Health Reimbursement Account (HRA): What It Means for Employers

What it means in practice

Two names, one arrangement. The IRS uses "health reimbursement arrangement" (Publication 969; Notice 2002-45). The HealthCare.gov glossary notes these plans are sometimes called health reimbursement accounts. The "account" is a promise of reimbursement, not money the employee owns: Publication 969 says the employer may not refund any part of the balance to the employee.

The basic definition. Notice 2002-45 describes an HRA as an arrangement that is paid for solely by the employer, reimburses section 213(d) medical care expenses of the employee, spouse and dependents, and reimburses up to a maximum dollar amount for a coverage period. Coverage and reimbursements are excluded from income under sections 106 and 105.

Carryover is a plan design choice. Notice 2002-45 builds carryforward into its definition, but Publication 969 says some, but not all, HRAs let unused amounts carry into the next year. Because there is no salary reduction, the notice says the health FSA ban on carryovers, the rule that the full annual amount be available at all times, and the mandatory 12-month coverage period do not apply. Future annual amounts may be raised or lowered, but an increase favoring highly compensated individuals may be discriminatory.

What it can pay for. Reimbursements must be for section 213(d) medical care, the expenses listed in Publication 502. Publication 969 adds health insurance premiums, long-term care coverage, over-the-counter medicine and menstrual care products. Each claim must be substantiated and incurred on or after the employee enrolled. An HRA cannot reimburse an expense deducted in a prior year (Notice 2002-45), and the employee cannot deduct an expense the HRA paid (Publication 502).

The cash-out rule. Notice 2002-45 says that if anyone has a right to cash or any benefit other than medical reimbursement, now or in a future year, every distribution made that year is taxable, including medical reimbursements. Publication 969 gives examples: unused amounts payable in cash at year end or termination, a cash death benefit, or a transfer to a retirement plan. A severance or retirement bonus tied to the remaining balance has the same effect.

Who can be covered. Publication 969 allows reimbursements for current and former employees, their spouses and dependents, a child under age 27 at year end, and survivors of deceased employees. Self-employed people are not eligible. Publication 15-B treats a more-than-2% S corporation shareholder like a partner, not an employee, for health benefits; see self-employed health insurance deduction.

Integrated HRAs and the ACA market reforms. An HRA is a group health plan, so it must satisfy the Affordable Care Act ban on annual dollar limits and the preventive care rule. A traditional HRA does so by being integrated with other group coverage under 29 CFR 2590.715-2711(d). Under either integration method, the employee must actually be enrolled in non-HRA group coverage (which can be a spouse's plan), the HRA must be available only to people so enrolled, and the employee must be able to opt out permanently at least once a year, with the balance forfeited or waivable on leaving employment. If that other coverage does not provide minimum value, the HRA may only reimburse cost sharing, premiums for that coverage, and expenses that are not essential health benefits. Notice 2013-54 says a retiree-only HRA is not subject to the annual dollar limit prohibition.

Individual coverage HRA (ICHRA). Since 2020, 29 CFR 2590.702-2 (with matching IRS and HHS rules at 26 CFR 54.9802-4 and 45 CFR 146.123) lets an HRA integrate with individual health insurance or Medicare. HealthCare.gov now calls these "CHOICE Arrangements (formerly known as ... ICHRAs)" and says employers of any size may offer them, with no minimum or maximum contribution. Conditions: every covered person must be enrolled in individual coverage (not solely excepted benefits) each month; a class offered an ICHRA cannot also be offered a traditional group plan; terms must be the same within each class; participants may opt out once a year; coverage must be substantiated; and a written notice must go out at least 90 calendar days before each plan year. Classes come from a fixed list, such as full-time, part-time, salaried, hourly, seasonal and rating area. Amounts may rise with dependents or age, but the oldest may get no more than three times the youngest.

Minimum class sizes. If an employer offers a traditional group plan to some classes and an ICHRA to others, certain ICHRA classes must have at least 10 employees (employer under 100), 10% of employees rounded down (100 to 200), or 20 (over 200) (29 CFR 2590.702-2(d)(3)). The DOL model notice, used timely, counts as good faith compliance.

ICHRA affordability and the premium tax credit. HealthCare.gov explains that an affordable ICHRA offer bars the employee and household from the premium tax credit, even if they do not use it, while an employee offered an unaffordable ICHRA may choose the ICHRA or the credit, but not both. Affordability compares the self-only lowest cost silver plan premium, minus the monthly HRA amount, with the required contribution percentage of household income: 9.96% for 2026 (Rev. Proc. 2025-25) and 10.22% for 2027 (Rev. Proc. 2026-26). For an applicable large employer, the Form 1095-C instructions treat an ICHRA as an offer of coverage and give codes 1L through 1U for reporting it (see full-time equivalent counting).

