What Is Health Reimbursement Account

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Published By: WebHR Team

Updated On: 2026-05-22 11:19:02

What Is Health Reimbursement Account

What is Health Reimbursement Account (HRA)?

A Health Reimbursement Account (HRA) is an employer-funded benefit that reimburses employees for qualified medical expenses and, in certain plan types, health insurance premiums.

What distinguishes an HRA from other healthcare accounts is that it is funded entirely by the employer employees make no contributions of their own.

Every dollar in the account comes from the company, and reimbursements are made tax-free when used for eligible expenses.

HRAs are designed to give employers a structured, cost-controlled way to support employee healthcare spending while offering workers meaningful financial relief on out-of-pocket medical costs.

They can be paired with high-deductible health plans, used to supplement existing group coverage, or in some configurations, used to replace traditional group health insurance entirely.

The flexibility of the HRA framework is one of its defining strengths, and it has made HRAs an increasingly common component of employer-sponsored benefits packages across organizations of all sizes.

How a Health Reimbursement Account Works

The mechanics of an HRA are straightforward. The employer establishes the account, sets the annual contribution amount, and defines which expenses are eligible for reimbursement.

Employees pay for qualified medical expenses out of pocket, then submit their receipts or claims to the employer or a designated HRA administrator.

Once the claim is verified against the plan's eligibility criteria, the employee is reimbursed from the account balance tax-free.

Employers have considerable design flexibility in how the account functions. They can determine how much to contribute per employee, whether contribution amounts vary by factors such as employment level or family status, and whether unused funds at the end of the plan year carry over into the following year or are forfeited.

This control over contribution levels and plan design is what makes HRAs particularly attractive to employers seeking predictable healthcare cost management, as opposed to traditional group health plans where premium increases can be difficult to anticipate or contain.

Types of Health Reimbursement Accounts

The HRA framework has evolved significantly over the past decade, and today there are several distinct types of HRAs, each designed for a different employer size, coverage situation, or reimbursement purpose.

Standard HRA

The standard HRA is the foundational model, used to reimburse employees for a broad range of qualified medical expenses.

Employers choose whether unused funds roll over from year to year or are forfeited at the end of the plan period.

This type is most commonly paired with a group health insurance plan to help employees cover costs that the insurance does not fully absorb, such as deductibles, copays, and coinsurance.

Qualified Small Employer HRA (QSEHRA)

The QSEHRA was created specifically for small businesses with fewer than 50 full-time equivalent employees that do not offer group health coverage.

It allows these employers to reimburse workers for individual health insurance premiums and qualified medical expenses up to federally set annual limits.

The QSEHRA gave smaller employers a practical way to offer meaningful healthcare benefits without the administrative complexity and cost of sponsoring a traditional group plan.

Individual Coverage HRA (ICHRA)

The ICHRA, introduced in 2020, is available to employers of any size and allows reimbursement of premiums for individual health insurance policies purchased by employees on the open market.

Unlike the QSEHRA, the ICHRA has no cap on contribution amounts, and employers can set different contribution levels for different classes of employees such as full-time versus part-time workers or employees in different geographic locations.

The ICHRA can serve as a complete replacement for traditional group health coverage, making it a significant development in employer-sponsored benefits design.

Excepted Benefit HRA (EBHRA)

The EBHRA supplements an existing group health plan by reimbursing a limited set of expenses that the primary plan does not cover, such as dental care, vision care, and short-term health coverage premiums.

It is not a standalone benefit employees must be offered the employer's group health plan to be eligible for an EBHRA, though they do not need to be enrolled in it. The annual contribution limit is set by federal regulation and adjusted periodically.

Benefits of a Health Reimbursement Account

For Employers

HRAs give employers direct control over their healthcare spending in a way that traditional group health insurance does not.

By setting fixed annual contribution amounts, employers can predict their healthcare costs with greater accuracy and avoid the exposure to unpredictable premium increases that come with conventional health plans.

Contributions made to an HRA are fully tax-deductible as a business expense, reducing the employer's taxable income while still delivering a meaningful benefit to employees.

The ability to customize plan design adjusting contribution levels, eligible expenses, and carryover rules means an HRA can be tailored to fit the specific budget and workforce composition of almost any organization.

For Employees

For employees, the primary benefit of an HRA is financial relief on out-of-pocket medical costs that would otherwise come directly from their own income.

Because reimbursements are tax-free and exempt from payroll taxes including Social Security and Medicare, the effective value of each reimbursed dollar is higher than if the same expense were paid from after-tax wages.

Access to HRA funds also encourages employees to seek preventive care and routine medical services they might otherwise delay due to cost concerns a dynamic that benefits both the individual's long-term health and the employer's overall healthcare cost trajectory.

Eligible Expenses for HRA Reimbursement

The IRS defines the scope of qualified medical expenses that HRAs can reimburse, and the list is broad.

It covers doctor visits and specialist consultations, prescription medications, dental care including orthodontics, vision care such as eyeglasses and contact lenses, chiropractic services, physical therapy, and medical devices like hearing aids or glucose monitors.

