What Are Health Reimbursement Arrangements (HRAs)?

Health Reimbursement Arrangements (HRAs) are employer-funded health benefit plans. Employers establish HRAs to help employees manage qualified medical expenses, reimbursing them for out-of-pocket costs. This allows businesses to support workforce healthcare needs, often complementing or replacing traditional health insurance.

Understanding Health Reimbursement Arrangements

A Health Reimbursement Arrangement is a tax-advantaged health benefit plan funded exclusively by an employer; employees cannot add their own funds. Its primary purpose is to reimburse employees for eligible medical expenses, such as deductibles, co-payments, and other healthcare costs. HRAs are not health insurance policies themselves but a supplemental benefit that complements an employee’s health coverage.

HRA funds are owned by the employer, not the employee. Employees do not have direct access to these funds. Instead, the employer or a third-party administrator manages the HRA, processing reimbursements after an employee incurs and submits claims for qualified medical expenses.

Employers retain control over HRA funds; unused amounts generally remain with the company if an employee leaves. This structure offers employers cost control and predictability regarding healthcare benefit expenditures.

How HRAs Operate

An employer sets an annual allowance, a specific dollar amount available to each employee for the plan year. Employees then incur qualified medical expenses and pay for them out-of-pocket.

After incurring an expense, the employee submits a claim with proof, such as a receipt or an explanation of benefits, to the employer or HRA administrator. The administrator reviews the claim for eligibility and processes the reimbursement. This ensures funds are disbursed only for verified medical costs.

Employers have discretion in how unused funds are handled. Some HRAs allow unused balances to roll over to the next plan year. Other plans may have a “use-it-or-lose-it” provision, where remaining funds are forfeited at year-end. If an employee’s employment ends, any remaining HRA funds typically revert to the employer.

Key Varieties of HRAs

Several distinct HRA types exist, each designed to meet specific employer and employee needs. Each type operates under particular rules regarding eligibility, funding, and reimbursable expenses.

The Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is for small businesses with fewer than 50 full-time equivalent employees that do not offer a traditional group health plan. Employers can reimburse employees for individual health insurance premiums and other qualified medical expenses. The IRS sets annual maximum contribution limits for QSEHRAs. Employees must have minimum essential coverage to receive tax-free reimbursements.

The Individual Coverage Health Reimbursement Arrangement (ICHRA) is available to employers of all sizes. An ICHRA allows employers to reimburse employees for individual health insurance premiums and qualified medical expenses. Employees must be enrolled in an individual health insurance plan to utilize ICHRA funds. Employers can offer different allowances to various classes of employees, such as full-time or part-time staff.

An Excepted Benefit Health Reimbursement Arrangement (EBHRA) covers limited “excepted” benefits like dental, vision, and short-term, limited-duration insurance. This HRA must be offered with a traditional group health plan, though employees are not required to enroll in the group plan to participate. Employer contributions to an EBHRA are subject to annual IRS caps.

The Standard, or Integrated, HRA is offered alongside a group health plan, often a high-deductible health plan (HDHP). This HRA helps employees pay for out-of-pocket medical expenses not fully covered by their primary health plan, such as deductibles, co-pays, and co-insurance. Unlike QSEHRAs and ICHRAs, an Integrated HRA does not reimburse for health insurance premiums. Employees must be enrolled in the employer’s group health plan to participate.

Comparing HRAs with Other Health Accounts

Health Reimbursement Arrangements differ from Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) primarily in funding. HRAs are solely employer-funded, with no employee contributions. HSAs can receive contributions from employees, employers, or third parties. FSAs are primarily funded by employee pre-tax payroll deductions, though employers can also contribute.

Portability and fund ownership also differ. HRA funds are employer-owned and generally not portable; employees typically forfeit unused balances if they leave. HSA funds are employee-owned and fully portable, retained even if employment changes or retirement. FSA funds are not portable and generally remain with the employer if an employee separates from service.

Rollover rules further distinguish these accounts. HSA balances can roll over year after year, allowing funds to accumulate. FSAs are typically subject to a “use-it-or-lose-it” rule, where most unused funds are forfeited at year-end, though some plans may offer a limited carryover. For HRAs, the ability to roll over unused funds depends on the employer’s plan design.

Eligibility requirements also vary. HSAs require enrollment in a qualified high-deductible health plan (HDHP). FSAs are offered alongside traditional health insurance plans and do not require HDHP enrollment. HRA eligibility depends on the specific HRA type and employer design, with some requiring group health plan enrollment and others allowing individual health coverage.

Eligible Medical Expenses and Tax Treatment

Health Reimbursement Arrangements cover a broad range of medical expenses, generally those defined as qualified by the IRS, such as those in Internal Revenue Code Section 213. These include common out-of-pocket costs such as deductibles, co-payments, and prescription medications. Depending on the specific HRA type, eligible expenses can also extend to dental and vision care, as well as certain over-the-counter medicines and menstrual care products.

For some HRA types, specifically Qualified Small Employer HRAs (QSEHRAs) and Individual Coverage HRAs (ICHRAs), individual health insurance premiums are also eligible for reimbursement. However, for an Integrated HRA, which supplements a group health plan, premiums for that group plan are generally not reimbursable; instead, the HRA focuses on out-of-pocket costs like co-insurance. Employers have the ability to further define or limit the list of eligible expenses within their HRA plan design.

The tax treatment of HRAs provides significant benefits for both employers and employees. Employer contributions to an HRA are considered a tax-deductible business expense for the employer. This reduces the employer’s taxable income and can help manage overall healthcare benefit costs.

For employees, reimbursements received from an HRA for qualified medical expenses are generally tax-free. This means employees do not pay federal income tax, Social Security, or Medicare taxes on these reimbursed amounts, effectively increasing the value of their compensation without increasing their taxable income. This tax-advantaged structure makes HRAs an attractive option for both offering and receiving healthcare benefits.