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 can claim a tax deduction for the reimbursements, and employees receive the reimbursement dollars tax-free.
Key Insights
- HRAs reimburse employees for specific medical expenses and sometimes insurance premiums.
- Funded solely by employers, not employees.
- Non-portable: employees lose the benefit when leaving the company.
- Government rules dictate reimbursable expenses, which employers may further refine.
- Depending on the HRA type, funds can cover health insurance premiums, vision and dental insurance premiums, and qualifying medical expenses.
How a Health Reimbursement Arrangement (HRA) Works
An HRA is set up by an employer to cover medical expenses for its employees. The employer decides the contribution amount, and employees request reimbursement for actual medical expenses up to that amount. All employees in the same class receive the same HRA contribution.
Unlike traditional accounts, HRAs are not immediately accessible funds. Employees incur the expense first, then request a reimbursement, though immediate reimbursements are possible if an HRA debit card is provided.
After using all allocated HRA funds before year-end, employees must cover subsequent health bills out-of-pocket or with funds from FSAs or HSAs for those with high-deductible health plans.
Note: Maternity clothes, gym memberships, and childcare are expenses not covered by HRAs.
Types of HRAs
Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)
A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) offers health coverage subsidies for employees of businesses with fewer than 50 full-time workers. It offsets health insurance costs or reimburses medical expenses not otherwise covered. For 2023, companies can reimburse up to $5,850 per individual and $11,800 per family, with increases to $6,150 and $12,450 respectively for 2024. These reimbursements are tax-free for employees and tax-deductible for employers.
Individual Coverage HRA (ICHRA)
An Individual Coverage HRA (ICHRA), available since January 2020, allows HRAs to pay individual health insurance premiums. Employees use these HRAs to purchase comprehensive health insurance with pretax dollars, either on or off health insurance marketplaces. ICHRAs also cover qualified health expenses such as copayments and deductibles.
Excepted Benefit HRA (EBHRA)
Employers offering traditional group health insurance can also provide Excepted Benefit HRAs to reimburse employees for up to $1,950 annually in qualified medical expenses, even if employees decline group health insurance. These funds cannot buy comprehensive health insurance but cover short-term health insurance, dental and vision insurance premiums, and qualified medical expenses.
Benefits of Health Reimbursement Arrangements
HRAs cover a wide range of medical expenses such as prescription medications, insulin, annual physical exams, medical equipment like crutches, birth control pills, meals during treatment at medical facilities, psychological care, and substance abuse treatment, among others. They also allow employees to buy individual comprehensive health insurance with pretax dollars through an ICHRA and can be used for spouses’ and dependents’ medical costs.
Limitations of Health Reimbursement Arrangements
HRAs cover only qualified medical and dental expenses, not costs to maintain general health like vitamins. Employers can exclude certain expenses despite their IRS qualification, specifying reimbursable expenses in the HRA plan document. The IRS allows at-home COVID-19 tests and personal protective equipment like face masks and hand sanitizers as eligible expenses.
Pros and Cons of HRAs
Pros
- Can cover medical and dental expenses such as prescriptions, physical exams, and birth control pills.
- Can buy individual health insurance with pretax dollars.
- Reimburses employees after they’ve paid for medical expenses and insurance premiums.
Cons
- Cannot be used for unnecessary expenses like teeth whitening or non-prescription medications.
- Set up by the employer who decides the contribution amount.
- Requires paying expenses first, with later reimbursement.
HRAs vs. Other Arrangements
Employees cannot choose which plan (HRA or FSA) reimburses an eligible expense shared by both; the primary plan designated by the employer covers the costs first. Unused HRA funds can be carried to the next year based on employer discretion. Unused FSA funds typically cannot roll over except for a short grace period or a limited carryover. HSAs, on the other hand, are fully vested accounts paired with high-deductible health plans, not subject to forfeiture, and portable when changing employers.
How Can I Use HRA Funds?
Your employer outlines eligible expenses for HRA reimbursement. They generally cover routine doctor’s visits, copays, hospital expenses, and medical equipment but exclude non-essential costs like teeth whitening and gym memberships.
HRA Funding and Portability
HRAs are exclusively employer-funded. Employers decide contributions but must ensure uniform contributions for employees in the same class. Unspent HRA funds may roll over based on employer-directed limits. HRAs are non-portable and do not accompany employees if they leave the company, differing from portable HSAs.
