Compliance Corner: A Primer on Health Reimbursement Arrangements


During a time when recruiting and retaining qualified employees is becoming more and more difficult, it is crucial for employers to consider (or even reconsider) their benefits offerings and determine if there are any alternative or more affordable options to provide employees with health benefits. Health reimbursement arrangements (“HRAs”), which can be offered in lieu of, or in combination with, an employer-sponsored medical plan, may be an attractive benefit depending on an employer’s situations, including size and budget. More specifically, HRAs provide a way for employers to reimburse their employees for qualified medical expenses, including insurance premiums in some cases, on a tax-favored basis.

Basic Rules & Legal Background

HRAs are funded by employer contributions, which are used to reimburse or pay for qualified medical care expenses (as defined under Internal Revenue Code (“IRC”) Section 213(d)) incurred by employees (and/or their spouse and dependents (as defined under IRC Section 152), including expenses not otherwise reimbursed by health coverage, and in some cases, premiums for health coverage. Such reimbursements are limited to a maximum dollar amount per year, and employers may allow unused HRA funds to be carried over from one year to the next (as opposed to only month-to-month), as detailed further below. Like other self-insured health plans, a HRA must satisfy the nondiscrimination requirements under IRC Section 105(h), as applicable.

Originally, under initial guidance from the Internal Revenue Service (“IRS”), HRAs could be offered either in combination with an employer’s group health plan or as a stand-alone HRA. An employer would generally offer a stand-alone HRA if it did not also offer a group health plan, and it would use the HRA to reimburse employee for their independent purchase of insurance (including individual market coverage). The ability to maintain a true stand-alone HRA has been limited through legislation (as discussed below); however, more recent regulation and IRS guidance have since established a few ways that employers can offer HRAs separate and apart from a group health plan.

HRAs are “group health plans” under the IRC, the Employee Retirement Income Security Act of 1974 (“ERISA”), and the Public Health Service Act (“PHSA”), and thus are subject to the rules applicable to group health plans (which includes, for example, the annual Form 5500 reporting requirement, the summary plan description disclosure requirement, the plan document requirement, coverage continuation, and application of ERISA’s fiduciary requirements).

HRAs are also considered “group health plans” under the Affordable Care Act (“ACA”), which means that HRAs will generally be subject to the ACA’s “market reforms” (provided they do not fall under a limited exception thereto).  The ACA market reforms most notably prohibit annual dollar limits on essential health benefits (“EHBs”) and require non-grandfathered group health plans to provide certain preventive health services with no cost sharing.

As mentioned above, one of the primary requirements for HRAs is that reimbursements are subject to an annual maximum dollar limit. As such, by the virtue of their design, HRAs will generally fail to satisfy the ACA’s prohibition on annual limits for EHBs. HRAs will similarly have trouble satisfying the prohibition on cost sharing for certain preventive services; once an employee receives his or her full reimbursement for the coverage period, the HRA will not be able to cover any additional preventive services during the coverage period.

Notably, in 2015, the IRS issued guidance confirming that a HRA that is “integrated” with another group health plan (i.e., eligibility is limited to those who are enrolled in the employer’s group health plan) may comply with the ACA’s market reforms. Generally, if the underlying group health plan satisfies the prohibition on annual limit and preventive services cost-sharing requirement, the HRA’s limits will not operate to violate the ACA. The IRS further confirmed that HRA integration was only available with group health coverage, and a HRA could not be used to purchase or reimburse amounts used to purchase health coverage on the individual market. The IRS’s position here essentially prohibited the continued use of true stand-alone HRAs. Now, stand-alone HRAs (other than the few exceptions mentioned below) are non-compliant and prohibited “employer payment plans”. Maintenance of a prohibited employer payment plan can result in the assessment of an excise tax and per-employee-penalty of $100 per day ($36,500 per year per employee) under IRC Section 4980D.

Notably, however, there have been regulatory exceptions to this integration requirement. Beginning in 2017, certain small employers were permitted to offer their employees “qualified small employer health reimbursement arrangements” (“QSEHRAs”). As discussed in more detail below, under a QSEHRA, covered employers can pay or reimburse eligible employees for qualified medical care expenses, including expenses for individual health plan premiums. Next, in 2019, the Trump Administration issued final regulations to remove the prohibition on integrating HRAs with individual market health coverage and allow employers to offer employees HRAs integrated with such individual coverage if several regulatory requirements (discussed further below) are satisfied. Per the regulations, because individual market coverage is subject to the same ACA market reforms that apply to group health plans, HRAs could be integrated with individual market coverage and still satisfy the necessary ACA requirements. These arrangements are referred to “individual coverage HRAs” or “ICHRAs”. The final regulations also allowed employers to establish “excepted benefit HRAs” or “EBHRAs”, which are excepted benefits that are not subject to the certain ACA rules discussed herein and are not integrated with any underlying health plan. Like ICHRAs, there are several requirements that must be satisfied in order to use an EBHRA. Most notably, the EBHRA cannot be an integral part of any group health plan and must be offered alongside a (non-HRA) group health plan.

