HRA Qualified Expenses and Reimbursement

Health Reimbursement Arrangements (HRAs) allow employers to reimburse employees for medical expenses on a tax-advantaged basis, but the scope of what qualifies for reimbursement depends on the HRA type, plan design, and governing IRS rules. Understanding the boundaries of qualified expenses — and the mechanics of how reimbursement flows — is essential for both employers designing plans and employees submitting claims. The regulatory context for health savings shapes which expenses are permissible and which trigger tax consequences.

Definition and Scope

An HRA qualified expense is any medical care cost that meets the definition established under Internal Revenue Code Section 213(d) and is permitted by the specific plan document governing the HRA. The IRS sets the outer boundary: only expenses that would be deductible as medical care under Section 213(d) are eligible for tax-free HRA reimbursement. However, an employer may design a plan that covers a narrower subset of those expenses.

IRS Publication 502 catalogs the universe of Section 213(d) expenses in detail. The list encompasses a broad range of costs:

Expenses that fall outside Section 213(d) — cosmetic procedures without a medical necessity basis, gym memberships in most cases, and general health and wellness products — are not reimbursable on a tax-free basis.

The scope also varies by HRA type. Traditional employer-sponsored HRAs can reimburse the broadest range of Section 213(d) expenses. A Qualified Small Employer HRA (QSEHRA) can reimburse individual market premiums and Section 213(d) expenses. An Individual Coverage HRA (ICHRA) can reimburse individual health insurance premiums plus Section 213(d) costs. An Excepted Benefit HRA (EBHRA) is capped at $1,950 per year (2024 figure, per IRS Notice 2023-75) and is limited to excepted benefits and Section 213(d) expenses other than individual health insurance premiums.

How It Works

HRA reimbursement follows a structured, employer-funded, claims-based process. Unlike HSAs, HRA funds are never deposited into an employee-owned account; the arrangement is an employer promise to reimburse, backed by a notional or funded balance maintained by the employer or a third-party administrator.

The reimbursement process operates in these discrete steps:

  1. Employee incurs an eligible expense. The expense must fall within both Section 213(d) and the plan document's approved list.
  2. Employee submits a claim. Documentation typically includes an Explanation of Benefits (EOB) from a health insurer, an itemized receipt from a provider, or a statement showing the date, provider, amount, and nature of the service.
  3. Administrator reviews the claim. The plan administrator — which may be the employer, a Third-Party Administrator (TPA), or a benefits platform — verifies that the expense qualifies under the plan terms.
  4. Reimbursement is issued. Approved amounts are paid to the employee, generally through payroll, direct deposit, or a debit card tied to the HRA.
  5. Recordkeeping is maintained. Both the employer and the employee must retain substantiation records in the event of an IRS audit or plan review.

Reimbursements that meet all plan and IRC requirements are excluded from the employee's gross income under IRC Section 105(b). Reimbursements for non-qualified expenses are included in gross income and subject to applicable taxes.

Timing rules matter as well. Most HRA plan documents specify a claims submission deadline, often 90 days after the end of the plan year. Expenses incurred before the HRA's effective date are not reimbursable unless the plan document explicitly allows retroactive coverage.

Common Scenarios

Premium reimbursement: Under an ICHRA, an employer may reimburse employees for individual health insurance premiums purchased on or off the ACA marketplace. The employee pays the premium directly to the insurer and submits proof of payment. This distinguishes ICHRA from traditional HRAs, which generally cannot reimburse individual premiums under pre-ACA rules codified in IRS Notice 2013-54.

Coordination with an HSA: A traditional HRA and an HSA cannot coexist without restrictions. An employee enrolled in an HSA-compatible High-Deductible Health Plan (HDHP) may only receive HRA reimbursements from a Limited-Purpose HRA — one restricted to dental, vision, and preventive expenses — to preserve HSA eligibility. Employers designing plans that allow both accounts must carefully structure the HRA to avoid disqualifying HSA contributions. The home page of this resource covers the broader landscape of tax-advantaged health account types.

Over-the-counter (OTC) medications: Since the CARES Act of 2020, OTC drugs and medicines no longer require a prescription to qualify for reimbursement from an HRA (IRS Notice 2020-33). Menstrual care products were simultaneously added as qualified expenses.

Retiree HRAs: Some employers establish HRAs exclusively for retirees, funding accounts that cover Medicare premiums and supplemental out-of-pocket costs. These arrangements operate under the same Section 213(d) framework but are designed around post-employment healthcare needs. For more on this structure, see the dedicated discussion on coordinating multiple health accounts.

Decision Boundaries

The line between a qualified and non-qualified HRA expense is determined by three overlapping tests:

  1. The Section 213(d) test: Does the IRS recognize this type of expense as medical care? IRS Publication 502 is the definitive reference. If the expense category is not listed or explicitly excluded, it does not qualify.
  2. The plan document test: Has the employer's plan document included this expense category? An employer may restrict reimbursement to a subset of Section 213(d) expenses — for example, excluding dental and vision to keep administrative costs low.
  3. The substantiation test: Can the employee provide documentation proving the expense was incurred, the amount paid, the provider, and the date of service? Claims lacking substantiation must be denied or reversed, regardless of the nature of the expense.

Cosmetic procedures present a consistent boundary case. Expenses primarily for appearance enhancement — rhinoplasty, teeth whitening, hair transplants — are excluded under Section 213(d) unless there is a diagnosed medical necessity, such as reconstructive surgery following an injury or illness. In those cases, a physician's written statement establishing medical necessity strengthens the claim.

Dual-purpose products also create classification challenges. A product like a fitness tracker does not qualify simply because it monitors heart rate; a prescribed CPAP machine does qualify because it treats a diagnosed condition (sleep apnea). The standard is whether the primary purpose is to treat, diagnose, or prevent a specific medical condition.

Employers should also note that IRS rules governing HRAs prohibit discriminating in favor of highly compensated employees with respect to benefits, eligibility, or plan terms under IRC Section 105(h). A plan that reimburses executives for a broader category of expenses than rank-and-file employees risks disqualification of the favorable tax treatment for those highly compensated individuals.

References

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