Health Reimbursement Arrangement (HRA): Definition and How It Works
Understand HRAs: Tax-advantaged employer-funded accounts for qualifying healthcare expenses.
What Is a Health Reimbursement Arrangement (HRA)?
A Health Reimbursement Arrangement (HRA) is a tax-advantaged employer-sponsored plan that reimburses employees for qualified health care costs and, in some cases, health insurance premiums. Unlike traditional health insurance plans where employers and employees share premium costs, HRAs are fully funded by employers and provide employees with a designated annual allowance to cover eligible medical expenses. The funds within an HRA are not considered taxable income to employees, making them an attractive benefit for both employers seeking to manage healthcare costs and employees looking for tax-free healthcare coverage options.
HRAs have become increasingly popular since the expansion of regulations in 2020, which created new types of arrangements allowing employers greater flexibility in how they structure healthcare benefits. These arrangements represent a significant shift in how employers can provide health benefits, particularly for businesses of all sizes looking to customize their healthcare offerings.
Understanding How HRAs Work
The mechanics of an HRA follow a straightforward four-step process that benefits both employers and employees:
Step 1: Employer Sets Annual Allowance
Each year, the employer determines the maximum amount they will contribute to the HRA, which varies depending on the type of HRA being offered. Some HRAs have federal limits established by the IRS, while others allow employers to contribute unlimited amounts. The employer communicates this annual allowance amount to employees during open enrollment periods, setting clear expectations about available benefits.
Step 2: Employee Purchases Eligible Healthcare Items
Employees use their HRA funds to purchase healthcare services and products that qualify under the plan’s specific guidelines. Eligible expenses typically include items defined under IRS Code Section 213(d), which encompasses a broad range of medical expenses. However, employers have the discretion to further restrict which expenses qualify for reimbursement, depending on the type of HRA offered.
Step 3: Employee Submits Reimbursement Request
After incurring eligible healthcare expenses, employees submit reimbursement requests to the HRA administrator. This request typically includes documentation of the expense, such as receipts or invoices, along with proof that the expense qualifies under the plan’s guidelines. The submission process has become increasingly streamlined through digital platforms that many employers now offer.
Step 4: Reimbursement is Processed
The HRA administrator reviews the request to determine if the expense qualifies under the plan. If approved, the employee receives reimbursement from their annual allowance. If the claim is denied, the administrator must follow established appeals procedures outlined in the plan documents.
Types of Health Reimbursement Arrangements
The evolution of HRA regulations has created several distinct types of arrangements, each designed for different employer needs and employee circumstances:
Standard HRA (Integrated HRA/Group Coverage HRA)
The Standard HRA, also known as an Integrated HRA or Group Coverage HRA, represents the traditional form of health reimbursement arrangement. This type must be combined with a group health insurance policy, making it an ideal complement to high-deductible health plans. Standard HRAs have no federal annual limits on employer contributions, though employers may establish their own caps. These arrangements can reimburse employees for virtually all IRS-qualified medical expenses, giving employers flexibility in plan design.
Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)
Introduced to help small employers provide healthcare benefits, QSEHRAs feature annual federal allowance limits set by the IRS each year. For 2024, these limits are adjusted annually. The key advantage of QSEHRAs is that employees may still qualify for premium tax credits if the employer’s HRA allowance is deemed unaffordable. This means employees aren’t locked into their employer’s plan if they can find more affordable coverage on the individual marketplace.
Individual Coverage HRA (ICHRA)
Created in 2020, Individual Coverage HRAs represent a significant innovation in employer-sponsored benefits. ICHRAs allow employers to reimburse employees for health insurance premiums and other qualified out-of-pocket expenses when employees purchase individual health insurance on the open market rather than enrolling in a group plan. This arrangement offers flexibility through customizable employee classes, allowing employers to tailor benefits to different worker categories. Employees can select individual plans from the marketplace that best suit their family’s needs, doctors, and prescriptions, potentially reducing administrative burdens on employers.
