HRA Portability and Carryover Rules

Health Reimbursement Arrangements are employer-funded benefit accounts governed by Internal Revenue Service rules, and two of the most consequential plan design decisions involve what happens to unused funds at year-end and what happens to account balances when an employee leaves a job. These questions — carryover and portability — are answered differently depending on which HRA variant the employer has established, and the answers carry material consequences for both employers and account holders. Understanding the regulatory structure that governs these rules is foundational to evaluating HRA value across the types of HRAs including QSEHRAs, ICHRAs, and traditional arrangements.

Definition and scope

Portability refers to whether an HRA balance can be retained and used by a former employee after leaving the employer. Carryover refers to whether unused HRA funds roll forward from one plan year to the next for active employees.

Both features are employer-discretionary — they are permitted under IRS rules but not required. The governing authority for HRA design is found in IRS Notice 2002-45 and subsequent regulations, including the final rules at 26 CFR §54.9815-2711A governing integrated HRAs and ICHRA structures. The Department of Labor and the Department of Health and Human Services maintain co-regulatory authority over group health plan requirements that intersect with HRA design, as detailed in the broader regulatory context for health savings.

The scope of these rules applies to four main HRA structures:

How it works

Carryover mechanics for active employees

Employers design their HRA plan documents to either forfeit or carry forward unused balances. When carryover is permitted, unused funds accumulate across plan years with no statutory dollar ceiling on the accumulated total — the employer sets any cap within the plan document. The IRS imposes no annual carryover limit on HRAs, which distinguishes them structurally from Flexible Spending Accounts, where carryover is limited to a specific indexed amount (IRS Publication 969 covers this contrast). An employer may also implement partial carryover — for example, rolling forward up to a defined dollar maximum while forfeiting the remainder.

Portability mechanics upon separation

HRAs are employer-owned accounts. Upon termination of employment, the default rule under IRS Notice 2002-45 is that account access ceases. However, employers may extend COBRA-equivalent access, allowing former employees to continue submitting claims against their HRA balance — provided the employer has structured the plan to permit this and the former employee pays any applicable COBRA premiums.

The portability rules differ across HRA types:

  1. Traditional integrated HRAs: Portability is generally not available post-separation unless COBRA continuation coverage is elected and the plan document explicitly preserves claim access.
  2. QSEHRAs: Because these reimburse individual health insurance premiums, a departing employee loses eligibility to receive reimbursements once no longer employed by the sponsoring small employer. Unused balances are forfeited unless the plan document specifies otherwise.
  3. ICHRAs: Similar to QSEHRAs in that reimbursements are tied to maintaining qualifying individual coverage while employed by the sponsor. Former employees lose ICHRA eligibility upon separation.
  4. Excepted Benefit HRAs: Access is tied to the active employment period; the employer determines whether any runout period applies for submitting prior claims.

A runout period — typically 30 to 90 days — is a common plan design feature that allows separated employees to submit claims for expenses incurred during the final plan year of employment, even after the termination date. This is distinct from portability and does not extend the period during which new expenses may be incurred.

Common scenarios

Scenario 1: Employee with large accumulated HRA balance changes jobs

An employee who accumulated $4,000 in an employer carryover HRA over 3 plan years separates voluntarily. Unless COBRA continuation is available and elected, and unless the plan document permits post-separation claims, the $4,000 forfeits to the employer. The employer retains those funds; there is no rollover mechanism to a new employer's HRA or to an HSA.

Scenario 2: COBRA continuation preserving HRA access

A former employee elects COBRA coverage for the underlying group health plan. If the employer's plan document extends HRA access during COBRA, the individual may continue submitting eligible claims against the existing balance for qualified medical expenses incurred during the COBRA coverage period. The employer may charge the COBRA premium, which can be up to 102% of the applicable cost (26 USC §4980B).

Scenario 3: Year-end forfeiture in a no-carryover plan

An employer establishes a traditional HRA with no carryover provision. An employee with $1,200 remaining at December 31 loses the entire balance on January 1. The employee cannot transfer that amount to an FSA or HSA. Employers sometimes mitigate this outcome by building a runout period into the plan design, but the balance is still forfeited — not carried forward.

Scenario 4: Retiree HRA with permanent balance

Some large employers establish dedicated retiree HRAs that are explicitly designed for post-employment reimbursement. These plans fund a balance at retirement and allow the retiree to draw down against that balance for qualified medical expenses indefinitely. This structure requires careful plan documentation and is addressed in detail under HRA for retirees.

Decision boundaries

Employers designing an HRA must make four discrete decisions that determine the effective portability and carryover profile of the plan. An overview of all these account types and their structural differences appears on the main health savings accounts index.

  1. Carryover: yes or no? Permitting carryover increases long-term plan liability (unfunded accumulated balances) but increases the perceived value of the benefit for employees with low annual medical spending.

  2. Carryover cap: unlimited or capped? An employer may cap accumulated carryover at a fixed dollar amount — for example, allowing up to $3,000 in total accumulated balance — to manage financial exposure while still offering the carryover feature.

  3. Runout period: length? A 30-day runout period is minimal; 90 days is more employee-favorable. The plan document must specify the exact duration to avoid ambiguity.

  4. Post-separation access: COBRA only, or broader? The decision to permit COBRA-based HRA continuation versus forfeiture upon termination is a plan design election with cost implications. Employers offering COBRA HRA access must coordinate with their third-party administrator to ensure claim adjudication infrastructure supports post-separation submissions.

The intersection of HRA carryover rules with HSA eligibility creates an additional decision boundary: if an employer's HRA is not a "limited-purpose" HRA, an active employee covered by that HRA is generally ineligible to contribute to an HSA, regardless of whether the HRA balance has been fully spent. This interaction is explored further under coordinating multiple health accounts and HRA and other account combinations.

For employers considering HRA design choices within the broader framework of plan administration, IRS rules governing HRAs provides the statutory and regulatory reference structure that underlies all plan document requirements.

References

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