Health Reimbursement Arrangements (HRAs)

Health reimbursement arrangements (HRAs) are employer-funded health care accounts that reimburse employees for their eligible out-of-pocket medical expenses on a tax-favored basis. Although employers have some HRA plan design options available to them, there are specific rules regarding eligibility, contributions and reimbursements they must adhere to.

HRAs are subject to a variety of employee benefits laws, including ERISA, COBRA, HIPAA and the Internal Revenue Code’s (Code) nondiscrimination rules for self-funded plans.

In addition, current guidance under the Affordable Care Act (ACA) substantially limits the types of HRAs that employers can offer. Most stand-alone HRAs are prohibited, although HRAs that are “integrated” with other group health coverage are permissible. In addition, beginning in 2020, employers may use a special type of HRA—an individual coverage HRA (ICHRA)—to reimburse employees’ individual health insurance premiums, if certain conditions are met.    

HRA Plan Design

HRAs are employer-funded health care reimbursement plans that receive favorable tax treatment under the federal Internal Revenue Code (Code). Typically, employers that sponsor HRAs establish unfunded “bookkeeping” accounts to reimburse eligible employees for substantiated medical expenses that are not covered by health insurance, such as deductibles and copayments.

Favorable Tax Treatment: HRAs are an attractive option for employers and employees due to their tax-favored status. Employers may take a federal income tax deduction for HRA contributions. The value of the HRA coverage is not taxable to covered employees. Any reimbursements that employees receive from their HRAs for medical care are excludable from the employees’ income.

HRAs are often paired with group health plans that have high deductibles in order to help employees pay for the out-of-pocket medical expenses they incur before meeting the group health plan’s out-of-pocket limits. Although employers have some HRA plan design options available to them, there are specific rules regarding eligibility, contributions and reimbursements they must adhere to.

Types of HRAs

The ACA’s market reforms have substantially narrowed the types of HRAs that are permitted under federal law. Before 2014, employers could offer a traditional HRA in conjunction with a group health plan or without a group health plan (that is, a stand-alone HRA). Also, HRAs could reimburse premiums for individual health insurance policies without substantial design restrictions. This changed, however, when the ACA’s market reforms became effective in 2014.

Effective for plan years beginning on or after Jan. 1, 2014, most stand-alone HRAs have been prohibited. Traditional HRAs that are integrated with other group health coverage do not violate the ACA and continue to be permissible. Some types of HRAs are exempt from the ACA’s reforms and can be offered on a stand-alone basis, such as retiree-only HRAs. Also, special types of HRAs, such as ICHRAs and qualified small employer HRAs (QSEHRAs) can be used to reimburse individual health insurance premiums, if certain conditions are met.

TYPE OF HRA	CURRENT STATUS
Traditional HRA – offered with a group health plan	Permitted if the HRA satisfies one of the integration methods described below
Traditional HRA – not offered with a group health plan	Not allowed
ICHRA	Permitted (must be integrated with individual health insurance or Medicare)
QSEHRA	Permitted (exempt from the ACA’s reforms)
Retiree-only HRA	Permitted (exempt from the ACA’s reforms)
HRA that pays only for excepted benefits (such as limited-scope dental and vision coverage)	Permitted (exempt from the ACA’s reforms)
Excepted Benefit HRA (EBHRA)	Permitted (exempt from the ACA’s reforms)

 Reimbursing Individual Health Insurance Premiums

Employers cannot use HRAs to reimburse employees for individual health insurance premiums without violating the ACA and risking exposure to excise taxes of $100 per day for each applicable employee under Code Section 4980D. This restriction does not apply to QSEHRAs, retiree-only HRAs or ICHRAs.

ACA Integration Methods—Traditional HRAs

There are two ways for an HRA to be considered “integrated” with another group health plan. One method imposes a minimum value requirement on the non-HRA group health plan coverage. The other method limits the types of expenses that can be reimbursed under the HRA.

Neither integration method requires the HRA and the coverage with which it is integrated to share the same plan sponsor, the same plan document or governing instruments, or file a single Form 5500, if applicable. Under both integration methods, the following four requirements must be met:

1. The employer sponsoring the HRA must sponsor a group health plan (other than the HRA) that provides more than just excepted benefits.

2. Employees (and their spouses and dependent children) who are covered under the HRA must be enrolled in another group health plan that provides more than just excepted benefits, regardless of whether the employer sponsors the plan (non-HRA group coverage).

3. The HRA must be available only to employees (and their spouses and dependent children) who are enrolled in the non-HRA group coverage, regardless of whether the employer sponsors the plan.

4. Employees (and former employees) must be offered the opportunity to permanently opt out and waive future reimbursements from the HRA at least annually. On termination of employment, the remaining amounts in the HRA must be forfeited or the employee must be permitted to permanently opt out of and waive future reimbursements.

