What Is a Health Reimbursement Arrangement (HRA)?

What Is a Health Reimbursement Arrangement (HRA)?

Let me explain what a health reimbursement arrangement, or HRA, really is. It's a plan funded by your employer that reimburses you for qualified medical expenses and sometimes even insurance premiums. As an employer, you can deduct these reimbursements from your taxes, and as an employee, the money you get back is generally tax-free.

Key Takeaways on HRAs

You need to know that HRAs cover reimbursements for specific medical expenses and occasionally insurance premiums. Remember, it's the employer who funds these plans, not you as the employee. These aren't portable benefits—if you leave your job, you lose the HRA. Government rules set the baseline for what expenses qualify, but your employer might narrow them down further. Depending on the HRA type, you could use the funds for health, vision, or dental insurance premiums, plus other qualified medical costs.

How a Health Reimbursement Arrangement (HRA) Works

Here's how an HRA operates in practice. Your employer sets up the plan to cover your medical expenses and decides the contribution amount. You can request reimbursement for actual expenses up to that limit, but all employees in the same class get the same contribution level. It's not like a bank account—you can't withdraw money upfront. You have to pay for the expense first and then get reimbursed. Sometimes, your employer might give you an HRA debit card for reimbursement right at the point of service.

If you exhaust your HRA funds before the year ends, you'll pay any remaining health bills out of pocket or use something like a flexible spending account (FSA) or health savings account (HSA) if you have one, especially with a high-deductible health plan. Just note that things like maternity clothes, swimming lessons, or childcare aren't covered by an HRA.

Types of HRAs

There are several types of HRAs you should be aware of. First, the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is for businesses with fewer than 50 full-time workers. You can use it to offset health insurance or cover uncovered medical expenses. The IRS sets annual limits—for 2023, it's up to $5,850 for individuals and $11,800 for families, bumping to $6,150 and $12,450 in 2024. These reimbursements are tax-free for you and deductible for your employer.

Next, the Individual Coverage HRA (ICHRA) started in January 2020. Before that, HRAs couldn't cover individual health insurance premiums, but now employers can offer this instead of group plans. You can buy your own individual health insurance with pretax dollars, on or off the ACA marketplace, and get reimbursed for things like copays and deductibles. Your eligibility for premium tax credits depends on whether the ICHRA is 'affordable' and if you opt in or out.

Then there's the Excepted Benefit HRA (EBHRA), which employers offering traditional group health insurance can provide. It reimburses up to $1,950 a year for qualified medical expenses. You can enroll even if you skip the group coverage, but you can't use it for comprehensive health insurance—think short-term plans, dental, vision premiums, or other medical costs instead.

Benefits of Health Reimbursement Arrangements

HRAs offer real advantages. You can use them for qualified expenses like prescription meds, insulin, annual physicals, crutches, birth control, meals during medical treatment, psychological care, substance abuse treatment, or transportation to get care. With an ICHRA, you might even buy individual health insurance pretax. Importantly, you can cover your spouse's and dependents' medical, dental, and vision costs too.

Limitations of Health Reimbursement Arrangements

But there are limits you have to consider. HRAs only cover qualified medical and dental expenses—things that alleviate physical or mental ailments, not general health maintenance like vitamins. Your employer might exclude some IRS-qualified expenses, so check your plan document. On a positive note, the IRS says at-home COVID-19 tests, masks, and sanitizer qualify for reimbursement under HRAs.

Health Reimbursement Arrangements vs. Other Arrangements

If you have both an FSA and HRA, and an expense qualifies for both, you can't pick which one pays—the employer decides the order, starting with the primary plan. Let's compare to FSAs and HSAs. An FSA uses part of your pretax salary, up to $3,050 in 2023 and $3,200 in 2024, and you decide the amount. Unused HRA funds might roll over at employer discretion, but FSA funds usually don't, except for a grace period or small carryover.

An HSA, unlike an HRA, is fully vested and portable, paired with a high-deductible health plan. You or your employer fund it, and unused funds stay yours even if you switch jobs. It covers medical and dental but not insurance premiums.

How Can I Use HRA Funds?

Your employer defines what medical expenses your HRA covers—some stick to health plan services, others include dental, vision, or pharmacy. Often, you'll get reimbursements for copays, hospital costs, equipment, eyeglasses, or routine visits. But the IRS excludes things like teeth whitening, maternity clothes, funerals, health clubs, controlled substances, childcare, foreign meds, or non-prescription drugs.

HRA Funding and Portability

Employers fund HRAs entirely and set the maximum annual contribution, ensuring equal amounts for same-class employees, though older workers or those with dependents might get more. Unspent funds can roll over, but employers may cap it. If you leave the company, the HRA stays behind—unlike a portable HSA.

HRA Tax Advantages

For employers, all HRA reimbursements are 100% tax-deductible, making it a predictable alternative to traditional healthcare. You as an employee can cover uninsured medical, dental, or vision costs, with reimbursements tax-free up to the limit. Some employers pair it with an FSA for extra benefits.

Common Questions About HRAs

What is an HRA in health insurance? It's your employer's plan to reimburse medical expenses tax-free. How does it work? Employer sets the amount, you get reimbursed up to that for qualified costs, with tax deductions for them and tax-free for you. HRA vs. HSA? HRA reimburses tax-free for expenses and premiums; HSA is your tax-advantaged account for HDHP costs, portable and vested. Can I cash out my HRA? No, you can't—unused funds might roll over, but per employer limits. What qualifies? Things like check-ups, prescriptions, or treatment programs.

The Bottom Line

In summary, an HRA is a tax-advantaged employer plan reimbursing you for approved medical and dental expenses up to a yearly limit. You get tax-free reimbursements, and employers deduct them. Options like QSEHRA suit small firms, ICHRA lets you buy individual insurance pretax, and you can cover copays or deductibles with it.