What Is a Health Reimbursement Arrangement (HRA)? How It Works

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A health reimbursement arrangement (HRA) is an employer-funded health benefit that repays employees, tax free, for qualified medical expenses and, depending on the type of HRA, health insurance premiums. The employer sets a dollar allowance for each period. The employee pays a covered cost, submits proof, and is reimbursed up to that allowance. In US tax law, an HRA is a reimbursement promise, not a bank account. It belongs to the employer’s benefits program and pays out only against expenses the employee has already incurred.

What Is a Health Reimbursement Arrangement (HRA)?

In everyday terms, an HRA is a company reimbursing health care costs under a written plan. The plan document, sometimes called the HRA agreement, spells out the terms:

• Who is eligible.
• How much each employee can be reimbursed per year (or per month).
• Which expenses qualify.
• Whether spouses and dependents are covered.
• How claims are submitted.
• What happens to unused amounts.

The tax treatment comes from the Internal Revenue Code’s rules on employer-provided accident and health plans, which is why HRA documents often refer to Section 105. IRS guidance issued in 2002 set out the framework for the traditional HRA. Later legislation and regulations added versions for small businesses and for employees who buy their own insurance.

The word “arrangement” matters. Benefits portals often show an “available balance,” but no money sits in an employee-owned account earning interest. The balance is a bookkeeping figure: the most the employer has promised to reimburse, typically paid from its general assets as claims come in. HRA funds therefore cannot be invested, withdrawn as cash or moved to a personal account.

How an HRA Works

The basic cycle is the same across HRA types:

1. The employer sets up the plan. It adopts a plan document, picks the HRA type, defines employee classes and sets each class’s allowance, which may be larger for older employees or those with dependents where the HRA type allows it.
2. The employee incurs an expense, such as a doctor’s copay, a prescription or a monthly insurance premium, depending on the plan.
3. The employee submits a claim with documentation such as an itemized receipt or an explanation of benefits showing the date, service and amount.
4. The plan administrator substantiates the claim. The cost must be a qualified medical expense under the plan’s terms and must have been incurred while the employee was covered by the HRA.
5. The employer reimburses the employee by direct deposit, check or payroll, up to the remaining allowance.

Some employers issue an HRA debit card, often called an HRA benefits card, so eligible charges can be paid at the point of service. The expense still has to qualify, and the administrator may still ask for receipts afterward.

Because reimbursement depends on actual expenses, an employee cannot draw funds in advance and spend them later. Once the allowance is used up, further bills fall to the employee, who may pay them from savings, a flexible spending arrangement (FSA) if the employer offers one, or an HSA with a qualifying high-deductible health plan (HDHP).

When an employee has both an HRA and an FSA, the employee does not choose which one pays a shared eligible expense. The employer’s plan documents set the order. The designated primary plan pays first, and the second plan picks up eligible expenses after the first is exhausted.

Rollover is the employer’s choice. At year-end, unused HRA amounts may carry over, carry over up to a cap, or be forfeited entirely. The plan document decides, not federal law.

Types of HRAs

All HRAs share employer funding and tax-free reimbursement. They differ on what coverage the employee must have, what can be reimbursed and which employers can offer them.

Integrated Group HRA

The traditional HRA works alongside an employer’s group health insurance plan. The employee must be enrolled in that group coverage. The HRA then helps with costs the insurance leaves behind, such as deductibles, copays and coinsurance. Many employers pair an integrated HRA with a higher-deductible group plan. The lower premium saves money, and the HRA cushions part of the deductible. An integrated HRA cannot be used to pay for individual health insurance.

Qualified Small Employer HRA (QSEHRA)

A QSEHRA, sometimes called a small business HRA, was created by the 21st Century Cures Act in 2016. It is meant for employers with fewer than 50 full-time employees that do not offer a group health plan. The employer reimburses employees for individual health insurance premiums and other qualified medical expenses, tax free, as long as the employee has minimum essential coverage.

The IRS caps QSEHRA reimbursements each year and adjusts the caps over time. For 2023, the limits were $5,850 for self-only coverage and $11,800 for family coverage. For 2024, they rose to $6,150 and $12,450. QSEHRAs carry other conditions too. The benefit must generally be offered on the same terms to all eligible employees, and the amount appears on the employee’s Form W-2.

