HRA Requirements: QSEHRA, ICHRA, and EBHRA Rules

Health Reimbursement Arrangement requirements come down to a handful of federal rules that the employer has to follow from the day the plan is written: only the employer funds the account, the plan lives on paper before it lives in practice, reimbursements go out only for documented medical expenses under Internal Revenue Code Section 213(d), and the design has to match one of the recognized HRA models — QSEHRA, ICHRA, or Excepted Benefit HRA — each with its own eligibility thresholds, contribution caps, and notice obligations.¹ Getting any of those elements wrong forfeits the tax treatment that makes the plan worth offering in the first place.

Employer-Only Funding

The rule that defines every HRA is that the employer funds it entirely. Employees cannot contribute through salary reductions or payroll deductions. An arrangement that accepts employee salary-reduction contributions is not an HRA and does not receive HRA tax treatment.² The employer sets the annual contribution amount within the caps that apply to its chosen HRA model, and money leaves the account only after an employee submits proof of a qualifying medical expense. Properly handled reimbursements are excluded from the employee’s gross income under IRC Section 105(b) and are not subject to payroll taxes.³

Written Plan Documents and HIPAA

An HRA has to exist on paper before anyone can use it. ERISA applies to most HRAs, and it requires a formal plan document identifying the administrator, the claims procedures, the eligibility criteria, and the benefits offered. The employer also has to give each participant a Summary Plan Description that walks through how the plan works, what expenses are covered, and how to file a claim.

The paperwork obligation carries teeth. Under ERISA Section 502(c)(1), a court can impose penalties of up to $110 per day against a plan administrator who fails to produce required documents within 30 days of a participant’s written request. Because HRA claim processing involves protected health information, the HIPAA Security Rule also applies, requiring administrative, physical, and technical safeguards for that data. Those safeguards travel with the plan to any third-party administrator the employer engages.⁴

Qualified Small Employer HRA (QSEHRA)

The QSEHRA is designed for small businesses. To offer one, an employer must have fewer than 50 full-time equivalent employees and cannot offer any group health plan. That prohibition sweeps in traditional HRAs, FSAs, and even excepted-benefit coverage like standalone dental.⁵

2026 Contribution Caps

The IRS adjusts QSEHRA limits annually. For 2026, the maximum permitted benefit is $6,450 for self-only coverage and $13,100 for family coverage.⁶ When an employee becomes eligible partway through the year, the benefit is prorated by the number of eligible months.

Same-Terms Requirement

A QSEHRA has to be offered on the same terms to every eligible employee. The reimbursement amount can vary by the employee’s age and the number of family members covered, and by nothing else. Larger benefits for managers or long-tenured staff are not permitted.² The plan may exclude specific categories of workers: employees with fewer than 90 days of service, those under age 25, part-time and seasonal employees, workers covered by a collective bargaining agreement, and nonresident aliens with no U.S.-source income.⁷

90-Day Written Notice

Before each plan year begins, the employer must give eligible employees a written notice at least 90 days in advance. Employees who become eligible mid-year must receive the notice on their eligibility date. The notice has to state the employee’s permitted benefit amount for the year, instruct the employee to share that amount with the Health Insurance Marketplace when applying for premium tax credits, and warn that reimbursements become taxable income if the employee does not maintain Minimum Essential Coverage.⁸ Missing the notice triggers a penalty of $50 per employee, up to $2,500 per year.⁷

Individual Coverage HRA (ICHRA)

An ICHRA works for an employer of any size, including one large enough to fall under the ACA’s employer mandate. There is no federal cap on contributions. The compliance framework is heavier in exchange.

Individual Coverage Integration

Every ICHRA participant, along with any covered dependents, must be enrolled in individual health insurance coverage that complies with ACA market rules, or in Medicare Part A and B (or Part C), for each month reimbursements are received.⁹ An employee who drops individual coverage mid-year loses ICHRA access for any month without that coverage.

