What Is an HRA: How It Works, Types, and Reimbursement

A Health Reimbursement Arrangement, or HRA, is an employer-funded account that pays you back tax-free for qualifying medical expenses. Only your employer contributes; you never put in your own money. Under federal tax law, the reimbursements are excluded from your gross income, so you keep the full dollar value with no income or payroll tax taken out.¹ The specific rules of your HRA, including what it covers and whether you need other insurance to use it, depend on which of four types your employer has set up.

How the Account Actually Works

An HRA is not a bank account with cash sitting in your name. It is a “notional” balance, essentially a ledger entry your employer keeps that shows how much reimbursement you have available. Money only leaves the employer when you submit a qualifying expense. To count as an HRA under IRS rules, the arrangement has to be paid for solely by the employer (not through salary reduction or a cafeteria plan), reimburse medical care expenses as defined by federal tax law, and let any unused balance carry forward to increase future reimbursements.¹

Your employer owns the funds throughout. Carryover is baked into the IRS definition, but many employers cap how much can roll over or set a ceiling on the total balance. The tax exclusion comes from Internal Revenue Code Sections 105 and 106, which means neither you nor your employer owe income or payroll tax on these payments.²

The Four Types of HRA

HRAs are not one product. Four distinct types exist, and they differ on who qualifies, what gets reimbursed, and whether you need other coverage to participate. The type your employer picks shapes your contribution limits, your eligibility for marketplace subsidies, and what you can spend the money on.

Individual Coverage HRA (ICHRA)

An ICHRA lets an employer of any size reimburse workers for individual health insurance premiums and other qualified medical expenses without offering a traditional group health plan. To use it, you must carry your own individual health insurance. That can be a marketplace plan, a plan bought directly from an insurer, or Medicare (Parts A and B together, or Part C).³

Employers can set different amounts for different employee classes based on job-related criteria such as full-time versus part-time, salaried versus hourly, work location, and collective bargaining status. Within each class, the amount can also vary by age (up to a 3:1 ratio) and by number of dependents.³ There is no federal cap on how much an employer can contribute to an ICHRA.

Qualified Small Employer HRA (QSEHRA)

The QSEHRA is built for small businesses with fewer than 50 full-time employees that do not offer a group health plan. Unlike the ICHRA, it has annual contribution limits set by the IRS and adjusted each year. For 2026, the maximum is $6,450 for self-only coverage and $13,100 for family coverage.⁴

Employers must offer a QSEHRA on the same terms to all full-time employees, though the reimbursement amount can vary by age and by whether the employee has family coverage.⁵ You need some form of minimum essential coverage to receive tax-free reimbursements; without it, the payments become taxable income.

Group Coverage HRA (Integrated HRA)

A Group Coverage HRA, sometimes called an Integrated HRA, works alongside an employer’s existing group health insurance. Only employees enrolled in the company plan can participate. Employers commonly pair this type with a high-deductible plan, so workers can use HRA funds to cover the gap before insurance kicks in.

Excepted Benefit HRA

An Excepted Benefit HRA is a smaller, supplemental arrangement for expenses that fall outside the primary group health plan, such as vision, dental, copays, and coinsurance. The employer must offer a traditional group plan alongside it, but you do not have to be enrolled in that group plan to use the HRA.⁶ For 2026, the maximum amount an employer can newly make available is $2,200.⁷ Excepted Benefit HRA funds cannot reimburse individual health insurance premiums or group plan premiums, other than COBRA continuation coverage.

What You Can Spend HRA Funds On

Eligible expenses are defined by Internal Revenue Code Section 213(d), which covers amounts paid for diagnosing, treating, or preventing disease, along with costs that affect any structure or function of the body. That takes in doctor visits, hospital stays, prescription drugs, lab work, mental health treatment, and transportation essential to getting medical care.⁸ Since the CARES Act took effect in 2020, over-the-counter medications and menstrual care products also qualify without a prescription.⁹

The law draws firm lines. Cosmetic procedures do not qualify unless the surgery corrects a deformity from a congenital condition, an accident, or a disfiguring disease.⁸ General wellness items like gym memberships and supplements taken for overall health are also off-limits.

Employers can narrow the list further. Even though federal law allows dental and vision as qualified expenses, a specific HRA plan might exclude those categories, often because the employer already provides separate dental and vision coverage. The plan document spells out what your particular arrangement will and will not reimburse, so read it before assuming an expense qualifies.

Who Can and Cannot Participate

Employers can exclude some groups from HRA eligibility: employees with fewer than three years of service, those under age 25, part-time and seasonal workers, employees covered by a collective bargaining agreement, and nonresident aliens with no U.S.-source income. Self-insured plans like HRAs also have to satisfy nondiscrimination requirements under IRC Section 105(h), meaning the plan cannot favor highly compensated individuals in either eligibility or benefits.¹⁰

If a plan fails that test, the consequences fall on the highly compensated employees, not the rank-and-file workers. Their reimbursements, or a portion of them, lose the tax exclusion and become taxable income. Everyone else keeps the tax-free benefit.¹⁰

Some people are barred outright. Self-employed individuals, partners in a partnership, and shareholders who own more than 2 percent of an S-corporation are treated as employers rather than employees under the tax code, so they cannot receive tax-free HRA reimbursements.¹¹ Funds flowing to you in one of those categories would be taxable.

