A Health Reimbursement Arrangement is an employer-funded account that reimburses employees tax-free for qualified medical expenses, and the rules for a Health Reimbursement Arrangement come from the tax code, ERISA, and the Affordable Care Act. Employers deduct contributions as a business expense, employees exclude reimbursements from gross income under IRC Section 105(b), and the money can only pay for expenses that qualify as medical care under IRC Section 213(d).1Office of the Law Revision Counsel. 26 U.S. Code 105 – Amounts Received Under Accident and Health Plans2Office of the Law Revision Counsel. 26 U.S. Code 213 – Medical, Dental, Etc., Expenses Beyond those shared bones, the specifics change by HRA type.
The Rules Every HRA Shares
Only the employer contributes. Employee contributions are prohibited across every HRA variant, pre-tax or after-tax. That employer-only funding is what unlocks the tax treatment on both sides of the transaction.
HRA dollars can only reimburse qualified medical expenses under Section 213(d): doctor visits, prescriptions, hospital bills, dental and vision care, medical equipment, transportation for medical care, long-term care services, and, depending on the HRA type, insurance premiums. The money cannot be cashed out or spent on anything else. If it could, the tax exclusion would collapse.
What happens to leftover funds is set by the plan document, not by law. Most employers roll unused balances into the next plan year in whole or in part, but no statute requires it. When an employee leaves, any remaining balance typically reverts to the employer unless the plan builds in a grace period or continuation of benefits.
Why Most HRAs Have to Be Integrated With a Group Plan
The ACA prohibits annual dollar limits on essential health benefits. An HRA caps reimbursements at a fixed dollar amount by design, so a standalone HRA violates that rule. The workaround for the traditional model is integration: the HRA is paired with an ACA-compliant group health plan that supplies the uncapped essential benefits, and the HRA fills in the gaps.3U.S. Department of Labor. FAQs About Affordable Care Act Implementation, Part 37
Three HRA types sit outside the integration requirement and follow their own rules: the Qualified Small Employer HRA (QSEHRA), the Individual Coverage HRA (ICHRA), and the Excepted Benefit HRA (EBHRA).
QSEHRA Rules
A QSEHRA is only for employers with fewer than 50 full-time equivalent employees that do not offer any group health plan to their workforce.4HealthCare.gov. Health Reimbursement Arrangements for Small Employers Both conditions matter. Offer a group health plan, an FSA, or another HRA to anyone on staff, and the QSEHRA is off the table.5Internal Revenue Service. IRS Notice 2017-67 – Guidance on Qualified Small Employer Health Reimbursement Arrangements
Contribution Caps and Same-Terms Rule
The IRS caps the annual amount an employer can make available and adjusts it for inflation. For plan years beginning in 2026, the maximum is $6,450 for self-only coverage and $13,100 for family coverage. Those are annual totals available for reimbursement, not per-expense limits.
The QSEHRA must be offered on the same terms to all eligible employees. Employers can vary the allowance by family size and by age-related differences in individual market premium costs, but they cannot vary it by job title or tenure. Employees who become eligible mid-year get a prorated allowance for the remaining months.
Minimum Essential Coverage
Reimbursements are only tax-free if the employee maintains minimum essential coverage, usually an individual market plan. Without qualifying coverage, the reimbursements are taxable. The employer can still pay them; the tax benefit just disappears.
Notice, W-2 Reporting, and Premium Tax Credit
Employers must give each eligible employee a written notice at least 90 days before the plan year begins, or on the date of first eligibility for anyone who becomes eligible mid-year. The notice must state the employee’s permitted annual benefit and warn that the QSEHRA may affect marketplace premium tax credit (PTC) eligibility. Skipping the notice costs $50 per employee, capped at $2,500 per year.
Report the total permitted QSEHRA benefit on the employee’s Form W-2 in Box 12 using Code FF. This is the permitted amount, not the amount reimbursed: a $5,000 permitted benefit with only $2,000 in claims still reports as $5,000.6Internal Revenue Service. General Instructions for Forms W-2 and W-3
The PTC impact runs two ways. If the QSEHRA makes the employee’s cost for the second-lowest-cost silver plan affordable, the employee gets no PTC. If the QSEHRA is not generous enough to make coverage affordable, the employee can still receive a PTC, but the credit is reduced by the full permitted QSEHRA benefit.
