Health Reimbursement Arrangements (HRA): How Your Boss Can Reimburse Your Health Plan

For decades, standard corporate health benefits followed an inflexible, one-size-fits-all model: an employer selected a single commercial insurance carrier, picked two or three pre-packaged group plan designs, and told employees to choose during open enrollment. If the network omitted your preferred specialist, or the monthly payroll deduction was too high for your family budget, you had no viable alternatives without forfeiting employer sponsorship entirely.

In response to rising group plan costs, some employers are taking a different approach. Instead of, or alongside, a traditional group plan, a growing number offer Health Reimbursement Arrangements (HRAs). Under this model, your employer provides a dedicated monthly allowance of 100% tax-free dollars, empowering you to choose your own health insurance plan on the open exchange or reimburse out-of-pocket medical bills. Understanding how these accounts function is critical to maximizing your take-home pay and avoiding unexpected tax penalties.

1. The Legal Foundation: What Is an HRA?

Codified under Internal Revenue Code (IRC) Section 105 and reinforced by joint regulations from the Departments of Labor, Treasury, and Health and Human Services, a Health Reimbursement Arrangement is an employer-funded, tax-advantaged health benefit account. Unlike a traditional insurance policy, an HRA is an internal financial arrangement with three core statutory characteristics:

• 100% Employer-Funded: Federal law explicitly forbids employee salary-reduction contributions into an HRA. Every dollar in the account is provided directly by the company.
• Tax-Free Reimbursements: Reimbursements for eligible expenses under a properly run HRA are generally excluded from the employee’s federal income and payroll taxes, and most states follow the federal treatment. For the employer, reimbursements are generally deductible as a business expense. A QSEHRA has one extra condition: you must have minimum essential coverage for the reimbursements to stay tax-free.
• Not a Bank Account (No Pre-Funding): Unlike an HSA, an HRA is not an individual savings account that belongs to you if you resign. It is a defined notional credit allowance. The employer only disburses funds when you submit proof of an eligible medical expense or an individual insurance premium invoice.

2. The Three Major Types of Modern HRAs

Federal rulemaking introduced two modern variations that decoupled HRAs from traditional group plans. Employers generally utilize one of three primary designs:

The Power of the ICHRA Revolution

The Individual Coverage HRA (ICHRA) represents the most impactful option for modern workers. If your company offers an ICHRA, you are not forced into an employer-selected HMO network. Instead, you shop on HealthCare.gov or your state exchange, pick any comprehensive plan that covers your personal doctors and daily prescriptions, and submit your premium statement to your employer’s plan administrator. The company reimburses the monthly premium up to your assigned allowance limit.

3. The Premium Tax Credit (APTC) Interaction

The most important legal detail when offered an ICHRA or QSEHRA is its strict interaction with federal exchange subsidies (Advance Premium Tax Credits) under 26 U.S.C. § 36B:

1. The “Affordability” Firewall: If your employer offers an ICHRA that is considered “affordable” under IRS guidelines (meaning the remaining cost of the lowest-cost Silver exchange plan minus your HRA allowance does not exceed the annual statutory percentage of your household income), you are legally barred from claiming ACA tax credits.
2. The Opt-Out Right: If your employer’s ICHRA allowance is small—rendering the coverage mathematically “unaffordable”—federal regulations grant you the legal right to opt out of the HRA. Once you formally decline the allowance, you can claim your full premium tax credit on the exchange if your household income qualifies.

With an ICHRA, you cannot “double dip” by taking the employer’s tax-free reimbursement and a premium tax credit for the same month. A QSEHRA works differently: if the QSEHRA is not considered affordable, you may still claim a premium tax credit, but it is reduced by the QSEHRA amount available to you. In both cases, tell the marketplace about the HRA offer when you apply so your advance credit is calculated correctly. See whether you can refuse employer insurance and take marketplace subsidies for the wider rules.

4. Actionable Steps: How to Claim Your Reimbursements

If your company implements an HRA benefit, execute this operational protocol to ensure your reimbursements are processed without delay:

1. Secure Qualified Coverage (MEC): For an ICHRA or QSEHRA, federal law requires you to be enrolled in an ACA-compliant individual plan (Minimum Essential Coverage). Short-term policies and health sharing ministries do not qualify.
2. Obtain Third-Party Proof of Payment: IRS auditing rules require substantiation. You cannot submit an unverified invoice. You must provide a formal receipt or bank clearing record proving you paid the premium or doctor, alongside the Explanation of Benefits (EOB) or detailed receipt.
3. Track Your Plan’s Run-Out Period: Many employers set a “run-out” period after the plan year ends for submitting claims incurred during that year; the length is set in your plan documents. Whether unused amounts carry over to the next year is the employer’s choice. Unused allowances generally stay with the employer if you leave.