Excepted Benefit HRA (EBHRA)
Excepted Benefit HRAs feature a federal annual allowance limit of $1,950 for 2023. These arrangements can reimburse limited categories of expenses including premiums for individual health plans, COBRA coverage, and dental and vision care, along with associated copayments and coinsurance. EBHRAs provide a more restricted but focused approach to healthcare benefits for specific expense categories.
Retiree-Only HRA
Specifically designed for retirees, this HRA type allows retirees to use funds toward Medicare premiums. Unlike some other HRA types, Retiree-Only HRAs have no federal annual allowance limits, though employers may establish their own caps. This arrangement enables employers to continue supporting healthcare costs for retired employees in a tax-efficient manner.
Eligible Expenses Under HRAs
The types of expenses that qualify for HRA reimbursement depend on the specific HRA type and employer design. However, common eligible expenses include:
Common Eligible Expenses:
- Health insurance premiums (varies by HRA type)
- Copayments and coinsurance
- Deductibles
- Prescription medications
- Doctor and specialist visits
- Dental and vision care (in certain HRA types)
- Mental health services
- Physical therapy and rehabilitation
- Medical equipment and supplies
- Hospital and surgical procedures
Employers maintain the authority to further limit eligible expenses beyond IRS guidelines, so employees should review their specific plan documents to understand which expenses their particular HRA covers.
Eligibility Requirements for HRA Participation
Eligibility for HRA benefits varies by HRA type, but general requirements typically include:
Employee Status
Generally, employees must be on the employer’s active payroll to participate in an HRA. Most HRAs require employees to work a minimum number of hours per week or month, though specific thresholds vary by plan.
Coverage Integration Requirements
Depending on the HRA type, employees must maintain qualifying health insurance coverage. For Individual Coverage HRAs, employees must be enrolled in individual health insurance and substantiate this coverage both annually and with every reimbursement request. For Standard HRAs, coverage integration with group health plans is required to ensure compliance with Affordable Care Act requirements.
Waiting Periods
Many employers impose waiting periods before new employees become eligible for HRA benefits, typically ranging from 30 to 90 days after employment begins.
Plan-Specific Eligibility
Individual employers may impose additional eligibility requirements, such as full-time status, completion of probationary periods, or membership in specific employee classes.
Tax Advantages of HRAs
HRAs offer substantial tax benefits to both employers and employees:
For Employees
Reimbursements from HRAs are not considered taxable income, meaning employees effectively receive these benefits tax-free. Additionally, because HRA funds are used to pay for qualified medical expenses, employees reduce their overall taxable income. If employees have remaining balances that roll over (in plans that permit rollovers), they continue to accumulate tax-free.
For Employers
Employer contributions to HRAs are tax-deductible as business expenses, reducing the employer’s taxable income. This tax deduction incentivizes employers to offer HRAs as a healthcare benefit. Additionally, HRA contributions may not be subject to payroll taxes, providing further tax efficiency.
HRA Substantiation Requirements
For Individual Coverage HRAs, employees must substantiate their enrollment in qualifying health insurance coverage through specific mechanisms. The regulations require annual attestation confirming employee coverage details, including the names of covered family members, the insurance company name, and coverage start date. Additionally, employees must provide ongoing attestation when submitting reimbursement requests. These substantiation requirements ensure compliance with ACA regulations and prevent misuse of HRA funds.
Annual Notice Requirements
Employers offering HRAs must provide employees with comprehensive annual notices containing specific information:
- Explanation of HRA terms and conditions
- Maximum annual allocation amount
- Description of different HRA types
- Statements regarding coverage restrictions
- ERISA applicability information
- Impact on premium tax credit availability
- Instructions for marketplace enrollment
- Information on coverage substantiation obligations
HRAs and the Affordable Care Act
HRAs must comply with various ACA requirements to maintain tax-advantaged status. Standard HRAs must integrate with ACA-compliant group health plans to satisfy requirements regarding preventive care coverage and prohibitions on annual and lifetime dollar limits. Individual Coverage HRAs can integrate with individual market coverage, Medicare, and certain other coverage types, but cannot integrate with short-term limited-duration insurance. These compliance requirements ensure that HRA arrangements support comprehensive healthcare coverage rather than serving as standalone insurance alternatives.
