Health Reimbursement Account:
Definition, Types & Comparison

A Health Reimbursement Account (HRA), also called a Health Reimbursement Arrangement, is an employer-funded account-based health plan that reimburses employees for qualified medical expenses. The employer owns the account, determines the contribution amount, and decides which medical expenses qualify for reimbursement. Unlike employee-contributed accounts, HRAs are funded exclusively by the employer, and employees cannot voluntarily add money to the account.

HRAs provide tax advantages for both employers and employees. Employer contributions are 100% tax-deductible to the employer and tax-free to the employee. Reimbursements for qualified medical expenses are excluded from taxable income. The account can be used to pay for deductibles, copays, coinsurance, prescription drugs, dental care, vision care, and in some cases, individual health insurance premiums or Medicare premiums.

Related terms: Health Savings Account (HSA), Flexible Spending Account (FSA), Individual Coverage HRA (ICHRA), Excepted Benefit HRA, qualified medical expenses

HRAs operate through employer contributions to individual employee accounts that can only be used for qualified medical expenses. The employer contributes a fixed amount to the account, often at the beginning of the plan year or on a monthly schedule. Employees submit claims for reimbursement when they incur eligible medical expenses, and each claim must be substantiated with a detailed receipt or Explanation of Benefits (EOB) showing the date of service, provider name, service or item purchased, and amount paid.

Most HRA plans provide employees with a debit card that automatically processes eligible expenses at pharmacies and doctors' offices. When automatic substantiation is not possible, the plan administrator sends a notice requesting documentation. Employees can also pay for expenses up front and request reimbursement by submitting receipts through the plan administrator's online portal, mobile app, or by mail.

The employer decides whether unused HRA funds roll over to the next plan year. If rollover is not permitted, unused funds return to the employer at year-end. When an employee leaves the company, the HRA typically stays with the employer, though vested employees may continue to submit claims against their account balance until it is exhausted.

There are 3 critical aspects of HRAs that employees should understand:

• An HRA is not traditional health coverage through a job – It is an employer-funded group health plan with a fixed dollar amount per year. You use the money to pay for qualifying medical expenses, and unused funds may carry over from year to year depending on the plan. For certain types of HRAs, you can use the money to pay monthly premiums for health plans you purchase yourself.
• You must have health coverage to use the HRA – For certain HRA types like Individual Coverage HRAs, you and eligible household members must enroll in a health plan to use the HRA money. If some household members qualify for premium tax credits and others do not because they have an HRA, you can enroll together in the same plan, with the premium tax credit amount based on who qualifies.
• Understand your options before you act – Review your HRA letter from your employer and use decision guides to avoid paying more for coverage and using more tax credits than you qualify for, which could result in owing money when filing taxes.

There are 4 main types of HRAs available to employers and employees:

• Individual Coverage HRA (ICHRA) – Reimburses medical expenses including monthly premiums and requires eligible employees and dependents to have individual health insurance coverage or Medicare Parts A, B, or C for each month covered by the HRA. This type allows employers to provide a defined contribution toward individual market health plans rather than offering traditional group health insurance.
• Qualified Small Employer HRA (QSEHRA) – Allows small employers that do not offer health coverage to help pay for their employees' medical expenses, including plan premiums. This option is limited to employers with fewer than 50 full-time employees.
• Excepted Benefit HRA – A limited HRA that employers can offer in addition to a traditional group health plan to finance additional medical care such as copays, deductibles, or expenses not covered by the primary plan. Employees can access this HRA even if they decline enrollment in the traditional group health plan.
• Limited Purpose HRA – Restricts reimbursements to specific types of expenses, most commonly dental and vision care. This type is typically paired with a Health Savings Account (HSA) and provides a useful option for employees with children needing glasses or orthodontia.

HRAs can be used to pay for qualified medical expenses as defined by IRS Section 213(d) and as determined by your employer. Some employers limit HRA reimbursements to services covered by the employee's health plan, while others allow the HRA to pay for a broader range of dental, vision, and other healthcare services.

