Health Reimbursement Arrangement (HRA)

What Is a Health Reimbursement Arrangement (HRA)?

A health reimbursement arrangement (HRA) is an employer-funded plan that reimburses employees for qualified medical expenses and, in some cases, insurance premiums. Employers are allowed to claim a tax deduction for the reimbursements they make through these plans, and reimbursement dollars received by employees are generally tax-free.

How a Health Reimbursement Arrangement (HRA) Works

A health reimbursement arrangement is a plan set up by an employer to cover medical expenses for its employees. The employer decides how much it will put into the plan, and the employee can request reimbursement for actual medical expenses incurred up to that amount. All employees in the same class must receive the same HRA contribution.

An HRA is not an account. Employees cannot withdraw funds in advance and then use them to pay medical expenses. Instead, they must incur the expense first, then have it reimbursed. Reimbursement at the time of service is possible if the employer provides an HRA debit card. An employee who uses up all the allocated funds in the HRA before year-end will have to cover any subsequent health bills out-of-pocket or with the funds in a flexible spending account (FSA), also known as a flexible spending arrangement, when available, or a health savings account (HSA) for employees who have a high-deductible health plan (HDHP).

Maternity clothes, gym membership fees, marriage counseling, and childcare are among the expenses not covered by a health reimbursement arrangement (HRA).

Types of HRAs

There are a few kinds of health reimbursement arrangements.

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is a health coverage subsidy plan for employees working for businesses that employ less than 50 full-time workers. Also known as a small business HRA, a QSEHRA can be used to offset health insurance coverage or repay medical expenses that would be otherwise uncovered.

The yearly limits are set by the Internal Revenue Service (IRS). For 2021, a company with a QSEHRA can reimburse individual employees for up to $5,300 per year and employees that have families for up to $10,700 per year. The money that is reimbursed is tax-free for the employees and tax-deductible for the employers.

Individual Coverage HRA (ICHRA)

An Individual Coverage HRA (ICHRA) is relatively new, having only been available since January 2020. Previously, HRAs could not be used to pay for individual health insurance premiums. But as of January 2020, the government allows employers to offer their employees a new type of HRA called an individual coverage HRA — instead of group health insurance.

Employees can use these HRAs to buy their own comprehensive individual health insurance with pretax dollars either on or off the Affordable Care Act's health insurance marketplace. Individual coverage HRAs can also reimburse employees for qualified health expenses such as copayments and deductibles.

Whether or not your ICHRA makes you eligible for a premium tax credit to help pay for health insurance coverage under the Affordable Care Act depends on whether your employer's ICHRA meets minimum standards for so-called "affordability," and whether you choose to opt-in or opt-out of the coverage.

Excepted Benefit HRAs (EBHRA)

In addition, employers that continue to offer traditional group health insurance can offer Excepted Benefit HRAs (EBHRA) to reimburse employees for up to $1,800 a year in qualified medical expenses. Employees can enroll in an "excepted benefit HRA" even if they decline group health insurance coverage, but they cannot use the funds to buy comprehensive health insurance. They can, however, use the funds to pay for short-term health insurance, dental and vision insurance premiums, and qualified medical expenses.

Benefits of Health Reimbursement Arrangements

HRAs can be used to pay for qualified medical expenses, which include prescription medications, insulin, an annual physical exam, crutches, birth control pills, meals paid for while receiving treatment at a medical facility, care from a psychologist or psychiatrist, substance abuse treatment, transportation costs incurred to get medical care, and much more. Employees can also use HRAs to buy their own comprehensive individual health insurance with pretax dollars through the aforementioned individual coverage HRA (ICHRA).

Employees can use the money in their HRAs to cover their spouse's and dependents' allowed medical, dental, and vision costs.

Limitations of Health Reimbursement Arrangements

An HRA only covers qualified medical and dental expenses. According to the Internal Revenue Service (IRS), medical expenses are costs incurred to alleviate or prevent a physical or mental ailment, not expenses to maintain general health, such as vitamins.

Expenses that do not qualify as a necessary medical expense include, for example, teeth whitening, maternity clothes, funeral services, health club membership fees, controlled substances, childcare for a healthy baby, marriage counseling, medication from other countries, and non-prescription medications.

An employer may exclude certain medical expenses even though the expenses are qualified by the IRS. An employer’s list of reimbursable medical expenses will be outlined in its HRA plan document for employees.

The IRS issued a statement notifying taxpayers that at-home COVID-19 tests and personal protective equipment such as face masks and hand-sanitizer are both considered eligible medical expenses that can be paid or reimbursed under health flexible spending arrangements, health savings accounts, and health reimbursement arrangements (HRAs).

