Health reimbursement arrangements (HRAs) are employer-funded plans that give businesses a vehicle to provide financial assistance to employees for their health care expenses. Reimbursements for qualified expenses are generally tax-free, but, as the term “qualified expenses” implies, not every medical expense can be reimbursed. Depending on the type of HRA, funds may be used to reimburse medical insurance premiums, vision and dental insurance premiums, and qualified medical expenses. 

This post will explain what costs HRAs may cover and what costs employees might need to shoulder themselves.

What are the different kinds of HRAs?

The two types of HRAs are qualified small employer HRAs (QSEHRAs) and individual coverage HRAs (ICHRAs). Both generally allow employers to provide their employees with nontaxable reimbursement of their qualified medical expenses, including insurance premiums, coinsurance, copayments, and other out-of-pocket costs.


QSEHRAs (sometimes called a small business HRA) are only available when an employer has fewer than 50 full-time employees and doesn’t offer a group health insurance plan (including a health flexible spending account). 

These arrangements can help offset employees’ health insurance coverage or repay medical expenses that would otherwise be uncovered. Employers decide how much to contribute to their employee’s accounts, up to the allowed IRS annual maximum. For 2021, the maximum is $5,300 for individual employees and $10,700 for employees with families. Employees do not have to opt-in or out of the QSEHRA; instead, they can submit reimbursement for eligible expenses if they choose to do so. 

To use their QSEHRAs, employees first pay their provider or insurance company for their covered expenses (including a premium) and then submit proof of payment for reimbursement by the QSEHRA. Reimbursements to employees are typically made monthly. These reimbursements are almost always tax-free for employees and employers; however, there may be exceptions (e.g., if the health insurance coverage is offered through a spouse’s employer-sponsored coverage).


Any employer with at least one employee (other than a self-employed owner or a spouse) can offer an ICHRA with no limits on the amount of their contributions, and the reimbursement is also generally nontaxable. Employees can use these HRAs to buy their own comprehensive individual health insurance on or off the ACA health insurance marketplace. Reimbursements are nontaxable if the employee is enrolled in eligible individual health coverage or Medicare.

The reimbursement process is similar to a QSEHRA’s. Unlike a QSEHRA, however, employees must have the opportunity to decline the ICHRA before the plan year, which is generally declined for the entire plan year.

What are qualified medical expenses?

Qualified medical expenses generally include those costs that would qualify for the itemized federal income tax deduction for medical and dental expenses.

According to the IRS, the deduction is available for amounts paid:

  • for the diagnosis, cure, mitigation, treatment, or prevention of disease
  • to affect the structure (for example, a bone or other body part) or function of the body.

These costs include payments for legal medical services provided by physicians, surgeons, dentists, and other medical practitioners. 

Qualified medical expenses also include the costs of equipment and supplies and the costs for transportation and even—with limits—lodging to obtain care.

But the primary purpose of qualified medical expenses must be to alleviate or prevent a physical or mental disability or illness. Expenses for items that are merely helpful for general health, such as vitamins or a vacation, aren’t eligible for HRA reimbursement.

For certain HRAs, medical expenses include the premiums you pay for insurance that covers the costs of medical care and the amounts paid for transportation to get medical care. Medical expenses also include amounts paid for qualified long-term care services and limited amounts paid for any qualified long-term care insurance contract.

Employers, as the plan sponsor, may also limit what expenses are reimbursable. It is important to carefully review your plan documents and other benefits materials to understand what expenses may be reimbursed. 

Note: Medical expenses reimbursed under an HRA are ineligible for the income tax deduction for medical and dental expenses.

Which insurance premiums can be reimbursed?