ICHRA Rules
An ICHRA is available to employers of any size and pairs with individual market health insurance or Medicare rather than a group plan. To participate, employees must be enrolled in individual coverage or in Medicare Part A, Part B, or Part C. Taking the reimbursement without qualifying coverage is not an option.7eCFR. 45 CFR 146.123 – Special Rule Allowing Integration of Health Reimbursement Arrangements and Other Account-Based Group Health Plans With Individual Health Insurance Coverage and Medicare
Employee Classes
Employers can split employees into defined classes (full-time, part-time, salaried, hourly, seasonal, employees in different geographic rating areas, and others) and set different reimbursement amounts for each class. There is no dollar cap on ICHRA contributions. Within a class, though, every employee must get the same terms: an employer cannot pay one full-time employee $400 per month and another full-time employee $200 per month.
Minimum Class Sizes
Minimum class size rules only apply when an employer offers a traditional group health plan to at least one class and an ICHRA to a different class. This blocks cherry-picking between marketplace and group coverage. The floors scale with employer size:8Federal Register. Health Reimbursement Arrangements and Other Account-Based Group Health Plans
- Fewer than 100 employees: the ICHRA class must include at least 10 employees.
- 100 to 200 employees: at least 10 percent of total employees, rounded down.
- More than 200 employees: at least 20 employees.
Employers that offer only an ICHRA and no group plan for any class do not have to meet these minimums.
Affordability and the Premium Tax Credit
Applicable large employers (50 or more full-time equivalents) must offer an ICHRA that meets ACA affordability standards. To test affordability, subtract the monthly ICHRA allowance from the cost of the lowest-cost silver plan available in the employee’s geographic rating area. If the employee’s remaining share for self-only coverage does not exceed 9.96 percent of household income for the 2026 plan year, the ICHRA is affordable.
An affordable ICHRA offer blocks the employee from claiming a PTC on the marketplace, whether or not the employee accepts the ICHRA. Turning down an affordable offer does not unlock marketplace subsidies.
EBHRA Rules
An EBHRA covers a narrow set of expenses, mainly dental, vision, and short-term limited-duration insurance premiums. It cannot reimburse premiums for individual market coverage or the employer’s own group health plan. For plan years beginning in 2026, the maximum amount an employer can newly make available is $2,200.9Internal Revenue Service. Rev. Proc. 2025-19 – Inflation Adjusted Amounts for Health Savings Accounts
The employer must also offer a traditional group health plan to the employees who receive the EBHRA. The employee does not have to enroll in that plan, but it has to be available. Because the EBHRA only reimburses excepted benefits, it doesn’t conflict with the ACA annual limit rules.
Integrated HRAs and Retiree HRAs
The traditional integrated HRA works alongside a group health plan and reimburses deductibles, copayments, and coinsurance the plan doesn’t fully cover. The employee must actually be enrolled in the group plan to use the HRA. Employers often pair an integrated HRA with a high-deductible health plan to reimburse a portion of what the employee pays before the plan’s coverage begins.
Retiree HRAs are a separate category available only to former employees who have retired. Retiree-only plans sit outside the ACA’s scope, so they are exempt from several ACA market reforms, including the annual limit prohibition. They typically help retirees cover Medicare premiums and out-of-pocket medical costs.
Rules for Combining an HRA With an HSA
A general-purpose HRA that reimburses all qualified medical expenses disqualifies the employee from contributing to a Health Savings Account. The IRS treats the HRA as “other coverage.” Three HRA structures preserve HSA eligibility:10Internal Revenue Service. Publication 969 – Health Savings Accounts and Other Tax-Favored Health Plans
- A limited-purpose HRA that reimburses only dental, vision, and preventive care.
- A post-deductible HRA that pays nothing until the employee meets the minimum annual HDHP deductible.