HRA Limitations and Considerations
While HRAs offer significant advantages, several limitations should be considered:
Use-It-or-Lose-It Rules
Many HRA plans operate under use-it-or-lose-it rules, meaning unused balances forfeit at the end of the plan year. However, employers may permit rollovers, allowing employees to carry forward unused funds to subsequent years, though the extent of permitted rollovers varies by plan design.
Portability Limitations
When employees separate from employment, HRA benefits typically do not follow them unless the employer provides continuation coverage under COBRA (Consolidated Omnibus Budget Reconciliation Act). COBRA allows employees to maintain access to HRA benefits after employment ends, though employees generally must pay both the employer’s contribution and the employee’s share of premiums.
Plan Documentation
HRAs require comprehensive written plan documents outlining all terms, conditions, and administration procedures. Employers must maintain these documents and provide them to employees upon request.
HRAs vs. Other Healthcare Benefit Arrangements
| Feature | HRA | FSA | HSA | Traditional Health Insurance |
|---|---|---|---|---|
| Funding Source | Employer only | Employee pre-tax salary reduction | Employee (employer may contribute) | Employer and employee premiums |
| Annual Limit (2024) | Varies by type | $3,300 (individual) | $4,150 (individual) | No limit |
| Tax Deduction | Tax-free reimbursements | Tax-free reimbursements | Tax-free contributions and growth | Limited deductions |
| Eligible Expenses | Medical, dental, vision (varies) | Medical, dental, vision | Medical only (with HDHP) | Broad coverage |
| Portability | Limited (COBRA available) | No portability | High portability | Limited (COBRA available) |
Frequently Asked Questions
Q: Can I keep my HRA balance if I leave my job?
A: Generally, no. However, if your employer offers COBRA continuation coverage, you may retain access to your HRA for a limited period, typically up to 18 months. After that, your HRA balance typically forfeits unless your employer has established a specific carryover provision.
Q: Can HRAs cover insurance premiums?
A: This depends on the HRA type. Standard HRAs can cover some premium types, while Individual Coverage HRAs specifically allow reimbursement for individual market health insurance premiums. Employers typically have discretion in determining which premium types qualify.
Q: Are HRA contributions taxable?
A: No. Employer contributions to HRAs and reimbursements from HRAs are not considered taxable income to employees. This tax-free treatment is a key advantage of HRA arrangements.
Q: How do I substantiate expenses for HRA reimbursement?
A: You typically need to submit receipts or invoices showing the date, amount, and nature of the expense. For Individual Coverage HRAs, you must also provide proof of health insurance coverage. Your employer’s HRA administrator will provide specific documentation requirements.
Q: Can self-employed individuals establish HRAs?
A: No. HRAs are employer-sponsored plans available only to businesses with employees. Self-employed individuals should consider Health Savings Accounts (HSAs) or other available arrangements as alternatives.
Q: What happens to unused HRA funds at year-end?
A: Under strict use-it-or-lose-it rules, unused funds typically forfeit at the end of the plan year. However, employers may allow modest carryover amounts or grace periods to use remaining funds, depending on plan design and applicable regulations.
Q: How do Individual Coverage HRAs affect premium tax credits?
A: Individual Coverage HRAs can make employees ineligible for premium tax credits on the ACA marketplace. However, if the employer’s allowance is insufficient to meet the affordability threshold, employees may opt out and qualify for tax credits through individual marketplace enrollment.
References
- Digging into the New HRA Regulations Part 1 – Individual Coverage HRAs — ERISA Practice Center. 2019-06. https://www.erisapracticecenter.com/2019/06/digging-into-the-new-hra-regulations-part-1-individual-coverage-hras/
- How Does a Health Reimbursement Arrangement (HRA) Work? — LiveLyme. 2024. https://livelyme.com/blog/how-does-a-health-reimbursement-account-work
- Health Reimbursement Arrangements (HRAs) — Congress.gov. https://www.congress.gov/crs-product/R47041
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