What is a Health Reimbursement Arrangement (HRA) and how does it benefit employees?

A Health Reimbursement Arrangement (HRA) is an employer-funded plan that reimburses employees for out-of-pocket medical expenses and, in some cases, health insurance premiums. Unlike HSAs, HRAs are solely funded by the employer, and employees cannot contribute. This arrangement offers tax-free reimbursements to employees under IRC Section 105, providing a significant financial benefit by reducing their healthcare costs.

What are the different types of HRAs available to employers?

There are several HRA types, including the Qualified Small Employer HRA (QSEHRA), Individual Coverage HRA (ICHRA), and Group Coverage HRA (GCHRA). QSEHRAs are for small employers (fewer than 50 full-time employees) not offering group health plans, as outlined in IRC Section 9831(d). ICHRA allows employers of any size to reimburse employees for individual health insurance premiums, while GCHRA supplements a traditional group health plan.

Who qualifies for an HRA, both from an employer and employee perspective?

Employer qualification depends on the HRA type. For example, a QSEHRA requires the employer to have fewer than 50 full-time employees and not offer a group health plan. Employees generally qualify if they are covered under the employer's HRA plan and, for ICHRA and QSEHRA, have qualifying individual health insurance coverage, as specified in IRS Notice 2017-67 for QSEHRA and IRS Notice 2020-33 for ICHRA.

Are there any dollar limits or contribution caps for HRAs?

Yes, dollar limits vary by HRA type. For QSEHRAs, the maximum annual reimbursement amounts are indexed for inflation; for 2024, these limits are $6,150 for self-only coverage and $12,450 for family coverage, as per IRS guidance. ICHRA and GCHRA generally do not have federal dollar limits, allowing employers more flexibility in setting contribution amounts, though state laws or plan documents may impose limits.

How do employees claim HRA reimbursements, and what documentation is required?

Employees typically submit claims to their employer or a third-party administrator for reimbursement of eligible medical expenses. Required documentation usually includes an explanation of benefits (EOB) from their health insurer, receipts for services or products, and proof of payment. These documents are crucial for substantiating the expense as a qualified medical expense under IRC Section 213(d).

What IRS forms are relevant for employers offering an HRA?

Employers offering HRAs, particularly QSEHRAs, must provide a written notice to eligible employees at least 90 days before the beginning of the plan year, as detailed in IRS Notice 2017-67. While there isn't a specific IRS form solely for HRA reporting, employers must report the amount of QSEHRA benefits on the employee's Form W-2, Box 12, using code FF, as per IRS instructions.

What IRS forms are relevant for employees receiving HRA benefits?

Employees receiving HRA benefits generally do not need to file specific IRS forms to claim the tax-free nature of the reimbursements. For QSEHRA, the employer reports the benefit on Form W-2, Box 12, Code FF. This reporting helps the IRS verify that the employee had minimum essential coverage (MEC) and that the HRA benefit was properly excluded from gross income under IRC Section 105.

Can HRA funds be rolled over from year to year, or do they expire?

The ability to roll over HRA funds depends on the specific plan design established by the employer. Many HRAs allow unused funds to roll over from year to year, providing a cumulative benefit to employees. However, some plans may have a 'use-it-or-lose-it' provision, similar to some FSAs, so employees should consult their plan documents for details.

What are common mistakes employers make when setting up or administering an HRA?

Common employer mistakes include failing to provide proper notice to employees, exceeding QSEHRA contribution limits, or not ensuring employees have minimum essential coverage (MEC) for ICHRA and QSEHRA. Misclassifying eligible expenses or failing to maintain adequate documentation for reimbursements can also lead to compliance issues, potentially violating IRC Section 105 and other regulations.

What are common mistakes employees make when utilizing an HRA?

Employees often make mistakes by submitting claims for non-eligible expenses or failing to provide sufficient documentation for reimbursement. Another common error is not understanding the interaction between their HRA and other health coverage, which can impact taxability or eligibility. Always refer to your plan's Summary Plan Description and IRS Publication 502 for eligible medical expenses.

What are potential audit red flags for HRAs that the IRS might scrutinize?

Audit red flags for HRAs include inconsistent reporting of HRA benefits on Form W-2, particularly for QSEHRAs, or a lack of substantiation for reimbursed expenses. If an employer offers an HRA but fails to meet the specific requirements for that HRA type (e.g., QSEHRA size limits), it could trigger IRS scrutiny. Non-compliance with ERISA or ACA regulations related to HRAs can also be a red flag.

