What Is a Health Reimbursement Account (HRA)?

Paul Gougé is a lead consultant in planning excellence at Northwestern Mutual.

Health care expenses can take a big bite out of your budget. On top of health insurance premiums, there are also deductibles, copays, coinsurance and costs that insurance doesn’t cover. In 2022, this type of out-of-pocket spending added up to roughly $1,425 per person, according to the Kaiser Family Foundation.

A health reimbursement arrangement (HRA), more commonly referred to as a health reimbursement account, is an employee benefit that could help ease some of the financial burden. Here’s how it works, along with the pros and cons of an HRA.

How does an HRA work?

An HRA is typically offered as part of your medical benefits. If an employer offers an HRA, they’ll fund it up to a certain amount each year. You can’t contribute to it yourself, but you can use it to get reimbursed for qualified medical expenses.

How you’re able to get reimbursements depends on your specific account. You might have a linked debit card you can use to pay for eligible costs directly, or you may have to cover these costs yourself and then submit the receipt to receive a reimbursement.

What happens to unused money in an HRA?

Your employee benefits package will determine what happens to unused funds at the end of each plan year. Some employers may allow some or all of that money to roll over into the following year, but others will expire at the end of the year. If you leave the company, whether its by choice, getting laid off or terminated, you’ll lose access to those funds.

How is an HRA different from an HSA or FSA?

An HRA, HSA and FSA all provide a way to use tax-free money to pay for medical expenses. But there are differences in how each of them works.

Generally, with an HSA or FSA, you fund the account. But with an HRA, your employer funds the account directly—and how much they put in each year is entirely up to them, up to the annual limit set by the IRS. The account isn’t one you can access and withdraw money from. Instead, you get reimbursed (or sometimes you’re able to pay from the account directly) for qualified medical expenses. (We’ll talk more about this in a minute.)

HRAs are sometimes confused with other types of health spending accounts. Here’s a closer look at how they’re alike and different:

Can you cash out your HRA account?

The short answer is no. The money your employer sets aside is for qualified medical expenses only, and you’ll likely need to provide a receipt or provider invoice to get reimbursed. That means you cannot tap those funds for anything else—or cash out your HRA.

Are HRA funds considered income?

No—funds you access from your HRA are not included in your taxable income, which means you don’t need to pay income taxes on them.

What can an HRA be used for?

What counts as a qualified medical expense will depend on the individual plan details, which can vary from one company to the next. HRA funds might go toward the following:

1. Deductibles

1. Copays

1. Insurance premiums

1. Dental and vision care

1. Prescriptions

1. Hospital bills

1. Over-the-counter medications and medical supplies

Your HRA plan documents should clarify what costs are reimbursable.

Different types of HRAs

There are a few different kinds of HRAs out there, and each works a little bit differently. Your employer might offer one of these:

Qualified Small Employer HRA (QSEHRA)

This is designed for employers who have fewer than 50 employees and don’t offer a group health plan. In 2024, the contribution limit for a QSEHRA is $6,150 for individual coverage and $12,450 for family coverage.

Individual Coverage HRA (ICHRA)

This type of HRA allows employers of all sizes to reimburse employees for health insurance premiums and other qualified medical expenses. The employer determines how much they’ll cover, and there are no federally-imposed maximum limits.

Excepted Benefit HRA (EBHRA)

Employers who offer a group health plan can provide an EBHRA to reimburse their employees for qualified medical expenses. Employees don’t need to be enrolled in the group health plan to use an EBHRA. In 2024, the reimbursement limit for an EBHRA is $2,100.

Group Coverage HRA (GCHRA)

Sometimes called an integrated HRA, a GCHRA is used in conjunction with an employer’s group health insurance plan. Employees must be enrolled in that plan to use a GCHRA, but there is no contribution limit.

Special Purpose HRA

These are less common and include:

• Limited Purpose HRA: This is used with group high-deductible health plans, but HRA funds cannot be used to reimburse costs that go toward an employee’s deductible.

• Post-Deductible HRA: This type of HRA can be used only after the employee spends a certain amount on out-of-pocket medical expenses. It works as if the HRA itself has a deductible.

• Retirement HRA: As the name implies, this kind of HRA is reserved for retired employees. It’s a benefit that allows retirees to get reimbursed for qualified health expenses when they’re no longer working.

• Suspended HRA: This HRA has a time period when contributions and reimbursements are temporarily paused. This suspension period allows you to contribute to an HSA, which you generally can’t do when receiving HRA reimbursements.

Pros and cons of HRAs

There are benefits and potential downsides of HRAs to be aware of. Here are some pros and cons of HRAs.

Pros

• They can help offset qualified medical costs, which can be significant.

• Contributions and reimbursed funds don’t count as taxable income.

• Unlike FSAs, funds aren’t necessarily use-it-or-lose-it. The employer decides if funds can roll over at the end of each plan year.

• Unlike HSAs, HRAs don’t require employees to be enrolled in a high-deductible health plan.

Cons

• The employer owns the funds, which means you can’t take them with you if you leave your job.

• You can’t invest the funds like you can with an HSA.

• HRAs are typically less flexible than HSAs or FSAs.

• In most cases, you can’t have an HRA and an HSA at the same time.

Navigating HRAs and other employee benefits can be tricky. But when done right, they could provide some savings and reduce your health care costs.

Work benefits are a big part of your financial plan. Your Northwestern Mutual financial advisor can show you how your benefits fit within your larger financial picture, helping to identify opportunities and blind spots that you may not have otherwise considered.