What are the IRS rules on health reimbursement accounts?

Health Reimbursement Arrangements (HRAs) are employer-funded, tax-advantaged plans that reimburse employees for qualified medical expenses and individual insurance premiums.

Core IRS Rules for HRAs

• Employer-Funded Only: HRAs must be financed solely by the employer. Employees cannot contribute through salary reductions or a cafeteria plan.
• Tax-Free Benefits: Employer contributions and reimbursements for qualified medical care are excluded from the employee's gross income.
• Substantiation Required: Every reimbursement requires proof (such as a receipt or bill) showing the expense is an eligible medical care cost under IRC Section 213(d).
• Carryover Allowed: Unused funds at the end of the year can roll over to subsequent plan years if allowed by the employer. Cashing out unused balances is strictly prohibited.
• Ownership: If an employee leaves the company, the employer generally retains any remaining balance in the HRA.

Common Types of HRAs

• Individual Coverage HRA (ICHRA): Allows employers of any size to provide tax-free reimbursements for individual health insurance policies, subject to class-based rules.
• Qualified Small Employer HRA (QSEHRA): Designed for businesses with fewer than 50 employees that do not offer a traditional group health plan. Contribution limits are adjusted annually.
• Group Health Plan HRA: Tied to an employer-sponsored group plan to help cover out-of-pocket costs like deductibles or copays.

You can review official regulations and updates on the IRS Health Reimbursement Arrangements Page or consult IRS Publication 969.

IRS rules forbid employers from simply handing cash to employees or reimbursing individual health insurance premiums outside of specific, approved tax-advantaged structures. Doing an informal or standalone reimbursement can trigger heavy penalties ($100 per day per employee under IRC Section 4980D).

To be tax-free and compliant, health insurance and medical reimbursements must flow through official IRS-recognized mechanisms.

Approved Reimbursement Methods

• Individual Coverage HRA (ICHRA): Employers of any size can reimburse employees tax-free for individual health insurance policies or Medicare, provided the ICHRA is paired with individual coverage and meets specific rules. There are no maximum contribution limits, and contributions can be scaled by employee classes.
• Qualified Small Employer HRA (QSEHRA): Designed for small businesses with fewer than 50 full-time employees that do not offer a traditional group health plan. It provides tax-free reimbursements for individual health insurance and medical care up to strict annual limits set by the IRS (for instance, $6,450 for single coverage and $13,100 for family coverage in 2026).
• Health Flexible Spending Arrangement (FSA): Funded via voluntary pre-tax employee salary reductions (capped at $3,300 for 2025) through a cafeteria plan, allowing tax-free reimbursement of qualified medical expenses.
• Health Savings Account (HSA): Available to individuals with a High-Deductible Health Plan (HDHP), allowing tax-deductible contributions and tax-free distributions for medical costs.

Core Compliance Rules

• Employer-Funded HRAs: Health Reimbursement Arrangements must be funded entirely by the employer. Employees cannot contribute via salary deductions.
• Written Plan Document: A formal, written plan must clearly define eligibility, coverage limits, and rules. Informal agreements make reimbursements fully taxable.
• Proof of Coverage: For ICHRAs and QSEHRAs, employees must provide proof of enrollment in individual minimum essential coverage before any premiums are reimbursed.
• Qualified Expenses: Reimbursed medical expenses must align strictly with IRS guidelines (such as IRC Section 213(d) definitions).

A Health Reimbursement Arrangement (HRA) is an employer-funded, tax-advantaged plan used to reimburse employees for qualified medical expenses, but it comes with strict operational and structural limitations.

Key Limitations of an HRA

• No Employee Contributions: Employees cannot contribute their own pre-tax or after-tax money to an HRA; funding is strictly the employer's responsibility.
• Lack of Portability: Because the employer owns the HRA funds, any remaining balance is forfeited and stays with the business if the employee leaves the company or is terminated.
• No Direct Cash Withdrawals: Funds cannot be paid out as cash or used for non-medical purposes; they must strictly reimburse qualified medical expenses or eligible health insurance premiums.
• Strict Documentation Required: Every single expense must be substantiated with provider receipts, itemized bills, or Explanation of Benefits (EOB) statements before the plan administrator can approve a reimbursement.
• Contribution Caps on Specific Types: While traditional or integrated group HRAs and ICHRAs (Individual Coverage HRAs) have no maximum contribution limits, specific variants like QSEHRAs (Qualified Small Employer HRAs) and Excepted Benefit HRAs enforce strict annual government-mandated caps.
• Employer Discretion on Rules: Employers maintain full control over plan design, meaning rules regarding what specific medical expenses are covered, whether funds roll over, and how reimbursements are handled can vary significantly from one company to another.

Health reimbursement arrangements (HRAs) are generally not taxable as long as the funds are used to pay for qualified medical expenses or eligible health insurance premiums.

Most users on Reddit agree that properly structured HRAs are not considered taxable income.

For Employees

• Tax-free reimbursements: Money received from an employer to cover qualified out-of-pocket medical costs, dental care, or individual insurance premiums is completely tax-free.
• No reporting required: Standard expense reimbursements for qualified medical care are not reportable to the IRS.
• Exceptions: If an HRA reimburses non-medical expenses or allows cash-outs of unused balances at the end of the year, the entire arrangement loses its tax-exempt status and all distributions become taxable income.

For Employers

• Tax-deductible contributions: Contributions and reimbursements made by a business to an employee's HRA are fully tax-deductible as a business operating expense.
• C-Corp Owner exception: Medical reimbursements made through an HRA to certain C-Corporation business owners must be included on their W-2 wages for federal income tax, though they are still exempt from FICA and FUTA taxes.

IRS guidelines require employers to use an Accountable Plan to reimburse employee business expenses tax-free, which demands a clear business connection, timely proof of costs, and the return of any extra money. If a plan fails these rules, the IRS treats the reimbursements as taxable wages.

You can review a detailed breakdown in the Emburse Expense Reimbursement Guide.

The Three Rules of an Accountable Plan

To keep reimbursements tax-free, your company plan must satisfy three strict conditions:

• Business Connection: The expense must be an ordinary and necessary cost incurred while performing job duties. It cannot be personal.
• Substantiation: Employees must provide proof of the exact amount, time, place, and business purpose.
• Return of Excess: Employees must return any advanced money that exceeds their actual spent expenses.

Receipt Requirements and the $75 Rule

The IRS requires specific proof for business spending:

• Itemized Receipts: Employees must submit itemized bills or receipts for all lodging expenses, regardless of the cost.
• The $75 Threshold: Receipts are generally not required for individual non-lodging expenses under $75, though the employee must still log the date, place, amount, and business reason.
• Digital Records: Digital photos or scans of receipts are fully valid substitutes for paper originals.

Safe Harbor Deadlines

The IRS uses specific timelines to define a "reasonable period" for compliance:

• Submitting Expenses: Employees should submit expense reports within 60 days of incurring the cost.
• Returning Excess Funds: Employees must return excess advances or allowances within 120 days.

Non-Accountable Plans

• Reimbursements that miss these criteria fall under a non-accountable plan.
• The company must add the reimbursement amount directly to the employee's W-2 form.
• The money becomes subject to federal income tax, Social Security, and Medicare withholding.