Health Reimbursement Arrangements (HRAs) are employer-funded, tax-advantaged benefit arrangements that reimburse employees for certain medical expenses. HRAs help employers manage costs while supporting employees with predictable financial assistance for care. Unlike Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs), HRAs are not employee-owned accounts. Instead, they operate as employer-controlled reimbursement programs under Section 105 of the Internal Revenue Code. As such, they are sometimes referred to as “Section 105” plans.
This page provides a foundational overview of what HRAs are, how they work, and why employers use them, along with quick comparisons and key compliance touchpoints. Individual HRA types – ICHRAs and QSEHRAs – are covered in detail on their own pages.
What an HRA Is
An HRA is a reimbursement allowance that an employer sets aside for each employee to use on variable eligible medical expenses. Key characteristics include:
- Employer-funded only
Employees cannot contribute. All funds come from the employer. - Employer-owned
This is not a bank account. Balances are not portable when an employee leaves unless the employer chooses to allow it. However, in most circumstances, HRAs can be continued via COBRA upon loss of eligibility. - Tax-advantaged
Reimbursements for qualified medical expenses are tax-free for employees and are deductible for employers. - Reimbursement-based
Employees submit claims substantiation and are reimbursed up to the allowance amount. - Flexible plan design
Employers choose allowance amounts, eligible expenses, rollover rules, and how the HRA pairs with other benefits.
How HRAs Work
HRAs follow a consistent structure that aligns with IRS rules under Section 105 and eligible medical expenses under Section 213(d).
- Employer establishes a per-employee or per-family reimbursement allowance for the plan year and selects the funding frequency.
- Allowances may be annual, quarterly, or monthly, depending on the HRA type and employer preference. The funding structure and frequency must be documented in the employer’s ERISA plan documents.
- Employer identifies eligible expenses within IRC Section 213(d)
- Employers may allow the full range of 213(d) medical expenses or restrict the reimbursable categories. Premiums are reimbursable only under certain HRA types known as ICHRAs and QSEHRAs.
- Employee incurs an eligible medical expense
- Expenses must occur during the HRA plan year and meet the employer’s defined criteria.
- Employee submits proof of the expense to the employer or the HRA Third Party Administrator (TPA)
- Substantiation must meet IRS requirements and typically includes an Explanation of Benefits (EOB) or itemized receipt.
- Employer reimburses the expense up to the available allowance
- Dollars must be available within the HRA for the reimbursement to be issued. There is no cash-out option or rollover of unused funds – unless permitted under the plan design.
- Unused balances may roll over depending on employer policy
- Employers have discretion to permit rollover into the next plan year and may set caps on carryover amounts.
Who Can Sponsor an HRA
Only employers can sponsor HRAs. That includes:
- Private employers
- Nonprofits
- Government employers
- Churches or religious organizations
Employees, individuals, unions, associations, and purchasing groups cannot sponsor HRAs. And HRAs are group health plans for purposes of ERISA compliance.
Why Employers Use HRAs
HRAs offer meaningful advantages for both employers and employees. They allow organizations to manage health benefit costs strategically while giving employees tax-free support for care.
Employer benefits
Cost control with predictable budgeting
Employers set a fixed dollar amount for employees to use on eligible medical expenses. This amount can help offset the higher cost-sharing associated with lower-premium plans such as High Deductible Health Plans (HDHPs) or Bronze-level plans. The employer avoids over insuring employees who may not use richer benefits while still providing meaningful financial support.
Plan design flexibility for different workforce needs
Employers have considerable discretion when designing standard HRAs (not ICHRAs or QSEHRAs). They can determine:
- Annual allowance amounts
- Eligible expense categories within IRC Section 213(d)
- Rollover rules
- Funding frequency
- Substantiation requirements
- Whether to use a TPA and which one
Tax-favored reimbursements for qualified medical expenses
Reimbursements are tax-free to employees and tax-deductible to employers.
Alternative to richer or more expensive medical plans
Employers may shift to lower metal tier plans or HDHPs, then use HRA dollars to help employees manage cost-sharing. This approach reduces premium spending while preserving support for high utilizers.