All types of HRAs are subject to several universal compliance requirements, as detailed above. Each type of HRA, however, is not universally available to all employers, and as detailed further below, the different types of HRAs are subject to different compliance requirements.

Taxation of HRAs

As mentioned above, through a HRA, employers can reimburse employees for their qualified medical expenses on a tax-favored basis. This is because the employer contributions made to a compliant HRA are excluded from an employee’s gross income and wages (i.e., they are not subject to income or payroll taxes), and distributions/reimbursements from such arrangements for qualified medical expenses are tax-free.

For small employers that do not offer group health coverage but want to pay or reimburse employees for their medical expenses in a way that is permitted under the ACA, establishing a HRA is a tax-favorable option. Although there are compliance requirements to consider with any type of HRA, a HRA provides a tax benefit that is not available with the remaining alternative in this situation, i.e., increasing an employee’s taxable wages and allowing (but not requiring) the employee to use those additional amounts to pay for insurance coverage and medical expenses.  

Types of HRAs

As mentioned above, there are several types of HRAs; however, not every type is an option for all employers. Below sets outs the primary (but non-exhaustive) rules for the following types of HRAs: (i) HRAs integrated with group health plans (“GHP HRAs”); (ii) QSEHRAs; (iii) ICHRAs; (iv) EBHRAs; and (v) Retiree-only HRAs.

GHP HRA: This type of HRA is only available for employers that sponsor a group health plan for their employees. A GHP HRA must be available to all employees (and their spouses or dependents) who are enrolled the employer’s group health plan; it cannot be offered to any employees who are not enrolled in the group health plan. There is no federal limit on the amount an employer may contribute to an employee’s GHP HRA; however, as mentioned above, employers must establish a maximum  amount available for reimbursement. Under a GHP HRA, an employer can reimburse all qualifying medical expenses of the employee (and his or her spouse or dependents) as long as the underlying group health plan provides “minimum value” under the ACA. Notably, a GHP HRA cannot be used to reimburse premiums (including those for individual market health coverage). Eligible employees must also be given the opportunity, at least annually, to opt out of the GHP HRA.

QSEHRA: As mentioned above, QSEHRAs are only available for small employers (i.e., those that employ less than 50 full-time or full-time equivalent employees) that do not also offer a group health plan to their employees. All employees are eligible if they are enrolled in “minimum essential coverage” (which can be individual coverage, coverage under a spouse’s employer plan, or Medicare); however, an employer may exclude seasonal or temporary employees, nonresident aliens, employees under age 25, and collectively bargained employees. If offered, QSEHRAs must be provided to eligible employees on the same terms; however, the maximum annual contribution/reimbursement amount can vary based on age and family size. The maximum contribution limit (which is set under federal law) for 2024 is $6,150 for self-only coverage and $12,450 for family coverage.

In addition to unreimbursed qualified medical expenses, employees (and their spouses and dependents (if enrolled in qualifying minimum essential coverage)) can be reimbursed for individual health coverage premiums. Employers may further restrict the types of medical and health services that are eligible for reimbursement under a QSEHRA. In order to have medical expenses reimbursed under a QSEHRA, federal law requires employees to provide their employer proof that they have minimum essential health coverage. Employers must provide notice regarding coverage under the HRA to eligible employees at least 90 days before the beginning of the plan year.

Employers can allow unused QSERHA balances to be carried forward to the next plan year, up to an aggregate limit. Any carryover amounts will count toward the subsequent year’s annual limit. If an employee ceases to be covered by minimum essential coverage at any point, the QSEHRA cannot reimburse the employee’s medical expenses, and upon termination of employment, an employee’s balance is forfeited.

ICHRA: An ICHRA can be offered by employers of any size, including those who sponsor group health plans; however, an employer cannot offer an ICHRA to the same class of employees who are offered coverage under the employer’s group health plan (which will include any tradition health plan, a QSEHRA, or an EBHRA). All employees who are enrolled in individual health coverage or Medicare are eligible to participate in an ICHRA. An ICHRA must be provided to all eligible employees within a class (e.g., full-time, part-time, salaried, hourly, employment site) on the same terms. For example, an employer may offer full-time employees employer-sponsored coverage and offer part-time employees an ICHRA.

