A Health Reimbursement Arrangement is an employer-funded account that pays employees back, tax-free, for medical costs the employer chooses to cover. The rules and eligibility for a Health Reimbursement Arrangement depend on which of four HRA types the employer sets up: an Individual Coverage HRA (ICHRA), a Qualified Small Employer HRA (QSEHRA), an Excepted Benefit HRA (EBHRA), or an integrated (traditional) HRA. Each type sets its own limits on who can offer it, who can participate, how much can go in, and what the money can pay for. For 2026, statutory caps run from $2,200 for an EBHRA up to $6,450 self-only or $13,100 family for a QSEHRA, while ICHRAs and integrated HRAs have no federal dollar limit.
The Four HRA Types and Who Each One Fits
Federal law recognizes four distinct HRA structures. Picking the wrong one can trigger excise taxes or knock employees out of marketplace subsidies, so the choice is not cosmetic.
Individual Coverage HRA
An ICHRA lets an employer of any size reimburse employees for individual health insurance premiums and other qualified medical expenses. There is no annual dollar cap. Every participating employee must maintain individual health insurance or Medicare coverage to receive reimbursements, and dropping that policy stops reimbursements immediately. An employer cannot offer an ICHRA and a traditional group health plan to the same class of employees.
Qualified Small Employer HRA
A QSEHRA is available only to employers with fewer than 50 full-time employees that do not offer any group health plan. For 2026, the maximum annual reimbursement is $6,450 for self-only coverage and $13,100 for family coverage. These caps are set by statute and adjusted for inflation each year.
Excepted Benefit HRA
An EBHRA supplements a traditional group health plan; the employer must offer group coverage, though employees are not required to enroll. For 2026, the employer can contribute up to $2,200 per year. An EBHRA cannot reimburse individual health insurance premiums. It covers out-of-pocket costs like copays, dental work, and vision care.
Integrated (Traditional) HRA
The original HRA model pairs with the employer’s group health plan. There is no federal cap on employer contributions, and the employee must be enrolled in the employer’s group plan to participate. These remain common among larger employers that maintain group coverage.
Which Employers Can Offer an HRA
Any employer can offer an ICHRA or an integrated HRA regardless of workforce size. The QSEHRA is the exception: it is reserved for employers with fewer than 50 full-time employees that do not offer a group health plan to any employee. When multiple businesses share common ownership, the 50-employee count aggregates across the entire controlled group, following the same rules used to determine applicable large employer status under the Affordable Care Act.
Certain owners cannot participate in their own company’s HRA. Partners in a partnership and shareholders who own more than two percent of an S-corporation are not treated as employees for purposes of the tax exclusion under Section 105(b), so any reimbursements paid to them would be taxable rather than tax-free. A greater-than-two-percent S-corporation shareholder-employee is also ineligible for a QSEHRA.
Minimum Class Size Rules for ICHRAs
When an employer offers a traditional group health plan to one class of employees and an ICHRA to a different class, federal rules impose minimum class sizes to keep employers from steering individuals into one arrangement or the other. The thresholds scale with employer size:
- Fewer than 100 employees: each ICHRA class must include at least 10 employees.
- 100 to 199 employees: each class must include at least 10 percent of the total workforce, rounded down.
- 200 or more employees: each class must include at least 20 employees.
These minimums do not apply when the employer offers only an ICHRA and no traditional group plan. The count is based on a reasonable estimate at the start of the plan year, not a rolling headcount.
Which Employees Are Eligible
Employers define who qualifies using legitimate employment categories: full-time versus part-time status, geographic location, salaried versus hourly classification, or similar distinctions. Whatever criteria the employer picks must be applied consistently. Federal nondiscrimination rules prohibit designing the plan to favor highly compensated employees or executives over rank-and-file staff. Violating those rules triggers an excise tax under Internal Revenue Code Section 4980D of $100 per day per affected individual, which reaches $36,500 per person per year.
Waiting periods for new hires are capped at 90 days before an eligible employee can enroll. For an ICHRA, the employee must be enrolled in a qualifying individual health insurance policy or Medicare Part A and B (or Part C) before any reimbursements can flow, and the employer will ask for proof of that coverage at enrollment and periodically during the plan year. If the employee cancels the individual policy mid-year, ICHRA access ends the same day.
Contribution Limits and Funding Rules
Every HRA is funded exclusively by the employer. Employees cannot contribute their own money, and using a salary reduction agreement to route employee wages into an HRA is prohibited. The employer sets the annual amount it will credit to each employee’s account, either as a lump sum at the start of the plan year or in monthly installments.
Different funding levels for different employee classes are allowed, such as higher amounts for full-time workers than for part-time staff, as long as the classes rest on legitimate business reasons and are applied uniformly within each class. For HRA types with statutory caps, the 2026 limits are:
- QSEHRA: $6,450 self-only, $13,100 family.
- Excepted Benefit HRA: $2,200.
- ICHRA and integrated HRA: no federal dollar limit.
What happens to unused funds at year-end depends on the plan’s design. Some employers allow balances to roll over; others use a use-it-or-lose-it approach. If an employee leaves the company, any remaining balance stays with the employer. HRA funds are not portable and do not follow the employee to a new job. This is an employer-owned benefit, not a personal savings account.
