# Health Reimbursement Arrangement (HRA): What It Is, How It Works

![Health Reimbursement Arrangement (HRA)](https://www.investopedia.com/thmb/Uy-gYeg-VviLac63X8ITyV-RJAM=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/HRA-Final-f8e962ce639a49519c39edd46aa44550.jpg)

*The employer decides how much it will contribute to the HRA, and the employee can request reimbursement for actual medical expenses incurred up to that amount. — Zoe Hansen / Investopedia*

## What Is a Health Reimbursement Arrangement (HRA)?

A health reimbursement arrangement (HRA) is a plan that reimburses employees for qualified medical expenses and, in some cases, insurance premiums. Reimbursements are tax free for employees and tax deductible for employers.

HRAs are employer-funded. In addition to the tax benefits, other perks include paying for medical and dental expenses (e.g., annual physical exam, birth control pills, and prescription medicine). Limitations include their non-portability (you can't take it with you if you resign or are fired) and that they can't be used for costs deemed not necessary.

The alphabet soup of various types of HRAs includes EBHRAs (Excepted Benefit HRAs, which reimburse up to $1,950 annually for medical expenses), ICHRAs (Individual Coverage HRAs, which can be used to buy comprehensive individual health insurance with pretax dollars and reimburse for qualified health expenses such as co-payments and deductibles), and QSEHRAs (Qualified Small Employer HRAs, a subsidy plan for employees of businesses with fewer than 50 full-time workers).

Health reimbursement arrangements differ from flexible spending arrangements (FSAs), which are funded with a portion of an employee's pretax salary and each employee determines how much money goes into the FSA annually, and Health Savings Accounts (HSAs), which are fully vested, their funds don't forfeit year-end, and employees can keep their HSAs if they change employers.

### Key Takeaways

*   Health reimbursement arrangements (HRAs) are employer-funded plans that reimburse employees for medical expenses and, sometimes, insurance premiums.
*   Unlike Health Savings Accounts (HSAs), HRAs are not portable and do not belong to the employee if they leave the company.
*   Employers determine how much they will fund HRAs, and all employees in a particular class must receive the same contribution amount.
*   HRAs offer tax advantages: The reimbursements are tax free for employees and tax deductible for employers.
*   Unused HRA funds may roll over to the next year, but the amount is subject to the employer's discretion.

## Understanding How HRAs Operate

A health reimbursement arrangement (HRA) is a plan set up by an employer to cover employee medical expenses. The employer decides how much it will contribute to the plan, and the employee can request reimbursement for actual medical expenses incurred up to that amount. All employees in the same class must receive the same HRA contribution.

An HRA is not an account. Therefore, employees cannot withdraw funds in advance and then use them to pay medical expenses. Instead, they must incur the expense first, then have it reimbursed. Reimbursement at the time of service is possible if the employer provides an HRA debit card.

An employee who uses up all the allocated funds in the HRA before year-end will have to cover any subsequent health bills out of pocket or with the funds in a [flexible spending account (FSA)](https://www.investopedia.com/terms/f/flexiblespendingaccount.asp), also known as a flexible spending arrangement, when available, or a [Health Savings Account (HSA)](https://www.investopedia.com/terms/h/hsa.asp) for employees who have a [high-deductible health plan (HDHP)](https://www.investopedia.com/terms/h/hdhp.asp).

### Note

Maternity clothes, swimming lessons, and child care are among the expenses not covered by a health reimbursement arrangement (HRA).

## Exploring the Different Types of HRAs

There are a few kinds of health reimbursement arrangements.

### Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

A [Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)](https://www.investopedia.com/terms/q/qsehra.asp) is a [health coverage](https://www.investopedia.com/terms/h/healthinsurance.asp) subsidy plan for employees working for businesses that employ fewer than 50 full-time workers. Also known as a small business HRA, a QSEHRA can be [used to offset health insurance coverage](https://www.investopedia.com/qualified-small-employer-health-reimbursement-arrangement-11724172) or repay medical expenses that would be otherwise uncovered.

The yearly limits are set by the [Internal Revenue Service (IRS)](https://www.investopedia.com/terms/i/irs.asp). In 2023, companies with a QSEHRA can reimburse up to $5,850 for individuals and $11,800 for families. In 2024, the limits change to $6,150 per individual and $12,450 per family.