5. A Worked Example (Hypothetical)

These numbers are invented to show how the pieces fit together.

• Offer: an employer gives a 35-year-old employee an ICHRA allowance of $400 a month.
• Plan chosen: the employee picks an individual plan with a $460 monthly premium.
• Reimbursement: after submitting proof of payment, the employee is reimbursed $400 and pays the remaining $60.
• Affordability check: suppose the lowest-cost Silver plan for this employee is $430. The employee’s share after the allowance would be $30 a month. If $30 is below the IRS affordability percentage of the household’s monthly income for that year, the ICHRA is “affordable” and no premium tax credit is available, even if the employee opts out.
• If the allowance were only $100: the employee’s share of the Silver plan would be $330. If that exceeds the affordability threshold, the employee could opt out of the ICHRA and apply for a premium tax credit instead.

The affordability percentage changes each year. HealthCare.gov has a worksheet for this test, and your employer’s notice should include the figures you need.

6. HRA vs. HSA vs. FSA at a Glance

• HRA: funded only by the employer, owned by the employer, and available for the expenses the employer’s plan allows.
• HSA: owned by you, portable when you leave, and available only if you are covered by a qualifying high-deductible health plan. Some HRA designs can make you ineligible to contribute to an HSA, so ask before combining them.
• FSA: usually funded by your own pre-tax salary, owned by the employer, with limited carryover.

For details, see FSA vs. HSA deadlines.

7. Questions to Ask HR or the Plan Administrator

• Which type of HRA is this, and what is my monthly or annual allowance?
• Does the allowance vary by age or family size?
• Which expenses are eligible: premiums only, or out-of-pocket medical costs too?
• What proof do you need, and how often are reimbursements paid?
• Is there a deadline to enroll in an individual plan after I receive the HRA notice?
• Do unused amounts carry over, and what happens if I leave mid-year?
• Can I pay my share of the premium pre-tax through payroll? (This is generally possible only for plans bought outside the exchange.)

8. Common Mistakes

• Not reporting the HRA offer to the marketplace. This can lead to advance credits you have to repay at tax time.
• Buying a plan that does not qualify. Short-term plans, fixed indemnity plans and sharing ministries generally do not satisfy the individual coverage requirement.
• Missing the enrollment window. Being newly offered an ICHRA or QSEHRA generally triggers a Special Enrollment Period for individual coverage, but it is time-limited.
• Letting coverage lapse. If your individual coverage ends, reimbursements for later expenses generally stop.
• Losing receipts. Keep premium statements and proof of payment for every claim.

The Bottom Line

A Health Reimbursement Arrangement turns rigid healthcare benefits into flexible, tax-advantaged capital. By funding individual premiums or bridging the gap across high annual deductibles, an HRA gives workers control over their clinical networks while protecting business budgets. Confirm your plan category, evaluate the exchange affordability test before turning down marketplace subsidies, and substantiate your medical expenses to get full value from this workplace benefit. Employers considering this route can read how small business owners use ICHRA.

Frequently Asked Questions

Can I contribute my own money to an HRA?

No. HRAs are funded only by the employer.

Do I keep the HRA if I leave my job?

Generally not. The allowance belongs to the employer’s plan. Some plans allow a short period to submit claims for expenses incurred before you left, and COBRA or similar continuation rights may apply to some HRAs. Ask your administrator.

Can I use an ICHRA with a plan bought off the exchange?

Yes, an ICHRA can generally be used with qualifying individual coverage bought on or off the exchange, and with Medicare in many cases. Premium tax credits are available only for exchange plans.

Is the reimbursement taxable?

Reimbursements for eligible expenses are generally tax-free when the plan’s rules and coverage requirements are met. A tax professional can confirm how it applies to you.

What if my employer’s allowance is too small?

Run the affordability test. If the ICHRA is unaffordable under the IRS standard, you may opt out and apply for a premium tax credit instead.