pays, and co-insurance, after the primary group health plan pays its portion. Unlike QSEHRAs and ICHRAs, a Group HRA generally cannot be used to reimburse individual health insurance premiums. Its primary role is to supplement the employer’s existing group health coverage, helping employees manage expenses not fully covered by their main plan.