What Is a Health Reimbursement Arrangement?

Health reimbursement arrangements are also known as health reimbursement accounts. They are generally referred to as HRAs, so they're part of the long list of health insurance acronyms you will hear that include FSA, HSA, PPO, EPO, HMO, POS, and more. This article will explain what HRAs are and how they can be used.

Employees often encounter HRAs when perusing their benefit options. HRAs are simply a way for employers to reimburse employees for out-of-pocket medical expenses using tax-free money. There are various rules and regulations that apply to HRAs, some of which have changed recently. The IRS outlines the rules for HRAs in Publication 969.

Funding

HRAs are funded solely by the employer. This is different from FSAs and HSAs, which can be funded by the employer and the employee. So if your employer offers an HRA, you won't be sending any portion of your paycheck to the account.

Since HRAs must be funded by an employer, self-employed people cannot establish HRAs. This is the same as FSAs, but it differs from HSAs, which do not have to be linked to any particular employment situation.

Reimbursements

You only get reimbursed from your HRA when you submit proof of a qualifying medical expense to your employer. Unused HRA funds can roll over for use in the next year, or the employer can impose a "use it or lose it" rule.

As long as employees use the money in the HRA for qualified medical expenses, the withdrawals are tax-free. But employers can place their own limits on what expenses can be covered with the HRA funds, so an HRA offered by one employer won't necessarily cover the same expenses as an HRA offered by another employer.

HRA funds can be used to reimburse medical expenses incurred by the employee, but also the employee's spouse and dependents, children under the age of 27, even if they're no longer a tax dependent, and some people who could have been claimed as a dependent but weren't.

Having an HRA at work (or via a spouse's employer) will generally make a person ineligible to contribute to an HSA, even if they have an HSA-qualified health plan. But there are a few types of restricted HRAs that an employee can have and simultaneously be eligible to contribute to an HSA: limited purpose HRAs, post-deductible HRAs, suspended HRAs, and retirement HRAs.

In most cases, the IRS does not limit how much an employer can contribute to their employees' HRAs, so employers can set their own caps. But note that Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) and Excepted Benefit HRAs do have maximum reimbursement amounts established by the IRS. These accounts became available in 2017 and 2020, respectively, and are discussed below.

Eligibility

There is no specific type of health insurance plan that you must have in order to have an HRA. This is in contrast with an HSA—in order to contribute to an HSA or receive employer contributions to an HSA, you must have coverage under an HSA-qualified high-deductible health plan.

Individual Coverage Health Reimbursement Arrangements (ICHRAs)

Prior to 2020, with the exception of small employers offering Qualified Small Employer Health Reimbursement Arrangements, employers did have to provide group health insurance in conjunction with the HRA.

They could not offer an HRA on its own or use an HRA to reimburse employees for the cost of individual market health insurance that the employees purchased on their own. This was clarified in the regulations that were issued in 2013 during the process of implementing the Affordable Care Act.

But the rules were changed under regulations that were finalized in 2019 and effective as of 2020. Under the new rules, employers can use HRAs to reimburse employees for the cost of individual market health insurance and the associated out-of-pocket costs.

And large employers can use these individual coverage HRAs (known as ICHRAs) to meet their requirements under the ACA's employer mandate (ie, requirement to offer health coverage) as long as the HRA is large enough to result in the employee's coverage being considered affordable.

For 2023 coverage, that means the ICHRA has to result in the lowest-cost silver plan in the marketplace not costing more than 9.12% of the employee's household income. (Note that this is only based on the cost of the employee's coverage, and not the cost to add family members. This is true even though the "family glitch" has been fixed as of 2023, resulting in some employees' family members becoming newly eligible for premium subsidies in the exchange/marketplace.)

If an employer starts offering an HRA integrated with individual market coverage and the timing doesn't correspond with the annual open enrollment period for individual market coverage, the employees have access to a special enrollment period during which they can purchase a plan in the individual market.

Employees receiving ICHRAs are not eligible for premium subsidies in the exchange. But if it is determined that the ICHRA doesn't pay enough to meet the affordability test, the employee can opt out of the HRA and receive premium subsidies in the exchange instead, assuming they are otherwise subsidy-eligible.

Employers can divide their workforce into certain accepted employee classifications (for example, full-time versus part-time, employees under the age of 25 versus over the age of 25, and employees who live in a particular rating area) and offer differing HSA benefits to different employee classes.

They can also offer some employee classes a group health plan while offering other employee classes an HRA that could be used to reimburse employees for individual market coverage. But they cannot offer both options to the same class of employees. In other words, any given employee cannot have a choice between an ICHRA and a group health plan.

