Health Reimbursement Accounts (HRA)

Health Reimbursement Arrangements (HRAs) are plans designed to help employers and employees lower health care costs. Allowed under sections 105 and 106 of the Internal Revenue Code, HRAs enable employers to reimburse employees for out-of-pocket medical expenses not covered by insurance. HRAs are usually combined with high-deductible health plans (HDHPs).

What are HRAs?

HRAs are health care accounts entirely funded through employers. HRAs are designed to reimburse employees for medical expenses not covered by insurance, such as insurance premiums, deductibles and copays.

How do HRAs work?

If employers choose to offer an HRA, they establish a contribution amount, reimbursement distribution schedule and define a list of eligible expenses. (This list must comply with section 213(d) medical expenses as defined in the Internal Revenue Code.) Employers can also include account caps on total HRA account balances and include rollover maximums on carryover balances. Employees then use these HRA funds to pay for uncovered medical expenses.

Tax implications

For employers, all HRA reimbursements are tax-deductible. For employees, all contribution amounts made by employers are tax-free.


Employers benefit from offering HRAs by reducing insurance costs and restructuring health benefits. By moving employees to HDHPs, costs are more predictable and controlled as employees are encouraged to become better health care consumers. HRAs motivate employees to make better health care and future planning decisions.

Employees benefit from the protection HRAs provide against catastrophic medical costs. HRA funds can be used to cover a wide range of health care expenses, but unlike Flexible Spending Accounts (FSAs), HRAs can be designed to allow funds to be carried over year to year. However, unused HRA amounts may not be cashed out – only carried over to the following year.

What expenses are not eligible for reimbursement through HRAs?

The following expenses are considered ineligible for HRA reimbursement:

  • Medical expenses not defined as eligible under an employer’s plan.
  • Medical expenses that do not meet the definition of “medical care” under Internal Revenue Code section 213(d).
  • Medical expenses incurred by an employee, employee’s spouse or any eligible dependents prior to the effective date in the program.
  • Medical expenses that can be reimbursed to an employee through another source, such as group health insurance.

Ineligible expense reimbursement requests are deniable. If an expense is deemed ineligible after it has already been paid, HRA account holders may be required to provide reimbursement. If this happens and an account holder fails to provide reimbursement, they may be required to pay income tax. For a complete list of eligible and ineligible HRA reimbursement expenses, please refer to IRS Publication 502 at:

Basic HRA legal requirements

  1. Only Employer Contributions – HRA must be funded solely with employer contributions. No direct or indirect employee contributions are allowed.
  2. No Cafeteria Plan Funding – An HRA can be offered with an HDHP that is offered under a cafeteria plan; the HRA itself may not be funded with pre-tax salary reductions or otherwise under a cafeteria plan.
  3. Reimbursements for Certain Individuals Only – An HRA may reimburse medical care expenses only if they were incurred by employees or former employees (including retirees) and their spouses and tax dependents. Effective March 30, 2010, this also includes children who are under age 27 as of the end of the taxable year. HRA coverage must be in effect at the time the expense is incurred.
  4. Reimbursements for Certain Medical Expenses Only – HRAs may reimburse only substantiated medical expenses described in Internal Revenue Code section 213(d). Such expenses include out-of-pocket medical expenses and health insurance premiums. If an HRA is also a FSA, the HRA may not reimburse for long-term care services (premiums may be reimbursed).  Under the health care reform law, effective Jan. 1, 2011, HRAs may be used to reimburse the cost of over-the-counter medicines or drugs only if they are purchased with a prescription. This rule does not apply to reimbursements for the cost of insulin, which will continue to be permitted even if purchased without a prescription.
  5. No Cash-Out of Unused Amounts – Unused HRA amounts cannot be cashed out and can only be used for reimbursement of medical care expenses. If an HRA includes a spend-down feature, terminated employees can spend down their HRA balances for medical expenses incurred after termination. After an employee’s death, only reimbursement of qualifying medical expenses of a surviving spouse or tax dependent is allowed. Qualified HSA distributions can be made from HRAs and directly rolled over into HSAs.
  6. COBRA – COBRA applies to an HRA. The legal issues surrounding COBRA and HRAs are complex, so consult with legal counsel.
  7. Coordination with Health FSA – HRA may be coordinated with a health FSA to modify which pays first. If no rule is established, HRA pays first and FSA last.
  8. Section 105 Nondiscrimination Rules – Nondiscrimination rules apply to self-insured medical plans and consequently are applicable to most HRAs. Under these rules, a self-funded HRA cannot discriminate in favor of highly compensated employees, and must satisfy the eligibility and benefits tests.
  9. HIPAA Rules – HRAs with a carryover feature are not in violation of the HIPAA nondiscrimination requirements. An HRA is a health plan that is subject to HIPAA’s portability requirements (creditable coverage) and HIPAA’s administrative simplification rules (privacy, security, electronic data interchange).
  10. ERISA – HRA is a welfare benefit plan and is covered under ERISA unless it is a governmental or church plan.

How do HRAs compare or differ from FSAs, HSAs and MSAs?
HRAs are the only tax-favored accounts among this group that are owned and funded solely by employers. HRAs are similar to FSAs in that they can be offered with any or no health plan, and there are no prescribed limits set by theIRS. (Beginning in 2013, under the health care reform law, employees may not elect to contribute more than $2,500 per year to an FSA.) However, unlike FSAs but similar to MSAs and HSAs, the uniform coverage rule does not apply to HRAs. Also unlike FSAs, but similar to HSAs and MSAs, HRA funds can be rolled over from year to year.

HRA and FSA rules

HRAs are generally but not always FSAs, yet are not subject to the following FSA rules:

  • Prohibition against carrying unused benefits into future plan years does not apply.
  • The mandatory 12-month period of coverage does not apply, which gives employers more flexibility in designing an HRA.
  • The uniform coverage rule does not apply, so the maximum amount of reimbursement under an HRA does not have to be available at all times during the period of coverage.
  • An expense incurred by a participant in one year may be properly paid out of the HRA balance attributable to a subsequent year, provided that the individual was a participant when the expense was incurred and remains a participant in the subsequent year.
  • HRAs may reimburse health insurance premiums.

HRAs are not encumbered by certain HSA requirements or features.

  • No HDHP is required. Stand-alone HRAs or HRAs combined with another health plan allow for additional flexibility.
  • HRAs do not have minimum deductibles or maximum out-of-pocket limitations.
  • HRAs give plan sponsors more control (for example, employers can decide whether the HRA will forfeit balances at termination, and they can choose what qualified medical expenses the HRA will cover).
  • HRAs have no limits on how much an employer can contribute in any given month, year or other coverage period.
  • HRAs are not subject to the comparable contribution requirements but are subject to Internal Revenue Code section 105 nondiscrimination requirements.
  • HRAs require less coordination with other plans than is required by an HSA.
  • HRAs do not have to be funded and are often simply credits that are not backed by actual contributions.
  • HRAs have fewer limitations on using funds for health insurance premiums.

Coordination of benefits issues

  • An individual may not have a general purpose HRA and contribute to an HSA.
  • An individual may have certain types of HRA coverage and still be eligible for an HSA:
    • Limited purpose HRA
    • Suspended HRA
    • HDHP with post-deductible HRA coverage
    • Retirement HRA
    • Combination of the above

HRAs may or may not be the right solution for all employers. Please contact your Benefit Logic representative for assistance in determining what tax-advantaged account will best meet your goals.