How does an HRA interact with other tax deductions, like the medical expense deduction?

HRA reimbursements are generally tax-free to the employee under IRC Section 105. Therefore, expenses reimbursed by an HRA cannot also be claimed as a medical expense deduction on Schedule A (Form 1040). This prevents a 'double dip' benefit. Employees should only claim unreimbursed qualified medical expenses that exceed 7.5% of their adjusted gross income.

Can an HRA be offered alongside a Health Savings Account (HSA)?

Generally, an HRA cannot be offered alongside an HSA without impacting HSA eligibility, as most HRAs constitute 'other health coverage' that disqualifies an individual from contributing to an HSA. However, certain limited-purpose HRAs (e.g., dental/vision only) or post-deductible HRAs can be compatible with an HSA, as outlined in IRS Notice 2004-43 and IRS Notice 2008-59.

How does an HRA interact with Flexible Spending Accounts (FSAs)?

An HRA can generally be offered alongside a Health Flexible Spending Account (FSA). However, employees cannot be reimbursed for the same expense from both an HRA and an FSA. The plan documents typically specify which account pays first or how coordination of benefits occurs. Both HRAs and FSAs are governed by IRC Section 105 and 125, respectively, for their tax-advantaged status.

What are the implications of the Affordable Care Act (ACA) on HRAs?

The ACA significantly impacted HRAs, particularly by prohibiting standalone HRAs that don't integrate with a group health plan, as they were deemed to violate market reforms. However, the 21st Century Cures Act created QSEHRAs, and subsequent regulations introduced ICHRAs, which are specifically designed to comply with ACA requirements by integrating with individual health insurance coverage or being offered by small employers not offering group plans.

Are there any specific HRA rules for self-employed individuals?

No, HRAs are employer-sponsored plans, meaning they are not directly available to self-employed individuals. Self-employed individuals can, however, deduct health insurance premiums as an above-the-line deduction if they meet certain criteria, as per IRC Section 162(l). They may also consider other tax-advantaged options like HSAs if they have a high-deductible health plan.

What are the reporting requirements for employers offering an ICHRA?

Employers offering an ICHRA must provide a written notice to eligible employees at least 90 days before the start of the plan year, informing them of the ICHRA offer and its implications. While there isn't a specific IRS form for ICHRA reporting, employers must ensure compliance with ACA reporting requirements, such as Form 1095-C for applicable large employers, if applicable, and maintain records for substantiation.

How do HRA benefits affect an employee's taxable income?

Qualified HRA reimbursements for medical expenses are generally excluded from an employee's gross income under IRC Section 105. This means the benefits are tax-free, providing a significant advantage over taxable wages. However, if an HRA reimburses non-qualified expenses, those reimbursements would be considered taxable income to the employee.

Are there any anticipated law changes regarding HRAs in 2026 or beyond?

While specific legislative changes are always subject to political processes, the regulatory framework for HRAs, particularly ICHRA and QSEHRA, has been relatively stable since their introduction. The indexing of QSEHRA limits for inflation will continue. Employers and employees should monitor IRS guidance and legislative updates for any potential future modifications to IRC Sections 105, 9831(d), or related regulations.

What is the difference between a 'fully insured' and 'self-funded' HRA?

The terms 'fully insured' and 'self-funded' primarily apply to the underlying health plan that an HRA might supplement, rather than the HRA itself. An HRA is always 'self-funded' in the sense that the employer directly pays for reimbursements from its own funds, not through an insurance policy. However, an HRA can be integrated with either a fully insured or self-funded group health plan, or with individual coverage in the case of ICHRA.

Health Reimbursement Arrangement (HRA) — 2026 Guide

Overview of Health Reimbursement Arrangements (HRAs)

Health Reimbursement Arrangements (HRAs) are employer-funded health benefit plans that reimburse employees for out-of-pocket medical expenses and, in some cases, health insurance premiums. Unlike Health Savings Accounts (HSAs), HRAs are solely employer-funded, and the funds remain with the employer if an employee leaves the company. HRAs offer a tax-advantaged way for employers to help their employees manage healthcare costs, providing flexibility and control over health benefits.

What is a Health Reimbursement Arrangement (HRA)?