A QSEHRA can affect the employee’s eligibility for the Affordable Care Act premium tax credit. The tax credit may be reduced by the QSEHRA amount.

Individual Coverage HRA (ICHRA)

The ICHRA has been available since plan years beginning in January 2020. Before then, HRAs generally could not reimburse individual health insurance premiums. The ICHRA lets an employer of any size offer an HRA instead of group insurance.

Employees covered by an ICHRA must enroll in individual health insurance, bought on or off the ACA marketplace, or in Medicare. The ICHRA can then reimburse premiums and, if the plan allows, other qualified expenses such as copays and deductibles.

Employers can offer different allowances to different classes of workers. Examples include full-time versus part-time employees, salaried versus hourly employees, or employees in different locations. Within a class, terms must be the same, although the allowance can rise with age or family size. An employer cannot offer the same class of employees a choice between its group plan and an ICHRA.

The premium tax credit interaction is a real decision point. It depends on whether the ICHRA offer counts as “affordable” under ACA rules and whether the employee opts in or opts out. If the offer is affordable, the employee cannot claim the credit. If it is unaffordable, the employee may opt out and claim the credit if otherwise eligible. Accepting the ICHRA rules the credit out either way.

Excepted Benefit HRA (EBHRA)

An EBHRA can be offered by an employer that also offers group health coverage. The employee does not have to enroll in the group plan to use it. The EBHRA cannot pay for comprehensive health insurance. It can reimburse qualified medical expenses and premiums for limited coverage such as dental, vision and short-term health insurance.

The annual cap is indexed. For plan years beginning in 2023, it was $1,950. Because the cap is small and the coverage narrow, an EBHRA works more as a supplement than as a main health benefit.

What an HRA Can Reimburse

Two layers decide what is covered. The outer layer is the IRS definition of medical care. Qualified medical expenses are costs to diagnose, treat, mitigate or prevent a physical or mental illness, not costs that merely support general health. The inner layer is the employer’s plan document. It can exclude expenses the IRS would allow, but it cannot add expenses the IRS does not recognize.

Expenses that generally qualify under the IRS definition include:

• Prescription medications and insulin
• Annual physical exams and doctor’s visits
• Birth control pills
• Crutches and other medical equipment
• Care from a psychologist or psychiatrist
• Substance abuse treatment
• Transportation to obtain medical care
• Meals while receiving treatment as an inpatient at a medical facility
• Deductibles, copays and coinsurance under a health plan

Premium coverage depends on the type: an ICHRA or QSEHRA can cover individual premiums, an EBHRA can cover limited-benefit premiums, and an integrated group HRA cannot cover individual premiums.

Expenses the IRS treats as not qualifying include:

• Teeth whitening and other cosmetic procedures
• Maternity clothes
• Swimming lessons and health club memberships
• Child care for a healthy baby
• Funeral services
• Vitamins taken for general health
• Controlled substances that violate federal law
• Medication bought from other countries

Nonprescription medication is a frequent point of confusion. The general IRS medical-expense rules exclude it, but since 2020 the CARES Act has allowed tax-advantaged health plans to reimburse over-the-counter medicines and menstrual care products without a prescription. Whether your HRA covers them still depends on the employer’s plan terms.

The IRS has also stated that at-home COVID-19 tests and personal protective equipment, such as face masks and hand sanitizer used to prevent the spread of the virus, are eligible medical expenses. They can be paid or reimbursed under HRAs, FSAs and HSAs.

An HRA can cover a spouse’s and dependents’ eligible costs if the plan extends to them. Plans often narrow the scope: one may reimburse only group plan deductible costs, while another also covers dental, vision or pharmacy expenses. The plan document is the only reliable list for a particular HRA.

Tax Treatment of HRAs

For the employee, reimbursements of qualified medical expenses are excluded from gross income, so they are not taxed as wages. The exception is a reimbursement for an expense that does not qualify under the rules. An expense reimbursed by the HRA also cannot be claimed again as an itemized medical deduction.

For the employer, reimbursements are deductible as a business expense. The employer also avoids payroll taxes it would owe if it paid the same amount as salary. And because the employer pays only what employees actually claim, its maximum annual cost is known in advance: the sum of all allowances.