If the non-HRA group health plan coverage described in the first three requirements above meets the ACA’s minimum value requirement, the HRA may reimburse any type of permitted medical care expense. However, if the minimum value standard is not met by the non-HRA group health plan coverage, the HRA can only reimburse copayments, coinsurance, deductibles and premiums under integrated non-HRA group coverage, as well as medical care that does not constitute essential health benefits.

General Rules for HRAs

HRA Eligibility Rules

As a general rule, an employer may allow any common law employee (or former employee) to participate in its HRA. While individuals who are not considered employees, such as self-employed individuals, partners in a partnership and more than 2 percent shareholders in a Subchapter S corporation, can sponsor an HRA for their employees, these self-employed individuals cannot participate in an HRA on a tax-favored basis.

Employers may decide that they only want certain groups of employees to be eligible for the HRA (for example, employees who work in a specific geographical location). While an HRA can be designed to cover only a portion of the employer’s workforce, there are two main legal restrictions to consider when designing an HRA’s eligibility rules—the Code Section 105(h) nondiscrimination rules and the ACA’s integration rules.

• Code Section 105(h) Rules: HRAs are subject to the Section 105(h) nondiscrimination rules for self-funded health plans. These rules prohibit self-insured plans from discriminating in favor of highly compensated individuals (HCIs) with respect to eligibility or benefits.

• ACA Integration Rules: Traditional HRAs are subject to the ACA’s market reforms and must satisfy the integration rules described above. This generally means that the HRA can only reimburse the medical expenses of individuals (including dependents) who are actually enrolled in the non-HRA group health plan coverage.

In addition to covering employees (and former employees, including retirees), HRAs may be designed to reimburse the eligible medical care expenses of an employee’s spouse and tax dependents. Due to the ACA, this also includes children who are under age 27 as of the end of the taxable year. However, unless a domestic partner qualifies as a tax dependent under the federal tax law, an HRA cannot reimburse a domestic partner’s medical care expenses on a tax-favored basis, even if the employer offers domestic partner coverage under its group health plan.

Employers may require new employees to satisfy a waiting period before they are allowed to participate in the HRA. However, for HRAs that are subject to the ACA, this waiting period cannot exceed 90 days.

Contribution Rules

Only employers are allowed to make HRA contributions. Unlike health savings accounts (HSAs) and health flexible spending accounts (FSAs), employees cannot make contributions to their HRAs. Also, while an HRA can be offered with a group health plan that is offered under a cafeteria plan (or Section 125 plan), the HRA itself may not be funded with pre-tax salary reductions or otherwise provided under a cafeteria plan.

Federal tax law does not impose a dollar limit on the maximum amount of traditional HRA accruals or reimbursements in a year. Thus, an employer has flexibility in establishing this limit. However, because the Section 105(h) nondiscrimination rules apply to the benefits provided under HRAs, employers must be careful to structure HRA contributions so that they do not discriminate in favor of HCIs.

An employer can choose to credit an employee’s HRA account once per year, on a pro rata monthly basis or on each payday. When making this decision, employers should consider employees’ cash flow needs and their own risk of loss for employees who terminate employment during the year.

Also, unlike with health FSAs, employees are not required to forfeit unused amounts in an HRA at the end of a plan year. As a design option, employers may allow unused HRA balances to carry over to the next plan year. Employers that allow HRA carryovers often place a cap on the carryover amount to help limit their financial exposure from year to year. For terminating employees, an employer may choose to either forfeit the unused amounts or permit the employees to spend down their account balances. In either case, employers that are subject to the Consolidated Omnibus Budget Reconciliation Act (COBRA) must offer continuation coverage when a qualifying event (such as a termination of employment) occurs.

Reimbursements

An HRA can only reimburse employees for amounts spent on medical care, as defined under Code Section 213(d), with some specific limitations. Section 213(d) broadly defines “medical care” to include amounts paid “for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.” Employers that sponsor HRAs can further limit expenses that are eligible for reimbursement. For example, some HRAs exclude certain expenses that are difficult to administer, such as those that could be for personal as well as medical reasons.

The following are examples of common medical care expenses that may be reimbursed by an HRA:

• Drugs and medicine (including over-the-counter drugs without a prescription)

• Orthodontia

• Drug addiction treatment

• Eye exams, eyeglasses, contact lenses or vision correction surgery

• Deductibles, copayments and coinsurance (if the underlying expense is for medical care)

• Dental exams and procedures

• Hearing exams and hearing aids

• Fertility treatments

• Durable medical equipment (for example, crutches)

• Genetic testing or counseling (to the extent the testing is done to diagnose a medical condition or to determine possible defects)

• Menstrual care products

An HRA can only reimburse medical care expenses that are not reimbursed from other health plan coverage and that the employee does not claim as a deduction on his or her tax return.

