What Is a Health Reimbursement Account?

A Health Reimbursement Account (HRA) is an employer-funded arrangement designed to help employees manage healthcare costs. Employers establish these plans to reimburse employees for qualified medical expenses. This benefit provides a structured way for organizations to support their workforce’s health and financial well-being, offering financial assistance for various health-related expenditures.

Defining Health Reimbursement Accounts

Health Reimbursement Accounts are financial arrangements established and funded exclusively by an employer; employees cannot contribute their own money. Funds within an HRA reimburse employees for eligible healthcare expenses, including deductibles, co-payments, co-insurance, and other out-of-pocket costs not fully covered by a primary health insurance plan. The Internal Revenue Service (IRS) defines qualified medical expenses, primarily outlined in IRS Publication 502.

HRAs are not health insurance plans themselves; they complement existing health coverage or can integrate with individual health plans. Their primary purpose is to provide a tax-advantaged method for employees to pay for medical services and products. While the employer funds the HRA, the funds typically remain with the employer until an eligible expense is incurred and reimbursed. Some HRA plans may allow unused funds to roll over from one plan year to the next.

How HRAs Function

The operational mechanics of an HRA begin when an employee incurs a qualified medical expense. After receiving a medical service or purchasing an eligible item, the employee typically pays for the expense out-of-pocket. The next step involves submitting a claim for reimbursement to the employer or a third-party administrator, often requiring documentation such as receipts or an Explanation of Benefits (EOB). Once the claim is approved, the employee receives reimbursement from the HRA funds set aside by the employer.

Qualified medical expenses, as defined by IRS Publication 502, encompass a wide range of services and products. Examples include doctor visits, prescription medications, dental treatments, vision care, and medical equipment. The employer’s specific HRA plan document will detail which of these expenses are eligible for reimbursement. Employees should review their plan’s guidelines, as employers can further restrict the list of reimbursable expenses.

HRA funds can often carry over from one plan year to the next if the employer’s plan design permits. This rollover feature allows employees to accumulate funds for future medical expenses. However, the total amount that can be reimbursed in a given year, even with rollovers, remains subject to annual limits set by the employer and, for some HRA types, by the IRS. The employer retains the primary role in establishing the HRA, determining annual contribution amounts, and managing the overall administration of the plan.

Different HRA Models

Several distinct HRA models exist, each designed to meet varying employer and employee needs.

Qualified Small Employer HRA (QSEHRA)

The Qualified Small Employer HRA (QSEHRA) is available to small employers with fewer than 50 full-time equivalent employees who do not offer a group health plan. For 2025, employers can reimburse up to $6,350 for individual coverage and $12,800 for family coverage. QSEHRAs allow employees to be reimbursed for individual health insurance premiums and other qualified medical expenses, provided they maintain minimum essential coverage.

Individual Coverage HRA (ICHRA)

The Individual Coverage HRA (ICHRA) offers greater flexibility and is available to employers of any size. Unlike QSEHRAs, ICHRAs do not have IRS-imposed contribution limits, allowing employers to determine reimbursement amounts. ICHRAs enable employers to reimburse employees for individual health insurance premiums and other qualified medical expenses. Employers can also offer different reimbursement amounts based on employee classes, such as full-time or part-time status, or geographic location.

Integrated HRAs (GCHRAs)

Integrated HRAs, also known as Group Coverage HRAs, work in conjunction with an employer’s traditional group health insurance plan. These HRAs help employees cover out-of-pocket costs such as deductibles, co-insurance, and co-payments not fully paid by their primary group plan. Employees must be enrolled in the employer’s group health plan, or a spouse’s or parent’s group plan, to participate. Funds in an Integrated HRA generally cannot be used to reimburse group health plan premiums.

Excepted Benefit HRA (EBHRA)

The Excepted Benefit HRA (EBHRA) is an integrated HRA that covers “excepted” medical care like dental and vision expenses. It generally cannot be used for individual or group health plan premiums, other than COBRA.

Tax Implications of HRAs

Health Reimbursement Accounts offer significant tax advantages for both employers and employees. For employees, employer contributions to an HRA are generally excluded from their gross income, meaning these contributions are tax-free. Furthermore, reimbursements received from an HRA for qualified medical expenses are typically tax-free for the employee. This tax-free status applies to federal income tax, Social Security, and Medicare taxes, effectively increasing the value of the benefit to the employee.

Employers also benefit from favorable tax treatment when offering HRAs. Contributions made to HRAs are generally considered tax-deductible business expenses. This deduction can help reduce an employer’s overall taxable income and associated tax liability. HRA contributions are typically exempt from payroll taxes, providing further savings for the employer.

For reimbursements to remain tax-free for employees, they must be used for expenses defined as qualified medical expenses by the IRS. If an HRA plan were to reimburse for non-medical expenses, the IRS could consider all reimbursements from that HRA as taxable income for the employee. Employers are responsible for ensuring their HRA plans comply with IRS regulations to maintain these tax benefits and may have certain reporting obligations.