HRA Contribution Limits and Employer Design

Health Reimbursement Arrangements (HRAs) give employers direct control over benefit spending, but the design rules governing contribution limits, eligible expenses, and integration requirements vary significantly across HRA types. Understanding those structural differences matters because choosing the wrong HRA model can trigger IRS penalties or ACA noncompliance. This page covers how HRA contribution limits are set, how different HRA structures work mechanically, and where employer design choices create meaningful legal and financial boundaries.

Definition and scope

An HRA is an employer-funded account that reimburses employees for qualified medical expenses on a tax-free basis (IRS Publication 969). Unlike Health Savings Accounts or Flexible Spending Accounts, employees cannot contribute to an HRA — the account is funded exclusively by the employer. This distinction carries structural implications: the employer sets the contribution ceiling, determines eligible expenses within IRS limits, and owns any unused funds unless the plan documents specify otherwise.

The IRS does not impose a single statutory annual dollar cap on traditional HRAs in the way it does for HSAs. Instead, contribution limits for traditional group HRAs are employer-determined, subject to nondiscrimination rules under IRC § 105(h). For the two most common defined-contribution HRA variants, however, specific statutory or regulatory limits do apply:

The broader regulatory context for these arrangements — including ACA market reform integration requirements — is covered at /regulatory-context-for-health-savings.

How it works

Employer design decisions flow through a structured sequence:

  1. Select HRA type. The employer chooses among a traditional integrated HRA, QSEHRA, ICHRA, or Excepted Benefit HRA. Each type has distinct eligibility rules, contribution caps, and permitted expense categories.
  2. Set the annual employer contribution. For QSEHRA, this amount cannot exceed the IRS annual threshold. For ICHRA and traditional HRAs, the employer sets the figure; for ICHRA, the amount must meet ACA affordability standards if offered in lieu of a group health plan.
  3. Define eligible expenses in plan documents. Employers may restrict reimbursements to a subset of IRS-qualified expenses. For example, an ICHRA plan document might limit reimbursements to insurance premiums and cost-sharing only, or open them to the full § 213(d) expense list.
  4. Establish carryover and forfeiture rules. Traditional HRA balances may roll over at the employer's discretion. QSEHRA and ICHRA do not have federally mandated carryover requirements; the plan document governs what happens to unused amounts at year-end or upon termination.
  5. Implement nondiscrimination testing. Traditional HRAs must satisfy § 105(h) nondiscrimination standards, which prohibit designs that disproportionately favor highly compensated employees. QSEHRA and ICHRA operate under separate nondiscrimination frameworks.
  6. Coordinate with other accounts. Employees enrolled in an ICHRA generally cannot contribute to an HSA unless the ICHRA is limited to dental, vision, and preventive care — a specific design election that requires careful plan language (IRS Notice 2019-45).

Common scenarios

Small employer replacing group coverage with QSEHRA
A business with fewer than 50 full-time equivalent employees that does not offer a group health plan may use a QSEHRA to reimburse employees for individual market premiums and qualified medical expenses. The 2024 family limit of $12,450 represents a defined ceiling; contributions above that threshold become taxable income to the employee. The employer files annual substantiation through IRS Form W-2 reporting under Notice 2017-67.

Large employer offering ICHRA to defined employee classes
ICHRA rules permit employers to offer different contribution amounts to different classes of employees — full-time, part-time, seasonal, salaried, or hourly workers, among others — provided each class is defined in the plan document. A large employer might offer full-time salaried employees $500 per month and part-time hourly employees $200 per month. These are distinct permissible classes under 26 CFR § 54.9802-4, and mixing HRA and traditional group plan offerings across classes is permitted under specific conditions.

Traditional HRA integrated with a group health plan
Employers offering a fully insured or self-funded group health plan may layer a traditional HRA on top to reimburse employee cost-sharing such as deductibles and copayments. There is no federal dollar cap, but plan documents must specify the reimbursable expense types and ensure the combined design complies with ACA annual limit prohibition rules.

For a side-by-side comparison of HRA types and other account structures, the HRA types overview provides classification detail, and the broader account comparison is available at /index.

Decision boundaries

The choice between HRA types turns on four concrete threshold questions:

Factor QSEHRA ICHRA Traditional HRA
Employer size Fewer than 50 FTEs Any size Any size
Existing group plan Cannot offer group plan Can coexist with group plan for different classes Requires group plan integration
Federal contribution cap Yes (2024: $6,150/$12,450) No cap No federal cap
Employee ACA compliance Employee must have MEC Employee must have individual coverage Employee must be enrolled in group plan

An employer that exceeds 49 FTEs cannot use QSEHRA — doing so triggers a penalty of $100 per day per affected employee under IRC § 4980D for failing to comply with group health plan market reform rules. That penalty exposure is the most significant hard boundary in HRA design selection.

Employers designing an ICHRA must also verify ACA affordability for full-time employees to avoid Employer Shared Responsibility Payments under IRC § 4980H (IRS ACA Information Center). The affordability calculation uses the employee's premium for the lowest-cost silver plan in the relevant Exchange rating area, adjusted by the IRS affordability percentage — set at 8.39% of household income for plan years beginning in 2024 (IRS Rev. Proc. 2023-29).

Excepted Benefit HRAs occupy a distinct category: limited to $2,100 per year (indexed annually), available only alongside a traditional group health plan, and restricted from reimbursing premiums for individual market coverage or Medicare (26 CFR § 54.9831-1). They are designed for dental, vision, and similar excepted benefits, not as a primary coverage vehicle.

References

The law belongs to the people. Georgia v. Public.Resource.Org, 590 U.S. (2020)