An HRA is a formal health benefit plan established and funded by an employer to reimburse employees for eligible medical expenses. These reimbursements are generally tax-free to the employee and tax-deductible for the employer. The specific rules and eligible expenses depend on the type of HRA offered. The IRS has recognized several types of HRAs, each designed to meet different employer and employee needs.

Individual Coverage HRA (ICHRA)

The Individual Coverage HRA (ICHRA) is a flexible health benefit that allows employers of any size to reimburse employees for individual health insurance premiums and qualified medical expenses on a tax-free basis [1]. Introduced in 2019, ICHRA offers a modern alternative to traditional group health plans, providing employees with greater choice in their health insurance while giving employers more control over costs.

Key Features of ICHRA:

Employer-Funded: Employers set a monthly allowance that employees can use for eligible expenses.
Individual Insurance Integration: Employees must be enrolled in individual health insurance coverage (or Medicare Parts A and B, or C) to participate.
Tax-Free Reimbursements: Reimbursements for premiums and qualified medical expenses are tax-free to employees.
Flexible Design: Employers can offer ICHRA to different classes of employees (e.g., full-time, part-time, seasonal) with varying allowance amounts, provided the classifications are legitimate and non-discriminatory.
No Cap on Contributions: Unlike other HRAs, there are no federal limits on the amount an employer can contribute to an ICHRA.

Qualified Small Employer HRA (QSEHRA)

The Qualified Small Employer HRA (QSEHRA) was established in 2016 to allow small employers (those with fewer than 50 full-time equivalent employees) to reimburse employees for medical expenses and individual health insurance premiums on a tax-free basis [2]. QSEHRA provides a way for small businesses to offer health benefits without the complexities and costs associated with traditional group health plans.

Key Features of QSEHRA:

Small Employer Focus: Exclusively for employers with fewer than 50 full-time equivalent employees who do not offer a group health plan.
Tax-Free Reimbursements: Reimbursements for qualified medical expenses and individual health insurance premiums are tax-free.
Annual Contribution Limits: The IRS sets annual limits on the maximum amount an employer can contribute (see 2026 limits below).
Uniform Terms: QSEHRA must be offered on the same terms to all eligible employees, though reimbursement amounts can vary based on age and family size.

Excepted Benefit HRA (EBHRA)

The Excepted Benefit HRA (EBHRA) is designed to be offered alongside a traditional group health plan, allowing employers to reimburse employees for certain "excepted benefits" and limited medical expenses not covered by the primary group plan [3]. This HRA provides additional financial support for specific healthcare costs, such as dental, vision, and short-term limited duration insurance premiums.

Key Features of EBHRA:

Offered with Group Plan: An EBHRA can only be offered if the employer also offers a traditional group health plan.
Limited in Scope: Reimbursements are typically for excepted benefits (dental, vision) and certain other medical expenses, but not for individual health insurance premiums or the primary group health plan premiums (except COBRA).
Annual Contribution Limits: The IRS sets annual limits on employer contributions (see 2026 limits below).
No Integration Requirement: Employees do not have to enroll in the employer's group health plan to participate in the EBHRA.

Who Qualifies for an HRA?

Qualification for an HRA depends on both the employer's and employee's circumstances, varying by the type of HRA being offered.

Employer Eligibility

ICHRA: Available to employers of any size. There are no restrictions based on the number of employees.
QSEHRA: Limited to small employers with fewer than 50 full-time equivalent employees who do not offer a group health plan.
EBHRA: Must be offered by an employer that also offers a traditional group health plan.

Employee Eligibility

ICHRA: Employees must be enrolled in individual health insurance coverage (or Medicare Parts A and B, or C) to receive reimbursements. They cannot receive premium tax credits if they accept an ICHRA offer that is considered affordable.
QSEHRA: All full-time employees must be offered the QSEHRA on the same terms. Employees must have minimum essential coverage to receive reimbursements.
EBHRA: Employees must be offered a group health plan by the employer, but they are not required to enroll in it to participate in the EBHRA.

How to Claim Your HRA Benefits

The process for claiming HRA benefits involves both the employee and the employer, with specific steps to ensure compliance and proper reimbursement.

For Employees

Incur Eligible Expense: Pay for a qualified medical expense or individual health insurance premium.
Submit Proof: Provide documentation (e.g., receipts, Explanation of Benefits, insurance premium statements) to your employer or HRA administrator.
Receive Reimbursement: Once approved, the employer or administrator will reimburse you for the eligible expense, typically through payroll or direct deposit.