An HRA may only reimburse eligible medical care expenses that are incurred while an individual’s HRA coverage is in effect. For example, a medical expense that an individual incurs before enrolling in the HRA is not eligible for reimbursement.

However, claims that are incurred during one plan year and are not reimbursed during that year (for example, because the individual exhausted his or her HRA balance) may be reimbursed in a future coverage period, depending on the HRA’s design. Employers may establish deadlines for submitting claims to restrict the time period for seeking reimbursement. For example, an HRA sponsor may require all claims for a coverage period to be submitted within 90 days after the coverage period ends.

Substantiation Requirement: HRA claims must be substantiated with information from a third party, such as a health care provider’s receipt or bill. HRA claims must include a statement from the participant that the medical expense has not been reimbursed from another source and that the participant will not seek reimbursement from another health plan. Due to the administrative expense involved with substantiating claims and HIPAA privacy concerns, many employers hire third-party administrators (TPAs) to substantiate HRA claims.

Unlike health FSAs, HRAs are not subject to the uniform coverage rule. This means that reimbursements from an HRA may be limited to an individual’s current HRA balance, and that the maximum amount of reimbursement under an HRA does not have to be available at all times during the period of coverage. For this reason, employers will often decide to prorate their HRA accruals throughout the year.

The federal tax rules also strictly prohibit HRAs from “cashing out” HRA balances (that is, paying some or all of an individual’s HRA balance in cash or other taxable benefits). Thus, when an employee dies or terminates employment, an employer may allow the employee (or his or her surviving spouse and dependents) to spend down an HRA account balance to pay for eligible medical expenses, but the balance cannot be cashed out.

Other Federal Laws

HRAs are subject to a variety of employee benefits laws, including ERISA, COBRA, HIPAA and Code Section 105(h) nondiscrimination rules for self-funded health plans.

ERISA

An HRA is an employee welfare benefit plan under the Employee Retirement Income Security Act of 1974 (ERISA). Unless an employer is exempt from ERISA because it qualifies as a church or governmental employer, its HRA must comply with ERISA’s standards. This means that the HRA must have a plan document and summary plan description (SPD) and is subject to the Form 5500 annual filing requirement (unless an exception applies). Also, if an HRA is funded, it will be subject to additional rules under ERISA regarding plan assets.

COBRA

HRAs are group health plans that are subject to COBRA, unless the employer sponsoring the plan is a small employer (with fewer than 20 employees) or a church. QSEHRAs, however, are not subject to COBRA. Employers with HRAs that are subject to COBRA should make sure they are providing required notices and offering COBRA coverage to participants who would lose HRA coverage due to a qualifying event. If an employee elects COBRA coverage for the HRA, the employee must have access to the unused balance and any additional accruals provided to similarly situated employees, less any year-to-date reimbursements.

Also, many employers link employees’ HRA eligibility with participation in the employer’s group health plans. If an employer coordinates HRA eligibility in this way, it can design its COBRA practices so that a qualified beneficiary who elects COBRA coverage may only elect the HRA in connection with the group medical plan.

HIPAA

HRAs are group health plans that are subject to the Health Insurance Portability and Accountability Act’s (HIPAA) Privacy and Security Rules, unless they qualify for the exemption for small plans (with fewer than 50 participants) that are self-insured and self-administered.

Code Section 105(h)

HRAs must comply with nondiscrimination rules for self-insured health plans under Code Section 105(h). Under these rules, an HRA cannot discriminate in favor of HCIs in regard to eligibility to participate in the plan, and the benefits provided under the HRA must not discriminate in favor of participants who are HCIs.

W-2 Reporting

The ACA requires employers to report the aggregate cost of employer-sponsored group health plan coverage on their employees’ Forms W-2. This Form W-2 reporting requirement is currently optional for small employers (those that had to file fewer than 250 Forms W-2 for the prior calendar year). HRA coverage is exempt from the W-2 reporting requirement under the ACA.

Special Types of HRAs

ICHRAs

Beginning in 2020, employers may use ICHRAs to reimburse employees for their individual health insurance premiums (or Medicare premiums), subject to the requirements outlined below.

• Enrollment Requirement: An employee who is covered by an ICHRA must be enrolled in individual health insurance coverage (or Medicare coverage) for each month that he or she is covered by the ICHRA. This coverage requirement also applies to any family members (such as spouses and children) who are covered by the ICHRA.

• Substantiation Requirement: The ICHRA must implement (and comply with) reasonable procedures to substantiate that participants and each dependent covered by the ICHRA are (or will be) enrolled in individual health insurance coverage or Medicare coverage for the plan year. Reasonable substantiation procedures may consist of documentation by a third party (for example, an insurance card or explanation of benefits document) or a participant’s attestation. A model substantiation form is available for employers to use.