HRA Tax Advantages
Employers can fully deduct HRA reimbursements and predict annual health benefit expenses. Employees receive a wide range of tax-free reimbursement benefits for medical costs and potentially secondary employer-provided benefits like FSAs in conjunction with HRAs.
HRA FAQs
What Is an HRA in Health Insurance? An HRA is an employer’s plan to cover employee medical-expense benefits in tax-free money.
How Does an HRA Work? The employer sets the reimbursement amount each year, tax-deduces reimbursed amounts, and employees receive tax-free reimbursements for qualified expenses.
What Is an HRA vs. an HSA? HRAs are tax-free benefit plans reimbursing specific medical expenses and health premiums for employees. HSAs are tax-advantaged accounts linked with high-deductible health plans, funding from employer or employee, and portable across jobs.
Can I Cash Out My HRA? HRA funds cannot be cashed out. Unused funds typically roll over at employers’ discretion.
What Qualifies for HRA Reimbursement? Eligible medical and dental expenses include annual check-ups, prescriptions, and substance abuse treatment.
The Bottom Line
HRAs provide tax-advantaged plans for employers to cover employees’ qualified medical and dental expenses, determined annually with tax-free reimbursements. Variations include QSEHRA for small businesses, ICHRA for individual insurance premiums, and EBHRA for certain uncovered health costs. Manage your medical expenses and leverage these exclusive benefits.
Related Terms: HSA, FSA, HDHP, qualified medical expenses.
References
- Health Insurance Marketplace. “Health Reimbursement Arrangement (HRA)”.
- Internal Revenue Service. “FAQs on New Health Coverage Options for Employers and Employee: Individual Coverage and Excepted Benefit Health Reimbursement Arrangements”, Page 2.
- Health Insurance Marketplace. “Health Savings Account (HSA)”.
- Health Insurance Marketplace. “Using a Flexible Spending Account (FSA)”.
- Internal Revenue Service. “Publication 502, Medical and Dental Expenses (Including the Health Coverage Tax Credit)”, Pages 15-16.
- Health Insurance Marketplace. “Health Reimbursement Arrangements (HRAs) for Small Employers”.
- Health Insurance Marketplace. “Exploring Coverage Options for Small Businesses”.
- Internal Revenue Service. “Employer’s Guide to Fringe Benefits”, Page 8.
- Health Insurance Marketplace. “What’s An Individual Coverage Health Reimbursement Arrangement (HRA)?”
- Internal Revenue Service. “Rev. Proc. 2022-24”, Page 2.
- Internal Revenue Service. “FAQs on New Health Coverage Options for Employers and Employee: Individual Coverage and Excepted Benefit Health Reimbursement Arrangements”, Pages 5-6.
- Internal Revenue Service. “FAQs on New Health Coverage Options for Employers and Employee: Individual Coverage and Excepted Benefit Health Reimbursement Arrangements”, Page 5.
- Internal Revenue Service. “Publication 502, Medical and Dental Expenses (Including the Health Coverage Tax Credit)”, Pages 5-15.
- Internal Revenue Service. “Publication 502, Medical and Dental Expenses (Including the Health Coverage Tax Credit)”, Page 2.
- Internal Revenue Service. “IRS: Cost of Home Testing for COVID-19 Is Eligible Medical Expense; Reimbursable Under FSAs, HSAs”.
- Internal Revenue Service. “IRS: 2024 Flexible Spending Arrangement Contribution Limit Rises by $150”.
- Internal Revenue Service. “IRS Provides Tax Inflation Adjustments for Tax Year 2023”.
- Internal Revenue Service. “Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans”, Page 8.
- Internal Revenue Service. “Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans”, Pages 3-4, 10.
- Internal Revenue Service. “Publication 502, Medical and Dental Expenses (Including the Health Coverage Tax Credit)”, Pages 15-17.
- Health Insurance Marketplace. “Deciding Between Group Coverage & An HRA?”
- Internal Revenue Service. “FAQs on New Health Coverage Options for Employers and Employee: Individual Coverage and Excepted Benefit Health Reimbursement Arrangements”, Page 3.
