Health Reimbursement Arrangement (HRA)

An employer-funded arrangement under IRC Section 105 that reimburses employees for qualified medical expenses up to a plan-defined allowance. Most traditional HRAs must be integrated with a group health plan to satisfy ACA rules.

See the Step-by-Step ProcessView Eligible Expenses
Heads up: An HRA is an employer-funded group health plan, which means it carries HIPAA privacy obligations, Section 105(h) nondiscrimination testing, COBRA, and ACA integration rules. Virtually every employer uses a third-party administrator (TPA) to process claims and keep protected health information out of HR's hands. Do not attempt to run an HRA without professional support. For the deductible-reimbursement design (MERP) see the MERP page; for individual-premium reimbursement see the ICHRA page.

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What An employer-funded arrangement that reimburses employees for qualified medical expenses (Section 213(d)) up to an annual allowance set by the employer, who may also restrict the eligible expense list further. The full allowance is typically available at the start of the plan year. Rollovers are optional and plan-design-dependent; there is no statutory use-it-or-lose-it rule unless the plan document imposes one. Only the employer contributes, no employee salary reductions.
Who Employers who want to offset out-of-pocket costs for group health plan participants. Employees must generally be enrolled in the employer's group health plan to participate. Some owners and shareholders may be treated differently under the tax rules; confirm before including them.
When Adopt a written plan document and SPD before the plan year begins. Communicate allowance amounts, eligible expenses, and claim procedures to employees at enrollment. Run Section 105(h) nondiscrimination testing annually, ideally before year-end.
Risk Operating without a written plan; HIPAA privacy violations from improper PHI handling; Section 105(h) nondiscrimination failures (HCIs must include excess benefits in income); COBRA administration errors; ACA integration failures; or reimbursing ineligible expenses without adequate substantiation.
Before
Plan year start

Adopt or refresh the HRA plan document and SPD before any reimbursements are made.

Annual
105(h) testing

Test that the plan doesn't discriminate in favor of highly compensated individuals.

Ongoing
COBRA events

The HRA is a group health plan subject to COBRA; coordinate with your COBRA administrator.

