Who Determines the Eligibility and Contribution Limits of an HRA?

Your employer determines HRA eligibility and contribution limits, working inside boundaries the federal government sets. The IRS, the Department of Labor, and the Treasury jointly write the rules that cap certain HRA types and prohibit favoring higher-paid workers, but within those rules the employer picks the plan type, defines who qualifies, and chooses the dollar amount available to each participant.

The Employer Decides, Within Federal Guardrails

Three agencies share oversight of Health Reimbursement Arrangements. The legal foundation sits in two sections of the Internal Revenue Code. Section 105 governs when reimbursements from an employer health plan are excluded from an employee’s taxable income.¹ Section 106 makes employer contributions to health plans excludable from gross income, which is what keeps HRA funding tax-free.²

Federal rules do three things. They set annual dollar caps for some HRA types. They prohibit designs that discriminate in favor of highly compensated employees. And they define the categories employers can use when sorting workers into who is eligible and who is not.

Everything else is the employer’s call. Which type of HRA to offer. Which employees qualify. How much money each person gets. Whether unused funds roll over. What expenses count. Those choices get written into a formal plan document, and that document is the definitive source for your plan’s specific rules.

The HRA Type Sets the Contribution Ceiling

The employer’s first decision is which HRA type to offer, and that single choice locks in the regulatory framework, including whether there is a federal cap on contributions at all. Four types cover most plans. For 2026:

Qualified Small Employer HRA (QSEHRA): $6,450 for self-only coverage; $13,100 for family coverage. Available only to employers with fewer than 50 full-time employees that don’t offer a group health plan.³
Excepted Benefit HRA (EBHRA): $2,200. Offered alongside a traditional group health plan to cover expenses the group plan doesn’t, such as dental or vision.
Individual Coverage HRA (ICHRA): no federal maximum. Available to employers of any size. Employees must carry individual health insurance or Medicare to receive reimbursements.⁴
Integrated HRA: no federal maximum. Paired with the employer’s own group health plan; the employee must be enrolled in that group plan to use it.

For the uncapped types, the employer’s budget is the only real constraint. Some companies set ICHRA allowances at a few hundred dollars a month. Others offer enough to cover the full cost of a silver-tier marketplace plan. The decision usually reflects what the employer previously spent on group coverage, local insurance costs, and competitive pressure from other employers.

Where a cap does apply, exceeding it is costly. An employer that provides more than the QSEHRA or EBHRA maximum faces an excise tax under IRC Section 4980D of $100 per day for each affected employee.⁵ For a company with 30 eligible workers, even a brief overage discovered months later could produce a six-figure penalty.

How Employers Set Eligibility

For an ICHRA, federal regulations let the employer sort workers into “classes” and offer the benefit to some classes but not others. The permitted classes are:

Full-time versus part-time
Salaried versus hourly
Geographic location, by state or insurance rating area
Seasonal employees
Union-covered versus non-union
New hires versus longer-tenured employees, using a set hire-date cutoff

The employer locks in these class definitions before the plan year starts and cannot change them mid-year.⁶ Classifications must follow objective standards. An employer can exclude all part-time workers, but it cannot handpick individual employees.

QSEHRAs work differently. The arrangement must be offered on the same terms to every eligible employee. The employer can carve out workers with fewer than 90 days of service, employees under age 25, part-time and seasonal workers, and certain employees covered by a collective bargaining agreement. Beyond those exclusions, everyone gets the same deal.

One eligibility condition sits outside the employer’s control: to receive any ICHRA reimbursement, you must be enrolled in individual health insurance or Medicare. Drop the coverage and the reimbursements stop until you enroll again.⁴

Limits on What the Employer Can Do

Nondiscrimination rules stop employers from tilting HRAs toward executives. The specific test depends on the plan type.

Integrated HRAs

Integrated HRAs are subject to IRC Section 105(h), which bars self-insured health plans from favoring highly compensated employees in either eligibility or benefits.¹ If a plan fails the test, reimbursements received by the favored employees lose their tax-free status and get taxed as ordinary income. The plan doesn’t become invalid for everyone else. Rank-and-file employees keep their tax benefit while the executives who received the disproportionate benefit pay taxes on the excess.

ICHRAs

ICHRAs follow the framework built into the 2019 final rule rather than the 105(h) test. The employer must offer the same terms to every worker within a given class, but contribution amounts can vary between classes.⁶ So an employer could offer full-time employees $500 per month and part-time employees $200 per month, but it could not give one full-time employee more than another.

What Happens When Employers Get It Wrong

Compliance failures hit both sides. Reimbursements that should have been tax-free become taxable income to affected employees. The employer faces the Section 4980D excise tax of $100 per day per affected employee.⁵ The penalty compounds quickly. For a plan covering 50 people, a single month of noncompliance could generate $150,000 in excise taxes alone.

One narrower tax consequence applies directly to workers. If you participate in a QSEHRA and lack minimum essential health coverage for a given month, the reimbursements you receive for that month may become taxable.² This is one reason QSEHRA sponsors verify insurance enrollment.

Where Your Specific Rules Live

Every HRA must be established through a formal written plan document. ERISA requires employee benefit plans to be maintained in writing, and this document is the definitive source for your plan’s rules: which expenses qualify, how to submit claims, whether unused funds roll over, and what deadlines apply. If your HR department tells you something different from what the plan document says, the document controls.

You are also entitled to a Summary Plan Description, which translates the plan’s legal terms into language an average participant can understand. Federal law requires the SPD to include eligibility requirements, claims procedures, and the process for appealing a denied reimbursement.⁷ If you haven’t received one, request it from your plan administrator. It’s the fastest way to see exactly which class the employer placed you in, what the contribution amount is, and how the plan expects you to use it.

1
Office of the Law Revision Counsel. 26 USC 105 – Amounts Received Under Accident and Health Plans
2
Office of the Law Revision Counsel. 26 USC 106 – Contributions by Employer to Accident and Health Plans
3
Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues
4
Centers for Medicare & Medicaid Services. Individual Coverage Health Reimbursement Arrangements Policy and Application Overview
5
Office of the Law Revision Counsel. 26 U.S. Code 4980D – Failure to Meet Certain Group Health Plan Requirements
6
eCFR. 29 CFR 2590.702-2 – Special Rule Allowing Integration of Health Reimbursement Arrangements
7
Office of the Law Revision Counsel. 29 U.S. Code 1022 – Summary Plan Description