Class Rules and No Choice Against a Group Plan

An employer offering an ICHRA cannot also offer a traditional group health plan to the same class of employees. The regulations do not permit workers to choose between the two.⁹ What the employer can do is split the workforce into recognized classes and offer different structures to each. The permitted classes are:

Full-time employees
Part-time employees
Seasonal employees
Salaried and non-salaried (hourly) employees
Employees in the same geographic rating area
Employees covered by a collective bargaining agreement
Employees within a waiting period
Non-resident aliens with no U.S.-source income
Temporary staffing agency employees

Classes can be combined into subclasses, such as full-time salaried employees in a particular region.¹⁰

ACA Affordability for Large Employers

Applicable Large Employers (50 or more full-time equivalents) using an ICHRA to satisfy the ACA employer mandate must ensure the arrangement is affordable. The affordability test subtracts the monthly ICHRA allowance from the premium for the lowest-cost self-only silver plan available on the employee’s local marketplace; the employee’s remaining cost cannot exceed 9.96% of household income for 2026. An ICHRA that fails the test exposes the employer to shared responsibility penalties, and affected employees can opt out and claim premium tax credits on the marketplace instead.¹¹

Excepted Benefit HRA (EBHRA)

An EBHRA layers a modest annual benefit on top of a traditional group health plan. The employer has to offer that group plan to the same employees, and the EBHRA cannot reimburse individual health insurance premiums. For 2026, the maximum amount an employer can newly make available under an EBHRA is $2,200 per year.¹² Employees typically use EBHRA funds for dental, vision, and short-term medical costs not covered by the group plan.

Employee Coverage Requirements

Across HRA types, the link between health coverage and tax-free reimbursements is the single most important rule for employees to understand. QSEHRA participants must maintain Minimum Essential Coverage; any reimbursement received in a month without MEC becomes taxable income.⁵ The ICHRA rule is stricter: an employee cannot receive any reimbursement without active enrollment in qualifying individual health insurance or Medicare.⁹

Nondiscrimination Testing

Self-insured medical reimbursement plans, which include most HRAs, must satisfy the nondiscrimination requirements of IRC Section 105(h). The rules bar a design that disproportionately benefits highly compensated individuals, defined as the five highest-paid officers, shareholders owning more than 10% of the company, and employees in the top 25% of compensation.¹

Two tests apply. The eligibility test looks at who is allowed to participate. The benefits test looks at whether the coverage and reimbursements available to highly compensated individuals are also available on the same terms to other employees. If either test fails, highly compensated individuals lose their income tax exclusion on some or all of their HRA reimbursements while other employees keep theirs. The QSEHRA sidesteps these tests because its same-terms requirement builds nondiscrimination into the design, and the ICHRA relies on its class-based framework as an anti-abuse mechanism.

Substantiating Claims and Eligible Expenses

HRA reimbursements are tax-free only for expenses that qualify as “medical care” under IRC Section 213(d), meaning amounts paid for the diagnosis, treatment, or prevention of disease and for treatments affecting any structure or function of the body.¹³ The plan document can narrow that universe. Many employers limit reimbursements to insurance premiums and copays rather than every expense the IRS would allow.

Before any reimbursement goes out, the plan administrator must verify that the expense qualifies. That means collecting documentation such as an Explanation of Benefits or an itemized provider receipt showing the date of service, the provider’s name, and the amount paid. The plan must also prevent double-dipping — a claim for an expense already covered by insurance or reimbursed through another account.³ Sloppy substantiation is where most HRA compliance failures happen, and it turns tax-free reimbursements into taxable income if the IRS audits the plan.

Unused Funds, Rollovers, and Separation

HRA money belongs to the employer, not the employee. It cannot be cashed out and does not travel with an employee who leaves. What happens to unused balances depends on the plan document.

Common rollover designs include:

Full rollover, where all unused funds carry forward to the next plan year, subject to any IRS or plan-imposed caps.
Partial rollover, where a fixed dollar amount or percentage carries forward and the rest reverts to the employer.
No rollover, where unused balances are forfeited at year-end.

For the QSEHRA specifically, rollovers are permitted but the total balance including any carryover cannot exceed the annual federal maximum. Most plans include a run-out window, commonly 90 days after the plan year ends, during which employees can submit claims for expenses incurred during the coverage period.

When an employee leaves, the plan can either forfeit unused balances after a short post-termination claims window or allow the former employee to spend remaining funds on eligible expenses incurred after separation. The employer cannot cut a departing employee a check for the balance. A cash-out would make all HRA distributions taxable, including past reimbursements previously excluded from income.

Coordinating With a Health Savings Account

An employee who wants to contribute to an HSA runs into a conflict with most HRAs. HSA eligibility requires enrollment in a High Deductible Health Plan and no other coverage that pays expenses before the HDHP deductible is met. For 2026, the minimum HDHP deductible is $1,700 for self-only coverage and $3,400 for family coverage.¹² A standard HRA that reimburses medical expenses from the first dollar counts as disqualifying “other coverage.”

