A retiree reimbursement account (RRA) is an employer-funded Health Reimbursement Arrangement that pays former employees back, tax-free, for qualified medical expenses in retirement, and the IRS rules that make it work are strict: the employer funds it entirely, reimbursements are limited to medical care as defined by Section 213(d), and no one can ever take the balance as cash. Break any of those rules and every dollar distributed to every participant in the plan becomes taxable.
What an RRA Actually Is
An RRA is not a separate category in the tax code. It is a common industry name for an HRA an employer sets up specifically to reimburse retired workers for medical expenses. The IRS treats it like any other HRA: the employer funds it, the employer owns the money, and reimbursements for qualified medical expenses are excluded from the retiree’s gross income under 26 U.S.C. § 105(b).1Office of the Law Revision Counsel. 26 U.S. Code 105 – Amounts Received Under Accident and Health Plans
The employer decides how much to contribute and writes the plan rules in a formal plan document. Unused funds roll over year to year and build up until you need them. That is a real advantage over most FSAs, which forfeit unused balances at plan-year end. But unlike an HSA, you do not own the RRA balance. The money cannot be transferred to another employer, rolled into a personal account, or taken as cash.2Internal Revenue Service. Publication 502 (2025), Medical and Dental Expenses
The IRS Rules That Keep It Tax-Free
The tax-free treatment rests on a short list of non-negotiable requirements from IRS Notice 2002-45, the foundational guidance for all HRAs. If the plan violates one, the consequences fall on every participant, not just the person tied to the violation.
- Every dollar in the account must come from the employer. Contributions cannot be made through salary reduction or a Section 125 cafeteria plan.3Internal Revenue Service. IRS Notice 2002-45 – Health Reimbursement Arrangements
- The account can only pay for expenses that meet the definition of medical care under Section 213(d). No other type of benefit is allowed.3Internal Revenue Service. IRS Notice 2002-45 – Health Reimbursement Arrangements
- If any person has the right to receive cash or any other non-medical benefit from the arrangement, all distributions to all participants become taxable, including amounts properly used for medical care.3Internal Revenue Service. IRS Notice 2002-45 – Health Reimbursement Arrangements
- Reimbursements are capped at a maximum dollar amount each coverage period, set by the employer. Unused amounts carry forward and increase the reimbursement limit in future periods.3Internal Revenue Service. IRS Notice 2002-45 – Health Reimbursement Arrangements
The cash-out prohibition deserves its own emphasis because the fallout is so wide. The IRS has clarified that even indirect cash equivalents violate the rule. If an employer ties severance pay to the amount left in a former employee’s HRA balance, the IRS treats the whole arrangement as failing, and reimbursements become taxable for everyone.3Internal Revenue Service. IRS Notice 2002-45 – Health Reimbursement Arrangements
What Counts as a Qualified Medical Expense
Under 26 U.S.C. § 213(d), medical care means amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.4Office of the Law Revision Counsel. 26 U.S. Code 213 – Medical, Dental, Etc., Expenses The definition also covers transportation essential to medical care, qualified long-term care services, and insurance premiums for medical coverage.
Common qualifying expenses:
- Deductibles, copayments, and coinsurance on covered medical services
- Prescription drugs, plus insulin even without a prescription2Internal Revenue Service. Publication 502 (2025), Medical and Dental Expenses
- Qualified long-term care insurance premiums, subject to age-based annual limits the IRS adjusts each year4Office of the Law Revision Counsel. 26 U.S. Code 213 – Medical, Dental, Etc., Expenses
- Lodging away from home that is primarily for and essential to medical care at a licensed hospital or equivalent facility, capped at $50 per night per person4Office of the Law Revision Counsel. 26 U.S. Code 213 – Medical, Dental, Etc., Expenses
What does not qualify: cosmetic surgery (unless it corrects a deformity from disease, injury, or a congenital abnormality), over-the-counter vitamins and supplements not prescribed for a specific medical condition, and gym memberships for general fitness. The dividing line is whether the expense treats, prevents, or diagnoses a medical condition, or simply supports general well-being.
Medicare and Insurance Premiums
Insurance premiums covering medical care fall within the 213(d) definition, so an RRA can reimburse premiums for Medicare Part B, Medicare Part D, Medicare Advantage (Part C), and Medigap supplemental policies, as long as the plan document allows it.2Internal Revenue Service. Publication 502 (2025), Medical and Dental Expenses
Medicare Part A is a narrower case. If you qualify for premium-free Part A through your own or your spouse’s work history, there is no premium to reimburse. If you voluntarily enrolled and pay Part A premiums because you did not earn enough Social Security credits, those premiums do qualify.2Internal Revenue Service. Publication 502 (2025), Medical and Dental Expenses The plan document is the final word on which premium types your RRA will reimburse, so check yours before assuming coverage.
