What Is an HRA and How Does It Work?

This type of employee benefit can help you pay for certain medical expenses, tax-free.

Lindsay Frankel
Written byLindsay Frankel
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Lindsay FrankelInsurance Writer
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Updated December 13, 2022 at 11:00 AM PST

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Health reimbursement arrangements (HRAs) are a type of health benefit that employers can offer to help employees pay for healthcare expenses.

An HRA can reimburse you for eligible medical expenses up to an annual limit, and the money isn’t considered taxable income. If you have money left over at the end of the year, you can roll it over to use the following year.[1]

Your employer may offer one of several kinds of HRAs and will set the annual allowance and covered expenses. Here’s what you need to know about HRAs so you can fully take advantage of the benefits.

What is a health reimbursement arrangement?

An HRA — or a health reimbursement account — is a tax-advantaged arrangement your employer sets up and funds. You can use the money in it to pay for qualified medical expenses.

HRAs usually work in conjunction with major medical coverage, such as an employer-sponsored group plan or individual marketplace plan. In fact, you often can use money from your HRA to pay your health insurance premiums.

The IRS first recognized HRAs as employer health benefits in 2002. Initially, they were offered either in conjunction with group health insurance or as stand-alone plans intended to be combined with health coverage purchased on the individual market. The passage of the Affordable Care Act in 2010 eliminated stand-alone HRAs for a while, but they’ve since returned under new guidance.

Now, some small employers can offer an HRA without offering group coverage. Large employers can also meet their employer responsibility requirement by offering an HRA to be used with an individual health insurance plan purchased on the marketplace.[2] Some types of HRAs are becoming more popular, especially among small and midsize businesses, according to the Society for Human Resource Management.[3]

Check Out: When Is Health Insurance Open Enrollment?

Types of HRAs

Multiple types of HRAs are available for employers to offer:

  • Group health plan HRA: Employers must offer group health insurance, and employees must be enrolled in a group plan — either their own or a spouse’s — to use this type of HRA. Employers must establish a contribution limit and a time frame in which the funds must be used.

  • Qualified small employer health reimbursement arrangement (QSEHRA): This type of HRA is generally only available to employers with fewer than 50 full-time employees that don’t offer health insurance coverage to any employees. To benefit from these arrangements, employees must have minimum essential health coverage, such as an individual medical plan. The annual employer contribution limit for 2022 is $5,450 for self-only coverage and $11,050 for family coverage.

  • Individual coverage HRA (ICHRA): Large and small employers alike can offer an ICHRA, and employees must have an individual health plan to participate. Employers may choose to offer an ICHRA only to certain classes of employees. Employers establish their own contribution limits for these plans.

  • Excepted benefit HRA (EBHRA): Employers can offer an EBHRA only alongside group health insurance coverage. Employees don’t have to be insured to use an EBHRA. The plans are designed to help pay for dental and vision benefits, and employees generally can’t use them to pay health policy premiums. But employees can use the money to pay for benefits coverage like dental and vision, COBRA coverage, and short-term insurance. The 2022 contribution limit for EBHRAs is $1,800.[2]

How do HRAs work?

  • They’re employer-funded and controlled. Each plan has its own specific rules. Your employer decides how much to contribute, which medical expenses will be covered, and what happens with rollovers. They also contribute all the funds. You’re not allowed to contribute to your HRA in the same way you could contribute to a health savings account (HSA).

  • They generally require you to have health coverage. With an HRA, you’ll either have a group or individual health plan. If you have a QSEHRA, you’ll need to ensure you buy minimum essential coverage. However, you don’t need to be insured to use an EBHRA.

  • The funds may or may not roll over. Rollovers are determined by your employer and vary by plan. For some plans, you may forfeit any money that isn’t used during a calendar year or when you leave the employer.

  • The funds don’t earn interest. With the exception of some retiree HRAs, an HRA doesn’t pay interest. You can’t invest the money in your HRA like you could with an HSA.[4]

  • Methods of reimbursement vary. Depending on your plan design, you might submit medical bills for reimbursement or use a debit card connected to the account. More commonly, your employer will reimburse your network healthcare provider directly.

Tax advantages of HRAs

Any money that your employer contributes to your HRA is not subject to income or payroll taxes.[5] That means you don’t have to report the funds as income on your tax return, and your employer doesn’t have to pay payroll taxes on the amount they contribute.

Who can get an HRA?

Your employer must offer an HRA for you to participate in one. You’ll also need to meet the health coverage requirements for your specific plan. You can’t get an HRA if you’re self-employed.

Read More: What Is a PPO and How Does It Work?

What can you use HRA funds for?

