Health Reimbursement Arrangement Rules.

10 Mar 2026 --
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Health Reimbursement Arrangement (HRA) Rules

A Health Reimbursement Arrangement (HRA) is an employer-funded health benefit plan that reimburses employees for qualified medical expenses and, in some cases, health insurance premiums. HRAs are widely used in the United States and are governed by a combination of tax law, ERISA, ACA (Affordable Care Act), and HIPAA.

1. Legal Nature of HRAs

HRAs are notional accounts funded solely by employers.
Employees do not contribute to HRAs.
Funds are reimbursed tax-free if used for qualified medical expenses under Internal Revenue Code (IRC) §105 and §106.

2. Types of HRAs

(a) Integrated HRA

Must be combined with a group health insurance plan.
Used to reimburse out-of-pocket medical expenses.

(b) Individual Coverage HRA (ICHRA)

Allows reimbursement of individual health insurance premiums.
Introduced under ACA reforms (2019 rule).

(c) Excepted Benefit HRA (EBHRA)

Limited reimbursements (e.g., dental/vision, short-term coverage).
Annual caps apply (e.g., ~$1,950 indexed).

(d) Retiree HRA

Designed for retired employees to cover post-retirement medical costs.

3. Key Regulatory Requirements

(1) Employer Funding Only

Employees cannot contribute to HRAs.
Ensures favorable tax treatment.

(2) Substantiation of Claims

Employers must verify that expenses qualify under IRC §213(d).
Requires receipts, invoices, or third-party verification.

(3) Nondiscrimination Rules

HRAs must comply with IRC §105(h):
- Cannot favor highly compensated employees.
Violations lead to loss of tax benefits.

(4) ACA Compliance

Standalone HRAs are generally prohibited unless structured as:
- ICHRA or EBHRA
Must meet market reform requirements:
- No annual/lifetime limits
- Preventive care coverage (if integrated)

(5) ERISA Compliance

HRAs are considered employee welfare benefit plans:
- Require plan documents
- Summary Plan Descriptions (SPDs)
- Fiduciary obligations

(6) HIPAA Privacy and Security

Medical reimbursement data must be protected.
Employers must implement safeguards for Protected Health Information (PHI).

4. Key Compliance Risks

Improper Standalone HRAs
- Violates ACA → penalties up to $100 per employee per day.
Failure to Substantiate Expenses
- Leads to loss of tax-exempt status.
Discrimination Violations
- Benefits to highly paid employees become taxable.
ERISA Non-Compliance
- Lack of documentation or fiduciary breaches.
Data Privacy Breaches (HIPAA)
- Exposure of medical information can trigger penalties.

5. Notable Case Laws

1. Commissioner v. Kowalski (1977)

Established principles on taxable vs. non-taxable reimbursements.
Reinforces that only qualifying medical reimbursements are tax-free.

2. United States v. Burke (1992)

Clarified treatment of compensation and benefits under tax law.
Relevant to distinguishing taxable income vs. excluded benefits in HRAs.

3. Pegram v. Herdrich (2000)

Addressed fiduciary duties under ERISA.
Demonstrates that employers administering health plans must act in participants’ interests.

4. Varity Corp. v. Howe (1996)

Landmark ERISA case on fiduciary misrepresentation.
Employers must provide accurate information about HRA benefits.

5. CIGNA Corp. v. Amara (2011)

Strengthened requirements for clear and accurate plan disclosures.
Applies to HRAs through Summary Plan Descriptions.

6. Gobeille v. Liberty Mutual Insurance Co. (2016)

Addressed ERISA preemption over state laws.
Confirms that federal law governs reporting obligations of employer health plans, including HRAs.

7. King v. Burwell (2015)

Focused on ACA subsidy framework.
Indirectly relevant as HRAs must align with ACA structures, especially for ICHRA compliance.

6. Best Practices for HRA Governance

Draft clear plan documents and SPDs
Use third-party administrators (TPAs) for compliance
Implement robust substantiation procedures
Ensure HIPAA-compliant data handling systems
Conduct regular nondiscrimination testing
Align HRA structure with ACA requirements (ICHRA/EBHRA)

7. Conclusion

Health Reimbursement Arrangements are flexible, tax-advantaged tools for employer-sponsored healthcare, but they are heavily regulated.

To remain compliant, employers must:

Integrate HRAs properly with health plans
Follow strict tax and ERISA rules
Avoid discrimination and privacy violations

Case law consistently emphasizes fiduciary responsibility, transparency, and proper structuring, making careful governance essential for avoiding penalties and ensuring employee trust.