Health Reimbursement Arrangements vs. Other Arrangements

An employee who has both an FSA and an HRA — and has an expense that is eligible to be reimbursed through both plans — can't choose which will cover the expense. Instead, the costs will be reimbursed by the plan that the employer has set up to pay first. When this primary plan has been depleted, the second plan will be used to cover any subsequent eligible medical expenses that are reported for reimbursement.

Here's a closer look at two other options for funding out-of-pocket medical expenses.

An FSA is funded using a portion of an employee's pre-tax salary, and, in contrast to an HRA, each employee determines how much money should go into these arrangements annually — up to $2,750 in 2021.

Unused funds in HRAs may be carried over to the following year according to the discretion of the employer. Unused FSA funds generally cannot be used in the next plan year, although an employer may offer either a short grace period (2.5 months) or allow up to $550 to be carried over.

Rules about the usage of unused FSA funds were temporarily changed as a result of the COVID-19 pandemic. With the passing of the Consolidated Appropriation Act, 2021, which was signed into law by former President Donald Trump at the end of December 2020, employees can carry over money up to the full annual amount allowed ($2,750) from 2020 to 2021 and from 2021 to 2022, for healthcare FSAs.

In comparison to an HRA, a health savings account (HSA) is a fully vested tax-advantaged account that is not subject to forfeiture if funds remain in the account at the end of the year. An HSA is paired with a high-deductible health plan (HDHP) to pay for medical and dental expenses. The account is funded by the employee or employer and, like an FSA, cannot be used to pay insurance premiums. Unlike HRAs and FSAs, employees get to keep their HSAs if they change employers.

Special Considerations

HRA Funding and Portability

The health reimbursement arrangement is funded solely by the employer, which also decides the maximum annual contribution for each employee’s HRA. Employers determine how much to contribute to employees’ HRAs, except that all workers in the same class of employees must receive the same contribution, as noted above. Workers who are older or who have dependents may receive more.

Any HRA money that is unspent by year-end may be rolled over to the following year, although an employer may set a maximum rollover limit that can be carried over from one year to the next. Furthermore, if an employee is terminated or leaves the company to work for another firm, the HRA does not go with them. That makes it different from an HSA — health savings account — which is portable.

HRA Tax Advantages

As a benefit to employers, reimbursements through the HRA are 100% tax-deductible. As an alternative to more expensive retiree healthcare, an employer may use an HRA to cover the health costs of retired employees. In addition, since the plans are fully funded by employers, they offer predictability, allowing employers to anticipate their approximate maximum expense for HRA health benefits for the year.

Employees may use the arrangement to pay for a wide range of medical expenses not covered by their health insurance policies. Depending on the HRA type, they may also use it for medical, dental, or vision insurance premiums. Furthermore, reimbursements are tax-free up to a maximum amount for a coverage period. Some businesses may offer employees the added advantage of other employer-provided health benefits, such as an FSA, in conjunction with an HRA.

HRA FAQs

Here are some commonly-asked questions.

What Is a HRA in Health Insurance?

A health reimbursement arrangement (HRA) is a plan an employer sets up to cover employee medical expenses.

How Does a HRA Work?

The employer determines the amount of money that will go into the plan and the employee can ask to be reimbursed for qualified medical expenses up to the designated amount. Employers can take a tax deduction for the reimbursements made through these plans, and the reimbursements given to employees are usually tax-free.

What Is a HRA vs. a HSA?

A health reimbursement arrangement (HRA) is a benefit used to pay employees back in tax-free money for certain qualified medical expenses and health coverage premiums. A health savings account (HSA) is a tax-advantaged account used by individuals covered under a high-deductible health plan (HDHP) looking to save up to cover the cost of qualified medical expenses.

Can I Cash out My HRA?

No. HRA money that hasn't been used by the end of the year can usually be rolled over to the next year, with an employer determining the maximum amount that can be carried from one year to another.

What Qualifies for HRA Reimbursement?

Medical and dental expenses that are considered to be "necessary," such as an annual check-up, prescriptions, or substance abuse treatment.

The Bottom Line

A health reimbursement arrangement (HRA) is a tax-advantaged plan that employers use to reimburse employees for certain approved medical and dental expenses. The plan amount is determined by the employer, up to a yearly limit, and the employee can be reimbursed up to that amount. The reimbursements paid to the employee are tax-free and the employers can claim a tax deduction for the reimbursements that they make.

A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is an HRA for smaller companies that have less than 50 full-time workers. An Individual Coverage HRA (ICHRA) allows employees to buy their own individual health insurance with pretax dollars. Employees with an ICHRA can be reimbursed for health expenses such as copayments and deductibles.