IRS HRA Guidelines and Employer Requirements

A Health Reimbursement Arrangement, or HRA, is a formal health benefit plan funded entirely by an employer. These arrangements are designed to reimburse employees for out-of-pocket medical care costs incurred by the employee, their spouse, and their dependents. Employer contributions are tax-deductible for the business and reimbursements are received tax-free by the employee, provided the plan follows Internal Revenue Service (IRS) rules.

An HRA is not a bank account; employees do not have direct access to the funds. Instead, it represents a promise by the employer to reimburse for qualified expenses up to a certain dollar amount each year. The structure provides employers with control over their benefits budget while offering employees flexibility in how they use their healthcare dollars.

Key HRA Classifications and Core Rules

There are several types of HRAs designed to fit different employer needs. The Individual Coverage HRA (ICHRA) allows employers of any size to reimburse employees for individual health insurance premiums and other medical costs. A Qualified Small Employer HRA (QSEHRA) is for employers with fewer than 50 full-time equivalent employees who do not offer a group health plan. A Group Coverage HRA (GCHRA), sometimes called an integrated HRA, is paired with a traditional group health plan to help employees pay for costs not covered by the primary insurance, such as deductibles and copayments.

The definition of a qualified medical expense is outlined in IRS Publication 502, Medical and Dental Expenses. Medical care expenses are defined as payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for treatments affecting any structure or function of the body. Expenses that are merely beneficial to general health, such as non-prescription vitamins, are not eligible for tax-free reimbursement.

Publication 502 provides an extensive list of eligible expenses, including:

• Payments to doctors, dentists, chiropractors, and other medical practitioners.
• The costs of hospital services, prescription medications, insulin, and ambulance services.
• Payments for eyeglasses, contact lenses, hearing aids, and dental treatments like fillings and braces.
• Insurance premiums for medical, dental, and qualified long-term care coverage, depending on the HRA plan design.

Individual Coverage HRA (ICHRA) Requirements

The Individual Coverage HRA (ICHRA) is available to employers of any size and offers a flexible alternative to traditional group health insurance. Employers can establish different classes of employees and offer different levels of benefits to each class based on job-related criteria. Permissible classes include full-time, part-time, salaried, or hourly status. Other classes can be based on geographic location, seasonal status, or coverage by a collective bargaining agreement.

To prevent unfair discrimination, all employees within a single class must be offered the ICHRA on the same terms. The reimbursement amount offered to all full-time employees, for example, must be consistent. Allowances can vary within a class by age or the number of dependents to reflect higher premium costs. Minimum class size requirements may also apply to prevent employers from creating classes that favor highly compensated individuals.

To receive tax-free reimbursements, an employee and their covered dependents must be enrolled in qualifying individual health insurance coverage. This can be a plan purchased on a public exchange, the private market, or Medicare Parts A and B or Part C. Employers must have a reasonable procedure to verify this coverage, which often involves requiring an annual attestation from the employee for the period in which medical expenses were incurred.

Employers determine the contribution amount for an ICHRA, and there are no federal limits on how much an employer can offer. The employer can choose to reimburse for insurance premiums only, other qualified medical expenses, or both. Since an ICHRA offer can affect an employee’s eligibility for the Premium Tax Credit, employees must be given the option to opt out of the ICHRA annually.

Qualified Small Employer HRA (QSEHRA) Requirements

A Qualified Small Employer HRA (QSEHRA) is a health benefit arrangement for small businesses. To offer a QSEHRA, an employer must have fewer than 50 full-time equivalent employees and cannot offer any group health plan, including a flexible spending account (FSA) or vision and dental plans, to any of its employees.

A QSEHRA must be offered on the same terms to all eligible employees. While employers can exclude certain employees, such as part-time or seasonal workers, those who are eligible must receive the same benefit. The reimbursement amounts can only vary based on whether the employee has self-only or family coverage.

The IRS sets annual maximum contribution limits for QSEHRAs. For 2025, an employer can reimburse up to $6,350 for an employee with self-only coverage and up to $12,800 for an employee with family coverage. These amounts break down to $529.16 per month for individuals and $1,066.66 per month for families. Employers can contribute less than the maximum amount but cannot exceed these caps.

Employers must report the benefit amount an employee is entitled to receive on their Form W-2 in Box 12, using code FF. This amount is not taxable income but is reported to inform the employee and the IRS how the benefit may affect eligibility for a premium tax credit. To receive reimbursements tax-free, employees must maintain health coverage that qualifies as Minimum Essential Coverage (MEC).

Establishing and Documenting Your HRA Plan

To offer a compliant HRA, an employer must establish a formal written plan. The IRS and the Employee Retirement Income Security Act of 1974 (ERISA) require a legal plan document that outlines the terms and administration of the benefit. An HRA that exists without a written document is not in compliance and can lead to significant penalties.

The plan document must contain specific details about the HRA’s operation, including:

• The name of the plan administrator and any other fiduciaries.
• Eligibility requirements, including any employee classes and waiting periods.
• The contribution amounts and the effective date of participation.
• Procedures for submitting reimbursement claims.
• Provisions for COBRA continuation coverage if the employer is subject to it.
• Rules for protecting employees’ private health information under HIPAA.
• The employer’s rights to amend or terminate the plan.

In addition to the plan document, employers must provide employees with a written notice before the start of each plan year. For an ICHRA, this notice must be provided at least 90 days in advance. The notice must include the HRA allowance amount, a statement that the employee must inform the health insurance marketplace about the HRA if applying for a premium tax credit, and the consequences of not maintaining qualifying health coverage. A similar notice is required for a QSEHRA.

HRA Reimbursement and Substantiation Process

The reimbursement process begins when an employee incurs and pays for a medical expense. To receive reimbursement, the employee must submit a claim to the employer or its designated third-party administrator. This request must be accompanied by documentation that proves a qualifying medical expense was paid.

The IRS requires that all HRA reimbursements be substantiated. Acceptable forms of substantiation include an itemized receipt from the provider, a bill from a medical facility, or an Explanation of Benefits (EOB) from an insurance company. The documentation must clearly show the date of service, a description of the service or product, the name of the provider, and the amount charged.

The employer is responsible for reviewing each claim and the associated documentation. This verification ensures that the expense is eligible under the HRA’s terms and IRS rules before any funds are released. If a claim is approved, the employer reimburses the employee up to their available HRA balance. If a claim is denied, the employer must notify the employee and may provide an opportunity to submit additional information.