What Is an Individual Health Reimbursement Arrangement?
Understand Individual HRAs: employer-funded solutions for health expenses and individual insurance premiums.
An Individual Health Reimbursement Arrangement (HRA) offers a structured approach for employers to assist employees with healthcare costs. This employer-funded benefit allows for tax-free reimbursements to employees for qualified medical expenses and, significantly, for individual health insurance premiums. It represents a flexible alternative to traditional group health insurance plans, providing employees with greater choice in their healthcare coverage. Individual HRAs are designed to empower employees to select health insurance plans that best suit their personal needs while offering employers a predictable way to manage healthcare benefit expenditures.
Defining Individual Health Reimbursement Arrangements
An Individual Health Reimbursement Arrangement is an employer-sponsored health benefit that integrates with individual health insurance coverage. Employers contribute funds to these arrangements, and employees can then receive tax-free reimbursements for eligible medical expenses and individual health insurance premiums. This structure allows employers to offer a valuable health benefit without directly providing a group health plan. The core characteristic is that the employer funds the arrangement, and employees use these funds to cover their healthcare costs, particularly if they obtain their own health insurance through the individual market or a health insurance exchange. Individual HRAs facilitate a shift in how employers provide health benefits, moving from direct provision of group coverage to a defined contribution model.
Two primary types of Individual HRAs are the Individual Coverage HRA (ICHRA) and the Qualified Small Employer HRA (QSEHRA). ICHRAs are available to employers of any size and offer broad flexibility in terms of contribution amounts and employee classes. QSEHRAs, by contrast, are specifically for small employers with fewer than 50 full-time equivalent employees and have annual contribution limits set by the IRS.
How Individual HRAs Function
Individual HRAs operate through a reimbursement mechanism where employees first pay for eligible healthcare expenses or individual health insurance premiums out-of-pocket. After incurring the expense, the employee submits a claim for reimbursement to their employer or a designated third-party administrator. This process ensures that the employer’s funds are only disbursed for actual, verified healthcare costs. The system is designed to seamlessly work with an employee’s chosen individual health insurance plan, allowing the HRA to supplement that coverage rather than replace it.
Common eligible expenses for reimbursement include individual health insurance premiums, deductibles, co-pays, and prescription drugs, along with a wide range of other medical expenses approved by the IRS in Publication 502. Employers can choose to limit the types of expenses eligible for reimbursement, for example, by only allowing premium reimbursements. Funds within an Individual HRA are typically managed by the employer or an administrator, and unused amounts may carry over from year to year, depending on the specific plan design established by the employer.
Eligibility and Compliance Requirements
Employers of any size can offer an Individual Coverage HRA (ICHRA), from small startups to large enterprises. However, a crucial requirement for employers offering an ICHRA is that they generally cannot offer a traditional group health plan to the same class of employees. This means employers must segment their workforce into distinct classes if they wish to offer both an ICHRA and a group plan.
In contrast, a Qualified Small Employer HRA (QSEHRA) is limited to employers with fewer than 50 full-time equivalent employees who do not offer any group health plan. For employees to participate in an Individual HRA, they must generally be enrolled in individual health insurance coverage that qualifies as “minimum essential coverage” (MEC). This includes plans purchased through the Health Insurance Marketplace or directly from an insurer, or Medicare Parts A and B together, or Part C. Employees covered by a traditional group health plan, including a spouse’s or parent’s plan, typically cannot participate in an ICHRA.
Non-discrimination rules under Internal Revenue Code Section 105 apply to ICHRAs, ensuring that benefits do not unfairly favor highly compensated individuals. While ICHRA has no contribution limits, employers must ensure that the offer is affordable for employees, which can impact an employee’s eligibility for premium tax credits. For QSEHRAs, the IRS sets annual contribution limits, which for 2025 are $6,350 for self-only coverage and $12,800 for family coverage. Employers must also provide employees with written notice about the HRA and its impact on premium tax credit eligibility.