Key takeaways

• An HRA is an employer-funded benefit that reimburses eligible medical costs, including copays, prescriptions, and dental and vision care.
• Employers make tax-deductible contributions to employees’ HRAs, and employees are reimbursed for eligible expenses without adding to their taxable income.
• Depending on the employer's plan design, unused reimbursement amounts may carry over to future plan years. Unlike HSAs, workers lose access to unused amounts if their employment ends.

Americans spent an average of $486 each month on medical costs in 2025, a 10% increase from 2024. To help employees cover healthcare expenses, employers may offer tax-advantaged plans, such as HRAs, as an employment benefit.

An HRA, or health reimbursement arrangement, is an employer-funded benefit that can reimburse employees for eligible medical expenses. Here’s how HRAs work, their benefits and drawbacks, and what they can be used for.

What is an HRA?

An HRA is a group health plan funded by an employer that allows employees to use untaxed funds to cover qualified medical expenses, such as copays and prescription medications. Employers make tax-deductible contributions up to a pre-determined amount, and employees can be reimbursed for eligible healthcare costs without it counting toward their taxable income.

Depending on the plan, HRAs may be used to pay for a spouse's and dependents' healthcare expenses, and even costs associated with dental and vision care. Some HRAs may also cover individual health insurance premiums, giving workers the flexibility to choose the plan that works best for them.

Benefits of an HRA

HRAs offer several benefits for both employers and their employees, including:¹

• Tax advantages: Employers can deduct 100% of their contributions, and employees receive tax-free reimbursements when spent on qualified medical expenses.
• Using an HRA for medical expenses: Employees can use their HRAs to pay for a wide range of qualified medical expenses. Some plans even allow funds to be used for individual health insurance or dental and vision expenses.
• Unused funds can be rolled over: If an employee has not reached their HRA reimbursement limit for the year, these funds can be rolled over into the next year.

Drawbacks of an HRA

Like any other health plan, HRAs can have potential drawbacks, including:²

• Use of HRA funds: HRAs can help cover necessary healthcare expenses, but procedures and items deemed “unnecessary” are not eligible for reimbursement. Gym memberships, cosmetic procedures, and vitamins are all expenses that HRAs may not cover.
• Contribution limits: HRAs are funded entirely by employers, which determine the annual contribution limit. For some households, this limit may not be enough to cover all necessary expenses.
• Account ownership: If an employee leaves or changes jobs, the HRA stays with the employer. This means employees lose access to any unused funds.

Types of HRAs

There are several types of HRAs that can be offered by employers, each with its own contribution limits and rules on how the funds can be used.

There are five types of HRAs:

• Individual Coverage HRA (ICHRA): The standard type of HRA offered by employers. ICHRAS can be used to cover individual health insurance premiums with pre-tax dollars, including co-payments and deductibles. Not all Affordable Care Act Marketplace plans are eligible for use with an ICHRA.³
• Qualified Small Employer HRA (QSEHRA): Also known as the small business HRA, the QSEHRA is a health coverage subsidy plan offered by businesses that employ fewer than 50 full-time workers. Employees paying for outside healthcare coverage can receive reimbursements for eligible medical costs, including insurance premiums and coinsurance.⁴
• Excepted Benefit HRA (EBHRA): EBHRAs can help pay for additional coverage outside of an employer's primary group health insurance. EBHRA funds can be used for eligible out-of-pocket expenses, including short-term health insurance, qualified medical expenses, and dental and vision insurance premiums. EBHRA can’t be used to cover the costs of comprehensive health insurance premiums.⁵
• Group Health Plan HRA (GCHRA): A GCHRA can helps workers pay out-of-pocket expenses when enrolled in an employer’s group health plan. This type of HRA may be offered alongside high-deductible health plans (HDHPs), though this is not required.⁶
• Retiree-only HRA: A retiree-only HRA can be offered as a continuing benefit to former employees who have retired to help manage out-of-pocket medical expenses. Retirees are not required to take part in any qualifying insurance plan.⁷

How does an HRA work?

HRAs are set up and funded by employers, and employees can use this money to help cover eligible medical expenses. Employers decide how much to contribute, and employees can use an HRA card or submit proof of expenses for reimbursement. Unused HRA funds, up to a certain limit, can be rolled over into the next year, and employers have the flexibility to set this limit.