The reimbursed money is [tax free](https://www.investopedia.com/terms/t/tax-free.asp) for the employees and [tax deductible](https://www.investopedia.com/terms/t/tax-deduction.asp) for the employers.

### Individual Coverage HRA (ICHRA)

The Individual Coverage HRA (ICHRA) has been available since January 2020. Previously, HRAs could not be used to pay individual health insurance premiums. However, as of January 2020, the government has allowed employers to offer their employees a new type of HRA called individual coverage HRA instead of group health insurance.

Employees can use ICHRAs to buy comprehensive individual health insurance with pretax dollars, on or off the Affordable Care Act's [marketplace](https://www.investopedia.com/terms/h/health-insurance-marketplace.asp). Individual-coverage HRAs can also reimburse employees for qualified health expenses such as co-payments and deductibles.

Whether or not your ICHRA makes you eligible for a premium tax credit to help pay for health insurance coverage under the Affordable Care Act depends on whether your employer's ICHRA meets minimum standards for so-called "affordability," and whether you choose to opt in or opt out of the coverage.

### Excepted Benefit HRAs (EBHRA)

Employers offering group health insurance can provide Excepted Benefit HRAs (EBHRA) to reimburse up to $1,950 annually for medical expenses.

Employees can enroll in an excepted benefit HRA even if they decline group health insurance coverage, but they cannot use the funds to buy comprehensive health insurance. They can, however, use the funds to pay for short-term health insurance, [dental and vision insurance premiums](https://www.investopedia.com/why-are-vision-and-dental-insurance-separate-8548493), and qualified medical expenses.

## Advantages of Using HRAs for Medical Expenses

HRAs can be used to pay for qualified medical expenses, which include prescription medications, insulin, an annual physical exam, crutches, birth control pills, meals paid for while receiving treatment at a medical facility, care from a psychologist or psychiatrist, substance abuse treatment, transportation costs incurred to get medical care, and much more.

Employees can also use HRAs to buy their own comprehensive individual health insurance with pretax dollars through the aforementioned individual coverage HRA (ICHRA).

> **Important**
>
> Employees can use the money in their HRAs to cover their spouse's and dependents' allowed medical, dental, and vision costs.

## Understanding HRA Limitations

An HRA only covers qualified medical and dental expenses. According to the IRS, medical expenses are costs incurred to alleviate or prevent a physical or mental ailment, not expenses to maintain general health, such as vitamins.

An employer may exclude certain medical expenses even though the IRS qualifies them. The list of reimbursable medical expenses will be outlined in the employer's HRA plan document for employees.

> **Tip**
>
> The IRS issued a statement notifying taxpayers that at-home COVID-19 tests and personal protective equipment, such as face masks and hand sanitizer, are eligible medical expenses that can be paid or reimbursed under flexible health spending arrangements, Health Savings Accounts, and health reimbursement arrangements (HRAs).

### Pros and Cons of HRAs

Pros

*   Can be used to pay for medical and dental expenses such as prescription medications, an annual physical exam, and birth control pills
    
*   Can be used to pay for individual health insurance with pretax dollars
    
*   Reimburses employees after they've paid for certain medical expenses and insurance premiums
    

Cons

*   Can't be used for costs that aren't deemed necessary, such as teeth whitening, funeral services, or non-prescription medication
    
*   Is set up by the employer, which decides how much money goes into the plan
    
*   Can't withdraw funds first, then pay expenses; must pay first, and then wait to get reimbursed
    

## Comparing HRAs to Other Health Arrangements

Employees with both FSAs and HRAs can't choose which covers a shared eligible expense. Instead, the costs will be reimbursed by the plan that the employer has set up to pay first. When this primary plan has been depleted, the second plan will be used to cover any subsequent eligible medical expenses that are reported for reimbursement.

Here's a closer look at two other options for funding out-of-pocket medical expenses.

### FSA

A flexible spending arrangement (FSA) is funded using a portion of an employee's pretax salary. In contrast to an HRA, each employee determines how much money should go into these arrangements annually, up to $3,050 in 2023 and $3,200 in 2024.

Employers may allow unused HRA funds to be carried over to the next year. [Unused FSA funds](https://www.investopedia.com/ask/answers/111815/do-flexible-spending-accounts-fsas-expire.asp) generally cannot be used in the next plan year, although an employer may offer either a short grace period (2.5 months) or allow up to $640 to be carried over.