Common eligible expenses include payments toward a deductible, copays, routine doctor visits, hospital expenses, dental care, blood pressure monitors, vision care including eyeglasses and contact lenses and exams, prescription drugs, and blood glucose monitors. For Individual Coverage HRAs, the account can also reimburse premiums for individual health insurance purchased on the marketplace or Medicare premiums. Post-employment health insurance premiums and premiums for qualified long-term care insurance may also be eligible depending on the plan design.

Each medical expense submitted for reimbursement must be adjudicated as a qualified medical expense by the plan administrator with documented proof before reimbursement occurs. HRAs cannot reimburse expenses incurred before the effective date of the HRA, before the participant enrolled in the HRA, or expenses for which a deduction was allowed on any prior year tax return.

HRA contributions and qualified withdrawals receive favorable tax treatment. Employees are not taxed on employer contributions under IRC Section 106, which provides tax exclusion for contributions an employer makes to an HRA. All employer contributions to HRAs that meet IRS rules are 100% tax-deductible to the employer and tax-free to the employee, and they do not increase the employee's income tax burden.

Assets used to pay for qualified medical expenses are not taxed under IRC Section 105, which provides tax exclusion for amounts received as reimbursement of medical care expenses. Expense reimbursements under HRAs for qualified medical expenses are not reportable to the IRS, so there is no IRS reportable event when taking a distribution for eligible expenses.

If an HRA fails to meet IRS requirements, all distributions made including those for qualified medical expenses will be taxable to the participants. This makes proper plan administration and substantiation of expenses critical for maintaining the tax-advantaged status of the account.

No, employees cannot voluntarily contribute to an HRA. According to IRS rules, an HRA must be funded solely through employer contributions or mandatory employee contributions. Employees may not make voluntary contributions on either a pre-tax or after-tax basis. This distinguishes HRAs from Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs), where employees can make their own contributions.

The one exception is when an employee makes contributions as allowed under COBRA continuation coverage. The Consolidated Omnibus Budget Reconciliation Act gives workers and their families who lose their health benefits the right to choose to continue group health benefits for limited periods under certain circumstances such as voluntary or involuntary job loss, reduction in hours worked, transition between jobs, death, divorce, and other qualifying life events.

When you leave your employer, the HRA account stays with the employer because the employer owns the account. You generally cannot move your HRA to a new employer. However, if you are vested in the HRA plan according to your employer's vesting schedule, you will be able to continue processing claims against the assets in your account until the balance is exhausted.

The HRA would continue to reside in the trust your employer established to hold the assets. Vesting schedules determine the right to non-forfeitable ownership of employer contributions, and assets in your HRA are only available to pay claims once you have satisfied the vesting requirements of your plan. If unused funds remain in the account and you are not vested, those funds are forfeited back to the employer.

HRA rollover allows unused funds to carry over from one plan year to the next, unlike Flexible Spending Accounts which have a use-it-or-lose-it requirement. The employer decides whether to allow rollover and can structure the plan so that all unused funds, a flat dollar amount, or a percentage of the balance carries forward. This rollover feature helps employees build up reserves for future medical expenses.

Forfeiture occurs when unused HRA funds return to the employer. This happens when an employee leaves the company and is not vested in the plan, or at the end of the plan year if the employer has not structured the HRA to permit rollover. Death can also trigger forfeiture if no spouse or dependents survive the employee, as HRAs cannot provide death benefits and can only be used for qualified medical expense reimbursements for the employee, spouse, or dependents.

You access HRA funds by submitting claims for qualified medical expenses to the plan administrator. Most employers provide a debit card that allows direct payment at network doctors, pharmacies, and other healthcare providers, with automatic substantiation occurring through the provider's merchant system. When you use the debit card, the purchase is automatically verified as an eligible expense in most cases.

For expenses that cannot be paid with the debit card or that require additional documentation, you submit a reimbursement request through the plan administrator's online portal, mobile app, secure fax, or by mail. You must provide a detailed receipt or Explanation of Benefits that includes the date of service, name of the provider, service or item purchased, and the amount you paid or are responsible for paying. Claims typically process within one to two weeks from submission.

For Individual Coverage HRAs, affordability is determined based on the lowest cost silver plan (LCSP) for self-only coverage in the employee's location. Employers use this benchmark to determine if their ICHRA offer satisfies the employer shared responsibility provisions under IRC Section 4980H and avoids employer responsibility payments.

