How Does an HRA Work?

HRAs can cover insurance premiums, deductibles, and more

Health reimbursement arrangements (HRAs) are benefits that some employers offer their employees to help with healthcare expenses. They’re a way for companies to reimburse workers for these costs, and reimbursements are generally tax-free when used for qualified medical expenses.

Since January 2020, the government has allowed employers to offer their employees two types of HRAs. The first is called an individual coverage HRA, and companies can only offer it if they don't offer group health insurance.

Employees can use these HRAs to buy their own comprehensive health insurance with pretax dollars either on or off the Health Insurance Marketplace. Individual coverage HRAs can also reimburse employees for qualified health expenses such as copayments and deductibles.

How much employers contribute to employees’ individual coverage HRAs is up to the employers, except that all workers in the same class of employees must receive the same contribution. Workers who are older or who have dependents may receive more.

Under the new rules, employers that continue to offer traditional group health insurance can also offer the second, new type: excepted benefit HRAs. These plans reimburse employees for up to $1,800 a year 2022 and $1,950 for 2023 in qualified medical expenses.

Employees can enroll in an excepted benefit HRA even if they decline group health insurance coverage, but they cannot use the funds to buy comprehensive health insurance. They can, however, use the funds to pay for short-term health insurance, dental and vision premiums, and qualified medical expenses.

Key Takeaways

  • Since January 2020, employers of all sizes have been able to reimburse their employees for some of the cost of buying individual health insurance plans instead of offering group health insurance.
  • These reimbursement arrangements, called individual coverage HRAs, can also pay employees back for qualified medical expenses such as coinsurance and deductibles.
  • Employers who continue to offer group coverage may also offer their employees excepted benefit HRAs to reimburse employees for qualified medical expenses but not for comprehensive health insurance premiums.
  • The HRA limit in 2022 is $1,800; in 2023 it increases to $1,950.

Who Funds an HRA?

HRAs are funded entirely by employer money. An HRA is not an account (though you may see it mistakenly referred to that way). It’s a reimbursement arrangement between employee and employer. Employees can’t invest the balance, and it doesn’t earn interest. If you participate in an HRA, you won’t see any deductions from your paycheck.

Instead, your employer decides how much it is willing to reimburse you for healthcare costs on a monthly or annual basis. If you still have a balance at the end of the year, it may roll over to the next year as long as your employer continues to offer the HRA and you continue to participate, but it also may not: that decision is up to your employer, too.

How to Participate

To participate in an HRA, you must opt in during your employer’s open enrollment period. If you have a qualifying life event, you can sign up outside of open enrollment. Spouses and children who participate in your employer’s health insurance plan can also be reimbursed through an HRA. Unfortunately, if you’re self-employed, you can’t use an HRA.

The IRS allowed employers more flexibility with their benefit plans during the COVID-19 crisis. An employee can make a new election if they initially declined to elect employer-sponsored health coverage; revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer; and revoke an existing election, provided that the employee attests in writing that they are enrolled, or will immediately enroll, in other health coverage not sponsored by the employer. All these provisions are entirely at the discretion of the employer.

Reimbursable Expenses

It’s up to your employer to decide which of your expenses to reimburse. The expense must be a qualified medical expense listed in IRS Publication 502, but your employer can use a narrower list. In general, employees can use an HRA to be reimbursed for qualified medical expenses their health insurance doesn’t pay for, such as medical and pharmacy expenses they must pay out of pocket before meeting a deductible, as well as a coinsurance that applies after meeting a deductible. 

Qualified medical expenses include costs such as doctor's office visits, X-rays, or surgery. Dental and vision expenses usually qualify, too, as do a few over-the-counter items, such as diabetes-testing aids, blood-pressure monitors, and contact-lens solutions.

Employers can’t let you use HRA funds for things the IRS doesn’t allow, though. You can’t use an HRA for over-the-counter medicines unless your doctor has prescribed them. You also can’t use an HRA to be reimbursed for costs you incurred before your HRA participation became effective or for costs from a different year.


The average annual premium for a high-deductible health plan (HDHP)/HRA for a family in 2021 was $21,662; the average for a single person was $7,441.

