10 health reimbursement arrangement FAQs

A health reimbursement arrangement (HRA) is a type of consumer-driven health plan (CDHP) that is gaining popularity, particularly among small employers. These employer-funded health benefits help small organizations offer cost-effective, flexible benefits and allow employees to take better charge of their healthcare and budget.

HRAs have to follow similar regulations as other tax-advantaged health benefits, like health savings accounts (HSAs) and flexible spending accounts (FSAs). But if this benefit is new to you, you may have questions about whether any special rules apply to HRAs.

To help you understand how your HRA works, we've answered the 10 most frequently asked questions about HRAs.

Takeaways from this blog post:

• There are different types of HRAs, including the QSEHRA, ICHRA, and GCHRA, each with their own rules and eligibility criteria.
• Only employers can contribute to the HRA allowance. Some HRAs have annual contribution limits.
• The IRS determines expenses eligible for reimbursement through an HRA. Depending on the HRA an employer offers, these may include health insurance premiums, deductibles, prescription drugs, and preventive services.

What is an HRA?

A health reimbursement arrangement (HRA) is an IRS-approved, tax-advantaged health benefit that enables employers to reimburse employees for qualified out-of-pocket medical care expenses and, depending on the HRA, individual health insurance premiums.

While they're sometimes called a health reimbursement account, an HRA doesn’t require employers to pre-fund an account, like other account-based health plans. With an HRA, employers define a monthly allowance of tax-free money that employees can use to spend on medical care.

Once employees purchase an eligible health insurance policy or medical services and items, they submit the expense. Once the employer or HRA administrator reviews the expense, the employer schedules reimbursement up to the employee’s available allowance.

The three types of HRAs that PeopleKeep offers are:

• The qualified small employer HRA (QSEHRA): Sometimes called the small business HRA, this HRA is for small employers with fewer than 50 full-time equivalent employees (FTEs) that don't offer a group plan. All W-2 full-time employees are automatically eligible for a QSEHRA, and the IRS sets annual maximum contribution limits.
• The individual coverage HRA (ICHRA): The ICHRA is for all employer sizes. But, only employees with an individual health insurance policy can participate in the benefit. There are no maximum contribution limits with an ICHRA. Employers can also set different allowance amounts for 11 classes of employees. For example, they can offer one separate class of employees, such as part-time employees, $350 per month. Then, they can offer another separate class of employees, such as full-time employees, $650 per month.
• The group coverage HRA (GCHRA): Also known as an integrated HRA, a GCRHA is available to employers of all sizes that offer traditional group health plans, such as high deductible health plans. Only employees on their employer's group health plan can use the HRA. Like ICHRAs, they have no maximum contribution limits and have seven employee classifications.

10 HRA FAQs

If you're considering implementing an HRA for your employees or you're simply curious about how they work, let's address 10 frequently asked questions about HRAs.

1. Do employees have to have a health insurance policy to participate in an HRA?

Employees need a qualifying health insurance policy to receive tax-free reimbursements from their employer. Depending on the type of HRA an employer is offering, that may be an individual health insurance policy—whether that be self-only or family coverage through the individual market—or an employer's group plan.

For example, if an employer offers a QSEHRA, an employee must have minimum essential coverage (MEC) to receive tax-free reimbursements. This can be through an individual health insurance plan or coverage through a spouse’s or parent’s group health plan.

If an employer offers an ICHRA, an employee can't use it without an individual health insurance plan with MEC. This allows employees to choose the healthcare coverage that's best for them during the annual open enrollment period (or during a special enrollment period if they experience a qualifying life event).

Integrated HRAs require employees to participate in an employer's group health plan to take advantage of the benefit.

Other HRAs, like the one-person stand-alone HRA, the retiree HRA, and the excepted benefit HRA (EBHRA), don't require employees to have a qualified health plan to participate.

2. Who owns an HRA—the employer or the employee?

By law, HRAs are employer-owned. This is unlike HSAs, which the individual employee owns. HSAs also aren't tied to employment, whereas HRAs are.

Because they're employer-owned and aren't set up like accounts, employees can't withdraw the funds from their HRA's allowance to directly pay for qualified medical care expenses or health coverage. They must incur the expense first and have their employer verify and approve it before they reimburse the employee.

3. Who can contribute to an HRA?

According to IRS regulations, only employers can contribute to HRAs. Federal regulations don’t allow participants in the HRA to contribute—a distinction that often gets confused with HSAs and FSAs, which are accounts that allow for both employee and employer contributions.

As an additional rule, HRA amounts don't count toward an employee’s gross income. Reimbursements are income tax-free as long as an employee has an individual health plan that provides minimum essential coverage (MEC).

4. How much can an employer contribute to an HRA?

Typically, the employer determines the allowance amount. However, some HRAs, like the QSEHRA and the EBHRA, have maximum annual contribution limits. Your HRA notice should outline the limits.

In 2025, small businesses with a QSEHRA can offer up to $6,350 for self-only employees ($529.16 per month) and $12,800 for employees with a family ($1,066.66 per month). If you have an EBHRA, the 2025 annual limit for contributions is $2,150.