What the HRA Can Reimburse
Eligible expenses are defined by Internal Revenue Code Section 213(d), which covers amounts paid for the diagnosis, treatment, or prevention of disease, or for care affecting any structure or function of the body. IRS Publication 502 lists the specifics. Common eligible expenses include doctor visits, hospital stays, prescription drugs, dental treatments, and vision care. Over-the-counter medications and health products are reimbursable without a prescription.
Employers have discretion to narrow the list. Some plans cover only individual insurance premiums; others reimburse a broad range of out-of-pocket costs. The plan document controls. The plan cannot reimburse non-medical expenses, and health care sharing ministry payments do not qualify.
Substantiation
Every reimbursement request needs third-party documentation showing the expense was legitimate and medical in nature. An itemized receipt or an explanation of benefits from an insurer typically works. The documentation must show the date of service, a description of the care, and the amount the employee actually paid. Both the employee and the plan administrator need to retain these records, because the tax-free status of every reimbursement rides on them during an audit.
Tax Treatment
The tax advantage runs both ways. Employer contributions to the arrangement are not included in the employee’s gross income under Internal Revenue Code Section 106. When the employee receives a reimbursement for a qualified medical expense, that payment is also excluded from gross income under Section 105(b). The employer deducts its contributions as a business expense. Neither side pays payroll taxes on the amounts.
One exception applies to QSEHRA participants. If an employee lacks minimum essential coverage for a given month, any QSEHRA reimbursement received for expenses incurred that month becomes taxable income.
W-2 Reporting for QSEHRAs
Employers offering a QSEHRA must report the total permitted benefit on each eligible employee’s Form W-2 using Box 12, Code FF. The reported figure is the maximum the employee could have received for the year, not the amount actually reimbursed. That number matters at tax time because it directly reduces any Premium Tax Credit the employee claims.
Required Notices and Deadlines
Employers offering an ICHRA or QSEHRA must give a written notice to every eligible employee at least 90 days before the start of each plan year. For employees who become eligible mid-year, the notice must go out on or before their first day of eligibility.
A QSEHRA notice must include the maximum permitted benefit the employee can receive, a statement that the benefit may affect eligibility for the Premium Tax Credit on the marketplace, and a warning that reimbursements become taxable if the employee lacks minimum essential coverage. The penalty for failing to provide the notice is $50 per employee per incident, capped at $2,500 per calendar year.
An ICHRA notice must tell eligible employees about the arrangement and their right to opt out. Employees offered an ICHRA outside the marketplace’s annual open enrollment period (November 1 through January 15) qualify for a Special Enrollment Period to buy individual coverage. That window runs 60 days in either direction: employees who were offered an ICHRA in the past 60 days or expect an offer in the next 60 days can enroll on the marketplace.
HRAs and HSAs
A standard HRA that reimburses general medical expenses disqualifies an employee from contributing to a Health Savings Account. The IRS treats the HRA as “other coverage” that violates the high-deductible health plan requirement for HSA eligibility. Two structures preserve HSA eligibility:
- A limited-purpose HRA covers only dental and vision expenses, leaving all other medical costs to the HDHP.
- A post-deductible HRA does not reimburse any expenses until the employee has met the statutory minimum annual deductible for an HSA-qualified plan. For 2025, those minimums are $1,650 for self-only coverage and $3,300 for family coverage. Once the deductible is satisfied, the HRA begins paying, and the employee can contribute to an HSA during the period before the HRA kicks in.
Getting this wrong is expensive. If an employee contributes to an HSA while covered by an HRA that meets neither exception, those contributions become subject to a six-percent excess contribution penalty each year they remain in the account.
Effect on Marketplace Subsidies
HRA benefits change whether an employee can claim the Premium Tax Credit, and the interaction differs by HRA type.
An ICHRA offer is considered affordable if the employee’s share of the lowest-cost silver plan available in their area, after subtracting the employer’s monthly ICHRA contribution, does not exceed a set percentage of household income. For 2026, that threshold is 9.96 percent. If the ICHRA offer is affordable by this standard, the employee is ineligible for the Premium Tax Credit.
A QSEHRA does not automatically disqualify an employee from the Premium Tax Credit, but it reduces the credit dollar-for-dollar. The monthly permitted benefit amount, as reported on the W-2, is subtracted from the calculated PTC for each month the employee is eligible. The reduction is based on the permitted amount, not what the employee actually used.
COBRA, Portability, and ERISA
COBRA applies to HRAs maintained by employers with 20 or more employees. When an employee experiences a qualifying event like job loss, reduced hours, or divorce, the employer must offer the option to continue HRA coverage for 18 to 36 months, depending on the event. The departing employee pays the full cost plus a two-percent administrative fee. COBRA applies to integrated HRAs and, in most cases, to ICHRAs. Church plans may be exempt.
HRA funds are not portable regardless of COBRA. When employment ends and any COBRA period expires, any remaining balance stays with the employer. There is no mechanism to transfer HRA funds to a new employer’s plan or a personal account.
Most HRAs are subject to ERISA, which requires a written plan document, a designated plan administrator, and fiduciary management. Employers with 100 or more participants at the beginning of the plan year, or whose plan holds assets in a trust, must file Form 5500 annually with the Department of Labor. Smaller unfunded plans, where the employer pays claims from general assets rather than a trust, are generally exempt from Form 5500 filing. Church plans are often exempt from ERISA’s reporting and fiduciary requirements, and the Section 4980D excise tax includes a specific exception for church plans when failures are discovered during an IRS examination.