As discussed below, the rules had already been relaxed for small employers as of 2017, allowing them to reimburse employees for the cost of individual market health coverage. Small employers are not subject to the ACA's employer mandate.

Excepted Benefit HRAs

As of 2020, employers can also use HRAs to reimburse employees for the cost of "excepted benefits," which are things like short-term health insurance and fixed-indemnity plans, which are not regulated by the Affordable Care Act. But this would not allow an employer to comply with the employer mandate, as excepted benefits are not considered minimum essential coverage.

Excepted benefits are not regulated by the ACA, and are generally not suitable to serve as a person's only health coverage. Short-term health insurance can serve as stand-alone coverage, but only temporarily. And since it is not regulated by the ACA, there are numerous gaps in the coverage (essential health benefits do not have to be covered, plans can impose benefit caps, and pre-existing conditions are not covered).

Unlike HRAs integrated with individual market coverage, employers offering excepted benefit HRAs have to also offer those employees regular group health insurance. But the employees have the option to decline the group health plan and use the excepted benefits HRA instead.

The rules for excepted benefit HRAs initially capped an employee's total reimbursement under an excepted benefits HRA at $1,800. This amount is indexed annually, and increased to $1,950 as of 2023.

Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs)

When HHS, the IRS, and the Department of Labor the Department of Labor were developing rules to implement the Affordable Care Act, they issued regulations banning employers—both small and large—from reimbursing employees for the cost of purchasing health insurance in the individual market. The regulations came with a steep $100 per day penalty for non-compliance.

The 21st Century Cures Act, which passed with strong bipartisan support and was signed into law by President Obama in December 2016, relaxed those rules for small employers, starting in 2017.

The 21st Century Cures Act is a wide-ranging piece of legislation, but one of its provisions was to allow employers with fewer than 50 full-time equivalent employees to set up Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs).

While traditional HRAs could, at that point, only be offered in conjunction with an employer-sponsored group health plan, QSEHRAs can only be offered if the employer does not offer a group health plan. Instead, the employees seek out their own individual market health insurance (in the exchange or outside the exchange), and the employer can reimburse them for some or all of the cost.

Unlike traditional HRAs and the newer ICHRAs, the IRS does impose a cap on how much reimbursement employees can receive via a QSEHRA. In 2022, a small employer can use a QSEHRA to reimburse an employee up to $5,850 if the employee has self-only coverage and up to $11,800 if the employee has family coverage.

Employees whose individual market premiums are reimbursed via a QSEHRA can still be eligible for premium subsidies in the exchange, but not if the QSEHRA benefit brings the net premium for the employee's coverage (not counting the premium for additional family members) under the second-lowest-cost silver plan down to less than 9.12% of the employee's household income in 2023. (That percentage is indexed annually).

Note also that while affordability for ICHRAs is based on the cost of the lowest-cost silver plan in the marketplace/exchange, the affordability determination for QSEHRAs is based on the cost of the second-lowest-cost silver plan.

The IRS puts an upper limit on how much employers can reimburse via a QSEHRA, but there's no minimum requirement since this is a voluntary program (under ACA rules, small employers are not required to offer coverage of any sort).

So if an employer reimburses only a nominal amount, the employee might still find that the second-lowest-cost silver plan in the exchange is more than 9.12% of their household income, even after applying for the QSEHRA benefit.

In that case, the employee could also receive premium subsidies from the federal government, but the amount of the subsidy would be reduced by the amount that the employee is getting via the QSEHRA—in other words, there's no "double-dipping."

Summary

Health reimbursement arrangements can be used by employers to reimburse employees for various medical expenses. Starting in 2017, and again in 2020, the rules have been relaxed to allow employers to use HRAs to reimburse employees for the cost of self-purchased health insurance.

When the ACA was first implemented, HRAs could not be used to reimburse employees for the cost of individual market health insurance. But this has changed over time. HRAs can still be used to reimburse employees for out-of-pocket medical expenses, as was always the case. But QSEHRAs, ICHRAs, and Excepted Benefit HRAs now give employers more flexibility.

A Word From Verywell

Some employers are choosing to reimburse their employees for the cost of self-purchased health coverage instead of offering a group health plan. And HRAs also continue to serve a useful purpose for employers that do offer group health insurance plans and want to help their employees pay their out-of-pocket costs with pre-tax funds. If your employer offers an HRA, you'll want to make sure you understand exactly what it can provide for you, and take advantage of the benefit as much as possible.