Health Reimbursement Arrangement (HRA)

How Does an HRA Work?

Unlike savings or spending accounts, employees don’t contribute or deposit funds to an HRA health plan. Instead, workers incur an eligible healthcare expense, submit proof of payment, and receive reimbursement from their employer up to a predetermined limit.

Employers typically set the plan's limit at the beginning of the plan year. If an employee hits this annual limit before the end of the year, they’re responsible for covering additional medical expenses out-of-pocket.

Depending on how the HRA plan is set up, unused funds may roll over to the next plan year or return to the employer.

HRA Eligible Expenses

Internal Revenue Service (IRS) Publication 502 identifies various plan guidelines and HRA-approved expenses, such as:

• doctor's visits
• hospital expenses
• prescription medication
• necessary medical equipment

However, the specific expenses an HRA medical plan will cover depends on how the employer structures the plan within those guidelines. Employers may, for example, limit reimbursements to only services covered by an employee’s health plan or expand them to include dental or vision costs.

Despite their flexibility, HRA rules strictly prohibit reimbursement for non-essential and personal expenses. These include cosmetic procedures such as teeth whitening or plastic surgery, non-prescription drugs, childcare, and health club memberships.

HRA Pros and Cons

One of the most significant benefits of an HRA is the level of financial control it provides employers. Companies can set a fixed reimbursement limit, ensuring cost predictability while tailoring their plan to fit their employees' unique needs and circumstances.

Furthermore, employers and employees receive significant tax advantages when using an HRA plan. Employer-contributed HRA funds are tax-deductible, and reimbursements for qualified medical expenses are tax-free for employees, reducing taxable income for both parties.

However, health reimbursement arrangements have limitations. For instance, HRA plans require employees to incur and pay for expenses themselves, which may be burdensome or impossible for an employee’s financial situation.

Moreover, employees can’t control important plan details, such as the annual HRA employer limit amount and whether unused funds are forfeited or rolled over to the following year.

Types of Health Reimbursement Arrangements

Several types of HRAs are available, each tailored to different business sizes, needs, and coverage requirements. While some work independently, others must be paired with a group health plan.

• Individual Coverage Health Reimbursement Arrangement (ICHRA): Created in 2020, an ICHRA allows employees to receive reimbursements for purchasing a comprehensive health insurance plan and covering related expenses, such as copays and deductibles. To participate, however, employees must first enroll in individual health insurance coverage, such as a plan purchased through the Health Insurance Marketplace.
• Group Coverage Health Reimbursement Arrangement (GCHRA): This type of HRA is designed for employers who already offer a traditional group health plan. Enrolled employees can use HRA funds to cover most out-of-pocket medical expenses, except insurance premiums.
• Qualified Small Employer Health Reimbursement Arrangement (QSEHRA): Designed for employers with fewer than 50 full-time equivalent employees (FTEs) that don’t offer a group health plan. Employers set monthly reimbursement allowances for employees on insurance premiums and eligible expenses but must comply with the IRS’ annual contribution limit ($6,350 individual coverage; $12,800 family coverage in 2025). Employees must, however, enroll in a plan that provides minimum essential coverage.
• Excepted Benefit Health Reimbursement Arrangement (EBHRA): Another type of HRA for employers that already offer traditional health insurance. EBHRAs reimburse workers for “excepted” healthcare costs, which are expenses not covered by their plan (e.g., vision or dental care). Like a QSEHRA, the IRS imposes an annual reimbursement limit ($2,150 in 2025).

HRA vs. HSA

Health savings accounts (HSAs) and HRAs serve similar purposes but in different ways. For instance, HSAs don’t require employees to incur expenses out of pocket or pay for costs upfront. Instead, they’re pre-funded with tax-free contributions the employee can use at the time of purchase.

Furthermore, HSAs are employee-owned and funded by employee and employer contributions. This allows employees to roll over and invest unused funds in other financial tools, such as stocks, bonds, or mutual funds. Employees can also take their HSAs when switching to a new employer.

Similar to some HRAs, though, the IRS sets annual limits on HSA contributions ($4,300 individual coverage; $8,550 family coverage in 2025), and employees must enroll in a high-deductible health plan (HDHP) before they can participate.

HRA vs. FSA

Flexible spending accounts (FSAs) are another tax-advantaged benefit employees can use to offset healthcare expenses via contributions from voluntary salary deductions. Like an HRA, FSAs are employer-owned and must comply with an annual contribution limit ($3,300 in 2025).

Despite also being employer-owned, FSAs tend to be less customizable than HRAs. For example, employers can structure certain HRAs to reimburse employees for health insurance premiums, an option not available with an FSA.

HRAs also allow employers to choose if unused funds roll over to the next year and have no limit on rollover amounts. FSAs, on the other hand, usually operate under a “use-it-or-lose-it” policy, which forfeits unused funds at the end of the year. Employers can, however, provide a grace period (up to 2.5 months) to spend the funds or allow a limited carryover amount ($660 in 2025).