Trigger When Notes
Adopt or refresh HRA plan document + SPD Before plan year begins Define allowance amount, eligible expenses, rollover or run-out rules, ACA integration requirement, COBRA treatment, appeals procedure, and HIPAA privacy protections. Must exist in signed written form before any reimbursements are made.
Participant communications At eligibility and each plan year Explain the annual allowance, eligible expenses, claim submission process, substantiation requirements, and appeal rights. SPD must be distributed within 90 days of first becoming covered.
Section 105(h) nondiscrimination testing Annually (pre year-end recommended) Test that the plan doesn't discriminate in favor of highly compensated individuals (HCIs), defined under Section 105(h) as the top 5 officers, 10%+ shareholders, and the highest-paid 25% of all employees. If a test fails, HCIs must include excess benefits in taxable income.
COBRA qualifying events Ongoing The HRA is a group health plan subject to COBRA. Calculate the applicable premium per IRS Notice 2002-45 (generally the expected annual cost plus 2% administrative fee) and coordinate HRA balance/allowance treatment with your COBRA administrator.
Claims run-out and rollover/forfeit Per plan terms (typically 60-90 days post plan year) Apply rollover or forfeiture rules consistently per the plan document. Unlike FSAs, there is no statutory forfeiture requirement; the plan design determines what happens to unused balances.
Trigger: Adopt or refresh HRA plan document + SPD
When: Before plan year begins
Notes: Define allowance, eligible expenses, rollover/run-out, ACA integration, COBRA, appeals, and HIPAA privacy protections.
Trigger: Participant communications
When: At eligibility and each plan year
Notes: Explain allowance, eligible expenses, claims, substantiation, and appeals. SPD within 90 days of becoming covered.
Trigger: Section 105(h) nondiscrimination testing
When: Annually (pre year-end recommended)
Notes: HCI = top 5 officers, 10%+ shareholders, highest-paid 25%. Failure means HCIs include excess benefits in income.
Trigger: COBRA qualifying events
When: Ongoing
Notes: HRA is a group health plan subject to COBRA. Applicable premium per IRS Notice 2002-45.
Trigger: Claims run-out and rollover/forfeit
When: Typically 60-90 days post plan year
Notes: Apply rollover or forfeiture per the plan document. No statutory forfeiture rule.
  • HRA Plan Document + SPD: The foundational written document specifying the annual allowance, eligible expense list (Section 213(d) or a narrower plan-defined list), rollover or run-out terms, ACA integration requirement, COBRA treatment, substantiation procedures, claims and appeals process, and HIPAA privacy provisions. Must be adopted before any reimbursements are made.
  • TPA agreement: A contract with a third-party administrator to process claims, hold and review PHI, and handle substantiation. The TPA is your practical HIPAA firewall; most employers do not want medical documentation flowing to HR. Execute a Business Associate Agreement (BAA) with the TPA before any PHI is exchanged.
  • HIPAA policies and BAAs: Even with a TPA handling most PHI, the employer-sponsored HRA is a covered entity. You need HIPAA policies and procedures and BAAs with any vendor who touches PHI on your behalf (TPA, technology platform, etc.).
  • Group health plan documentation confirming ACA integration: Evidence that the HRA is limited to employees enrolled in the employer's group health plan and that the group plan provides minimum essential coverage. This is what makes the HRA ACA-compliant.
  • Section 105(h) testing dataset: A roster of all non-excludable employees with compensation, officer status, ownership percentage, and HRA benefits received, needed to run the Eligibility Test and Benefits Test annually.
  • Participant communications: Claim instructions, eligible expense list, denial and appeal rights. Your TPA typically provides templates; review them to confirm they reflect your plan design.
1
Choose your HRA designConfirm you're offering a traditional integrated HRA (available to all group plan enrollees, employer-funded, tied to the employer's group health plan). If you're looking at a deductible-reimbursement strategy, see the MERP page. If you want to reimburse individual insurance premiums, see the ICHRA page. Design choices include: annual allowance amount, eligible expense list (full Section 213(d) or narrower), rollover vs. forfeiture, and whether to allow premium reimbursement for the group plan cost share.
2
Draft the plan document and SPDInclude allowance amount, eligible expenses, ACA integration requirement (limited to employees enrolled in the group plan), run-out or rollover rules, COBRA treatment, claim and appeal procedures, and HIPAA privacy provisions. This document must be signed and dated before any reimbursements begin.
3
Engage a TPA and execute BAAsSelect a TPA to administer claims and handle PHI. Execute a Business Associate Agreement before any employee health information is shared. Configure the TPA's claim portal or reimbursement workflow to match your plan document; do not accept claims the plan doesn't cover.
4
Enroll participants and distribute communicationsAt the start of the plan year, credit each eligible employee's HRA allowance. Distribute the SPD and claim instructions explaining how to submit expenses, what documentation is required, how to appeal a denial, and the run-out or rollover terms.
5
Run Section 105(h) nondiscrimination testingTest annually, ideally before year-end, for compliance with the Eligibility Test (the plan must cover enough non-HCI employees) and the Benefits Test (HCIs cannot receive better benefits than non-HCIs). If a test is failing, make prospective corrections before year-end. Contact your TPA or benefits attorney if any test fails.
6
Close the yearProcess the run-out period; apply rollover or forfeiture rules per the plan document. Coordinate with your COBRA administrator on participants who had qualifying events during the year. Archive claims records and testing workpapers.
  • Available up-front: The full annual HRA allowance is typically credited to the participant at the start of the plan year, not earned per pay period. Employees can submit claims against the full allowance immediately, unlike a DCAP where reimbursements are limited to contributions made to date.
  • Substantiation required for every claim: Every reimbursement requires appropriate documentation establishing the expense is an eligible medical expense, typically an Explanation of Benefits (EOB), itemized provider receipt, or similar. "Just reimburse what they submit" is not compliant. The TPA reviews substantiation; PHI should not flow to the employer's HR team.
  • Debit cards: Can be used with the TPA's auto-substantiation system but require receipt follow-up for transactions that can't be auto-verified at point of sale. Many employers skip debit cards and run a simple TPA reimbursement workflow to reduce substantiation complexity.
  • Premium reimbursement: A traditional integrated HRA may reimburse the employee's share of group health plan premiums if the plan document permits. It may not reimburse individual market premiums; that requires an ICHRA. See the ICHRA page.
  • Employer-funded only: The employer funds the HRA; employees make no contributions. Because there are no employee salary reductions, no Section 125 cafeteria plan is required for the HRA itself (though the employer may have a Section 125 plan for other benefits).
  • Electronic delivery: If distributing SPDs or claim instructions electronically, meet DOL safe harbor requirements. Protect PHI in any electronic communications and system access.
  • Plan Document/SPD and all amendmentsThe original signed plan document and each formal amendment. Retain indefinitely; amendments must be signed before they take effect.
  • SPD distribution recordsA log showing when the SPD was provided to each participant, including new participants as they become eligible.
  • Claims and determination recordsRetain at the TPA level where possible to limit employer exposure to PHI. Confirm with your TPA how long they retain records and what happens to records if you change administrators. Retain for at least 6 years.
  • TPA agreement and BAAsThe TPA service agreement and all signed Business Associate Agreements. Retain for the duration of the relationship plus 6 years.
  • Section 105(h) testing workpapersWritten records of each year's nondiscrimination test: employee census, HCI classifications, benefits paid, and pass/fail results. Retain for at least 6 years.
  • COBRA recordsCOBRA election notices, premium payment records, and documentation of how the HRA applicable premium was calculated. Retain for at least 6 years.
  • Rollover/forfeiture recordsYear-end accounting of unused allowances and how they were treated (rolled over or forfeited) per the plan document terms.

