What Is an HRA and How Does It Work?

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]

Pros and cons of HRAs

Health reimbursement arrangements have benefits and drawbacks to consider.

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.