What Is a Health Reimbursement Arrangement

A Health Reimbursement Arrangement (HRA) is an employer-funded account that reimburses employees for qualified medical expenses and, in certain plan designs, individual health insurance premiums. Unlike Health Savings Accounts or Flexible Spending Accounts, HRAs are funded exclusively by employers — employees make no contributions. The regulatory context for health savings that governs these accounts spans multiple IRS code sections, ACA rules, and agency guidance issued jointly by the IRS, Department of Labor, and Department of Health and Human Services.

Definition and Scope

An HRA is defined under Internal Revenue Code Section 105 and Section 106 as an employer-sponsored arrangement that reimburses employees on a tax-free basis for substantiated medical expenses. The IRS has elaborated on HRA structure through a series of notices and final rules, most significantly the final regulations published at 26 CFR Part 54, 29 CFR Part 2590, and 45 CFR Parts 144, 146, and 147 covering Individual Coverage HRAs and Qualified Small Employer HRAs.

Three core structural characteristics define HRAs under federal guidance (IRS Notice 2002-45):

  1. Employer-funded only. Employees may not contribute to an HRA through salary reduction or any other mechanism.
  2. Reimbursement-based. Funds are disbursed only after an employee submits substantiation for a qualifying expense — the employer retains unused amounts unless plan documents specify carryover.
  3. Employer-controlled design. The sponsoring employer sets the contribution amount, eligible expense categories, carryover policy, and coverage tiers within the bounds of applicable law.

Because HRAs are not funded in advance into a separate trust, they are not "funded" welfare benefit plans in the ERISA sense — they are unfunded promises to reimburse, making their administration structurally distinct from fully insured or self-funded group health plans.

How It Works

The operational mechanics of an HRA follow a discrete sequence:

  1. Employer establishes a plan document complying with ERISA summary plan description requirements and applicable IRS guidance. The plan document specifies the annual employer contribution (which may vary by employee class), the eligible expense list, and any carryover provisions.
  2. Employer allocates a notional account for each eligible employee at the start of the plan year. No cash moves until a reimbursement claim is approved.
  3. Employee incurs a qualifying expense — such as a copayment, deductible payment, prescription drug cost, or, under certain HRA types, an individual insurance premium.
  4. Employee submits a claim with substantiation — typically an Explanation of Benefits (EOB), itemized receipt, or premium invoice. Third-party administrators (TPAs) process the majority of HRA claims in employer deployments.
  5. Employer reimburses the substantiated amount up to the available account balance, tax-free to the employee under IRC §105(b), provided the expense qualifies under IRC §213(d) or meets plan-specific criteria for premium reimbursement.
  6. Unused balances remain with the employer. Unlike HSAs, HRA balances are not portable by default — portability exists only if the plan document explicitly permits it and the employee is no longer covered by the HRA.

Reimbursements are excluded from the employee's gross income and are also deductible by the employer as a business expense, creating a tax-efficiency structure detailed further at the main overview on this site.

Common Scenarios

HRAs are deployed across four principal configurations, each with distinct regulatory boundaries:

Integrated (Group Coverage) HRA
The traditional HRA model pairs with a group health plan. The employer offers both a major medical policy and an HRA to cover cost-sharing. Employees must be enrolled in the employer's group plan to access HRA funds. Contribution amounts are employer-determined with no statutory cap, though ACA market reform rules impose integration requirements under HHS guidance at 45 CFR §147.126.

Qualified Small Employer HRA (QSEHRA)
Created by the 21st Century Cures Act (Pub. L. 114-255, enacted 2016), the QSEHRA allows employers with fewer than 50 full-time equivalent employees who do not offer a group health plan to reimburse employees for individual market premiums and medical expenses. Contribution limits are set annually by the IRS — for 2024, the ceiling is $6,150 for self-only coverage and $12,450 for family coverage (IRS Rev. Proc. 2023-29). Employees must maintain Minimum Essential Coverage to receive reimbursements tax-free. A full breakdown appears at QSEHRA: Qualified Small Employer HRA.

Individual Coverage HRA (ICHRA)
Established by final IRS/DOL/HHS rules effective January 1, 2020, the ICHRA permits employers of any size to reimburse employees purchasing individual health insurance — including marketplace plans — with no statutory dollar cap. Employers must define eligible employee classes (full-time, part-time, seasonal, etc.) and may not offer a traditional group plan to the same class receiving an ICHRA. The ICHRA is explored in depth at Individual Coverage HRA.

Excepted Benefit HRA
Available since plan years beginning on or after January 1, 2020, this HRA type covers excepted benefits (dental, vision, short-term supplemental) with a 2024 limit of $2,100 per year (IRS Rev. Proc. 2023-29). Employees need not be enrolled in the employer's major medical plan, making it useful for limited supplemental benefit design.

Decision Boundaries

Choosing the appropriate HRA type depends on five determinative factors:

Factor Integrated HRA QSEHRA ICHRA Excepted Benefit HRA
Employer size requirement None <50 FTEs None None
Group health plan required Yes No No Yes (employee must be eligible)
Statutory contribution cap None Yes (IRS annual limit) None Yes (IRS annual limit)
Premiums reimbursable No (generally) Yes Yes No
ACA marketplace subsidy interaction N/A Reduces subsidy dollar-for-dollar Disqualifies subsidy if ICHRA is "affordable" N/A

The ACA affordability interaction is a critical decision boundary for ICHRA and QSEHRA. An employee offered an ICHRA that meets the IRS affordability threshold — where the employee's cost for self-only coverage on the lowest-cost silver plan in the area does not exceed a percentage of household income set annually by the IRS — cannot claim a premium tax credit under IRC §36B. This interaction is governed by the final rules at 26 CFR §1.36B-2.

Employers analyzing whether to offer an HRA alongside or instead of a group health plan should also consider ERISA reporting obligations (Form 5500 for plans with 100 or more participants), COBRA continuation requirements under 29 USC §1161 for integrated HRAs, and state-level insurance regulations that may affect individual market premium reimbursements. A complete treatment of the applicable rule structure appears in IRS Rules Governing HRAs.

References

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