What Is a Health Reimbursement Arrangement (HRA)?

A Health Reimbursement Arrangement (HRA) is an employer-funded benefit that reimburses employees for eligible medical expenses and, in some cases, health insurance premiums. Unlike traditional health insurance, an HRA is not a health plan itself but a financial arrangement that allows employers to help cover employees' out-of-pocket healthcare costs on a tax-free basis.

How an HRA Works

Employers establish HRAs to provide financial assistance for medical expenses, setting a fixed contribution amount for each employee. Employees can then use these funds to pay for qualifying healthcare expenses, such as doctor visits, prescription medications, hospital stays, and in some cases, individual health insurance premiums. The employer determines what expenses the HRA will cover, as long as they align with IRS guidelines.

HRAs are structured as reimbursement accounts, meaning employees must first incur an eligible expense, submit proof of payment (such as a receipt or explanation of benefits from an insurer), and then receive reimbursement from the employer. These funds do not roll over between jobs, as the employer owns the HRA, not the employee. However, some HRAs allow unused funds to roll over from year to year, depending on the plan design.

Types of HRAs

There are several types of HRAs, each designed to meet different employer and employee needs:

1. Traditional HRA – This is the most common type, used alongside a group health insurance plan to help employees cover out-of-pocket costs like copays, deductibles, and coinsurance. The employer sets contribution limits and eligible expenses.
2. Qualified Small Employer HRA (QSEHRA) – Designed for small businesses with fewer than 50 full-time employees, a QSEHRA allows employers to reimburse employees for medical expenses, including individual health insurance premiums. Employers must offer the same reimbursement amount to all eligible employees, though adjustments can be made based on family size.
3. Individual Coverage HRA (ICHRA) – This HRA allows employers of any size to reimburse employees for individual health insurance premiums and qualified medical expenses instead of offering a traditional group health plan. Unlike the QSEHRA, employers can vary contributions based on job classification (such as full-time vs. part-time employees).
4. Excepted Benefit HRA (EBHRA) – This HRA lets employers provide a limited reimbursement for dental, vision, and other excepted benefits without requiring employees to enroll in a group health plan. The annual contribution limit is lower than other HRAs.
5. Retiree HRA – Some employers offer HRAs specifically for retirees to help them pay for medical costs in retirement, including Medicare premiums and other out-of-pocket healthcare expenses.

Tax Benefits and Compliance

HRAs offer significant tax advantages for both employers and employees. Employers can deduct their contributions as a business expense, and reimbursements received by employees are tax-free as long as they are used for qualified medical expenses. Unlike Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs), employees do not contribute to an HRA, nor can they take the funds with them when they leave the company.

Employers must ensure that their HRAs comply with federal regulations, including the Affordable Care Act (ACA), IRS guidelines, and the Employee Retirement Income Security Act (ERISA) in some cases. For example, ICHRAs must meet affordability requirements under the ACA, meaning employers must ensure that their reimbursement amounts allow employees to afford a compliant health insurance plan.

HRA vs. Other Healthcare Accounts

HRAs are often compared to HSAs and FSAs, but they operate differently:

• HSA vs. HRA – An HSA is an employee-owned savings account that allows tax-free contributions for medical expenses, but it requires enrollment in a high-deductible health plan (HDHP). Employees own the funds, and the account remains with them even if they change jobs. In contrast, an HRA is entirely employer-funded, does not require an HDHP, and is not portable.
• FSA vs. HRA – FSAs are also employer-sponsored but allow both employer and employee contributions. Unlike HRAs, FSAs typically have a "use-it-or-lose-it" rule, meaning unused funds may not roll over. HRAs generally offer more flexibility, as employers can choose whether to allow rollovers.

The Bottom Line

A Health Reimbursement Arrangement is a valuable tool for employers looking to offer healthcare benefits without committing to traditional group insurance. By reimbursing employees for medical expenses and sometimes health insurance premiums, HRAs provide financial relief while maintaining flexibility for businesses. With various types available, employers can tailor HRAs to fit their workforce's needs while taking advantage of tax benefits. However, compliance with federal regulations is essential to ensure the program operates effectively and legally. For employees, HRAs represent a cost-effective way to cover healthcare expenses with tax-free funds provided by their employer.