There is a catch for people who want to pair an HRA with an HSA. To make HSA contributions, a person generally cannot have other coverage that pays medical costs before the HDHP deductible is met. A general-purpose HRA reimbursing first-dollar expenses counts as such coverage. Employers that want both benefits use HSA-compatible designs, such as a limited-purpose HRA covering only dental and vision, or a post-deductible HRA that pays only after the HDHP deductible is satisfied.

Example of a Health Reimbursement Arrangement

Hypothetical example; the figures are illustrative and not any employer’s actual terms.

A company offers an integrated group HRA alongside a group health plan with a $3,000 deductible. Employees in the full-time class get a $1,500 annual HRA allowance. The plan document reimburses deductible and copay expenses only, and allows up to $500 of unused allowance to roll over into the next year.

Maria, a full-time employee, incurs these expenses during the year:

• February: $400 for an imaging test, applied to her deductible. She submits the itemized bill and receives $400. Remaining allowance: $1,100.
• May: $250 in prescription copays. She is reimbursed $250. Remaining allowance: $850.
• September: $90 for over-the-counter vitamins. The claim is denied because vitamins for general health are not a qualified expense. Remaining allowance: still $850.
• November: $200 for a specialist visit applied to her deductible. She is reimbursed $200. Remaining allowance: $650.

At year-end, Maria has $650 unused. Under this plan’s rollover cap, $500 carries into next year, so her new-year limit is $1,500 + $500 = $2,000. The other $150 is forfeited. She cannot take the $650 as cash.

Maria’s $850 of reimbursements is not taxable income to her, and her employer deducts it. Had she left in October, her unused allowance would generally have stayed with the employer, unless she elected continuation coverage where available.

Limitations of an HRA

• The employer controls the benefit. It decides whether to offer an HRA, sets the amount and covered expenses, and can change the terms for future plan years.
• No employee contributions. You cannot add pretax salary, even if your costs will exceed the allowance.
• Pay first, then wait. Without a debit card, you front the cost and wait for the claim to be processed.
• Limited portability. An HRA generally ends with your employment. Group-type HRAs are generally group health plans for COBRA purposes, so a departing employee may keep access to the remaining allowance for a period by electing COBRA, typically for a premium. QSEHRAs are not subject to COBRA.
• Interactions with other benefits. A general-purpose HRA can block HSA contributions, and ICHRAs and QSEHRAs can reduce or eliminate premium tax credit eligibility.
• Narrow coverage in some plans. An EBHRA cannot pay for comprehensive insurance, and an integrated HRA may cover only deductible-related costs.

HRA vs. FSA vs. HSA

These three benefits all help pay medical costs with tax-advantaged dollars. They differ on who funds them, who owns them and what happens to unused money.

HRA vs. FSA

A flexible spending arrangement (FSA) is funded mainly by the employee, who elects a pretax salary reduction each year up to an IRS limit. For 2024, the limit was $3,200. With an HRA, the employer decides the amount.

FSA money is generally use-it-or-lose-it. An employer may offer one of two relief features, not both. The first is a grace period of up to two and a half months after the plan year. The second is a carryover of a limited amount, which was $640 for 2024 plan years. An HRA’s rollover, by contrast, is whatever the employer chooses, from nothing to the full balance.

Like an HRA, an FSA is tied to the employer. Unlike an HRA, a health FSA cannot reimburse insurance premiums.

HRA vs. HSA

A Health Savings Account (HSA) is a tax-advantaged account owned by the individual. It is available only to people covered by an HDHP who have no disqualifying other coverage. The employee, the employer or both can contribute.

The money is fully vested. It never expires at year-end and stays with the account holder after a job change or retirement. HSA balances can often be invested, so long-term growth through compound interest is possible. An HRA allowance has no investment option. HSAs generally cannot pay health insurance premiums, with a few exceptions such as COBRA premiums. Some HRA types are built specifically to cover premiums.

FAQs

The Bottom Line

HRAs matter to employees whose employers offer one and to employers deciding how to fund health benefits. The plan document sets the allowance, the covered expenses and the rollover rules, so employees should read it closely. They should also check how their HRA type affects HSA contributions and premium tax credits. Because the allowance usually stays with the employer after a job change, an HRA works best for current medical costs, not long-term savings.