### HSA

Unlike an HRA, a Health Savings Account (HSA) is fully vested and funds don't forfeit year-end. An HSA is paired with a high-deductible health plan (HDHP) to pay for medical and dental expenses. The employee or employer funds the account and, like an FSA, cannot be used to pay insurance premiums. Unlike HRAs and FSAs, employees can keep their HSAs if they change employers.

## Utilizing HRA Funds Effectively

Your employer determines the types of medical expenses for which an HRA can be used. Some plans can only reimburse services in your health plan, while others might include dental, vision, or pharmacy services.

HRAs often, but do not always, reimburse other expenses such as co-pays, hospital expenses, medical equipment, eyeglasses, or routine doctor's visits.

In addition, the IRS also excludes certain other expenses as being unqualified. For example, expenses that do not qualify as necessary medical expenses include teeth whitening, maternity clothes, funeral services, health club membership fees, controlled substances, child care for a healthy baby, medication from other countries, and non-prescription medications.  

## Insights on HRA Funding and Portability

The health reimbursement arrangement is funded solely by the employer, which also decides the maximum annual contribution for each employee’s HRA. Employers determine how much to contribute to employees’ HRAs, except that all workers in the same class of employees must receive the same contribution, as noted above. Workers who are older or who have dependents may receive more.

Any HRA money unspent by year-end may be rolled over to the following year, although an employer may set a maximum rollover limit that can be carried over from one year to the next. Furthermore, if an employee is terminated or leaves the company to work for another firm, the HRA does not go with them. That makes it different from an HSA—Health Savings Account—which is portable.

## Exploring the Tax Benefits of HRAs

As a benefit to employers, reimbursements through the HRA are 100% tax deductible. As an alternative to more expensive traditional healthcare, an employer may use an HRA to cover the health costs of several classes of employees. In addition, since employers fully fund the plans, they offer predictability, allowing employers to anticipate their approximate maximum expense for HRA health benefits for the year.

Employees may use the arrangement to pay for a wide range of medical expenses not covered by their health insurance policies. Depending on the HRA type, they may also use it for medical, dental, or vision insurance premiums.

Furthermore, reimbursements are tax free up to a maximum amount for a coverage period. Some businesses may offer employees the added advantage of other employer-provided health benefits, such as an FSA, in conjunction with an HRA.

## What Is a HRA in Health Insurance?

A health reimbursement arrangement (HRA) is an employer's plan to cover employee medical expenses. It pays employees tax free to reimburse them for medical costs.

## How Does a HRA Work?

The employer determines the amount of money that will go into the plan, and the employee can ask to be reimbursed for qualified medical expenses up to the designated amount. Employers can take a tax deduction for the reimbursements made through these plans, and the reimbursements given to employees are usually tax free.

## What Is a HRA vs. a HSA?

A health reimbursement arrangement (HRA) is a benefit that pays employees back in tax-free money for certain qualified medical expenses and health coverage premiums.

A Health Savings Account (HSA) is a tax-advantaged account used by individuals covered under a high-deductible health plan (HDHP) looking to save up to cover the cost of qualified medical expenses.

## Can I Cash Out My HRA?

You cannot cash out your HRA. HRA money that hasn't been used by the end of the year can usually be rolled over to the following year, with an employer determining the maximum amount that can be carried from one year to another.  

## What Qualifies for HRA Reimbursement?

Examples of medical and dental expenses considered necessary might be an annual check-up, prescriptions, or substance abuse treatment.

## The Bottom Line

A health reimbursement arrangement (HRA) is a tax-advantaged plan funded by employers to reimburse employees for certain medical and dental expenses. Reimbursements are tax free for employees and tax deductible for employers.

The types of HRAs available include the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) for small businesses, the Individual Coverage HRA (ICHRA) for purchasing individual health insurance, and the Excepted Benefit HRA (EBHRA) for specific health-related costs.

HRAs are not portable when an employee leaves the company, but unused funds may carry over to the next year if the employer allows.

HRAs differ from FSAs and HSAs. FSAs are employee-funded and let employees set aside pretax funds for qualified medical expenses. HSAs are portable, not forfeited, and used as a tax-advantaged account created for or by individuals covered under high-deductible health plans (HDHPs) to save for qualified medical expenses.

You should check with your employer about specific covered expenses and contribution limits, as these can vary significantly.

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