An HRA is an employer-sponsored arrangement that reimburses employees on a tax-free basis for their eligible medical expenses. Unlike a health savings account (HSA), employees do not need to participate in a high-deductible health plan (HDHP) to be eligible for an HRA. It is common for HRAs to be paired with an HDHP in order to maximize premium savings and increase employee awareness of medical spending.
HRAs are funded completely by employer contributions. These employer contributions are generally tax-deductible and excluded from an employee’s gross income. Different from HSAs or health flexible spending accounts (FSAs), employees cannot make contributions to an HRA. Most employers with HRAs create unfunded accounts for each participating employee and reimburse eligible medical expenses up to each employee’s HRA balance.
Employers have considerable design flexibility with respect to their HRAs, including establishing the maximum reimbursement amount under the HRA. This limit may vary for different groups of employees, although employers are generally prohibited from basing contributions on an employee’s age, length of service or compensation.