Once an employee leaves their job, they typically lose access to their HRA and any leftover funds. HRAs are only offered as employee benefits and cannot be opened by unemployed or self-employed individuals.

The annual contribution amount set by employers determines how much each worker can be reimbursed throughout the year for qualified expenses. Employers determine the annual contribution amount for each employee class — a defined group of employees, such as full-time or part-time workers. All employees within the same class generally receive the same contribution amount.

The maximum amount that can be contributed to each type of HRA is as follows:

When employees pay for eligible medical (and potentially dental and vision) expenses, there are typically two ways they are reimbursed. They may receive an HRA debit card to pay for qualified expenses. Otherwise, workers will need to first pay out-of-pocket, then submit receipts to their HRA administrator and wait for their claim to be processed. It’s important for employees to check their individual plan to determine when and how to seek reimbursement.

Employees can typically roll over unused HRA amounts to the next plan year — up to a certain amount set by their employer. Because HRAs are tied to the employer, workers will lose access to any unused reimbursements if they leave or change jobs.

Some HRA plans permit employees to transfer unused HRA amounts into a retirement plan. Other plans may allow unused funds to be paid in cash to an employee’s beneficiary or estate in the case of their death. In either case, this amount is considered taxable income to recipients. ¹¹

Read more: HSA, FSA & HRA reimbursement explained

HRA eligible expenses

HRAs can be used for a wide range of out-of-pocket medical expenses, including doctor visits, necessary procedures, and prescription medication. The following expenses are typically deemed eligible under HRAs:¹²

• Deductibles, copays, or coinsurance
• Hospital services and surgical services
• Prescription medications and insulin
• Certain over-the-counter medicines, when allowed by the plan
• Medical equipment and diagnostic devices
• Vision care — including eye exams, eyeglasses, and contact lenses
• Dental care — including exams, cleanings, fillings, orthodontia, extractions, and dentures
• Certain assistive or accessibility items, such as grab bars or bathroom support bars, when used to accommodate a disability or medical condition

The specifics of each plan may impact what is considered a qualified expense. It’s important for employees to consult their plan administrator before covering out-of-pocket expenses to check eligibility.

What items are not HRA-eligible?

Not every health-related purchase is HRA-eligible. In general, HRAs do not cover:¹³

• Fitness, gym, or weight-loss programs
• Cosmetic surgery — including hair removal, hair transplants, or teeth whitening
• Babysitting, childcare, and nursing services
• Diapers and diaper services
• Household help — not including long-term care
• Surrogacy expenses
• Nonprescription drugs, medicines, or nutritional supplements, unless allowed by the plan
• Controlled substances illegal under federal law — including marijuana
• Personal use items not used to prevent or alleviate a disability or illness
• Insurance premiums (unless specifically stated by your plan) — including those paid by or through the Premium Tax Credit
• Contributions to or expenses already covered by another account, such as an HSA or FSA
• Funeral expenses
• Veterinary fees

What is the difference between an HRA and HSA?

A health reimbursement arrangement (HRA) is an employer-owned reimbursement benefit, while a health savings account (HSA) is an individually-owned savings account. Both can be used to cover eligible medical expenses, but they differ in who owns and contributes to the account, along with eligibility requirements and account portability.

Here are the key differences between HRAs and HSAs:

HRA FAQs

What happens if you use your HRA for ineligible items?

When you pay for ineligible items, you simply will not get reimbursed for those expenses. It’s important to check with your plan to determine what is considered eligible before paying large out-of-pocket expenses, even when using an HRA card.

Can I cash out unused HRA funds?

Unless allowed by your plan, you are typically not able to cash out unused HRA funds. If your plan does allow you to receive any unused reimbursements at the end of the year or when leaving your job, then this amount will count toward your taxable income.¹⁴

What’s the difference between an FSA and an HRA?

A flexible spending account (FSA) is often employee-funded through paycheck deductions, while an HRA is employer-funded only. FSAs are typically funded through voluntary salary reductions from an employee’s paycheck, though an employer may also contribute.

An FSA is also generally considered “use-it-or-lose-it”, though an employer may allow a grace period or limited carryover. Alternatively, HRAs may allow unused amounts to carry forward for future reimbursements, depending on the employer’s plan rules.

Can you have an HRA and an HSA?

Yes, there are certain situations in which you can have both an HRA and an HSA. Check with your plan administrator before contributing to an HSA while covered by an HRA.