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Publication 969

Health Reimbursement Arrangements (HRAs)(p18)

A health reimbursement arrangement (HRA) must be funded solely by an employer. The contribution cannot be paid through a voluntary salary reduction agreement on the part of an employee. Employees are reimbursed tax free for qualified medical expenses up to a maximum dollar amount for a coverage period. An HRA may be offered with other health plans, including FSAs.
Note.Unlike HSAs or Archer MSAs which must be reported on Form 1040 or Form 1040NR, there are no reporting requirements for HRAs on your income tax return.
For information on the interaction between an HRA and an HSA, see Other employee health plans under Qualifying for an HSA, earlier.

What are the benefits of an HRA?(p18)

You may enjoy several benefits from having an HRA.

Qualifying for an HRA(p18)

HRAs are employer-established benefit plans. These may be offered in conjunction with other employer-provided health benefits. Employers have complete flexibility to offer various combinations of benefits in designing their plan. You do not have to be covered under any other health care plan to participate.
Self-employed persons are not eligible for an HRA.
Certain limitations may apply if you are a highly compensated participant.

Contributions to an HRA(p18)

HRAs are funded solely through employer contributions and may not be funded through employee salary deferrals under a cafeteria plan. These contributions are not included in the employee's income. You do not pay federal income taxes or employment taxes on amounts your employer contributes to the HRA.

Amount of Contribution(p18)

There is no limit on the amount of money your employer can contribute to the accounts. Additionally, the maximum reimbursement amount credited under the HRA in the future may be increased or decreased by amounts not previously used. See Balance in an HRA, later.

Distributions From an HRA(p18)

Generally, distributions from an HRA must be paid to reimburse you for qualified medical expenses you have incurred. The expense must have been incurred on or after the date you are enrolled in the HRA.
Debit cards, credit cards, and stored value cards given to you by your employer can be used to reimburse participants in an HRA. If the use of these cards meets certain substantiation methods, you may not have to provide additional information to the HRA. For information on these methods, see Revenue Ruling 2003-43 on page 935 of Internal Revenue Bulletin (IRB) 2003-21 at, Notice 2006-69, 2006-31 I.R.B. 107 available at, and Notice 2007-2, 2007-2 I.R.B. 254 available at
If any distribution is, or can be, made for other than the reimbursement of qualified medical expenses, any distribution (including reimbursement of qualified medical expenses) made in the current tax year is included in gross income. For example, if an unused reimbursement is payable to you in cash at the end of the year, or upon termination of your employment, any distribution from the HRA is included in your income. This also applies if any unused amount upon your death is payable in cash to your beneficiary or estate, or if the HRA provides an option for you to transfer any unused reimbursement at the end of the year to a retirement plan. However, see Qualified HSA distribution, later.
If the plan permits amounts to be paid as medical benefits to a designated beneficiary (other than the employee's spouse or dependents), any distribution from the HRA is included in income.
Reimbursements under an HRA can be made to the following persons.
  1. Current and former employees.
  2. Spouses and dependents of those employees.
  3. Any person you could have claimed as a dependent on your return except that:
    1. The person filed a joint return,
    2. The person had gross income of $3,650 or more, or
    3. You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2010 return.
  4. Effective March 30, 2010, your child under age 27 at the end of your tax year.
  5. Spouses and dependents of deceased employees.
For this purpose, a child of parents that are divorced, separated, or living apart for the last 6 months of the calendar year is treated as the dependent of both parents whether or not the custodial parent releases the claim to the child's exemption.

Qualified medical expenses.(p19)

Qualified medical expenses are those specified in the plan that would generally qualify for the medical and dental expenses deduction. These are explained in Publication 502, Medical and Dental Expenses. However, even though non-prescription medicines (other than insulin) do not qualify for the medical and dental expenses deduction, they do qualify as expenses for HRA purposes.
Note.After 2010, non-prescription medicines (other than insulin) do not qualify as an expense for HRA purposes. See the discussion under What's New for 2011, earlier.
Qualified medical expenses from your HRA include the following. If you are covered under both an HRA and a health FSA, see Notice 2002-45, Part V, which is on page 93 of IRB 2002-28 at
You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the distribution from the HRA.

Qualified HSA distribution.(p19)

This is a distribution from your HRA that is transferred to your HSA, discussed earlier. The distribution must not be more than the lesser of the balance in the HRA on: If you were not covered by an HRA on September 21, 2006, you cannot elect to make a qualified HSA distribution from the HRA.
The following conditions must be met to make a qualified HSA distribution. Only one qualified HSA distribution is allowed for each HRA.
For more information, see Notice 2007-22, 2007-10 I.R.B. 670 available at
If you do not remain an eligible individual for HSA purposes during the testing period, the distribution is included in your income and is subject to a 10% additional tax. See Qualified HSA distribution under Health Savings Accounts (HSAs), earlier.

Balance in an HRA(p19)

Amounts that remain at the end of the year can generally be carried over to the next year. Your employer is not permitted to refund any part of the balance to you. These amounts may never be used for anything but reimbursements for qualified medical expenses. See Qualified HSA distribution, earlier.

Employer Participation(p19)

For an HRA to maintain tax-qualified status, employers must comply with certain requirements that apply to other accident and health plans. Chapters 1 and 2 of Publication 15-B, Employer's Tax Guide to Fringe Benefits, explain these requirements.