What Is a Healthcare Reimbursement Account?

A Healthcare Reimbursement Account (HRA) is an employer-funded arrangement designed to reimburse employees for qualified medical expenses. An HRA operates on a reimbursement model, meaning employees typically pay for services or items first and then submit claims for payment from their HRA.

Defining Healthcare Reimbursement Accounts

Healthcare Reimbursement Accounts are exclusively funded by the employer; employees cannot contribute their own money. The employer sets aside a specific amount of money for each employee to use for eligible healthcare costs. When an employee incurs a qualified medical expense, they pay for it out-of-pocket and then submit a claim with supporting documentation to the HRA administrator for reimbursement.

Eligible expenses for HRA reimbursement are defined by the Internal Revenue Service (IRS) under Internal Revenue Code Section 213. These include costs for medical, dental, and vision care. Common eligible expenses include deductibles, co-payments, prescription drugs, and certain medically necessary over-the-counter items. While the IRS sets general guidelines, an employer’s specific HRA plan document may further limit which expenses are covered.

The employer retains ownership of the funds within the account. HRA funds are generally not portable, meaning an employee typically forfeits any unused balance if they leave their employer. However, some employer-sponsored plans may include provisions for limited rollover of unused funds from one plan year to the next, which is entirely at the employer’s discretion.

From a tax perspective, HRAs offer advantages for both employers and employees. Employer contributions to an HRA are tax-deductible business expenses. For employees, reimbursements received for qualified medical expenses are tax-free, provided the expenses meet IRS guidelines. Employees typically access funds by submitting receipts for reimbursement or, in some cases, through a debit card linked to the HRA, which simplifies the payment process for eligible items and services.

Understanding Different HRA Models

The term “Healthcare Reimbursement Account” encompasses several distinct models designed to meet various employer and employee needs. Each HRA model has specific regulations governing its use, particularly regarding employer size and the type of health insurance coverage it can integrate with.

One common model is the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). It is designed for small employers with fewer than 50 full-time employees who do not offer a traditional group health insurance plan. A QSEHRA allows these employers to reimburse employees for individual health insurance premiums and other qualified medical expenses on a tax-free basis. For 2024, the IRS established maximum annual contribution limits for QSEHRAs: $6,150 for self-only coverage and $12,450 for family coverage.

Another model is the Individual Coverage Health Reimbursement Arrangement (ICHRA), which offers greater flexibility than a QSEHRA and can be utilized by employers of any size. An ICHRA enables employers to reimburse employees for individual health insurance premiums and other qualified medical expenses. Unlike QSEHRAs, ICHRAs do not have federal contribution limits, allowing employers to set reimbursement amounts based on their budget and employee classes. Employees participating in an ICHRA must be enrolled in an individual health insurance plan that provides minimum essential coverage.

Beyond these specific types, a “standard” or “integrated” HRA is often offered in conjunction with a high-deductible health plan (HDHP). This type of HRA helps employees cover out-of-pocket costs, such as the deductible, before their health plan’s full coverage begins. While QSEHRAs and ICHRAs are designed to stand alone or integrate with individual plans, integrated HRAs typically work alongside a group health plan.

HRA in Context of Other Health Accounts

Understanding Healthcare Reimbursement Accounts is clearer when comparing them to other common health benefit accounts, specifically Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs). While all three aim to help individuals manage healthcare costs, their funding mechanisms, ownership, portability, and tax implications differ considerably.

Health Savings Accounts (HSAs) are distinct from HRAs in several ways. HSAs can be funded by the employee, the employer, or both, whereas HRAs are solely employer-funded. Once funds are in an HSA, they are employee-owned and fully portable, meaning the employee takes the account with them if they change jobs.

HRA funds, conversely, are employer-owned and typically forfeited upon leaving employment, though limited rollover policies can exist. Eligibility for an HSA requires enrollment in a high-deductible health plan (HDHP), a requirement not universally applicable to all HRA types. HSAs offer a “triple tax advantage”: contributions are tax-deductible, funds grow tax-free, and withdrawals for qualified medical expenses are tax-free.

Flexible Spending Accounts (FSAs) also differ from HRAs. FSAs are primarily funded by employee pre-tax contributions through salary deductions, although employers can contribute. HRA funds, however, originate solely from the employer. FSA funds are employee-funded but managed by the employer, while HRA funds remain the employer’s property.

A characteristic of FSAs is the “use-it-or-lose-it” rule, where most unused funds are forfeited at the end of the plan year, although some plans may allow a limited carryover amount or a grace period. HRA rollover policies are at the employer’s discretion and can vary. Neither HRAs nor FSAs offer the same level of portability as an HSA, as funds are generally tied to the employer’s plan.