Reimbursement Logistics

Your HRA administrator will often be able to verify your claim automatically, but sometimes you’ll need to submit an itemized bill from your healthcare provider to substantiate your claim. By law, no expense is too small to be reimbursed, but your employer might require you to accumulate a minimum amount of reimbursable expenses before it will issue a check. 

Your employer chooses how it will reimburse you for qualified medical expenses. You may receive a debit card so you can pay for your expenses as needed, or you may have to pay up front, then request reimbursement. Some plans will reimburse your doctor directly, so you don’t need to use a debit card or wait to get your money back. 

The maximum you can be reimbursed per year is whatever your employer decides. If your employer allows it, you may be able to spend the amount remaining in your HRA within a limited period if you are terminated.

Tax Benefits

You don’t have to report your participation in an HRA on your tax return. The amount your employer is willing to reimburse you for medical expenses through an HRA is not considered taxable income, nor are the actual amounts reimbursed, as long as you put the money toward qualified medical expenses as defined by the IRS and your employer. 

Exceptions to tax-free distributions apply in a few situations: If your employer pays out your unused reimbursements at the end of the year or when you leave your job, the money will be considered taxable income. Because it’s not being used to reimburse you for qualified medical expenses, it’s treated as ordinary income.

Using an HRA With an HSA or FSA

Can you combine an HRA with a Health Savings Account (HSA) or flexible spending account (FSA)? Before answering that question, it's important to clarify the meaning of these two types of accounts. Health insurance terms can get confusing, so here's a quick reminder:

  1. HSAs must be used with a high-deductible health plan (HDHP). Contributions can come from both employers and employees, the balance can be invested and rolled over from year to year, and the account goes with you when you change jobs. These accounts can also be useful as retirement savings vehicles.
  2. FSAs don’t have to be used with an HDHP. Contributions come only from employee payroll deductions, and the balance can’t be invested and doesn’t earn interest. FSA funds must be spent in the current plan year, though some employers allow small amounts to roll over or give employees a grace period at the beginning of the following year to use up the balance. Also, FSAs don’t go with you when you change jobs.

The question is if you have both an HRA and an FSA, which account should you use to pay for a given medical expense? If an expense is only covered by one account or the other, you have your answer. If it’s eligible to be paid from either account, you’ll need to know your employer’s rules about which account pays first. It probably goes without saying, but you can’t double-dip and be reimbursed for the same expense from both accounts.

What Are the Drawbacks of an HRA?

The employer who establishes the HRA has most of the control over it. They dictate how much money goes into the plan, whether it can roll over from one year to the next, and what uses of the funds are allowed. Usually, costs that aren't deemed necessary or non-prescribed treatments or drugs aren't eligible. Also, as the name health reimbursement arrangement suggests, you can't withdraw money to pay for charges. You're only paid back for expenses after you incur them.

What Are the Differences Between HSAs, HRAs, and FSAs?

All three offer tax benefits related to paying health and medical costs. But an HSA is funded entirely by the individual, while an HRA is funded by the employer. An FSA can be funded by either or both (though it's usually just the employee who does). HRA funds can cover insurance premiums; the other two can't. You can keep an HSA even if you leave your job; generally, the other two stay with your employer (though they may let you spend any remaining HRA funds through the end of the year).

Can I Use an HRA and an FSA?

Yes, it is possible to have both an HRA and an FSA. If you do, great—that’s even more untaxed income you can use for medical expenses. You can contribute up to $2,850 to an FSA in 2022 (rising to $3,050 in 2023), and your employer will take that money out of your paycheck. However, do note that in most cases, you cannot use an HRA along with an HSA.

The Bottom Line

If your employer offers you a new type of HRA called an individual coverage HRA instead of group health insurance, you'll receive tax-free reimbursement for the premiums you pay for the comprehensive health insurance you purchase on or off the exchange. You can also get reimbursed for qualified medical expenses such as coinsurance and the bills you pay before you meet your deductible.

HRAs can vary significantly from one employer to the next in terms of how much coverage they offer and which expenses will be reimbursed. So although this article has provided a broad overview of what to expect, you’ll want to read your employer's summary plan description of its HRA, if it offers one, to get the details.

Article Sources
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