- A suspended HRA the employee elects to freeze for a coverage period, restoring HSA eligibility during the suspension.
For 2026, HSA contribution limits for employees enrolled in an HDHP are $4,400 for self-only and $8,750 for family coverage, with an additional $1,000 catch-up contribution at age 55 or older.9Internal Revenue Service. Rev. Proc. 2025-19 – Inflation Adjusted Amounts for Health Savings Accounts Employers offering both an HRA and an HDHP need to structure the HRA carefully so it doesn’t quietly cut off employees’ HSA eligibility.
Nondiscrimination Testing
HRAs are self-insured health plans, so they are subject to nondiscrimination testing under IRC Section 105(h). Two tests apply.
The eligibility test asks whether the plan covers a broad enough portion of the workforce. It’s generally satisfied by benefiting at least 70 percent of all non-excludable employees, hitting an 80 percent participation rate among those eligible, or covering a nondiscriminatory classification of employees.
The benefits test requires that the benefits available to highly compensated individuals be available on the same terms to everyone else, including reimbursement amounts, waiting periods, and covered expenses. Highly compensated individuals for this purpose are the five highest-paid officers, anyone owning more than 10 percent of the company, and the highest-paid 25 percent of all employees. If the plan fails either test, the reimbursements paid to highly compensated individuals become taxable to them; the rest of the workforce is unaffected.
QSEHRAs handle nondiscrimination through the same-terms requirement, and ICHRAs handle it through class-based uniformity. Traditional integrated HRAs face the full Section 105(h) analysis, and employers who skip the testing often don’t learn they had a problem until an audit.
Substantiating Reimbursements
Every reimbursement request has to be substantiated with third-party documentation. Acceptable proof includes an Explanation of Benefits from the insurer or an itemized receipt showing the service date, provider, nature of the expense, and the employee’s financial responsibility. A credit card statement alone doesn’t work because it doesn’t identify the specific medical service. The employer or its third-party administrator must verify each expense before paying.
Over-the-counter medications are fully eligible for reimbursement without a prescription, along with health supplies like bandages and contact lens solution.
Employer Compliance Obligations
COBRA
HRAs subject to ERISA trigger COBRA continuation for private-sector employers with 20 or more employees. On a qualifying event (job loss, reduction in hours, divorce, or aging off a parent’s coverage) the employer must offer continuation of the HRA benefit for up to 18 or 36 months, depending on the event. Whether it’s worth electing depends on the departing employee’s unused balance.
The QSEHRA is exempt from COBRA because it isn’t a group health plan under ERISA. Small employers offering only a QSEHRA don’t need to provide COBRA notices or continuation for it.
HIPAA
HRAs are group health plans, so they fall under HIPAA’s privacy and security rules. The claim details that flow through HRA administration are protected health information. Most employers use an independent third-party administrator to handle claims and keep HR staff away from individual medical data; employers that self-administer must designate specific authorized personnel and limit access.
ERISA Plan Documents and Form 5500
Most HRAs fall under ERISA. The employer must maintain a written plan document and furnish a Summary Plan Description to every participant covering eligibility, covered expenses, claims procedures, and appeal rights.11U.S. Department of Labor. Plan Information Failing to provide an SPD when a participant requests one can cost up to $110 per day.
HRAs with 100 or more participants at the start of the plan year must file Form 5500 annually with the Department of Labor. Smaller plans meeting certain conditions may file the Form 5500-SF, and some very small unfunded plans are exempt.12Internal Revenue Service. Form 5500 Corner
PCORI Fee
Employers sponsoring an HRA owe the Patient-Centered Outcomes Research Institute fee, reported and paid annually on IRS Form 720. The fee is charged per covered life and adjusts each year. For plan years ending between October 1, 2025, and September 30, 2026, the rate is $3.84 per covered life. The Form 720 filing deadline for plan years ending in 2025 is July 31, 2026.13Internal Revenue Service. Patient-Centered Outcomes Research Institute Filing Due Dates and Applicable Rates Smaller employers with a standalone QSEHRA or ICHRA often miss this filing because they don’t realize the arrangement triggers it.