How Reimbursement Works
RRAs run on a pay-first, get-reimbursed-later model. You pay the expense out of pocket, gather documentation, submit a claim to the plan administrator, and receive payment once the administrator verifies the claim.
The IRS requires substantiation for every reimbursement. Your documentation must show the date of service, who received the care, what the service was, who provided it, and how much you paid. Itemized receipts, provider invoices, and Explanation of Benefits statements from your insurance carrier all work. A credit card receipt or canceled check alone is not enough, because it does not describe the medical service.
Most administrators accept claims through an online portal or by mail. Processing takes a few business days for straightforward claims once documentation is complete. Incomplete submissions are the most common reason for delays. If a claim is denied, the plan document should outline an appeals process.
The RRA Blocks HSA Contributions
To contribute to an HSA, you must have a High Deductible Health Plan and no other coverage that pays for medical expenses before the deductible is met. A retiree-only HRA counts as “other health coverage” because it can reimburse medical expenses from the first dollar. The IRS is explicit: once you have a retiree HRA in place, you can no longer make HSA contributions.5Internal Revenue Service. Publication 969 (2025), Health Savings Accounts and Other Tax-Favored Health Plans
You can still spend money already in your HSA. The restriction applies only to new contributions. If you built up a large HSA balance during your working years, those funds remain available for qualified medical expenses alongside your RRA. You just cannot add to the HSA once the retiree HRA is active.
The RRA Blocks ACA Premium Tax Credits
If you retire before 65 and were counting on a marketplace subsidy, the RRA creates a real problem. The IRS and the Department of Labor have confirmed that a standalone retiree-only HRA is an eligible employer-sponsored plan and constitutes minimum essential coverage. A retiree covered by a standalone HRA for any month is not eligible for a premium tax credit for that month.6U.S. Department of Labor. Technical Release No. 2013-03
This applies as long as funds remain in the HRA, even during periods when the employer has stopped making new contributions.6U.S. Department of Labor. Technical Release No. 2013-03 A retiree with an RRA balance of any size is generally ineligible for the credit, which can be worth thousands per year. For some early retirees, the math may favor declining or opting out of the RRA to preserve premium tax credit eligibility, but only if the plan allows waiver and the credit exceeds the reimbursement value. Run the numbers before making that choice.
What Happens After You Die
The unused RRA balance cannot be paid as a lump sum to anyone. That would violate the cash-out rule and blow up the tax treatment for the entire plan. Many plan documents do include a “spend-down” feature that lets a surviving spouse, tax dependents, and qualifying children keep using the remaining balance for their own qualified medical expenses.
Whether that feature exists, and who qualifies, depends entirely on the plan document. Some plans limit the spend-down to a set number of years. Others let it run until the balance is exhausted. If the plan has no spend-down provision, the unused balance goes back to the employer. Review your plan document and make sure your spouse or family understands the terms before the situation arises.
Administrators have to be careful to reimburse only eligible survivors. If a plan pays expenses for someone who does not qualify under its terms, the IRS treats all reimbursements from the arrangement as taxable, including those to other eligible participants.
The Employer Still Owns the Money
The most overlooked risk of an RRA is ownership. Unlike a pension or 401(k), where benefits vest and are protected by federal funding requirements, retiree health benefits like an RRA do not carry the same protections under ERISA.7U.S. Government Accountability Office. Effect of Bankruptcy on Retiree Health Benefits Employers are not required to set aside dedicated funds, and retirees do not have a vested legal right to a specific balance.
If the employer terminates the plan, the plan document controls what happens. Some plans include a run-out period that gives participants time to submit claims for expenses already incurred. Others forfeit unused balances immediately. If the employer files for bankruptcy, RRA balances held as notional bookkeeping entries may have no assets backing them. Even when funds sit in a trust, retirees can face delays or reduced benefits as part of a bankruptcy settlement.
Weigh this when you decide how to pace claims. Some retirees treat the account as a long-horizon savings vehicle and defer claims for years, but that concentrates your exposure to the employer’s financial health. Submitting claims regularly rather than stockpiling the balance is often the safer play.