The numbers explain why. KFF's 2025 Employer Health Benefits Survey found that 33% of covered workers were enrolled in a high-deductible health plan in 2025, up from 28% the year before. As deductibles rise, more employers are pairing HDHPs with HRAs to cushion out-of-pocket costs for employees.
The problem? Many employers and employees still misunderstand how HRAs actually work — who funds them, who owns the money, and what happens if it goes unused. This guide breaks down exactly how an HRA functions, step by step, and how to pick the right type for your business.
Key Takeaways
- An HRA is 100% employer-funded; employees cannot contribute, and it is not a savings account
- Employees typically pay for care first, then submit for tax-free reimbursement
- Several HRA types exist (QSEHRA, ICHRA, GCHRA, EBHRA), each suited to different employer needs
- Employers set the rules: contribution amounts, eligible expenses, and rollover policies
- A licensed broker helps keep plan design compliant with IRS and ACA rules
What Is an HRA?
An HRA, or Health Reimbursement Arrangement, is an employer-owned benefit plan that reimburses employees tax-free for qualified medical expenses. According to IRS Publication 969, an HRA must be funded solely by the employer; employees cannot fund it through salary reduction the way they can with an FSA.
Employers use HRAs to control healthcare spending while still giving employees flexibility to cover deductibles, copays, and other costs. As deductibles have risen industry-wide, that flexibility has become more valuable.
What an HRA is not:
- Not insurance
- Not an employee-funded account like an HSA or FSA
- No investment growth or interest earnings
- Employer-controlled: employees don't own the balance
Even with ACA marketplace options widely available, HRAs remain relevant because they offer employers cost predictability and tax advantages that a straight premium subsidy doesn't. Several HRA types exist (QSEHRA, ICHRA, GCHRA, and EBHRA), and each has its own eligibility rules and reimbursement mechanics, which we'll cover below.
How Does an HRA Work?
An HRA follows a defined process from plan design to reimbursement, with the employer controlling each stage.
Initiation
The process starts when the employer designs the plan and sets a monthly or annual allowance. This step is entirely employer-driven — there's no automatic funding trigger, and employees can't initiate contributions.
Employers must decide, upfront, on two things:
- Allowance amounts: how much the employer will reimburse per employee each year
- Eligible expense categories: which medical costs the plan will cover
This is often the hardest setup step. Set the allowance too low and the benefit feels empty; define the wrong expense categories and you invite compliance problems later. Broker guidance helps lock both decisions to IRS rules and your workforce’s real costs.
Core Operation
Once the plan is live, the reimbursement cycle looks like this:
- Employee incurs an eligible expense, such as a doctor visit, prescription, or procedure
- Employee pays out of pocket at the time of service
- Employee submits documentation (a receipt or Explanation of Benefits) to the employer or plan administrator
- Administrator reviews the claim against plan rules and approves or denies it
- Employee receives reimbursement, usually through payroll
Accuracy and timing matter. Missing paperwork or late submission is the most common reason reimbursements stall. Keeping a copy of every EOB is the simplest habit for a smooth HRA experience.
Regulation and Control
Employers maintain control by capping annual allowances and defining which expenses qualify, generally drawing from the list in IRS Publication 502. But that list doesn't automatically make every expense reimbursable under every plan — the plan document is what governs.
HRAs also have to follow ACA, ERISA, and IRS rules. Individual coverage HRAs, for example, are treated as group health plans under federal rule, which means they carry disclosure obligations under ERISA, including a summary plan description.
Why this matters: noncompliant plan design can trigger IRS penalties or strip the tax-free status of reimbursements. A licensed broker helps confirm the plan document, notices, and expense rules stay aligned with ACA, ERISA, and IRS requirements.
Output and Result
At the end of the cycle, employees receive tax-free reimbursement — no payroll taxes withheld, no income inclusion, assuming the plan is properly designed. Unused funds are handled per the plan document:
- Rollover: some plans let unused balances carry into the next year, at the employer’s discretion
- Forfeiture: unused amounts beyond any permitted carryover are lost at year-end
An employer can never refund the unused balance in cash.
When reimbursements run on time and match the plan rules, employees see the HRA as a reliable benefit rather than a paperwork burden.
Types of HRAs and Where They're Used
Not every HRA fits every business. Here's a quick breakdown:
| Type | Best for | Key feature |
|---|---|---|
| QSEHRA | Employers with fewer than 50 full-time employees, no group plan | Reimburses premiums and expenses; 2026 IRS limits are $6,450 self-only / $13,100 family |
| ICHRA | Any size employer | Reimburses individual market premiums; allowances can vary by employee class |
| GCHRA | Employers with an existing group health plan | Supplements out-of-pocket costs alongside group coverage |
QSEHRA works only for small employers that don't offer a group plan. IRS rules also require an annual notice at least 90 days before the plan year begins.
ICHRA has no size limit and lets employers set allowances by employee class — full-time versus part-time, salaried versus hourly, and so on.
GCHRA sits on top of a group plan you already offer, helping employees manage deductibles and coinsurance.
Choosing the right type depends on your company size, whether you already run a group plan, and how your workforce is structured. An experienced broker can help you weigh those factors against budget and compliance needs. Muneris Benefits has worked with ICHRA setups for employers across Virginia and West Virginia, designing plans that fit both budget and compliance requirements.
HRA vs. HSA: Key Differences
These two get confused constantly, but they work very differently.
| Feature | HRA | HSA |
|---|---|---|
| Ownership | Funds stay with the employer; they don't follow the employee if they leave | Employee-owned and fully portable |
| Funding | Employer-funded only | Employee, employer, or both (requires a qualifying HDHP) |
| Investment | Cannot be invested; earn no interest | Can be invested and grow tax-free |
| Rollover | Depends on the employer's plan document | Always rolls over |
For 2026, HSA contribution limits are $4,400 for self-only coverage and $8,750 for family coverage, according to IRS Rev. Proc. 2025-19. QSEHRA limits, by comparison, are $6,450 and $13,100 — useful context, but not interchangeable with HSA rules.
The Bottom Line
An HRA works through a simple cycle: the employer sets an allowance, the employee pays for care and submits proof, and the employer reimburses tax-free. The details, from which type fits your business to how allowances should be structured and what stays compliant, are where things get complicated.
If you're an employer in Virginia or West Virginia weighing an HRA against other benefit options, a conversation with Muneris Benefits can help you design a plan that fits your workforce and your budget. Call (888) 686-3741 or reach out through the contact page to get started.
Frequently Asked Questions
How does an HRA reimbursement work?
Employees pay for eligible expenses out of pocket, submit documentation such as receipts or an Explanation of Benefits (EOB), and the employer reimburses them tax-free under the plan's rules.
How do I use my HRA balance?
Submit receipts or an Explanation of Benefits to your employer or plan administrator. They'll review the claim and draw down your allowance accordingly.
What can I use my HRA to pay for?
Eligible expenses depend on your employer's plan design. Common ones include deductibles, copays, prescriptions, and sometimes premiums.
Is it better to have an HRA or HSA?
The better fit depends on business size, goals, and whether employees have an HDHP. HSAs offer employee ownership and portability; HRAs give employers more control over funding and design.
Is an HRA plan worth it?
For many employers, yes. HRAs offer flexibility and cost control. The right fit depends on your workforce size, existing coverage, and budget, so it's worth reviewing with a benefits advisor.
What are the IRS rules on health reimbursement accounts?
IRS Publication 502 governs which expenses qualify for reimbursement. Specific HRA types, including QSEHRA, ICHRA, and EBHRA, have their own contribution limits and compliance rules.
