HRA Plan Primer: Facts about Qualified Expenses, Taxes and More

HRA planHealth Reimbursement Arrangements (HRAs) are employer-sponsored benefit plans that reimburse employees for qualified expenses. Unlike other types of employer-sponsored healthcare benefits, an HRA plan is owned and completely funded by the employer. Employee participants do not make contributions or pay taxes on reimbursements received.

Generally, there are no limits on employer contributions to regular HRA plans. An exception is the Qualified Small Employer HRA (QSEHRA), created by Congress in late 2016 as part of the 21st Century Cures Act. For 2023, maximum employer contributions for QSEHRAs are $5,850 for an employee with individual coverage and $11,800 for an employee with family coverage.

If your employer offers an HRA plan, here are some important things to know about the accounts:

HRA plan specifics can vary widely.

After incurring a qualified medical expense, the employee participant is reimbursed – and that’s about where the similarity ends between HRA plan designs. The sponsoring employer has a wide range of options. For example, some companies restrict reimbursement to deductible expenses, while others also allow co-pays and co-insurance. Some employers provide an HRA for dental and vision expenses, but not for medical, or vice-versa. Some plans fund participant accounts in full at the beginning of the plan year, while others are funded semi-annually, quarterly, monthly, or as claims are received. Some HRAs add unused funds from the previous year to account balances for a new plan year, while others do not.  And so on.

HRAs are not portable.

If the participant leaves the job or is terminated, unused funds remain with the employer. There are some exceptions, though. Employers may permit terminated employees to access HRA funds to pay for expenses incurred while the person was still employed. Also, some plans may allow retirees to enroll in an HRA plan as part of a retiree health coverage package.

HRA plans may restrict which expenses are covered.

Under IRS Section 213 of the Internal Revenue Code, HRAs can reimburse any expense considered to be a qualified medical expense. However, because employers own and fund the HRA plan, they have the authority to specify which medical expenses are eligible for reimbursement, as long as the company adheres to IRS guidelines.  Most HRAs cover common medical expenses such as deductibles, coinsurance, and copays. They may also cover other IRS-approved medical costs not typically covered by standard major medical health insurance coverage, such as dental and vision expenses.

Most HRAs cannot reimburse for insurance premiums.

Under the Affordable Care Act (ACA), standard HRAs cannot reimburse for health insurance premiums. However, with the passage of the Cures Act in 2016, small employers (those with fewer than 50 full-time employees) who do not have a group health plan can offer a QSEHRA for premium reimbursement.  Learn more about QSEHRAs.

Once reimbursed by an HRA, expenses are no longer tax-deductible.

As with other tax-friendly healthcare accounts, expenses reimbursed by an HRA cannot also be deducted on your tax returns. Nor can employee participants ‘double-dip’ by submitting the same expenses for reimbursement from their FSA or HSA.

HRA reimbursements are not taxable under most plan designs.

In general, the IRS does not tax reimbursements that employees receive from an HRA, although there are exceptions. For example, employers are not allowed to reimburse for non-medical expenses. The IRS considers this to be deferred compensation and therefore taxable to the employee participant. (In fact, if an employer does reimburse non-medical expenses, all reimbursements received from the HRA plan become taxable – including those for expenses that would otherwise be considered eligible.)

In addition, certain types of HRA plan designs can trigger a shift from non-taxable to taxable income. These include plans that:

  • Comply with the “medical expenses only” requirement, but reimburse employees for some or all of their unused money at the end of the year
  • Provide a death benefit to employees’ dependents from unused funds, and allow the funds to be used for non-medical expenses
  • Allow unused account dollars to be applied to other company benefits, such as a 401(k) contribution

HRA plans offer many advantages – tax and otherwise – to both employers and employee participants. If you’re not sure whether your company offers an HRA plan, contact your human resources department.