IRS Notice 2002-45 is the foundational IRS guidance defining a Health Reimbursement Arrangement and the conditions it must meet to deliver tax-free medical reimbursements. The notice sets three core requirements: the employer funds the account entirely, reimbursements go only to qualified medical expenses, and unused balances carry forward. Those rules still govern every HRA, but a compliant plan today also has to clear ACA integration, nondiscrimination, COBRA, HIPAA, ERISA, and annual filing hurdles the 2002 notice does not address.
The Three Core Requirements
Under the notice, an arrangement qualifies as an HRA only if it meets all three conditions.
The employer must fund it entirely. No salary reduction contributions, no employee contributions of any kind. If employee money flows in, the arrangement loses its HRA status and its tax-free treatment.1Internal Revenue Service. IRS Notice 2002-45 – Health Reimbursement Arrangements
Every reimbursement must be for a medical care expense that qualifies under Section 213(d) of the tax code, which covers doctor visits, prescriptions, certain medical equipment, and similar healthcare costs.2Office of the Law Revision Counsel. 26 USC 213 – Medical, Dental, Etc., Expenses Employers must verify each claim with receipts or third-party documentation before paying. Properly substantiated reimbursements are excluded from the employee’s gross income under Section 105(b).
The arrangement must set a maximum dollar amount for each coverage period and carry forward any unused portion to increase the maximum available in later periods.1Internal Revenue Service. IRS Notice 2002-45 – Health Reimbursement Arrangements
Who Can Be Covered
The notice confirms that eligible recipients include current employees, former employees, and retirees, along with the spouses and dependents of all three groups, including spouses and dependents of deceased employees.1Internal Revenue Service. IRS Notice 2002-45 – Health Reimbursement Arrangements An HRA can keep reimbursing former employees and retirees for Section 213(d) expenses after they leave, even if they do not elect COBRA. The retiree simply draws down whatever balance accumulated during active employment.
Carryover of Unused Amounts
The built-in carryover is what distinguishes HRAs from many other health accounts. Any unused portion of the maximum reimbursement amount at the end of a coverage period increases the maximum available in the next period.1Internal Revenue Service. IRS Notice 2002-45 – Health Reimbursement Arrangements Employers can cap the carryover or limit how long balances remain accessible, but the default structure allows indefinite accumulation.
Nondiscrimination Under Section 105(h)
Because an HRA is a self-insured medical reimbursement plan, Notice 2002-45 explicitly subjects it to the nondiscrimination rules of Section 105(h). If the plan discriminates, highly compensated individuals lose the tax exclusion on their reimbursements to the extent those amounts are excess reimbursements.1Internal Revenue Service. IRS Notice 2002-45 – Health Reimbursement Arrangements
The test has two prongs. Eligibility cannot favor highly compensated individuals, and the benefits provided cannot favor them either. Section 105(h)(5) defines a highly compensated individual as one of the five highest-paid officers, a shareholder owning more than 10% of the employer’s stock, or a person among the highest-paid 25% of all employees.3Office of the Law Revision Counsel. 26 USC 105 – Amounts Received Under Accident and Health Plans The notice specifically warns that increasing maximum reimbursement amounts in a way that favors highly compensated individuals can violate these rules.1Internal Revenue Service. IRS Notice 2002-45 – Health Reimbursement Arrangements
Ordering Rules When an HRA and FSA Overlap
When an employee has both an HRA and a Health FSA covering the same types of expenses, the HRA pays first by default. The employee cannot use the FSA until the HRA balance is exhausted for those expenses. An employer can reverse this ordering, but only if the HRA plan document explicitly states, before the FSA plan year begins, that the HRA will not reimburse expenses until the FSA amount is spent.1Internal Revenue Service. IRS Notice 2002-45 – Health Reimbursement Arrangements Regardless of order, the same expense can never be reimbursed by both accounts.
Why Notice 2002-45 Is Not Enough on Its Own
The notice was issued more than a decade before the ACA’s market reforms took effect, and those reforms changed how HRAs can be offered. In Notice 2013-54, the IRS clarified that a stand-alone HRA not integrated with a group health plan violates the ACA’s prohibition on annual dollar limits for essential health benefits. An employer cannot simply hand employees an HRA and tell them to buy their own individual market coverage under the general Notice 2002-45 framework, because the HRA itself is a group health plan subject to ACA rules, and it cannot be integrated with individual market policies for that purpose.4Internal Revenue Service. IRS Notice 2013-54 – Application of Market Reform and Other Provisions of the ACA to HRAs
The penalty is steep. Under Section 4980D, an employer that maintains a non-compliant group health plan owes an excise tax of $100 per day per affected individual, running from the date the violation begins until it is corrected.5Office of the Law Revision Counsel. 26 U.S. Code 4980D – Failure to Meet Certain Group Health Plan Requirements Employers who read Notice 2002-45 in isolation and set up what looks like a valid HRA often miss this.
