HRA rules: how health reimbursement arrangements work

Rules that apply to all HRAs

• Only the employer funds an HRA — employees cannot contribute.
• Reimbursements require substantiation (proof of a qualified expense or coverage).
• Funds belong to the employer; unused amounts generally aren''t paid out unless rollover is allowed.
• A written plan document and employee communications are required.
• Reimbursements are tax-free only when the arrangement is compliant.

ICHRA rules in brief

Any employer size; no contribution cap; employees must have qualifying individual coverage or Medicare; allowances can vary by employee class and by age/family size on the same terms; a class can''t be offered both an ICHRA and a group plan; the required ICHRA notice must be sent (generally 90 days before the plan year).

QSEHRA rules in brief

Only for employers with fewer than 50 full-time-equivalent employees that don''t offer a group plan; an annual IRS contribution cap (adjusted yearly); generally offered to all eligible employees on the same terms; employees need minimum essential coverage to be reimbursed tax-free; a required notice applies.

Integrated and excepted-benefit HRA rules

Integrated (group-coverage) HRAs must be paired with a compliant group health plan and typically reimburse out-of-pocket costs, not premiums. Excepted-benefit HRAs are limited-dollar HRAs offered alongside a group plan, capped at an annual IRS limit, with their own constraints — and employees can use them even if they decline the group plan.

The substantiation requirement

Across every HRA type, reimbursements must be substantiated — employees prove they have qualifying coverage and that expenses are eligible — before being paid. Substantiation is what keeps reimbursements tax-free; reimbursing without it can make payments taxable wages.

Plan document and notice

Every HRA needs a written plan document establishing the arrangement, and employee communications (notices) explaining the benefit. These aren''t optional — they''re the legal foundation for the tax-free treatment. An administrator or broker generates and maintains them.

Common HRA compliance mistakes

• Letting employees contribute (HRAs are employer-funded only).
• Reimbursing without substantiation.
• Running an HRA with no plan document.
• Offering the same class both an HRA and a group plan (for ICHRA).
• Exceeding the cap (for QSEHRA) or offering a QSEHRA alongside a group plan.

The nondiscrimination principle

HRAs generally cannot be designed to favor owners or highly-compensated employees. Within any employee class you offer, the terms must be applied consistently, and certain HRAs (like self-insured Section 105 arrangements) are subject to specific nondiscrimination testing. The class system lets you differentiate by role or geography, not by who is most valuable to the business.

How HRAs interact with the ACA

The market-reform rules are why the HRA type matters. An ICHRA must reimburse qualifying individual coverage; a group-coverage HRA must sit on top of a group plan; an excepted-benefit HRA stays limited and supplemental. A bare arrangement that just reimburses premiums for active employees, outside these frameworks, generally does not comply.

Recordkeeping and audit readiness

Compliance is also about being able to show your work.

• Keep the signed plan document and every version of the employee notice.
• Retain proof of coverage and expense substantiation for each reimbursement.
• Document your employee classes and the allowance for each.
• Hold records long enough to cover a potential audit window.