Health reimbursement arrangements (HRAs) are a benefit that some employers offer their employees to help with healthcare expenses. They’re a way for companies to reimburse workers for these costs, and reimbursements are generally tax free when used for qualified medical expenses. These accounts work alongside group health insurance plans that comply with the Affordable Care Act (ACA). The plan is often a high-deductible health plan (HDHP), but it doesn’t have to be; the plan can be a PPO or an HMO. What an HRA Isn’t The alphabet soup of health insurance benefits can confuse anyone. HRAs are not health savings accounts (HSAs) or flexible spending accounts (FSAs), each of which has its own set of rules and benefits for how it can be used to pay for qualified medical expenses. Here's a quick rundown, since these terms can get confusing. HSAs must be used with an HDHP, contributions can come from both employers and employees, the balance can be invested and rolled over from year to year and the account goes with you when you change jobs. (For related reading, see How to Use Your HSA for Retirement.) FSAs don’t have to be used with an HDHP, contributions come only from employee payroll deductions and the balance can’t be invested and doesn’t earn interest. FSA balances must be used in the current plan year, though some employers allow small amounts to roll over or give employees a grace period at the beginning of the following year to use up the balance. Also, FSAs don’t go with you when you change jobs. (See How Flexible Spending Accounts Work.) Who Funds One? HRAs, on the other hand, are funded entirely with employer money. An HRA is not an account; it’s a reimbursement arrangement between you and your employer. You can’t invest the balance and it doesn’t earn interest. If you participate in an HRA, you won’t see any deductions from your paycheck. Instead, your employer decides how much it is willing to reimburse you for healthcare costs on a monthly or annual basis. If you still have a balance at the end of the year, it may roll over as long as your employer continues to offer the HRA and you continue to participate, but it may not: That decision is up to your employer, too. How to Participate To participate in an HRA, you must opt in during your employer’s open enrollment period. If you have a qualifying life event, you can sign up outside of open enrollment. Spouses and children who participate in your employer’s health insurance plan can also be reimbursed through an HRA. Unfortunately, if you’re self-employed, you can’t use an HRA. (See 10 Tax Benefits for the Self-Employed.) Reimbursable Expenses It’s up to your employer to decide which expenses you will be reimbursed for. The expense must be a qualified medical expense listed in IRS Publication 502, but your employer can use a narrower list. In general, you can use an HRA to be reimbursed for qualified medical expenses your health insurance doesn’t pay for, such as medical and pharmacy expenses you must pay out of pocket before meeting your deductible and coinsurance you’re responsible for after meeting your deductible. Eligible expenses include costs like visiting the doctor when you’re sick, getting X-rays or having surgery. Some plans even let you use HRA funds for health insurance premiums. Dental and vision expenses usually qualify, too, as do a few over-the-counter items, such as diabetes-testing aids, blood-pressure monitors and contact-lens solution. You can also use your HRA to pay for long-term care insurance premiums. Some HRAs are more limited and you can only use them for coinsurance. Other HRAs only reimburse expenses after you’ve met your deductible. Employers have a lot of flexibility in how they set up an HRA. (For related reading, see Vision Care Insurance: Will You See a Benefit? and Should You Bite on Dental Insurance?) Employers can’t let you use HRA funds for things the IRS doesn’t allow, though. You can’t use an HRA for over-the-counter medicines unless your doctor has written a prescription for them. You also can’t use an HRA to be reimbursed for costs you incurred before your HRA participation became effective or for costs from a different year. Special HRA Rules for Small Businesses With a qualified small employer health reimbursement arrangement (QSEHRA), businesses with fewer than 50 full-time employees or the equivalent can reimburse workers up to $4,950 per year for single coverage and up to $10,000 per year for family coverage. Employers who offer a QSEHRA must offer it to all employees with a few exceptions, such as those who are new, part-time or seasonal workers. Employers have to contribute the same amount to each employee’s QSEHRA unless there are differences in employees’ premiums based on their age and number of family members covered. QSEHRAs are only an option for small employers who offer no other form of group health insurance, and employees must prove that they carry the minimum essential health insurance coverage that the ACA requires. The QSEHRA became an option after former president Barack Obama signed the 21st Century Cares Act into law December 13, 2016. Before Obama passed the act, small employers offering HRAs in 2014 through 2016 faced potential fines of $100 per employee per day, or up to $36,500 per year because these plans were considered out of compliance with ACA rules. Companies can offer QSEHRAs in 2017 within 90 days of notifying employees, which means the first date they may be available is March 13, 2017 for employers who provided notice immediately after the law was signed. Reimbursement Logistics Often, your HRA administrator will be able to verify your claim automatically, but sometimes you’ll need to submit an itemized bill from your healthcare provider to substantiate your claim. By law, no expense is too small to be reimbursed, but your employer might require you to accumulate a minimum amount of reimbursable expenses before it will issue a check. Your employer chooses how it will reimburse you for qualified medical expenses. You may receive a debit card so you can pay for your expenses as needed, or you may have to pay up front, then request reimbursement. Some plans will reimburse your doctor directly, so you don’t need to use a debit card or wait to get your money back. The maximum you can be reimbursed per year is whatever your employer decides (see above for the limitations if your plan is a QSEHRA). In 2016, the average employer contribution to an HRA was $1,059 for singles and $1,867 for families, according to the Kaiser Family Foundation’s 2016 Employer Health Benefits Survey. If your employer allows it, you may be able to spend the amount remaining in your HRA within a limited period after you are terminated. Tax Benefits You don’t have to report your participation in an HRA on your tax return. The amount your employer is willing to reimburse you for medical expenses through an HRA is not considered taxable income, nor are the actual amounts reimbursed, as long as you put the money toward qualified medical expenses as defined by the IRS and your employer. Exceptions to tax-free distributions apply in a few situations: If your employer pays out your unused reimbursements at the end of the year or when you leave your job, the money will be considered taxable income. Since it’s not being used to reimburse you for qualified medical expenses, it’s treated like ordinary income. (For further reading, see 10 Sources of Nontaxable Income.)