For Employers

Establish HRA Plan: Set up a formal HRA plan document outlining the terms, eligible expenses, and reimbursement limits.
Communicate to Employees: Provide clear notice to eligible employees about the HRA, its rules, and how to claim benefits.
Verify Claims: Review employee submissions to ensure expenses are eligible and properly documented.
Process Reimbursements: Issue tax-free reimbursements to employees for approved claims.
Maintain Records: Keep accurate records of all contributions, reimbursements, and employee documentation for compliance purposes.

2026 HRA Limits, Amounts, and Rates

Staying informed about the annual limits and rates for HRAs is crucial for both employers and employees to maximize benefits and ensure compliance. The IRS typically adjusts these figures annually for inflation.

Excepted Benefit HRA Limits

For plan years beginning in 2026, the maximum amount that may be made available for an Excepted Benefit HRA is $2,200 [3] [4]. This is an increase from $2,150 in 2025.

QSEHRA Limits

For 2026, the maximum annual reimbursement amounts for a QSEHRA are [5]:

Self-Only Coverage: $6,450 ($537.50 per month)
Family Coverage: $13,100 ($1,091.66 per month)

ICHRA Affordability

While there are no federal limits on employer contributions to an ICHRA, affordability is a key consideration for Applicable Large Employers (ALEs) to avoid potential penalties under the Affordable Care Act (ACA) employer shared responsibility provisions. An ICHRA offer is generally considered affordable if the employee's required contribution for self-only coverage under the lowest-cost silver plan, minus the ICHRA allowance, does not exceed 8.39% of their household income for 2026 [1]. Employers can use safe harbors to determine affordability, often based on the lowest cost silver plan for self-only coverage in the employee's residence or primary site of employment [1].

Common Mistakes That Cost Taxpayers Money

Navigating the complexities of HRAs can lead to common pitfalls. Avoiding these mistakes can save both employers and employees significant financial and compliance headaches:

Incorrect Employee Classification: Failing to properly classify employees (e.g., full-time, part-time) can lead to offering the wrong HRA or violating non-discrimination rules.
Lack of Proper Documentation: Employees failing to submit adequate documentation for reimbursements, or employers not maintaining thorough records, can result in disallowed deductions or compliance issues.
Misunderstanding HRA Types: Confusing the rules and eligible expenses for different HRA types (ICHRA, QSEHRA, EBHRA) can lead to improper reimbursements and penalties.
Non-Compliance with Notice Requirements: Employers failing to provide timely and accurate notices to employees about their HRA can result in penalties.
Affordability Calculation Errors (for ICHRA): ALEs incorrectly calculating ICHRA affordability can trigger ACA penalties.
Reimbursing Ineligible Expenses: Attempting to reimburse expenses not permitted under the specific HRA type or IRS guidelines.
Not Having Minimum Essential Coverage (for ICHRA/QSEHRA Employees): Employees participating in ICHRA or QSEHRA without qualifying individual health insurance or minimum essential coverage will not have their reimbursements be tax-free.

IRS Code Section Reference

Health Reimbursement Arrangements are primarily governed by the following sections of the Internal Revenue Code (IRC) and related regulations:

IRC Section 105: Generally governs the tax-free nature of employer-provided health benefits, including reimbursements from HRAs.
IRC Section 106: Addresses the exclusion from gross income of employer contributions to accident and health plans.
IRC Section 9831(c): Pertains to excepted benefits, relevant for Excepted Benefit HRAs.
IRC Section 9831(d): Relates to Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs).
IRC Section 4980H: Employer Shared Responsibility Provisions under the ACA, relevant for ICHRA affordability rules for Applicable Large Employers.
21st Century Cures Act: Established QSEHRAs.
Treasury Regulations and IRS Notices: Various regulations and notices, such as Notice 2017-67 (for QSEHRA) and the 2019 final rules for HRAs, provide detailed guidance.

Book a Consultation with Uncle Kam

Understanding the nuances of Health Reimbursement Arrangements can be complex. To ensure you are maximizing your tax savings and remaining compliant with all IRS regulations, consider a personalized consultation. Our expert tax strategists at Uncle Kam are here to guide you through the intricacies of HRAs and other tax deductions, helping you make informed decisions for your financial well-being.

Ready to optimize your health benefits and tax strategy? Book a call with Uncle Kam today!

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