How an HRA Affects Marketplace Subsidies

If your employer offers an ICHRA, that offer can disqualify you from the premium tax credit for marketplace coverage. The only way to keep the subsidy is if the ICHRA is deemed “unaffordable” and you opt out of receiving any reimbursements.¹² For plan years beginning in 2026, the affordability threshold is 9.96 percent of household income. If the lowest-cost silver plan available to you, minus the ICHRA amount your employer offers, costs more than 9.96 percent of your household income, the ICHRA is unaffordable and you can decline it and claim the credit.¹³

QSEHRAs work differently. If your QSEHRA benefit is affordable, you generally cannot use the premium tax credit at all. If it is unaffordable, you can enroll in marketplace coverage and claim the credit, but you must reduce your monthly credit by the amount of your monthly QSEHRA benefit. The QSEHRA dollars offset the subsidy dollar for dollar, even if you never use the full QSEHRA amount.⁵ People get tripped up here at tax time: failing to account for the QSEHRA offset can mean repaying excess credits when you file.

Getting Reimbursed

Getting money out of an HRA requires substantiation, meaning proof that a qualifying medical expense actually occurred. Every claim, including debit card transactions, must be verified.¹ You typically need an itemized receipt or an Explanation of Benefits from your insurer showing who received the service, the date, a description of the care, and the amount you owe. A credit card statement showing a lump sum paid to a medical office is not enough; the IRS wants line-item detail.

The usual workflow: you pay for the service, then submit documentation to your employer’s third-party administrator. The administrator confirms the expense qualifies and that you have enough balance, then sends reimbursement by check or direct deposit, tax-free. Some employers issue a debit card that auto-verifies at the point of sale for certain merchants, but those transactions can still be flagged for follow-up documentation. If you cannot substantiate a debit card charge, the amount may be suspended from your balance until you repay it or provide receipts.

What Happens When You Leave the Job

Because your employer owns the funds, the plan document controls what happens to any leftover balance. Most plans give you a short window, often 30 to 90 days, to submit claims for expenses you incurred while still employed. After that window closes, the balance reverts to the employer. Some plans allow departing employees to “spend down” the balance on eligible expenses incurred after termination until it hits zero. What the plan cannot do is cash you out; handing you the leftover as a lump sum would convert every past reimbursement into taxable income.

For employers with 20 or more employees, federal COBRA rules apply to HRAs the same way they apply to other group health plans. If you lose coverage because of termination (other than for gross misconduct) or a reduction in hours, you can elect COBRA continuation of your HRA benefits.¹⁴ Under COBRA you gain access to the balance regardless of any forfeiture provision, plus any credits a similarly situated active employee would receive during the continuation period. COBRA coverage for an HRA typically lasts up to 18 months, and you pay for it, usually the full cost of coverage plus a 2 percent administrative fee.

HRA vs. HSA vs. FSA

These three acronyms get confused constantly, and the differences matter. Choosing the wrong account, or misunderstanding one your employer offers, can cost real money.

A Health Savings Account (HSA) belongs to you, not your employer. You, your employer, or both can contribute, and the money stays yours if you change jobs. The trade-off is that you have to be enrolled in a qualifying high-deductible health plan. For 2026, the IRS caps annual contributions at $4,400 for self-only coverage and $8,750 for family coverage.¹⁵ HSA funds roll over indefinitely and can be invested for long-term growth.

A Flexible Spending Account (FSA) is funded through your own pre-tax salary deductions, sometimes with an employer match. For 2026, the contribution limit is $3,400. Unlike an HRA, you can use the full annual election amount from day one of the plan year, before you have contributed that much. The downside is the “use it or lose it” rule: most unspent FSA funds expire at year-end, though employers may offer either a $660 carryover or a 2.5-month grace period, not both.

An HRA stands apart because only the employer funds it, you never own the balance, and there is no requirement to be enrolled in a high-deductible plan (except for Integrated HRAs paired with group coverage). HRAs also have no universal contribution cap; aside from the QSEHRA and Excepted Benefit HRA, the employer decides the amount. The flip side is that you lose access when you leave, unless the plan or COBRA provides otherwise.¹

One interaction worth flagging: you generally cannot contribute to an HSA while participating in an HRA that covers the same expenses. An HRA structured as a “limited-purpose” arrangement covering only dental, vision, or post-deductible costs can coexist with an HSA. If your employer offers both, check the plan documents to confirm they are designed to work together.

1
Internal Revenue Service. Health Reimbursement Arrangements Notice 2002-45
2
Internal Revenue Service. Health Reimbursement Arrangements (HRAs)
3
HealthCare.gov. Individual Coverage Health Reimbursement Arrangements
4
Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3
5
HealthCare.gov. Health Reimbursement Arrangements (HRAs) for Small Employers
6
Centers for Medicare and Medicaid Services. What Is an Excepted Benefit Health Reimbursement Arrangement
7
Internal Revenue Service. Revenue Procedure 2025-19
8
Office of the Law Revision Counsel. 26 USC 213 – Medical, Dental, Etc., Expenses
9
Internal Revenue Service. IRS Outlines Changes to Health Care Spending Available Under CARES Act
10
Office of the Law Revision Counsel. 26 USC 105 – Amounts Received Under Accident and Health Plans
11
Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues
12
HealthCare.gov. Individual Coverage HRAs
13
Internal Revenue Service. Updates to Questions and Answers About the Premium Tax Credit
14
U.S. Department of Labor. FAQs on COBRA Continuation Health Coverage for Employers and Advisers
15
Internal Revenue Service. IRS Notice 2026-05