The IRS publishes an ICHRA Employer LCSP Premium Look-up Table that allows employers in states with Federally-facilitated Exchanges and State-based Exchanges on the Federal Platform to access individual market Qualified Health Plan LCSP data by geographic location. An employer may determine affordability based on the employee's residence or, under a location safe harbor, the employee's primary site of employment.

For ICHRAs with a calendar year plan year, employers may use the LCSP for self-only coverage for January of the prior year. For ICHRAs that do not have a calendar year plan year, employers may use the LCSP for January of the current year. Similar rules apply for determining employee eligibility for premium tax credits under IRC Section 36B when an employee is offered an ICHRA.

Yes, HRAs are subject to nondiscrimination requirements under IRC Section 105(h), which prohibits discrimination in favor of highly compensated employees with respect to eligibility to participate and benefits provided. The IRS requires employers to perform nondiscrimination testing each year to prevent key and highly compensated employees from receiving a disproportionate amount of employer-provided tax-free benefits compared to rank-and-file employees.

Nondiscrimination testing is a critical component of plan compliance. Failure to satisfy the nondiscrimination testing requirements or take necessary corrective measures can result in the inclusion of discriminatory benefits in the income of highly compensated employees. Many HRA administrators offer nondiscrimination testing services to help employers maintain compliance and avoid adverse tax consequences.

The Employee Retirement Income Security Act (ERISA) requires employers who offer HRAs to create and maintain written plan documents and a Summary Plan Description. These documents communicate plan benefits, how the plan operates, contribution schedules, reimbursable expenses, order of reimbursement rules, rollover provisions, and vesting schedules. All documents must be stored electronically with date and time stamps of the original version and any subsequent revisions.

For Individual Coverage HRAs, employers must provide employees with an HRA letter that includes information needed for individual coverage enrollment such as the HRA type, dollar amount the employer will contribute, and how the funds can be used. Model notices and attestations are available from the IRS and CMS to help employers meet these documentation requirements. Employees need this letter and their annual household income estimate to navigate enrollment decisions and avoid owing money when filing taxes.

An HRA is often compared to 3 related account-based health plans:

HRA vs. Health Savings Account (HSA)

An HRA is employer-funded and employer-owned with no employee contributions allowed, while an HSA is employee-owned and receives contributions from both employees and employers. HRA funds do not roll over unless the employer permits it, and the account stays with the employer when the employee leaves. HSA funds always roll over year to year and the account belongs to the employee even after changing jobs or retiring. HSAs require enrollment in a high-deductible health plan and have annual contribution limits set by the IRS, while HRAs have no IRS-imposed contribution limits. Both provide tax-free reimbursements for qualified medical expenses, but HSAs offer additional investment opportunities for long-term growth.

HRA vs. Flexible Spending Account (FSA)

An HRA is funded exclusively by the employer and owned by the employer, while an FSA is primarily funded through employee payroll deductions and owned by the employee. HRAs may allow unused funds to roll over to the next plan year based on employer plan design, whereas FSAs typically follow a use-it-or-lose-it rule where unused funds are forfeited at year-end, though some plans allow a grace period or limited carryover. The employer determines all aspects of the HRA including contribution amounts and eligible expenses, while employees elect their FSA contribution amount during open enrollment subject to IRS annual limits. Both provide tax advantages for paying qualified medical expenses, but the ownership structure and rollover provisions create significant differences in how employees use and plan for these accounts.

HRA vs. Retiree Reimbursement Arrangement (RRA)

An HRA primarily serves active employees and their dependents for current medical expenses, while a Retiree Reimbursement Arrangement specifically provides benefits to former employees after retirement. RRAs typically reimburse post-employment health insurance premiums including Medicare Parts A, B, C, and D, Medicare supplement insurance, and qualified long-term care insurance premiums. HRAs for active employees focus on deductibles, copays, coinsurance, and other out-of-pocket medical expenses, though some HRA types like Individual Coverage HRAs can also reimburse individual health insurance premiums. Both arrangements are employer-funded and provide tax-free reimbursements, but they serve different stages of the employee lifecycle and address different healthcare coverage needs.