You can use your HRA for qualified medical expenses as determined by your company. These qualified medical expenses are limited to items defined as medical care under the Internal Revenue Code section 213(d) and menstrual care products. Your employer may further restrict coverage for items listed in that section.

HRA funds are designed to be used for expenses like health insurance premiums, prescription drugs, and healthcare services that you pay for out of pocket. The following table illustrates some, but not all, eligible and ineligible expenses. Remember, employers can further limit what HRA funds can be used for.[2]

Eligible ExpensesExcluded Expenses
Over-the-counter medicationsFood
Birth control and other prescription medicationsBotox
Co-insurance and copaymentsCBD
DeductiblesCosmetic surgery
Physical exams and doctor’s office visitsDentures
Physical therapyToiletries
Pregnancy testsDaycare
Drug addiction treatmentDiapers
Acupuncture and chiropracticMarriage counseling
Fertility enhancementsChildcare or babysitting
Medical suppliesHealth club dues
Lab feesElectrolysis or hair removal
AmbulanceFuneral expenses
Flu shotsNonprescription drugs
Hearing aidsNutritional supplements
Service animalsWeight-loss programs
Dental and vision careMaternity clothes

Pros and cons of HRAs

Health reimbursement arrangements have benefits and drawbacks to consider.

Pros
  • HRAs often give you the flexibility to pick your provider and plan.

  • The funds in an HRA are not subject to taxes.

  • If your employer allows it, unused HRA funds can be rolled over to subsequent years.

  • HRA funds can help pay for items that health plans don’t typically cover.

Cons
  • HRA funds usually stay with your employer if you leave your job.

  • Depending on where you live, marketplace options may not be as robust as a group health plan.

  • Some types of HRAs have contribution limits.

  • Your employer may limit rollovers or eligible expenses.

Learn More: How to Compare Medicare Advantage & Get the Best Plan

Health reimbursement arrangement FAQs

With all the different types of health benefits employers can offer and the varying eligibility requirements, it’s common to get confused about HRAs. These are some of the most commonly asked questions about health reimbursement arrangements.

  • What’s the difference between an HRA and an HSA?

    While HRA and health spending accounts are both tax-advantaged and can be used to pay for eligible health care expenses, they differ in some key ways. You can only have an HRA if your employer offers one, while you can set up an HSA on your own. However, you can only contribute to an HSA while you have a high-deductible health plan.

    HSAs have contribution limits, while some HRAs don’t. HSA funds never expire and can be used for non-medical expenses after you’re 65 with no penalty, while HRA funds may expire annually and will also stay with the employer if you leave your job.[6] And while you can invest the funds in your HSA, an HRA is not an account and generally doesn’t earn interest.

  • What’s the difference between an HRA and an FSA?

    Flexible spending accounts are designed to be used with group coverage and can’t be used with a marketplace plan. They’re typically funded by the employee, although employers may contribute. They can’t be used to pay health insurance premiums. They have annual contribution limits, unlike some HRAs, and generally expire at the end of the plan year, with some exceptions.[7]

  • Where are HRA funds held?

    HRA funds are held by your employer. They are provided via reimbursement after you submit a qualified medical expense.

  • What happens to an HRA if you leave your job?

    If you leave your job, any remaining funds in your HRA will likely stay with your employer and will not be available for you to use.

Sources

  1. HealthCare.gov. "Health Reimbursement Arrangement (HRA)." Accessed December 13, 2022
  2. Congressional Research Service . "Health Reimbursement Arrangements (HRAs): Overview and Related History." Accessed December 13, 2022
  3. SHRM. "Employers Consider HRA-Based Alternatives to Group Health Plans." Accessed December 13, 2022
  4. Fidelity . "HRA vs. HSA: Comparing health accounts." Accessed December 13, 2022
  5. Department of the Treasury Internal Revenue Service. "Health Savings Accounts and Other Tax-Favored Health Plans." Accessed December 13, 2022
  6. Health Insurance Marketplace. "What’s a Health Savings Account?." Accessed December 13, 2022
  7. HealthCare.gov. "People with coverage through a job." Accessed December 13, 2022
Lindsay Frankel
Lindsay FrankelInsurance Writer

Lindsay Frankel is a content writer specializing in personal finance and auto insurance topics. Her work has been featured in publications such as LendingTree, The Balance, Coverage.com, Bankrate, NextAdvisor, and FinanceBuzz.

Evelyn Pimplaskar
Edited byEvelyn PimplaskarEditor-in-Chief, Director of Content
Evelyn Pimplaskar
Evelyn PimplaskarEditor-in-Chief, Director of Content
  • 10+ years in insurance and personal finance content

  • 30+ years in media, PR, and content creation

Evelyn leads Insurify’s content team. She’s passionate about creating empowering content to help people transform their financial lives and make sound insurance-buying decisions.

Featured in

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