What Is a Health Reimbursement Arrangement (HRA)?

Definition & Examples of Health Reimbursement Arrangements (HRAs)

Standalone HRA

A health reimbursement arrangement (HRA) allows employers to fund employee health care coverage without having to administer a complicated and expensive health plan. Both businesses and employees can receive tax benefits from this arrangement.

Learn about the types of HRAs that offer even more benefits and flexibility to employers and employees.

What Is a Health Reimbursement Arrangement (HRA)? 

A health reimbursement arrangement is a plan set up by employers to reimburse employees for their medical expenses. It also allows unused amounts to be carried forward. The employer administers the plan, which allows employees, their spouses, and dependent children up to age 27 to use the HRA funds tax-free to pay medical expenses.  

  • Alternate name: Health reimbursement account
  • Acronym: HRA

You may also see HRAs called “health reimbursement accounts” because the employees have individual reimbursement accounts. 

How Does a Health Reimbursement Arrangement Work? 

The employer sets up a plan according to IRS regulations and puts money in individual employee reimbursement accounts, up to a maximum amount each year. The employee is reimbursed when they have verified that the expense is on a list of qualified medical expenses. 

For example, if an employee has paid a bill for an X-ray, they can request reimbursement for the amount they paid. Any funds remaining in the employee’s HRA account at the end of the year are rolled over to the following year, when they can then be used along with the contributions for that next year, as well. 

HRAs can be set up under cafeteria benefit plans that allow employees a choice of benefits.   

Your company (as the employer) can set up the requirements for employee participation. For example, you can allow reimbursements from the HRA to: 

  • Current employees and retirees
  • Employee spouses and dependents under age 27
  • Spouses and dependents of deceased employees 

As part of your plan set up, you must have a method to verify reimbursements to make sure they are for qualified medical expenses. You can give employees a debit card, credit card, or stored value card for reimbursements, but they must be able to have a way to show that the reimbursements are for qualified medical expenses. 

HRAs, like all other employee benefit plans, must be offered on the same terms to all employees in a specific class. The plan must also not favor S corporation shareholders or highly-compensated employees. 

Covered Medical Expenses

According to the IRS, employees can use an HRA to pay for the cost of “diagnosis, cure, mitigation, treatment, or prevention of disease, for any part or function of the body.” Covered expenses don’t include expenses for the general health of the person. 

Some of the most common qualified expenses include insurance premiums, dental treatment, and eye care. Long-term care coverage is also included, up to a maximum, depending on the age of the insured. You can decide which benefits to include in your company’s HRA plan. 

You can see the list of qualified medical expenses (and expenses that are not qualified) in IRS Publication 502: Medical and Dental Expenses

Tax Benefits of HRAs 

HRAs are health plans, and the IRS classifies them as employee benefit programs. This means that your contributions as an employer to employee HRAs are tax-deductible expenses for your business. In addition, your contributions to the HRA are considered fringe benefits to employees, and the IRS says you may be able to exclude all or part of their value from the employee’s taxable income. In addition, you as the employer don’t owe employment taxes on these contributions.

What Are Different Types of HRAs?  

In addition to traditional HRAs, your business can choose from three HRA versions to give health care coverage to employees without the burden of administering an employer-sponsored health care plan. 

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

Your small business may be able to set up a special kind of HRA called a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). The plan is specifically designed for small businesses with fewer than 50 full-time employees that can’t afford to give employees health coverage. Employees must have minimum essential coverage, including plans from the individual Health Care Marketplace (the national health care plan under the Affordable Care Act). The insurance bought by employees can’t be short-term, limited-duration insurance, and it can’t be just dental, vision or other “excepted benefits.” 

Like a traditional HRA, the employer contributes an amount each year to employee accounts, and the employees must use this amount to enroll in individual health insurance or Medicare. Employers must limit reimbursements to a maximum amount each year.

For 2020, the maximum limit is up to $5,250 for individuals and $10,600 for families.

Individual Coverage HRA

Another type of HRA, called an Individual Coverage HRA, allows employers of any size to reimburse employee premiums for individual health insurance. This HRA was first offered in 2020 and it allows employees more flexibility in choosing health coverage and helps make the coverage more portable (allowing employees to keep coverage if they leave an employer).  

Your contributions as an employer are not limited, and employees can roll over unused amounts to the next year. Employees can only use this Individual Coverage HRA amount if they are enrolled in individual health insurance coverage, including private insurance or a HealthCare.gov plan, or if they have Medicare coverage. 

You can offer reimbursement amounts to all employees or only employees in certain classes, vary the amount based on age or number of dependents, and you can have a waiting period. The terms you offer employees must be the same for all members of available classes.  

Offering employees this Individual Coverage HRA may count as coverage if you are a large employer under the requirements of the ACA employer mandate. This part of the regulation is complicated, so check with your tax professional.   