Common traps

No written plan document before reimbursements begin: An HRA must be established under a written plan before any expenses are incurred and reimbursed. Operating an HRA without a plan document, even informally reimbursing employee medical expenses, creates a compliance problem under both Section 105 and ERISA.
PHI flowing to HR without a firewall: When employees submit medical documentation directly to the employer's HR team without a TPA in between, the employer is handling protected health information without the proper HIPAA infrastructure. Use a TPA as the claims reviewer and keep PHI out of HR's hands.
Not running Section 105(h) testing: Many small employers skip nondiscrimination testing because the plan "seems fair." But Section 105(h) uses a specific definition of HCI (top 5 officers, 10%+ shareholders, and the highest-paid 25% of all employees) and a specific Benefits Test; surface-level fairness doesn't automatically pass. If testing is skipped and a problem exists, HCIs face retroactive income inclusion.
Reimbursing individual insurance premiums: A traditional integrated HRA cannot reimburse premiums for individual market coverage purchased on or off the Exchange. This requires an ICHRA, which has its own eligibility, notice, and design rules. See the ICHRA page.
Forgetting COBRA: The HRA is a group health plan subject to COBRA. When an employee or dependent experiences a qualifying event, they must be offered COBRA continuation on the HRA. Work with your COBRA administrator to calculate the applicable premium and handle remaining allowances correctly.

FAQs

What expenses can an HRA cover?

The default is Section 213(d) qualified medical expenses, the same broad list that governs FSA and HSA reimbursements. However, the employer can restrict the eligible expense list further in the plan document (e.g., limiting to deductible and coinsurance only, or excluding dental and vision). Premium reimbursement for the group plan is also permitted if the plan document allows it. The plan document controls what's in and what's out; make sure employees receive a clear eligible expense list at enrollment.

Does the HRA disqualify employees from contributing to an HSA?

Yes, if it's a general-purpose HRA. An employee covered by a traditional HRA that reimburses any Section 213(d) expense is not eligible to contribute to an HSA. To preserve HSA eligibility alongside an HDHP, the HRA must be limited-purpose (dental and vision only) or post-deductible (reimburses medical expenses only after the HDHP minimum deductible is met). Coordinate with the HSA page if offering both.

Can owners and shareholders participate?

It depends on the business structure. Sole proprietors and partners cannot participate in Section 105 plans on a tax-favored basis. More-than-2% S-corporation shareholders are treated as partners and generally cannot receive tax-free HRA reimbursements. C-corporation shareholders who are employees may participate. Confirm the owner's tax status with a benefits attorney or CPA before including them in the plan.

  • MERP, deductible reimbursement strategy: Some employers use an HRA specifically to reimburse employees' deductible costs, a design sometimes called a Medical Expense Reimbursement Plan (MERP). A MERP is a type of HRA with a narrower eligible expense list and is often paired with a higher-deductible group health plan as a cost-sharing strategy. See the MERP page for details on this specific design.
  • Other HRA types, separate pages: The ICHRA (for reimbursing individual insurance premiums) and other specialized HRA types have their own eligibility rules, notice requirements, and contribution structures. Don't apply traditional integrated HRA rules to those arrangements.
  • HSA compatibility: A traditional general-purpose HRA disqualifies employees from contributing to an HSA. To offer both, the HRA must be limited-purpose (dental and vision only) or post-deductible. See the HSA page for coordination guidance.
  • Owner and shareholder participation: Sole proprietors, partners, and more-than-2% S-corporation shareholders generally cannot receive tax-free HRA reimbursements. C-corporation shareholders who are bona fide employees may participate. Confirm the owner's classification before including them in the plan; including them incorrectly creates a tax problem for the owner and a potential Section 105(h) testing issue for the plan.
  • Medicare coordination: If the HRA reimburses Medicare cost-sharing (deductibles, copays), confirm this is permitted under your plan design and doesn't create ACA integration issues. HRAs integrated with Medicare rather than employer group coverage have specific rules and limitations.
  • State continuation coverage: Some states have mini-COBRA laws that extend continuation beyond the federal COBRA 18- or 36-month periods, or apply to employers below the federal 20-employee threshold. Coordinate with your COBRA administrator on any applicable state continuation requirements for the HRA.

