IRS Rules Governing HRAs

Health Reimbursement Arrangements (HRAs) are employer-funded accounts governed by a specific body of Internal Revenue Service guidance that determines how funds may be contributed, what expenses qualify for reimbursement, and how different HRA structures interact with other health benefit programs. The rules draw from the Internal Revenue Code (IRC), Treasury Regulations, and a series of IRS Notices that have evolved the HRA framework since the late 1990s. Understanding these boundaries matters because noncompliance can disqualify an HRA, triggering excise taxes and loss of the tax exclusion that makes the arrangement valuable. For a broader overview of the regulatory landscape, the regulatory context for health savings resource provides foundational framing.

Definition and scope

Under IRS guidance — principally IRS Notice 2002-45 and IRC §§ 105 and 106 — an HRA is an arrangement that meets four structural requirements:

  1. The arrangement must be funded solely by the employer. Employee salary reductions cannot fund an HRA.
  2. The arrangement must reimburse employees for substantiated medical care expenses as defined under IRC § 213(d).
  3. The maximum reimbursement amount for any coverage period must be fixed in advance (though unused amounts may carry forward).
  4. The arrangement must qualify as employer-provided accident or health coverage under IRC § 106.

Because HRAs are employer-funded, contributions are excluded from an employee's gross income and are deductible by the employer as a business expense. There is no statutory contribution ceiling imposed directly on employers for traditional HRAs, though specific HRA types carry their own caps (see Decision Boundaries below).

The Department of the Treasury and IRS jointly issued final regulations in June 2019 (Treasury Reg. §§ 54.9802-4, 1.105-17, 1.106-1) that created two new HRA models — the Individual Coverage HRA (ICHRA) and the Excepted Benefit HRA — expanding the prior framework significantly.

How it works

The tax treatment of an HRA flows through IRC § 106, which excludes employer contributions to accident and health plans from employee gross income, and IRC § 105(b), which excludes reimbursements received for medical care expenses from income. The mechanism operates as follows:

  1. Employer establishes the plan. The HRA must be part of a formal written plan document that specifies coverage periods, eligible expense categories, maximum reimbursement amounts, and any carryover provisions.
  2. Employer credits a notional account. No physical fund needs to be segregated; the employer records an available balance for each eligible employee.
  3. Employee incurs a qualifying expense. Qualifying expenses are those defined under IRC § 213(d), which includes premiums for eligible health coverage in certain HRA types.
  4. Employee submits substantiation. Reimbursement requires documentation of the expense (receipts, Explanation of Benefits). IRS Notice 2006-69 and related guidance confirm the substantiation requirement; debit card usage is subject to additional verification rules.
  5. Employer reimburses. The reimbursement is excluded from the employee's income and is not subject to FICA or federal income tax withholding.

HRAs are subject to ERISA if sponsored by private-sector employers, meaning plan documents, summary plan descriptions, and claims and appeals procedures are also required by the Department of Labor.

Common scenarios

Traditional (Integrated) HRA. The most common pre-2019 structure, a traditional HRA must be offered alongside a qualifying group health plan. It cannot reimburse individual health insurance premiums. Employers use it to offset deductibles, copayments, or other cost-sharing under the group plan. Because it is integrated with minimum essential coverage, it satisfies the Affordable Care Act's market reform requirements.

ICHRA (Individual Coverage HRA). Created by the June 2019 final regulations, an ICHRA allows employers of any size to reimburse premiums for individual market health insurance or Medicare — a use prohibited under earlier rules. Employees must be enrolled in qualifying individual coverage. The ICHRA has no contribution cap, but employers must set uniform amounts within defined employee classes (14 permissible classes are identified in the regulations). Employees who receive an ICHRA offer above a certain affordability threshold lose eligibility for premium tax credits under IRC § 36B.

QSEHRA (Qualified Small Employer HRA). Established under the 21st Century Cures Act (Public Law 114-255, enacted December 2016), the QSEHRA is available to employers with fewer than 50 full-time equivalent employees that do not offer a group health plan. For 2024, the annual contribution limit is $6,150 for self-only coverage and $12,450 for family coverage (IRS Revenue Procedure 2023-29). The QSEHRA can reimburse individual premiums and § 213(d) medical expenses.

Excepted Benefit HRA. Limited to $2,100 per year (2024 limit per IRS Notice 2023-75), this HRA runs alongside a traditional group health plan but may reimburse premiums only for excepted benefit coverage such as dental and vision — not major medical premiums or individual insurance. It does not affect HSA eligibility.

The types of HRAs: QSEHRA, ICHRA, and traditional page provides additional structural comparisons across these categories.

Decision boundaries

The IRS rules create several hard limits that determine which HRA type applies and how it interacts with other arrangements:

HRA and HSA compatibility. A traditional integrated HRA or QSEHRA that covers general medical expenses will disqualify an employee from contributing to a Health Savings Account. An employee paired with an ICHRA may contribute to an HSA only if the ICHRA is limited to premiums and the individual is enrolled in a High Deductible Health Plan. An Excepted Benefit HRA does not disqualify HSA contributions. The home page provides a navigational overview of how these account types relate.

Carryover rules. Unlike Flexible Spending Accounts, HRAs are not subject to the statutory "use-it-or-lose-it" rule that applies under IRC § 125. Employers may — but are not required to — permit unused HRA balances to carry forward. The plan document controls this design choice entirely.

Forfeiture on termination. HRA balances are generally forfeited upon termination of employment unless the plan document provides for continuation. COBRA continuation coverage may apply to HRAs sponsored by employers with 20 or more employees under the rules of IRC § 4980B.

Discrimination testing. HRAs sponsored by employers subject to IRC § 105(h) must not discriminate in favor of highly compensated employees with respect to eligibility or benefits. Violation results in the discriminatory benefits becoming taxable income to the highly compensated participants.

No salary reduction funding. Because employee pre-tax salary reduction cannot fund an HRA, HRAs cannot be offered through a cafeteria plan under IRC § 125 — a structural distinction from FSAs. Employer contributions are the exclusive funding mechanism.

References

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