• Cannot Offer Traditional Group Health Plan: If an employer offers an ICHRA to a class of employees, the employer cannot also offer a traditional group health plan to the same class of employees. Permissible employee classes include: full-time employees, part-time employees, salaried employees, non-salaried employees, seasonal employees, collectively bargained employees, employees in a waiting period, temporary employees, employees whose primary employment site is in the same rating area, nonresident aliens without U.S.-based income, and any group of employees formed by combining two or more of these classes.

• Same Terms: An employer must offer the ICHRA on the same terms to all employees within a class of employees, subject to a few specific exceptions for age, number of dependents and new participants.

• Written Notice: Employers with ICHRAs must provide a notice to eligible participants regarding the ICHRA and its interaction with the ACA’s premium tax credit. In general, this notice must be provided at least 90 days before the beginning of each plan year. For participants who are not eligible at the beginning of the plan year (such as new hires), the notice must be provided by the time the participant is first eligible to participate in the ICHRA. A model notice is available for employers to use to satisfy this notice requirement.

• Annual Opt-Out: Employees must be permitted to opt out of an ICHRA so they may claim the premium tax credit under the ACA, if they are otherwise eligible for the premium tax credit and the ICHRA is considered unaffordable. An employer may establish timeframes for enrollment in (and opting out of) the ICHRA but, in general, the opportunity to opt out must be provided in advance of the first day of the plan year. 

QSEHRAs

Effective in 2017, QSEHRAs were the first type of HRA to allow small businesses to reimburse employees’ individual health insurance premiums without violating the ACA’s reforms. Although a QSEHRA is similar to an ICHRA in that both types of HRAs can reimburse individual health insurance premiums, QSEHRAs are subject to their own design requirements. Key requirements for QSEHRAs are summarized below.

Eligible Employers

To be eligible to offer a QSEHRA, an employer must meet the following two requirements:

• The employer is not an applicable large employer (ALE) that is subject to the ACA’s employer shared responsibility rules.

• The employer does not maintain a group health plan for any of its employees.

ALEs are employers that employ, on average, at least 50 full-time employees, including full-time equivalents, during the preceding calendar year. ALE status is determined on a controlled group basis.

Design Requirements

Like all HRAs, a QSEHRA must be funded solely by the employer. Employees cannot make their own contributions to an HRA, either directly or indirectly through salary reduction contributions. In addition, the following requirements apply to QSEHRAs:

Maximum Benefit

For 2023, the maximum benefit available under the QSEHRA for any year cannot exceed $5,850 (or $11,800 for QSEHRAs that also reimburse medical expenses of the employee’s family members). The IRS has not yet released the maximum benefit limits for 2024.

These dollar amounts are subject to annual adjustment for inflation. The maximum dollar limits must be prorated for individuals who are not covered by the QSEHRA for the entire year.

Eligibility and Benefit Rules

The QSEHRA must be provided on the same terms to all eligible employees except:

• The maximum benefit may vary based on age and family-size variations in the price of an individual policy in the relevant individual health insurance market; and

• The QSEHRA may exclude certain categories of employees, including collectively bargained employees, employees who are part time or seasonal, employees who have not completed 90 days of service, employees who are younger than age 25 and nonresident aliens without earned income from sources within the United States.

Reimbursements

QSEHRA payments or reimbursements must be limited to Code Section 213(d) medical care expenses incurred by the employee or the employee’s family members, after the employee provides proof of coverage. This would include, for example, premiums for individual health insurance coverage and other out-of-pocket medical expenses.

Employee Notice

An employer funding a QSEHRA for any year must provide a written notice to each eligible employee. This notice must be provided no later than 90 days before the beginning of the year. For employees who become eligible to participate in the QSEHRA during the year, the notice must be provided by the date on which the employee becomes eligible to participate.

Other Types of HRAs

Types of HRAs that are exempt from the ACA’s reforms include:

• Retiree-only HRAs;

• HRAs that only pay for excepted benefits, such as limited-scope dental or vision coverage; and

• Excepted benefit HRAs (EBHRAs).

The table below summarizes key design requirements for these types of HRAs. 

	Retiree-only HRA	HRA Pays Excepted Benefits	EBHRA
Eligible Employers	All employers	All employers	Employers that offer a traditional group health plan
Eligible Employees	Former employees (retirees) Although amounts may be credited while individuals are current employees, only expenses after retirement may be reimbursed	Any employees	Must be offered traditional group health plan coverage (not required to enroll)
Eligible Expenses	Medical care expenses, including premiums for individual health insurance and Medicare	Excepted benefits, such as limited-scope dental or vision coverage	Medical care expenses, except cannot reimburse: premiums for individual health insurance coverage, premiums for group health plan coverage (other than COBRA or continuation), or Medicare Parts B or D
Annual Limit	No annual limit	No annual limit	Yes—$1,950 for 2023 ($2,100 for 2024)—this limit is indexed annually for inflation