Unlike MERPs, limited-purpose HRAs, and ICHRAs, which cover a narrower defined set of expenses, a traditional HRA can, at the employer's discretion, reimburse the full range of Section 213(d) medical expenses. Here's what that means in practice.

What Section 213(d) Is, and Isn't

Section 213(d) of the Internal Revenue Code doesn't contain a list of eligible expenses. It contains a definition. Specifically, it defines "medical care" as amounts paid for:

  • The diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body;
  • Transportation that is primarily for and essential to medical care;
  • Qualified long-term care services; or
  • Insurance covering the above (including premiums for qualified long-term care insurance within IRS limits).

The practical reference for applying this definition is IRS Publication 502: Medical and Dental Expenses, which translates the statutory definition into a plain-language A-Z list of what qualifies and what doesn't. When in doubt about a specific expense, Publication 502 is the right place to check.

Sample Eligible Expenses

The following are representative examples, not an exhaustive list. The employer's plan document may cover all of these or restrict to a narrower subset.

Category Examples
Preventive care Annual physicals, wellness visits, screenings (mammograms, colonoscopies, etc.), immunizations
Medical and hospital care Doctor visits, specialist care, urgent care, emergency room, inpatient hospital stays, surgery, anesthesia, lab tests, diagnostic imaging
Prescription drugs and insulin All FDA-approved prescription medications; insulin (with or without a prescription)
OTC medications and menstrual care Over-the-counter drugs and medicines (no prescription required since 2020); menstrual care products
Mental health Therapy, psychiatry, psychologist visits, inpatient mental health or substance use treatment
Dental Exams, cleanings, fillings, crowns, root canals, oral surgery, orthodontia; not teeth whitening or other purely cosmetic dental work
Vision Eye exams, prescription eyeglasses, contact lenses and supplies, LASIK and corrective eye surgery; not non-prescription sunglasses
Hearing Hearing exams, hearing aids and batteries
Therapy and rehabilitation Physical therapy, occupational therapy, speech therapy, chiropractic care, acupuncture
Medical equipment and supplies Wheelchairs, crutches, walkers, blood pressure monitors, blood glucose monitors and test strips, CPAP machines and supplies, prosthetics
Transportation Mileage, bus, taxi, or rideshare costs when primarily for and essential to obtaining medical care
Long-term care Qualified long-term care services; qualified long-term care insurance premiums (within annual IRS limits by age)

Commonly Ineligible Expenses

These are generally not Section 213(d) medical care regardless of how the HRA plan is written:

  • Cosmetic procedures that aren't medically necessary (e.g., teeth whitening, elective cosmetic surgery, hair transplants)
  • Health club memberships and gym fees (unless prescribed for a specific medical condition, a narrow exception)
  • Non-prescription vitamins, supplements, and nutritional products (absent a prescription or specific medical necessity)
  • Diet foods, weight loss programs, and general wellness products (unless treating a diagnosed disease such as obesity; confirm with Publication 502)
  • Childcare and dependent care (covered separately under a DCAP)
  • Toiletries and personal hygiene products
  • Insurance premiums for a group health plan (unless the HRA plan document specifically permits this)

Employer's Right to Restrict

Just because an expense qualifies under Section 213(d) doesn't mean your HRA must cover it. The employer can limit the eligible expense list in the plan document, for example, covering only deductibles and coinsurance, or excluding dental and vision. Whatever the plan covers, it must be consistently applied and clearly communicated to participants. If you restrict the list, make sure the participant materials reflect exactly what is and isn't covered under your specific plan.

This list is representative, not exhaustive. For the complete IRS guidance on eligible and ineligible expenses, see IRS Publication 502. Consult a qualified benefits attorney or CPA for questions about specific expenses or plan design.