Some HRAs do not allow for reimbursement of insurance premiums. For the HRAs that do allow premium reimbursement, employees may claim reimbursement for premiums they pay for insurance policies that cover:

  • Hospitalization, surgical services, and x-rays
  • Prescription drugs
  • Insulin
  • Dental care
  • Vision
  • Replacement of lost or damaged contact lenses
  • Long-term care (subject to limitations)
  • Special equipment or home improvements if the primary purpose is medical care
  • Major medical individual health insurance premiums
  • Medicare Part A or B, Medicare HMO, and employer-sponsored health insurance premiums
  • Medicare Advantage and Supplement premiums
  • COBRA premiums

Depending on the HRA, there may be additional requirements—such as the medical plan being minimum essential coverage—in order to be reimbursed. See more below. 

If a plan also provides payments for non-medical expenses, an employee can be reimbursed for the premiums for the medical care portion of the policy. The cost of the medical portion must be separately stated in the policy or billed on a separate statement.

Which insurance premiums can’t be reimbursed?

Not every insurance policy is eligible for HRA reimbursement. For example, employees can’t be reimbursed for premiums for:

  • Life insurance
  • Policies providing payments for loss of earnings
  • Policies for loss of life, limb, vision, and the like
  • Policies that pay a guaranteed amount weekly, for a stated number of weeks, if the insured is hospitalized for sickness or injury
  • The medical insurance coverage included in vehicle insurance.

Which out-of-pocket expenses can’t be reimbursed?

Out-of-pocket expenses may include any qualifying medical expenses that the employee’s insurance plan doesn’t already cover or anything the insurance company expects them to pay. The IRS list of eligible medical expenses is long, but it also has a shorter list of expenses that don’t qualify for the deduction and therefore aren’t reimbursable under an HRA. 

Those include:

  • Childcare for healthy children
  • Cosmetic surgery not necessary to improve a deformity related to a congenital abnormality, a personal injury, or a disfiguring disease
  • Future medical care (beyond the end of the year)
  • Hair transplants
  • Health club dues
  • Medicines and drugs from other countries
  • Nonprescription medicines and drugs (except insulin)
  • Nutritional supplements
  • Teeth whitening

Weight-loss programs unless the weight loss is a treatment for a specific disease diagnosed by a physician (for example, obesity, hypertension, or heart disease).

Are there instances where expenses deemed “qualified” might not be reimbursed?

Most HRAs cover medical expenses that qualify for the tax deduction, but employers are permitted to exclude specific costs that would be deductible. Employees should review the list of reimbursable expenses in their employer’s plan document.

Whose expenses can be paid with an HRA?

Employees generally can receive reimbursement for qualified medical expenses they’ve paid for themselves, their spouses, and their dependents. Spouses and dependents must have their status when they incurred the expense, or the employee paid it.

Are COVID-related expenses eligible?

The IRS has announced that amounts paid for personal protective equipment (e.g., face masks, hand sanitizer, and sanitizing wipes) for the primary purposes of preventing the spread of COVID-19 are considered qualified medical expenses. Because most HRA’s don’t roll over year-to-year, these might be things that employees can choose to stock up on before the new plan year starts to take full advantage of their benefits. 

What kind of documentation is required for reimbursement?

Employees need to substantiate their out-of-pocket expenses when seeking reimbursement—in other words, prove that the expenses qualify for reimbursement. Depending on which kind of out-of-pocket costs your employees are paying for, they’ll need to submit different documents to get them reimbursed. Documentation could be a receipt or an invoice.

An employee can generally satisfy this requirement with documentation from an independent third party that states: 

  • the employee has incurred a medical expense, 
  • the date it was incurred, and 
  • the amount. 

In some cases, a doctor’s note stating the item is medically necessary will be required. For these items to qualify for reimbursement, the doctor’s note usually needs to include

  • The specific names of the items recommended
  • What medical condition the item is treating (it cannot just be for general health and wellness) and, 
  • Signature of a licensed medical practitioner

An employee can also usually satisfy the requirement by submitting an explanation of benefits from an insurance company that indicates the date of the service and the employee’s out-of-pocket expense for the service. The IRS also has approved the use of HRA-dedicated credit or debit cards to “auto-substantiate” claims.

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