What is an HRA and how does it work?

Have you ever asked yourself?:

How do I apply for medical aid?
Who will reimburse me for my medical visit
how do I get help paying for medical expenses?

Well, did you know that your employer may offer something called a Health Reimbursement Arrangement, or HRA? This is a common term when discussing benefits or health plans with your employer. From reading this you should learn about the ins and outs of what an HRA is, how it compares to other health plans, and more.

What is an HRA?

Starting back in June of 2002, the IRS defined what an HRA is and how it could be used. An HRA is a type of employer-funded plan that reimburses employees for eligible medical expenses. Contributions to HRAs are not considered taxable income, and unused funds may roll over to the next year. Since this is an employer-offered health plan, you can sign up for one through your employer if they offer it.

Qualifying medical expenses:

Here are some common expenses that HRAs may reimburse, depending on the employer’s plan design:

Monthly premium payments
Payment toward a deductible
Copays
Routine doctor’s visits
Hospital Expenses
Dental Care
Blood pressure monitors
Vision care: Including – Eyeglasses, contact lenses, and exams
Over-the-counter medicine and drugs
Prescription Drugs
Blood glucose monitors

Types of HRAs

There are five common types of HRAs:

1. A Fully-Integrated or Integrated HRA

There is no federal limit on contributions to an integrated HRA; the employer chooses how much they contribute to the plan. Those who are offered an Integrated HRA may still qualify for premium tax credits for Marketplace coverage under the ACA. Tax credit eligibility will be determined based on whether the major medical plan integrated with the HRA is “affordable” under ACA rules. The affordability requirement was lowered from 9.61% in 2022 to 9.12% in 2023. Employees will generally need to be offered the employer’s major medical plan and enrolled in qualifying group coverage in order to be eligible to participate in the HRA.

2. Individual Coverage HRA (ICHRA)

As of January 2020, ICHRAs could be offered to employees. Companies of all sizes may offer one. An ICHRA has no limit for minimum or maximum contributions. However, with this type of HRA, employers can include or exclude certain permitted groups/classes of employees from participating. Employees who are offered ICHRAs don’t automatically qualify for premium tax credits. They will qualify for assistance to buy Marketplace coverage if the ICHRA does not meet the minimum standard for affordability, and the employee declines/opts out of it.

Classes of employees allowed by the IRS

Full-time employees
Part-time employees
Employees working in the same geographic location (generally, the same insurance-rating area, state, or multi-state region)
Seasonal employees
Employees in a unit of employees covered by a particular collective bargaining agreement
Employees who have not satisfied a waiting period
Non-resident aliens with no U.S.-based income
Salaried workers
Non-salaried workers (such as hourly workers)
Temporary employees of staffing firms
Any group of employees formed by combining two or more of these classes

Determining ICHRA 2023 Affordability

ICHRA affordability is based on the lowest cost silver plan for either the employee's residence or primary site of employment.

If you’re interested in learning more about what the minimum affordability threshold means, the penalties employers can face, and what safe harbor means, learn about ACA compliance here

3. Excepted Benefit HRA (EBHRA)

An EBHRA qualifies as an “excepted” benefit. It can reimburse copays, deductibles, COBRA premiums and premiums for dental and vision, among other expenses; however, this does exclude individual health insurance premiums. The EBHRA is often paired with a group health plan and allow employers to set aside up to the maximum contribution limit for plan years beginning in 2023 ($1,950 per employee).

4. Qualified Small Employer HRA (QSEHRA)

Small employers (less than 50 employees) that DON’T offer group health plans can offer a QSEHRA. Former employees are not eligible. Tax credits differ for each HRA type, but for a QSEHRA you may be eligible for some or no tax credit. Learn how much tax credit you could get

5. Retiree-Only HRA

A Retiree HRA covers eligible out-of-pocket medical expenses and/or reimburses eligible insurance premiums for retirees, their spouses, and dependents (children under the age of 27). There is no eligible insurance premiums associated with this form of HRA. Employers may further restrict the eligible expenses outlined by the Internal Revenue Code (IRC) Section 213(d).

A retiree that signs up for an HRA offered by a former employer is not eligible to claim a premium tax credit to enroll in a Marketplace plan, even if the retiree doesn’t submit any expenses for reimbursement. For this reason, employers generally provide retirees with the opportunity to waive retiree-only HRA coverage annually.

See the full list of deductible and eligible medical expenses outlined by the IRC

How does an HRA work?

Eligibility for an HRA

Most employees are eligible for an HRA if their employer offers one. Generally, HRAs are not available to people who are self-employed.

How funds are deposited into an HRA

HRAs are employer funded. Funds can be made available upfront as a lump sum or on a monthly basis.

How to use an HRA to pay for healthcare expenses

Depending on the HRA provider, the HRA pays you first, or may be set up to reimburse your network doctor directly. This continues until your entire HRA balance is fully exhausted. If there are any unused funds at the end of a plan year, some employers may offer a rollover/carryover option.

HRA rollover and carryover rules

When you have unspent money by the end of the year in an HRA that allows funds to accumulate, it may be rolled over to the following year’s amount. This means that it is added to the next plan year’s monetary amount. This amount may be limited by your employer so be sure to ask what the plan rules are.

Advantages and Disadvantages of an HRA

Advantages

Contributions are non-taxable for employees
High Deductible Health Plan (HDHP) not required
May be paired with a benefits debit card

Disadvantages

Cannot take it with you when you leave your job, unless you elect for COBRA coverage
May have out-of-pocket requirements, such as a deductible

How HRAs differ from other healthcare plans

Read our blog to get a brief overview of how HRAs compare to Healthcare Flexible Spending Accounts and Health Savings Accounts.

This blog is up to date as of May 2023 and has not been updated for changes in the law, administration or current events.