health reimbursement arrangement (HRA)

Who funds an HRA?

HRAs must be funded entirely by the employer, so nothing is deducted from the employee’s paycheck. The HRA contribution that the employer makes is not counted in the employee’s income.

Is there a limit on how much can be reimbursed with an HRA?

This depends on the type of HRA. In general, there’s no upper limit on how much employers can contribute to their employees’ HRA (unlike FSAs and HSAs, which do have limits), although non-discrimination rules apply. But some types of HRAs, including QSEHRAs and excepted benefit HRAs,¹ do have contribution limits. On the other end of the spectrum, there are no minimum contribution requirements for HRAs.

Can HRA funds be used to pay for individual health insurance?

Yes, if it’s a QSEHRA or an ICHRA. Under federal rules related to the implementation of the ACA, employers were not allowed to offer an HRA unless it was integrated with an employer-sponsored group health insurance plan. But these rules were relaxed in 2017 to allow small employers to offer QSEHRAs, and in 2020 to allow employers of any size to offer ICHRAs.

What can be reimbursed with an HRA?

Although the IRS defines what constitutes qualified medical expenses, employers can further limit the expenses for which employees can seek reimbursement under their HRA. To be reimbursed, an employee has to provide documentation showing that they incurred an eligible expense.

As of 2011, the ACA prohibited the purchase of over-the-counter medications with HRA funds, unless a doctor prescribed them. But Section 4402 of the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act changed that. The CARES Act, signed into law in March 2020, allows over-the-counter medications to be a reimbursable expense under an HSA, if the employer allows it. It also allows menstrual product purchases to be reimbursed with HRA funds, if the employer allows it.

In June 2020, the IRS proposed regulations to allow employers to use HRAs to reimburse employees for direct primary care fees and health care sharing ministry fees, but the proposed rules were never finalized.

Can I have an HRA together with an HSA?

In most cases, an HRA benefit makes an employee ineligible to contribute to an HSA, even if they have an HSA-compliant high-deductible health plan. But some limited types of HRAs can be used in conjunction with an HSA.