Two designs preserve HSA eligibility:

A limited-purpose HRA that reimburses only dental and vision expenses, which the IRS treats as permitted insurance.
A post-deductible HRA that reimburses no medical expenses until the employee has met the HDHP’s minimum annual deductible.

The two designs can also be combined: limited-purpose reimbursements from day one, then full reimbursements after the deductible is met. Getting this wrong is costly. If the HRA is structured incorrectly, every employee who contributed to an HSA while covered by that HRA faces excess contribution penalties.

Reporting Obligations

W-2 Reporting for QSEHRAs

An employer offering a QSEHRA reports each employee’s permitted benefit amount on Form W-2 in Box 12 using Code FF. The reported figure is the maximum the employee could have received during the year, not the amount actually reimbursed. Amounts for mid-year eligibility are prorated, and prior-year carryovers are not included.

PCORI Fees

HRAs are treated as self-funded health plans for the Patient-Centered Outcomes Research Institute fee. For plan years ending between October 1, 2025, and September 30, 2026, the fee is $3.84 per covered life. Employers report and pay it annually on the second quarter Form 720, due by July 31. Some HRAs qualify for an exception under the single-plan rule when paired with a group health plan that already accounts for the covered lives.

Form 5500

HRAs subject to ERISA generally require an annual Form 5500 filing with the Department of Labor. Plans with fewer than 100 participants at the start of the plan year can typically use the shorter Form 5500-SF. Crossing the large-plan threshold adds requirements, including an independent audit.

COBRA Coverage

Employers with 20 or more employees on at least half of their typical business days in the preceding calendar year must offer COBRA continuation coverage for their HRA. The employee count includes both full-time and part-time common law employees. Employers below that threshold are exempt from federal COBRA, though some states have mini-COBRA laws that may apply.

Where COBRA applies, a qualifying event such as termination or reduction in hours triggers the employer’s obligation to offer continued HRA access. The COBRA beneficiary keeps the balance that existed at the qualifying event, plus any credits a similarly situated active employee would receive during the COBRA coverage period, even if the plan’s normal terms would otherwise forfeit the balance at separation.

Penalties for Non-Compliance

The largest exposure comes from IRC Section 4980D, which imposes an excise tax of $100 per day for each individual affected by a failure to meet group health plan requirements.¹⁴ Even for a small workforce, the amount compounds into six figures within weeks. Common triggers include offering an HRA that violates ACA market reform rules and failing to properly integrate an ICHRA with individual coverage.

Other penalties layer on top:

QSEHRA notice failure: $50 per employee who does not receive the required 90-day written notice, capped at $2,500 per year.⁷
ERISA disclosure failure: up to $110 per day for each participant request the administrator does not answer with required plan documents within 30 days.
Nondiscrimination failure: highly compensated individuals lose the income tax exclusion on their HRA reimbursements, so those amounts become taxable wages subject to income and payroll taxes.¹

The Section 4980D penalty has limited exceptions. No tax applies if the employer can demonstrate reasonable cause and corrects the failure within 30 days of when it knew or should have known about it. Small employers that did not know of the violation despite reasonable diligence face a lower annual cap.

1
Office of the Law Revision Counsel. 26 U.S. Code 105 – Amounts Received Under Accident and Health Plans
2
Office of the Law Revision Counsel. 26 U.S. Code 9831 – General Exceptions
3
Internal Revenue Service. Rev. Rul. 2005-24 – Amounts Received Under Accident and Health Plans
4
U.S. Department of Health and Human Services. Summary of the HIPAA Security Rule
5
HealthCare.gov. Health Reimbursement Arrangements (HRAs) for Small Employers
6
Internal Revenue Service. Rev. Proc. 2025-32
7
Internal Revenue Service. IRS Notice 2017-67 – QSEHRA Guidance
8
Internal Revenue Service. Extension of Period for Furnishing Written QSEHRA Notice
9
eCFR. 26 CFR 54.9802-4 – Special Rule Allowing Integration of Health Reimbursement Arrangements
10
Federal Register. Health Reimbursement Arrangements and Other Account-Based Group Health Plans
11
HealthCare.gov. Individual Coverage HRAs
12
Internal Revenue Service. Rev. Proc. 2025-19
13
Office of the Law Revision Counsel. 26 U.S. Code 213 – Medical, Dental, Etc., Expenses
14
Office of the Law Revision Counsel. 26 U.S. Code 4980D – Failure to Meet Certain Group Health Plan Requirements