There is no annual limit on the amount employers may contribute to an ICHRA under federal law; however, employers must establish a reimbursement limit. Even within the same class of employees, employers may vary employee ICHRA amounts according to employee age and family size.

An ICHRA can be used to reimburse unreimbursed qualified medical expenses, premiums for individual coverage, and/or Medicare premiums incurred by the employee (and his or her spouse and dependents if they are also enrolled in qualifying individual coverage). Employers offering ICHRAs may further restrict the types of medical and health services that are eligible for reimbursement. Also similar to a QSEHRA, substantiation of individual coverage (or Medicare) is required.

Employees must also be given the opportunity, prior to the beginning of each plan year, to opt out of the ICHRA. Additionally, employers must provide notice to eligible employees at least 90 days before the beginning of the plan year (or for employees hired mid-year, no later than when ICHRA coverage begins) regarding key ICHRA information.

Employees can carry over unused balances to the next plan year, up to an aggregate limit set by the employer. Any carryover amounts will count toward the subsequent year’s annual contribution limit. If an employee ceases to be covered under individual coverage at any point, the employee must either forfeit his or her balance or permanently opt out and waive future reimbursement from the ICHRA. Former employees may retain access to their ICHRAs if they do not opt out of the HRA, and the employer has structured the benefit to be available to former employees (or through COBRA).

EBHRA: Employers of any size that offer a group health plan may also offer an EBHRA, which is an excepted benefit and not subject to the ACA’s market reforms (but is still a group health plan under ERISA). Because EBHRAs are excepted benefits, they do not have to be integrated with any health coverage. That being said, in order to offer an EBHRA, an employer must offer traditional group health coverage (i.e., coverage that is not limited to excepted benefits and is not an account-based group health plan) to EBHRA-eligible employees; however, the employees are not required to enroll in the other group health plan. This means that employees eligible to participate in an employer’s traditional group health plan may participate in the EBHRA; however, EBHRA coverage is not limited to those employees enrolled in the health plan (like a GHP HRA). An EBHRA must be offered to all similarly situated individuals under the same terms and conditions.

An EBHRA can be used to reimburse unreimbursed qualified medical expenses of an employee (or his or her spouse and dependents); however, while “qualified medical expenses” generally includes health insurance premiums, EBHRAs cannot reimburse premiums for individual coverage, Medicare, or group health coverage. An EBHRA can reimburse premiums for COBRA coverage, coverage consisting solely of excepted benefits (e.g., limited dental or vision coverage), and short-term, limited duration insurance (if not prohibited under state law). Employers may further restrict the types of qualified medical expenses that are eligible for reimbursement under an ICHRA.

There is an annual contribution limit for EBHRAs under federal law. For 2024, this annual limit is $2,100 (though employers can limit reimbursement even further if desired). Note that the annual limit is inclusive of any amounts made available under another HRA (or another account-based plan) provided by the employer for the same year unless such arrangement reimburses only excepted benefits.

Employees may carry forward unused balances to the next plan year; however, employers can set an aggregate carryover limit. Unlike QSEHRAs, carryover amounts do not count toward the annual limit. If an employee terminates employment, he or she may retain his or her EBHRA if the employer permits former employees to do so (or under COBRA).

Retiree-Only HRA: This type of HRA, which can be offered by employers of any size, is designed to provide benefits after an employee’s employment ends. As such, those eligible to participate in (i.e., receive reimbursement from) this type of HRA are former employees/retirees. There is no integration requirement, so a participant can be enrolled in any type of insurance coverage or no coverage. This HRA does not have any federal annual reimbursement limit, so employers can set this limit as desired. A Retiree-Only HRA can be used to reimburse qualified medical expenses, including premiums for individual coverage and Medicare, incurred after retirement. Employers may further restrict the types of qualified medical expenses that are eligible for reimbursement. Participants may carry forward unused balances to the next plan year; however, employers can set an aggregate carryover limit.

Considerations & Next Steps

As detailed above, HRAs are not available for every employer or employee. Some options may not be available or feasible depending on an employer’s particular facts and circumstances. Employers contemplating establishing a HRA should work with their benefits consultants to determine what, if any, options are available and best fit the needs of the employer and their employee populations. Moreover, it is important to consider the various requirements with each type of HRA and evaluate whether such requirements can be satisfied on an on-going basis. A HRA can impact eligibility for other benefit programs, including a health savings account, as well as impact an employee’s eligibility to receive a premium tax credit under the ACA (neither of which is addressed in this Compliance Corner). As such, it is also important to determine how a HRA would fit into an employer’s overall benefits offering and coordinate benefits, as necessary.

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