Excepted Benefit HRA 

Your business has another HRA option called an Excepted Benefit HRA to cover specific additional benefits to employees. This was first offered in 2020. It covers expenses not covered under a primary health care plans, like co-pays and deductibles. You might want to consider this option if your company has a traditional group health plan. Employees can enroll in an Excepted Benefit HRA even if they don’t enroll in a traditional group health plan. 

This arrangement requires an annual maximum employer contribution of $1,800 a year (indexed for inflation starting in 2021). It also can’t be used to reimburse individual health insurance premiums, group health plan premiums (other than COBRA coverage for terminated employees), or Medicare premiums. 

Comparing HRAs

  QSEHRA Individual Coverage HRA Excepted Benefit HRA
Employer Size Less than 50 employees who don’t offer other a group health plan Any size, with at least one employee (not counting certain owners or their spouses) Any size
Employee Requirements Must have minimum essential coverage required by the Affordable Care Act Must have individual health insurance coverage, including private insurance or a plan through HealthCare.gov Employers must offer a traditional health plan, but employees aren’t required to enroll
Maximum Annual Contribution for 2020 $5,250 for individuals and $10,600 for families No maximum, but employers must offer this HRA on the same terms to all employees in each class $1,800, indexed for inflation beginning in 2021

Alternatives to HRAs

A Flexible Spending Arrangement, or Flexible Spending Account (FSA), is another type of employer-based benefit arrangement that reimburses employees for medical expenses. Employees can take pre-tax funds from their paychecks to use for specific medical expenses. Your company can also contribute to the FSA and get a tax deduction. 

Each year, the IRS designates a specific maximum for voluntary salary reduction ($2,750 in 2020). If the employee doesn’t spend all the money by the end of the year, it’s forfeited.

One of the advantages of an FSA is that the employee can get reimbursed for expenses even if they haven’t made their full contribution for that year. For example, an employee may contribute a specific amount from each paycheck during the year, but the full contribution amount is available to them on January 1 of that year. 

HRAs and FSAs are not available to self-employed individuals, and funds in HRAs and FSAs can’t be transferred to another employer. 

HRAs vs. FSAs

Health Reimbursement Arrangement (HRA) Flexible Spending Arrangement (FSA)
Only employers contribute to this plan Both employees and employers can contribute voluntarily
No limit on employer contributions Employee pre-tax contributions are limited to $2,750 for 2020, and there’s no limit on employer contributions
Unused amounts at year-end are rolled over to increase the next year’s amount Unused amounts at year-end are usually forfeited (but employer may extend for up to 2.5 months)
Funds can be used for health insurance premiums and other specific costs not covered by primary health plans Funds can be used for specific short-term health expenses, though not insurance premiums

How to Set Up a Health Reimbursement Arrangement

The best way to set up a plan is to hire a benefit plan administrator—someone who is responsible for running employee benefit plans. The administrator can help you prepare the documents you need, find a financial institution to manage the employee accounts, and send information to employees. 

Key Takeaways

  • Employers can set up and fund one of several health reimbursement arrangements (HRAs) which reimburse employees for qualified medical expenses. 
  • Employees may roll over unused reimbursements to the next year. 
  • Employers can take a tax deduction for HRA contributions if they meet specific IRS requirements.  
  • Employees don’t have to pay taxes on employer HRA contributions for IRS-approved plans.
  • Several types of HRAs are available, depending on the specific needs of your business.

Article Sources

  1. IRS. "Form 502: Medical and Dental Expenses." Page 17. Accessed June 24, 2020. 

  2. IRS. "Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans." Page 19. Accessed June 24, 2020. 

  3. IRS. "Publication 502 Medical and Dental Expenses." Page 2. Accessed June 22, 2020.

  4. IRS. "2019 Instructions for Schedule C: Profit of Loss From Business." Page 7. Accessed June 24, 2020. 

  5. IRS. "Publication 535: Business Expenses." Page 9. Accessed June 24, 2020. 

  6. IRS. "Publication 15-B Employer's Tax Guide to Fringe Benefits." Page 7. Accessed June 24, 2020. 

  7. IRS. "FAQs on New Health Coverage Options for Employers and Employees: Individual Coverage and Excepted Benefit Health Reimbursement Arrangements." Question 2. Accessed June 24, 2020.

  8. IRS. "Publication 15-B Employer's Tax Guide to Fringe Benefits." Page 7. Accessed June 24, 2020.

  9. U.S. Department of Health and Human Services. "New Health Coverage Options for Employers and Employees." Page 6. Accessed June 24, 2020. 

  10. IRS. "IRS: Eligible employees can use tax-free dollars for medical expenses." Accessed June 24, 2020.