HRAs: An Introduction

Health Reimbursement Arrangements (HRAs) offer significant tax benefits and flexibility for employers and employees, but understanding the various types and complex regulations is essential for effective implementation.

A health reimbursement arrangement (HRA) is a type of tax-favored health plan for employees as allowed under Internal Revenue Code.

The original concept is simple: The employer designates an annual reimbursement amount that employees can use for specific healthcare expenses, such as deductibles and out-of-pocket costs not covered by their regular health plans. The employer pays all HRA plan costs, but there are tax advantages to the employer and employees. The employer’s cost to pay HRA benefits and any administrative fees are tax-deductible to the employer. Further, the HRA benefits paid to employees are excluded from their gross income, so the employee saves from reduced income taxes, and both the employer and employee save from reduced payroll taxes (e.g., FICA).

It sounds simple, but HRAs must be designed and administered in accordance with complex IRS rules. The Employee Retirement Income Security Act (ERISA) and other federal laws on health plans usually apply as well. Adding to the complexity, several new laws and regulations have required changes in recent years. Two new types of HRAs became available starting in 2020—with more complicated IRS rules to go with them. The term “HRA” now refers to several types of arrangements, but each type is unique and is subject to different rules on availability, tax consequences, and coordination with other federal benefit laws.

Health Reimbursement Arrangement (HRA)

The Health Reimbursement Arrangement —the original one, or simply “HRA”—is still the most common type and may be offered by any size employer. It is an account-based group health plan, similar to a health flexible spending account (FSA), but funded entirely by the employer.

The HRA is designed to reimburse employees, up to the account limit, for healthcare expenses that are not covered by other plans. However, the HRA is prohibited from reimbursing premiums for individual (non-group) medical insurance. There is no mandatory “use or lose” rule, so many employers design their HRA plan to allow employees to carry unused amounts over to the next plan year.

The HRA is subject to § 105 of the Internal Revenue Code. Federal laws for group health plans, including the Affordable Care Act (ACA), ERISA, and the Consolidated Omnibus Budget Reconciliation Act (COBRA), also apply to the HRA.

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

The Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) may be offered only by small employers (generally those with fewer than 50 full-time-equivalent employees) that do not offer a group health plan to any of their employees. For instance, a small employer that does not offer a group medical plan but offers group dental coverage to some employees cannot offer a QSEHRA to any of its employees.

The QSEHRA allows small employers to help employees pay the premiums for their individual (non-group) health insurance policies. QSEHRA benefits are tax-free to the employee, provided the employee has an individual insurance policy providing minimum essential coverage. Generally, the same QSEHRA maximum benefit must be offered to all employees, although some variations (such as single versus family) are allowed.

The QSEHRA is not a group health plan, so the ACA, COBRA, and most ERISA provisions do not apply.

Individual Coverage Health Reimbursement Arrangement (ICHRA)

The first of the new arrangements that became available starting in 2020 is the Individual Coverage Health Reimbursement Arrangement (ICHRA). Any size employer can offer an ICHRA provided it is offered on the same terms to all employees in a class (full time, part time, salaried, hourly, etc.).

As the name implies, the ICHRA is designed for employers that want to help their employees pay the premium cost of individual (non-group) medical insurance or Medicare. The ICHRA must provide the same maximum benefit to all participants, other than variations due to single versus family or age-based premiums.

Excepted Benefits Health Reimbursement Arrangement (EBHRA)

The other new arrangement that first became available in 2020 is the Excepted Benefits Health Reimbursement Arrangement (EBHRA). It is designed for employers that offer employees an ACA-compliant group medical plan (although enrollment is not required). The EBHRA can reimburse employees’ expenses for “excepted benefits,” such as premiums for dental, vision, or short-term limited-duration insurance and out-of-pocket healthcare expenses. It cannot be used for individual medical insurance or Medicare premiums.


HRAs—the original type, the special type for small employers, and the new types—are complicated. The tax benefits do not come without lots of IRS rules, so employers that are considering any type of health reimbursement arrangement are encouraged to work with legal counsel and tax advisors with expertise in this arena.  

Each employer has unique needs when it comes to health benefits, and HRAs offer versatile solutions to fit those needs. To discuss how HRAs can benefit your organization and ensure compliance with complex regulations, fill out the form below.

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