Support for employees in higher deductible plans
HRAs provide an employer-funded safety net that helps employees manage rising deductibles, coinsurance, and out-of-pocket costs.
Employee Benefits
Tax-free reimbursement for eligible medical expenses
When employees incur qualified medical expenses, reimbursements from the HRA are not considered taxable income.
Lower out-of-pocket costs when paired with group health plans
Employees can use the employer’s HRA dollars to pay for care, easing the financial burden of deductibles, copays, and other cost-sharing.
Potential rollover of unused balances when allowed
If the employer permits rollover, employees may carry unused balances into the next plan year. Rollover rules are fully determined by employer policy.
Simple claims experience when administered by a TPA
Most employers use specialized TPAs to administer HRAs. Employees typically experience streamlined online portals, mobile apps, and integrated substantiation processes.
Types of HRAs
HRAs come in several forms, each with its own rules, compliance requirements, and ideal use cases.
- Traditional Group HRAs (Integrated HRAs)
Paired with ACA-compliant group medical plans to offset deductible or cost-sharing expenses. These HRAs reimburse IRS Section 213(d) medical expenses but cannot reimburse individual health insurance premiums. Integrated HRAs must be offered alongside an ACA-compliant group health plan because an HRA by itself cannot satisfy ACA market reform requirements such as the prohibition on annual dollar limits and the preventive services mandate. Employees may choose to waive one or both plans, but employers cannot offer an HRA on a standalone basis. - Individual Coverage HRAs (ICHRAs)
Allow employers to reimburse individual health insurance premiums and, if the employer chooses, other qualified medical expenses under Section 213(d). Most employers design ICHRAs to reimburse only reimburse Individual and Family Plan (IFP) premiums. Employers retain full discretion over reimbursable categories. - Qualified Small Employer HRAs (QSEHRAs)
Available only to small employers with fewer than 50 Full-Time Equivalent (FTE) employees who do not offer any group health plan. QSEHRAs may reimburse individual market health insurance premiums and qualified medical expenses up to IRS-set annual limits. Many employers also structure QSEHRAs as reimbursement vehicles for Individual and Family Plan (IFP) premiums only, excepting other medical expenses. - Excepted Benefit HRAs (EBHRAs)
Supplemental HRAs that reimburse excepted benefits such as dental, vision, limited-scope coverage, and certain short-term limited duration insurance. They cannot reimburse individual health insurance premiums.
Each HRA type follows the same core reimbursement model but is subject to distinct rules under the ACA, Internal Revenue Code, and ERISA.
General Compliance Snapshot
All HRAs operate within a structured regulatory framework. While each HRA type has its own specific rules, HRAs typically involve the following requirements:
- ERISA requirements
Plan document, SPD, claims procedures, fiduciary rules, and disclosures apply unless the HRA qualifies for an exemption. - Section 105(h) nondiscrimination
HRAs are self-funded group health plans. They cannot disproportionately favor highly compensated individuals. - HIPAA privacy and security
Protects medical information used for substantiation and claims processing. - COBRA
Applies to most HRAs. COBRA calculations depend on the type of HRA and the remaining allowance. - PCORI fees
Apply to most HRAs that reimburse medical expenses. - IRS substantiation requirements
Reimbursements must be validated as legitimate Section 213(d) medical expenses. Or, for ICHRA and QSERHA, eligible Individual and Family Plan health insurance premiums.
Quick Comparison — HRA vs HSA vs FSA
A high-level summary:
- Health Reimbursement Arrangements (HRAs)
Employer-funded, reimbursement-based, flexible design, not portable. The HRA focus is reimbursement. - Health Savings Accounts (HSAs)
Employee-owned savings accounts for medical expenses. Portable, individually owned, and require enrollment in an HSA-qualified HDHP to contribute. The HSA focus is saving. - Flexible Savings Accounts (FSAs)
Employer-established cafeteria plan accounts funded primarily through employee pretax salary reductions. Employees prospectively elect dollars up to IRS-specified limits (and within any employer-defined caps) to spend on qualified medical expenses. FSAs are “use it or lose it” arrangements, meaning employees must spend elected dollars during the plan year unless the employer adopts either a carryover provision or a grace period. The FSA focus is spending.