An Excepted Benefit HRA is an employer-funded account that reimburses employees for certain out-of-pocket medical costs, with a maximum employer contribution of $2,200 per participant for plan years beginning in 2026.1Internal Revenue Service. Rev. Proc. 2025-19 It sits alongside a traditional group health plan rather than replacing one, and it qualifies as an “excepted benefit” under federal regulations, which keeps it outside the Affordable Care Act’s market reform requirements. Miss any of the qualifying conditions and the arrangement loses that status for the entire plan year.
The Three Conditions That Define an EBHRA
Federal regulation at 26 CFR 54.9831-1(c)(3)(viii) sets out what an HRA must do to qualify. All three conditions apply at the same time, for the full plan year.2eCFR. 26 CFR 54.9831-1 Special Rules Relating to Group Health Plans
A Traditional Group Health Plan Must Be Offered Alongside It
The employer has to make non-excepted, non-account-based group health plan coverage available to the same employees who are eligible for the EBHRA. In plain terms: there has to be a regular medical plan on the table. The EBHRA cannot be the only health benefit an employer offers.2eCFR. 26 CFR 54.9831-1 Special Rules Relating to Group Health Plans
Employees do not have to enroll in that traditional plan to use the EBHRA. Someone covered under a spouse’s policy or another source can still tap the account. What matters is that the employer offers the group plan; enrollment is the employee’s call.3Centers for Medicare & Medicaid Services. Overview of New Health Reimbursement Arrangements
The Annual Contribution Cap
New employer contributions per participant are capped at an inflation-adjusted dollar amount. The 2026 figure is $2,200.1Internal Revenue Service. Rev. Proc. 2025-19
Only the new money counts. If the plan permits unused balances to roll into the next year, those carryovers do not count against the cap.2eCFR. 26 CFR 54.9831-1 Special Rules Relating to Group Health Plans An employee who brought $800 forward from last year and receives a fresh $2,200 has $3,000 to spend, and the plan is still compliant.
When an employer sponsors more than one account-based plan for the same participant, the new contributions across those plans are added together. If the combined amount exceeds the cap, the EBHRA loses its excepted status.
Uniform Availability
The benefit must be offered on the same terms to all similarly situated employees. That test follows the existing HIPAA nondiscrimination framework, so employers can distinguish among classifications like full-time and part-time, geographic location, job category, and collective bargaining unit membership.2eCFR. 26 CFR 54.9831-1 Special Rules Relating to Group Health Plans
What is off-limits is varying the arrangement based on a health factor. Offering a bigger contribution to healthy employees, or a smaller one to workers with chronic conditions, violates the rule. Within any class, the contribution amount and access have to be identical.
Employers of any size can set up an EBHRA. There is no minimum headcount, and both small and large employers can use it, provided they already sponsor a traditional plan.
What EBHRA Funds Can Pay For
The account reimburses most out-of-pocket medical expenses that qualify under Internal Revenue Code Section 213(d): copays, deductibles, coinsurance, prescription drugs, lab work, and similar costs tied to diagnosing, treating, or preventing disease.3Centers for Medicare & Medicaid Services. Overview of New Health Reimbursement Arrangements
A limited set of insurance premiums is also reimbursable:
- Excepted benefit coverage such as stand-alone dental and vision plans
- COBRA continuation coverage after a qualifying event
- Short-term, limited-duration insurance premiums, though federal agencies retain authority to restrict this for small-employer EBHRAs in certain states
What the EBHRA cannot pay for is just as important. It cannot reimburse premiums for the employer’s own group health plan, individual market coverage (including Marketplace plans), or Medicare.3Centers for Medicare & Medicaid Services. Overview of New Health Reimbursement Arrangements That premium prohibition is what distinguishes the EBHRA from an Individual Coverage HRA, which is built specifically to fund individual market premiums.
Tax Treatment
Contributions are deductible to the employer as a business expense, and reimbursements are excluded from the employee’s gross income. Employees pay no federal income tax or payroll tax on amounts reimbursed through the plan, and the employer avoids payroll tax on those same dollars. That combination generally beats simply raising pay to help employees cover medical costs.
One tradeoff: because EBHRA reimbursements are tax-free, the underlying expenses cannot also be claimed as itemized medical deductions on the employee’s personal return. The same dollar of spending cannot generate two tax benefits.
ERISA, Plan Documents, and Filings
An EBHRA is a group health plan subject to the Employee Retirement Income Security Act, with limited exceptions for church and governmental plans. That classification carries administrative obligations.
The employer needs a written plan document and must give each participant a Summary Plan Description covering eligibility, reimbursable expenses, claim submission, and appeals. Reimbursement requests have to be handled under ERISA’s claims-and-appeals procedures, including specific decision timeframes and appeal rights when a claim is denied.
HIPAA’s administrative simplification rules apply too. Employers must safeguard protected health information under HIPAA’s privacy and security rules, though an exception exists for certain small self-insured, self-administered plans.
Whether a Form 5500 filing is required depends on plan size and funding. Welfare plans with fewer than 100 participants at the start of the plan year that are unfunded or fully insured are generally exempt. Most EBHRAs are unfunded, meaning claims are paid from the employer’s general assets rather than a trust, so smaller EBHRAs typically avoid the filing. Plans funded through a trust, or those with 100 or more participants, have to file.
What Happens If the EBHRA Loses Excepted Status
If any qualifying condition is missed, the arrangement stops being an excepted benefit and becomes subject to the full ACA market reform provisions, including the ban on annual dollar limits and the requirement to cover preventive services without cost sharing.4U.S. Department of Labor. FAQs about Affordable Care Act Implementation Part 33 An EBHRA is built around an annual cap and does not stand alone as preventive coverage, so it will violate both requirements the moment it loses excepted status.
The most frequent trigger is exceeding the annual contribution limit, particularly when an employer sponsors multiple account-based plans whose contributions have to be aggregated. Failing to offer a group health plan alongside the EBHRA, or drawing distinctions based on health factors, can also blow it up. There is no cure period. The plan either meets every condition for the full plan year or it does not.
How the EBHRA Compares to ICHRA and QSEHRA
The EBHRA is one of three HRA types employers commonly weigh, and each answers a different problem.
- The EBHRA works for employers of any size that already offer a traditional group health plan. It is capped at $2,200 for 2026 and reimburses out-of-pocket costs plus certain excepted-benefit premiums, but not individual market or employer group plan premiums. Employees do not need their own individual coverage to use it.1Internal Revenue Service. Rev. Proc. 2025-19
- The Individual Coverage HRA has no dollar cap and is designed to reimburse individual health insurance premiums. Employees have to enroll in their own individual market coverage. The employer does not offer a group plan alongside it.
- The Qualified Small Employer HRA is limited to employers with fewer than 50 employees that do not offer a group plan. Employees must carry minimum essential coverage. Its annual limit is higher than the EBHRA’s and is set separately for self-only and family coverage.
The EBHRA fits employers that want to keep their existing group plan and layer a modest supplemental benefit on top. An employer cannot offer an EBHRA and an ICHRA to the same class of employees, because the two arrangements assume opposite things about whether a group plan is in place.