Certain HRA types specifically the ICHRA and QSEHRA also permit reimbursement of individual health insurance premiums, which significantly expands the practical value of those accounts.

It is important to note that not every HRA covers the full range of IRS-eligible expenses.

Each plan document specifies which expenses are reimbursable under that particular employer's design, and employees should review their plan details carefully before assuming an expense qualifies.

Retaining receipts and submitting claims according to the administrator's process is required for every reimbursement undocumented expenses cannot be reimbursed under a compliant HRA.

HRA vs. HSA vs. FSA: Understanding the Differences

HRAs are frequently compared to Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs), and while all three help employees manage medical costs with tax advantages, they operate quite differently.

An HSA is owned by the employee, funded by both the employee and optionally the employer, fully portable when employment ends, and available only to individuals enrolled in a qualifying high-deductible health plan.

An HRA, by contrast, is employer-owned and employer-funded, and in most cases the account balance does not follow the employee if they leave the company.

An FSA is typically funded through employee salary deferrals, subject to a "use it or lose it" rule at year end (with limited exceptions), and available regardless of what type of health plan the employee carries.

The key practical implication is that HRAs, HSAs, and FSAs are not interchangeable they serve different roles and carry different rules. However, they can be used in combination.

An employee might use an ICHRA to cover their individual insurance premium, an HSA to build long-term tax-free savings for medical expenses, and an FSA for predictable near-term costs, depending on what their employer offers and what their plan eligibility allows.

Tax Implications of a Health Reimbursement Account

The tax treatment of HRAs is one of their most significant advantages for both parties in the employment relationship.

Employer contributions are deductible as ordinary business expenses, which reduces the company's taxable income dollar for dollar.

On the employee side, reimbursements received from an HRA for qualified medical expenses are entirely excluded from gross income they are not subject to federal income tax, state income tax in most jurisdictions, or payroll taxes such as Social Security and Medicare.

This tax exemption on both ends of the transaction is what makes the HRA structurally efficient compared to simply paying employees additional wages to cover their medical expenses.

A dollar contributed to an HRA delivers its full value as a healthcare benefit, whereas a dollar paid as wages loses a portion to taxation before it can be used for medical costs.

Employees with specific tax situations particularly those in higher income brackets or those combining an HRA with other tax-advantaged accounts should consult a tax advisor to ensure they are optimizing their overall benefit.

Common Misconceptions About HRAs

Several misunderstandings about HRAs persist among both employees and employers, and they can lead to underutilization of the benefit or compliance errors.

The most common misconception is that HRA funds are portable in the same way HSA funds are. In most HRA designs, the account balance belongs to the employer and does not transfer to the employee upon termination or resignation.

Employees who leave a job generally lose access to any remaining HRA balance, which makes it strategically important to use available funds before employment ends rather than allowing them to accumulate indefinitely.

Another frequent misunderstanding is that all HRAs work the same way. As the section on types makes clear, a QSEHRA, an ICHRA, and an EBHRA operate under materially different rules regarding contribution limits, eligible expenses, and the relationship to other coverage.

Assuming that one HRA experience transfers directly to another can lead to incorrect claims or missed reimbursement opportunities.

Finally, some employees assume that an HRA and an FSA or HSA cannot coexist in practice, certain combinations are permitted and can meaningfully expand the range of expenses covered.

How to Use an HRA Effectively

Getting full value from an HRA requires a proactive approach rather than treating it as a passive benefit that activates only when a medical bill arrives.

Employees should begin by reading their plan document carefully to understand exactly which expenses are eligible, what the claims submission process requires, and whether unused funds carry over at year end.

This last point is particularly important if the plan does not allow carryover, failing to submit eligible expenses before the deadline results in a direct financial loss.

Maintaining organized records of all medical expenses throughout the year makes the claims process significantly easier and reduces the risk of missing reimbursable costs.

For larger planned medical expenses elective procedures, orthodontic treatment, or significant prescription costs timing those expenditures to align with the plan year and available HRA balance can maximize the tax-free benefit.

Employees who also have access to an FSA or HSA should think strategically about which account to draw from for different expense types, particularly when one account has a use-it-or-lose-it rule and the other does not.

Conclusion

A Health Reimbursement Account is one of the most flexible and tax-efficient healthcare benefits an employer can offer.

By funding the account entirely and retaining control over its design, employers gain predictable cost management and a meaningful recruitment and retention tool.

Employees, in turn, receive tax-free reimbursement for medical expenses that would otherwise come from after-tax income a benefit whose real value is often greater than its face value suggests.

Understanding the different HRA types, the tax treatment on both sides of the relationship, the scope of eligible expenses, and the ways an HRA can complement other healthcare accounts is the foundation for using this benefit effectively.

For employers evaluating their benefits strategy and for employees trying to make the most of what their company offers, the HRA deserves careful attention as a genuinely powerful component of modern healthcare financial planning.