What Is an HRA? Health Reimbursement Arrangements Explained

Health Reimbursement Arrangements (HRAs) are employer-funded benefits designed to reimburse employees for qualified medical expenses. While not health insurance, an HRA provides a tax-advantaged method for employers to support their workforce’s healthcare needs.

Core Principles of an HRA

An HRA is an employer-funded health benefit, meaning employees do not contribute their own money. These arrangements are considered notional accounts; funds are not held in a separate bank account for each employee. Instead, the employer pays reimbursements from company funds as eligible claims are approved.

The primary function of an HRA is to reimburse employees for eligible medical expenses, rather than providing upfront payment for services. Employers establish an annual limit on the amount of money available to each employee through their HRA, which allows businesses to control their benefit costs effectively.

Whether unused funds roll over from one year to the next depends on the specific design of the employer’s HRA plan. Some plans permit full or partial rollovers, while others operate on a “use it or lose it” basis, requiring employees to utilize allocated funds within the plan year. If an employee leaves the company, any remaining HRA funds typically revert to the employer.

Operational Mechanics of an HRA

The process for an employee to utilize their HRA involves a series of steps after incurring a healthcare expense. First, the employee pays for a qualified medical expense out-of-pocket, which could include doctor visits or prescription drugs.

Following payment, the employee submits a claim for reimbursement, usually to their employer or a third-party administrator (TPA) managing the HRA benefit. This claim generally requires proof of the expense, such as a receipt, an invoice, or an Explanation of Benefits (EOB) from their insurance provider, detailing the service, cost, and date.

Upon receiving the claim, the employer or TPA reviews it to ensure the expense is eligible under the specific HRA plan rules. Once the claim is approved, the employer reimburses the employee directly from company funds, up to the available balance in their HRA.

Key HRA Structures

Several types of HRAs exist, designed to meet different employer and employee needs, particularly concerning how they integrate with health insurance coverage.

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

This HRA is for small businesses with fewer than 50 full-time equivalent employees that do not offer a group health plan. It allows employers to reimburse employees for individual health insurance premiums and other qualified medical expenses, provided the employee has minimum essential coverage.

Individual Coverage Health Reimbursement Arrangement (ICHRA)

ICHRAs permit employers of any size to reimburse employees for individual health insurance premiums and other medical expenses. To participate, employees must be enrolled in individual health insurance coverage or Medicare Parts A and B, or Part C. ICHRAs can be offered as a standalone benefit, allowing employers to customize allowances based on employee classes, such as full-time or part-time.

Excepted Benefit Health Reimbursement Arrangement (EBHRA)

Employers can offer EBHRAs alongside a traditional group health plan. These are designed to cover “excepted benefits” like dental and vision care, short-term, limited-duration insurance, and certain out-of-pocket medical costs not covered by the primary group plan. Employees can participate even if they decline enrollment in the employer’s main group health plan.

Group Coverage HRA (GCHRA) or Integrated HRA

This HRA works in conjunction with a traditional group health insurance plan, allowing employers to reimburse employees for out-of-pocket costs such as deductibles, co-pays, and coinsurance.

Reimbursable Costs and Tax Treatment

HRAs cover a range of eligible medical expenses, defined by the IRS. Common reimbursable costs include deductibles, co-payments, and co-insurance. Many plans also cover prescription drugs, dental care, and vision services, including eyeglasses and contact lenses. For certain HRA types, such as QSEHRAs and ICHRAs, individual health insurance premiums can also be reimbursed. Employers define the specific list of eligible expenses for their particular HRA plan.

HRAs offer favorable tax treatment for both employees and employers. For employees, reimbursements received from an HRA for qualified medical expenses are generally tax-free. This means the reimbursed amounts are not subject to federal income tax or payroll taxes.

Contributions made to HRAs are typically tax-deductible as a business expense for employers. This can reduce the employer’s taxable income and overall tax liability, providing a cost-effective way to offer healthcare benefits.