The ICHRA and the GCHRA don't have any maximum contribution limits, so employers can offer as little or as much allowance as they wish. Because HRAs give employers the power to define a specific allowance amount, they are cost-effective alternatives to traditional group health plans.

5. Does the money in an HRA earn interest?

An HRA doesn't earn interest like a regular bank account or an HSA. Remember, HRAs aren't pre-funded accounts. Employers maintain them on an unfunded basis and only pay money out as reimbursements once employees and eligible dependents make an eligible purchase. Employers or HRA administrators must verify and approve the expenses in accordance with IRS regulations. Therefore, they're unable to earn interest.

6. Does an HRA roll over from year to year?

If you want to roll over your HRA funds annually, it'll depend on the type of HRA you have and how your employer sets the benefit set up.

For instance, QSEHRA allowance amounts can roll over monthly or yearly. But because QSEHRAs have annual contribution limits, your total allowance amount plus your rolled-over amount from the previous year can't exceed the maximum limit.

However, one-person HRAs, stand-alone HRAs, or integrated HRAs can roll over monthly and annually—if the employer chooses to allow them.

Sometimes, rollover capabilities depend on the HRA software your employer uses to administer your benefit. For example, only monthly rollovers are permitted if you have HRA through PeopleKeep.

7. What does an HRA cover?

Many employees want to know how they can use their HRA money. Under IRS regulations, HRA funds can only reimburse an employee for eligible healthcare expenses defined in IRS Publication 502 and the CARES Act. Only the employee, their spouse, and eligible dependents can incur eligible medical expenses during the HRA's plan year.

A few examples of eligible expenses under an HRA include:

• Individual health insurance premiums
• Deductibles, coinsurance, and copayments
• Vision and dental expenses
• Over-the-counter medicines, like pain relievers or acne treatment
• Prescription drugs
• Preventive services
• Diagnostic services

The type of HRA an employer offers can sometimes restrict what expenses qualify for reimbursement. For example, integrated HRAs can't reimburse health insurance premiums. Additionally, an employer can restrict what expenses they want to allow for reimbursement, even if the IRS lists the items as eligible.

Examples of ineligible expenses include:

• Items or services that an employer's HRA plan documents or explanation of benefits (EOB) don’t define as eligible
• Items or services that the IRS doesn’t list in Publication 502
• Items or services an employee, their spouse, or eligible dependents incur before their HRA's coverage effective date
• Items or services eligible for reimbursement from alternative sources, such as an HSA or FSA
• General nutrition, wellness, and health items or services incurred with a doctor’s note that the IRS doesn’t consider¹ medical expenses

8. Can employees use HRA funds to pay for their family's medical expenses?

Yes, HRA funds can pay for eligible medical expenses of an employee’s spouse and any family member listed as dependent on their federal tax return. Per the IRS, as long as an employee and their spouse or partner are legally married and their HRA covers dependents, they can submit their family members’ expenses for reimbursement just like they would their own expenses.

If an employee has a QSEHRA with PeopleKeep and their employer has enabled the employer-sponsored premium reimbursement (ESPR) feature, employees have an added bonus. ESPR allows employees to receive reimbursement for their spouse's health insurance premiums.

However, these reimbursements are likely taxable because their spouse is most likely paying the monthly premium for the policy through payroll deductions on a pre-tax basis.

9. What is the maximum reimbursement under an HRA?

Employees are eligible for reimbursement up to the allowance amount determined by their employer. Employers should outline the allowance amount in the HRA's plan documents. Additionally, a maximum reimbursement amount may increase or decrease from year to year.

Employers aren't obligated to provide employees with the maximum available allowance amount (if you have an HRA with an allowance cap) or even the same amount given the previous year if an employee has an HRA with unlimited allowance capabilities.

10. What happens to unused HRA funds?

Because an HRA is employer-owned, most HRAs are only for current employees. Unused funds stay with an employer if an employee leaves their job, is laid off, or retires. This is unlike HSAs that are employee-owned. With an HSA, the account and unused funds go with an employee even if they change jobs.

Employees also can't “cash out” any remaining allowance funds before they leave a job since an HRA isn't pre-funded, and the funds aren't can’t be claimed by the employee until they make an eligible expense.

However, an employer may allow a 90-day grace period for employees to submit reimbursement requests for any medical care expenses made while they were still employed. Additionally, retiree-only HRAs allow retired employees to use contributed funds after they retire.

Conclusion

Whether you’re hearing about the HRA for the first time or doing some deeper analysis to determine whether or not to use this plan as a health benefit, understanding some basic facts will help you understand why this personalized health benefit is an excellent alternative to traditional health plans.

With HRA funds, you can give employees the ability to have their insurance premiums and out-of-pocket medical costs covered, keeping them financially steady throughout rising healthcare costs. The better you understand how an HRA works, the greater the value your team can receive from it.

This article was originally published on July 16, 2012. It was last updated on April 18, 2024.

1. https://www.irs.gov/newsroom/irs-alert-beware-of-companies-misrepresenting-nutrition-wellness-and-general-health-expenses-as-medical-care-for-fsas-hsas-hras-and-msas