HRA Structures That Comply Today
Individual Coverage HRA
Available since 2020, the ICHRA lets employers of any size fund an HRA that employees use alongside their own individual health insurance. There is no minimum or maximum on employer contributions.6HealthCare.gov. Individual Coverage Health Reimbursement Arrangements (HRAs) Employees must be enrolled in qualifying individual coverage, such as a Marketplace plan, a private individual policy, or Medicare Parts A and B or Part C, for every month they are covered by the HRA. Short-term plans and standalone dental do not count. An employer offering an ICHRA cannot also offer a traditional group health plan to the same class of employees. For ICHRAs, HRA amounts may vary within a class based on age and number of dependents, provided the maximum for the oldest participant does not exceed three times the amount for the youngest.7eCFR. 45 CFR 146.123 – Special Rule Allowing Integration of HRAs With Individual Health Insurance Coverage and Medicare
Qualified Small Employer HRA
The QSEHRA is available to businesses with fewer than 50 employees that do not offer a group health plan. It has annual caps: for 2025, $6,350 for self-only coverage and $12,800 for family coverage; for 2026, $6,450 and $13,100.8Internal Revenue Service. Revenue Procedure 2024-40 – Inflation Adjusted Items for 2025 It must be employer-funded and offered on the same terms to all eligible employees.9GovInfo. 26 USC 9831 – General Exceptions
Excepted Benefit HRA
An EBHRA can sit alongside a traditional group health plan. For plan years beginning in 2026, the maximum newly made available under an EBHRA is $2,200. It can reimburse premiums for limited benefit coverage like dental and vision, plus other Section 213(d) expenses, and it does not require enrollment in any particular type of coverage.
HSA Compatibility
A general-purpose HRA disqualifies an employee from contributing to a Health Savings Account. HSA eligibility requires coverage under a high deductible health plan and no other health plan covering benefits the HDHP covers. A standard HRA that reimburses broad medical expenses fails that test. The fix is a limited-purpose HRA restricted to dental and vision expenses, which Section 223(c)(1)(B) excludes from the disqualification analysis.10Office of the Law Revision Counsel. 26 USC 223 – Health Savings Accounts The restriction has to be written into the plan document from the start.
COBRA and HIPAA
An HRA is a group health plan, so employers with 20 or more employees must offer COBRA continuation coverage when a qualifying event occurs. Termination and a reduction in hours that causes loss of HRA coverage both trigger COBRA rights. For an ICHRA, however, an employee dropping their individual policy and becoming ineligible for the HRA as a result is not a COBRA qualifying event.11Centers for Medicare & Medicaid Services (CMS). Overview: New Health Reimbursement Arrangements (Part Two)
Employers who self-administer an HRA are covered entities under HIPAA. That triggers the full privacy and security framework: a designated security official, access controls for electronic protected health information, staff training, and written security policies retained for at least six years.12U.S. Department of Health & Human Services (HHS). Summary of the HIPAA Security Rule Using a third-party administrator shifts much of this burden, but the employer still needs a business associate agreement with the TPA.
Plan Documents and ERISA
A compliant HRA begins with a written plan document identifying the employer, eligibility rules, the maximum dollar amount per coverage period, and which expenses qualify. Structural choices such as FSA ordering, limited-purpose restrictions for HSA compatibility, and carryover caps are locked in here.
ERISA requires a Summary Plan Description written in language participants can understand.13eCFR. 29 CFR 2520.102-3 – Contents of Summary Plan Description Each participant must receive the SPD within 90 days after first becoming covered; for a newly established plan, the deadline is 120 days after the plan becomes subject to ERISA.14eCFR. 29 CFR 2520.104b-2 – Summary Plan Description The employer needs a record showing each participant received it. Formal adoption happens through a board resolution or an authorized officer’s signature.
Annual Filings and Fees
HRAs covering 100 or more participants at the start of the plan year must file Form 5500 with the Department of Labor. Smaller plans are generally exempt as long as the plan is unfunded or fully insured and is not subject to Form M-1 requirements.15U.S. Department of Labor. 2025 Instructions for Form 5500 Annual Return/Report of Employee Benefit Plan Employers who also maintain other welfare benefit plans should count participants across all plans to test the threshold.
Self-insured health plan sponsors, including HRA sponsors, owe an annual PCORI fee. For plan years ending after September 30, 2025, and before October 1, 2026, the fee is $3.84 per covered life.16Internal Revenue Service. Patient-Centered Outcomes Research Trust Fund Fee: Questions and Answers It is reported and paid on IRS Form 720 by July 31 of the year following the end of the plan year. The dollar amount is small, but the IRS tracks whether the form was filed.