Qualified small employer HRA (QSEHRA). Section 9831(d) created the QSEHRA for employers that are not applicable large employers and that offer no group health plan, including no other HRA or health FSA, to any employee (Publication 15-B). It is not a group health plan. It must be employer-funded, reimburse medical expenses including premiums after the employee proves minimum essential coverage, stay within the annual limit ($6,450 self-only, $13,100 family for 2026), and be offered on the same terms to all eligible employees, though it may exclude employees with under 90 days of service, those under 25, part-time or seasonal workers, and certain union and nonresident alien employees. Notice 2017-67 says limits are prorated by month, carryover plus new money cannot exceed the limit, and 2% S corporation shareholders cannot participate.

QSEHRA notice, credit and W-2. The written notice is due at least 90 days before each year, or by the date a new employee is first eligible. Section 6652(o) imposes a penalty of $50 per employee, up to $2,500 per calendar year, for failing to provide it (Notice 2017-67). The notice must tell employees to report the permitted benefit to any Marketplace, because the premium tax credit is reduced by 1/12 of the permitted benefit for each month. On the W-2 form, the employer reports in box 12, code FF, the amount the employee was entitled to receive, not the amount actually reimbursed.

Excepted benefit HRA (EBHRA). Under 26 CFR 54.9831-1(c)(3)(viii), an HRA is an excepted benefit, and so outside most market reforms, if the employer makes other non-excepted group coverage available to the participant for the plan year (the employee need not enroll), new amounts stay within the annual limit ($2,200 for 2026 plan years), the HRA does not reimburse premiums for individual coverage, group coverage other than COBRA, or Medicare (except premiums for excepted-benefit coverage), and it is available on the same terms to all similarly situated people. Carryovers are disregarded for the limit, but multiple HRAs are aggregated. The regulation points to the DOL rules for a summary plan description for the notice requirement.

Coordination with HSAs and health FSAs. Publication 969 says an employee covered by an HRA that pays general medical expenses generally cannot contribute to a health savings account (HSA). HSA eligibility is kept with a limited-purpose HRA (dental, vision and preventive care, for example), a suspended HRA elected before the coverage period, a post-deductible HRA, or a retiree-only HRA. With a flexible spending account (FSA), Notice 2002-45 Part V says HRA amounts must be used first for the same expenses unless the HRA document, adopted before the FSA plan year, makes the HRA available only after the FSA is exhausted. No expense may be reimbursed by both.

Nondiscrimination and COBRA. To the extent an HRA is a self-insured medical reimbursement plan, section 105(h) applies (Notice 2002-45 Part VI). Publication 15-B says a plan that favors highly compensated employees, meaning the five highest paid officers, more-than-10% owners and the highest paid 25% of employees, must include all or part of their reimbursements in box 1 of Form W-2; see non-discrimination testing. An HRA is generally subject to COBRA; Notice 2002-45 Part VII says the plan continues the available amount, adds the same increases active participants get, and charges the same premium regardless of balance.

PCORI fee. A self-insured HRA is an applicable self-insured health plan for the Patient-Centered Outcomes Research Trust Fund fee, which runs through plan years ending before October 1, 2029. Under 26 CFR 46.4376-1, an employer whose only self-insured plans are HRAs or health FSAs may count each participant as one covered life, and an HRA with the same sponsor and plan year as another self-insured plan may be treated as one plan with it. The fee is paid on the second-quarter Form 720 by July 31 of the year after the plan year ends.

Step by step for an employer. (1) Choose the type. (2) Confirm eligibility: ALE status and other plans for a QSEHRA, classes and class sizes for an ICHRA. (3) Adopt a written plan setting the amount, carryover rule and eligible expenses. (4) Send any 90-day notice. (5) Collect proof of coverage. (6) Reimburse only substantiated expenses. (7) Report code FF or Form 1095-C codes as applicable. (8) Pay any PCORI fee by July 31.

Example 1 (illustration): QSEHRA proration. An employee hired in 2026 becomes eligible on April 1 for a calendar-year QSEHRA that offers the self-only maximum. Nine of 12 months remain, so the permitted benefit is $6,450 x 9/12, or $4,837.50, and that prorated figure goes in box 12, code FF, even if the employee claims less.

Example 2 (illustration): ICHRA age banding. An ICHRA gives its youngest participants $2,000 a year. Under the 3:1 limit, the oldest may receive no more than $6,000.

Example 3 (illustration): ICHRA affordability. For 2026, an employee with household income of $60,000 has a threshold of 9.96% x $5,000 a month, or $498. If the lowest cost silver plan is $700 a month and the ICHRA provides $250 a month, the employee's net cost of $450 is under $498, so the offer is affordable and the household cannot claim the premium tax credit.

Where states differ. The rules above are federal. State income tax rules for health benefits, and state insurance rules for the individual policies an ICHRA or QSEHRA reimburses, can differ, so check your state revenue and insurance departments.

Question: Can employees add their own money to an HRA? No. Publication 969 says an HRA is funded solely by employer contributions. Under an ICHRA, HealthCare.gov says employees may use pre-tax payroll deductions for the rest of the premium only for coverage bought outside the Marketplace.

Question: Does an HRA change an employee's Marketplace window? It can. HealthCare.gov says employees newly offered a QSEHRA or ICHRA may qualify for a special enrollment period; see qualifying life event.

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