HRA Rollover: How It Works and What You Need to Know

Health Reimbursement Arrangements (HRAs) are employer-funded accounts that help cover medical expenses. Some HRAs allow unused funds to roll over into the next year, providing continued financial support. Understanding rollover rules helps employees maximize their benefits and avoid losing funds.

Not all HRAs permit rollovers, and rules vary by employer. Knowing the specifics of your plan ensures informed decisions about using or saving these funds.

Eligibility for Rollover

Whether an HRA allows unused funds to carry over depends on the employer’s plan. Some plans permit full rollovers, while others cap the amount. Employers may also require employees to remain actively employed or enrolled in the plan to access rollover funds. Reviewing plan documents or consulting a benefits administrator clarifies these rules.

The type of HRA also affects rollover eligibility. Individual Coverage HRAs (ICHRAs) and Excepted Benefit HRAs (EBHRAs) often have different rollover policies than traditional HRAs. Some employers allow funds to accumulate indefinitely, while others impose limits or restrict usage to specific expenses.

Certain plans include forfeiture rules, meaning unused funds are lost if not used within a set period. This is common in HRAs linked to high-deductible health plans (HDHPs) or integrated with other employer-sponsored benefits. Employees should be aware of deadlines that could impact their ability to retain funds.

Tax Implications

HRA funds are employer contributions and are not considered taxable income for employees. This tax-free status applies when funds are deposited and when used for eligible medical expenses. Unlike wages or bonuses, HRA contributions do not appear on an employee’s W-2, reducing tax liability.

Withdrawals remain tax-free if used for qualified healthcare expenses as defined by IRS rules. These include doctor visits, prescriptions, medical procedures, and sometimes dental and vision care. If funds are used for non-medical expenses, the employer may deny reimbursement, and improper use could have tax consequences.

Since HRAs are employer-owned, employees cannot claim a tax deduction for medical expenses reimbursed through the account. The IRS prohibits double-dipping, meaning the same expense cannot be reimbursed by an HRA and also deducted on a tax return. This is particularly relevant for those who itemize deductions and plan to claim medical costs exceeding 7.5% of their adjusted gross income (AGI).

Calculation of Rollover Balances

The amount an HRA carries over depends on the employer’s policy and account usage. Some plans allow a percentage of the remaining balance to roll over, while others set a fixed dollar limit. For example, an employer might permit up to $1,500 in unused funds to carry forward, even if the account had a $2,000 balance at year’s end.

The timing of expenses also matters. If an employee submits reimbursement claims late in the year, those withdrawals reduce the balance before the rollover is calculated. Some plans have claims deadlines, meaning expenses from the prior year must be submitted by a certain date. If claims are processed after the rollover calculation, they may be denied or applied to the new plan year’s funds instead.

Employers may also use tiered rollover structures, where the amount retained depends on spending patterns. A plan might allow full rollover if less than 50% of the allocation was spent but cap it at 50% if more than half was used. This approach encourages moderate spending while ensuring employees retain some benefit without excessive accumulation.

Coordination with Other Medical Accounts

Managing an HRA alongside other healthcare accounts requires planning to maximize reimbursements and comply with IRS regulations. Many employees also have Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs), each with different tax advantages and spending rules. Understanding how reimbursements interact across these accounts helps avoid forfeiting funds or missing tax benefits.

The order in which expenses are reimbursed can affect financial outcomes. Some employers structure HRAs to pay first, meaning eligible medical costs are deducted from the HRA before an FSA or HSA is used. This preserves employee-funded accounts for future use or investment growth in the case of HSAs. Conversely, if an HRA pays secondary, employees may need to exhaust their FSA or HSA funds before accessing the employer-provided balance. Reviewing the plan’s coordination rules ensures efficient use of funds while avoiding unnecessary out-of-pocket costs.

Accessing Rollover Funds

Once rollover funds accumulate in an HRA, employees must understand how to access and use them. Employers establish specific procedures for requesting reimbursements, typically requiring documentation for eligible expenses. Some plans offer debit cards linked to the HRA for direct payments, while others require employees to pay out-of-pocket and then file a claim for reimbursement.

Some HRAs limit access to current employees, meaning funds may be forfeited if an individual leaves the company. Others allow continued access for retirees or former employees under specific conditions, such as COBRA continuation coverage. Additionally, some plans restrict rollover balances to specific expenses like deductibles or prescriptions. Reviewing plan documents clarifies these details and prevents unexpected loss of funds.