What Is an HRA Fund & How Does It Work?
Understand how Health Reimbursement Arrangements (HRAs) work. Learn about these employer-funded accounts for tax-advantaged medical expense reimbursement.
A Health Reimbursement Arrangement (HRA) is an employer-funded health benefit that reimburses employees for qualified medical expenses. Employers allocate a specific amount of money for employees’ healthcare costs, with no employee contributions. HRAs help employees manage out-of-pocket medical expenditures, supplementing traditional health insurance coverage.
Core Mechanics of HRA Funds
HRA funds are exclusively employer-funded; employees cannot contribute their own money. The employer establishes the HRA and determines the annual allowance for each eligible employee. These funds are not pre-funded individual accounts; instead, an HRA operates as a “notional account,” where the employer holds the money until a valid claim is submitted for reimbursement.
When an employee incurs a qualified medical expense, they pay for it out-of-pocket first. The employee then submits a claim with proof of the incurred expense, such as a receipt or an Explanation of Benefits (EOB), to the HRA administrator or their employer. After verification and approval, the employer reimburses the employee for the eligible expense from the allocated HRA funds. This process ensures funds are disbursed only for legitimate medical costs.
Common HRA Fund Models
Employers utilize several common HRA models, tailored to different benefit strategies and employer sizes. An Integrated HRA (GCHRA) works with a traditional group health insurance plan. This model helps employees pay for out-of-pocket costs such as deductibles, copayments, and coinsurance. Employees must be enrolled in a group health plan, either through their employer or a spouse’s employer.
Individual Coverage HRAs (ICHRAs) allow employers of any size to provide tax-free funds for employees to purchase their own individual health insurance coverage, in addition to other qualified medical expenses. This model offers flexibility, enabling employees to choose a health plan that best fits their personal needs from the individual market. Employers can offer ICHRAs to different classes of employees, such as full-time or part-time staff, and set varying allowance amounts based on factors like age or the number of dependents.
Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) are specifically designed for smaller employers who do not offer a traditional group health plan. QSEHRAs allow eligible small businesses to reimburse employees for individual health insurance premiums and qualified medical expenses. QSEHRAs have annual contribution limits set by the IRS, which for 2025 are $6,350 for self-only employees and $12,800 for employees with a family.
Other HRA types, such as Stand-Alone HRAs, are used for more limited benefits, like dental or vision expenses, or for retirees. Excepted Benefit HRAs (EBHRAs) cover specific benefits like dental, vision, or short-term limited duration insurance, with a maximum contribution limit.
Tax Implications and Benefits
HRA funds offer significant tax advantages for both employees and employers. For employees, reimbursements for qualified medical expenses are tax-free. These funds are not considered taxable income and are exempt from federal income tax, Social Security, Medicare, and in most cases, state income taxes.
For employers, contributions to an HRA are tax-deductible business expenses, reducing their overall taxable income and lowering their tax liability. These contributions are exempt from payroll taxes. These tax treatments are granted under Internal Revenue Code Section 105, which designates HRAs as tax-advantaged health benefit plans.
Important Rules and Usage
HRA funds can only be used for “qualified medical expenses” defined by the IRS. Common eligible expenses include deductibles, copayments, coinsurance, prescription medications, and dental or vision care. Employers define the specific list of reimbursable expenses within their HRA plan documents.
The ability for unused HRA funds to roll over from year to year is at the employer’s discretion. Some plans allow full or partial rollover, while others require forfeiture at the end of the plan year. For certain HRA types like ICHRAs and QSEHRAs, funds roll over month-to-month.
If an employee leaves their company, HRA funds are forfeited, as they are employer-owned assets and not employee-owned savings accounts. Employers may allow a limited period for employees to submit claims for expenses incurred prior to termination. HRAs are not portable; they are tied to the employer’s plan and do not transfer to a new employer. HRA funds cannot be cashed out by employees, as this would trigger taxation of all distributions.