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Background and basics


Prior to 2002

Medical reimbursement plans using carryover accounts were of limited popularity, due in part to uncertainty regarding their tax treatment. 


The IRS guidance established a safe harbor allowing unused amounts to carry over from year to year without becoming subject to federal tax and essentially created the vehicle we now know as an HRA. Since then, HRAs have become much more common. There is no specific Code section governing HRAs but the IRS has confirmed their tax-favored treatment under the general principles of Code §§105 and 106.


Health care reform added a variety of requirements for group health plans (including HRAs). Importantly, employers were not allowed to use HRAs to reimburse employees for the cost of individual health insurance, and most employees had to be covered by a group health plan to receive reimbursement from an HRA. 


Congress passed legislation that created Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs). QSEHRAs share some basic design features with other HRAs, but are available only to small employers who do not offer traditional group health plan coverage to employees.


The IRS, DOL, and HHS jointly issued regulations that expand the permitted use of HRAs beginning on or after January 1, 2020. The regulations bring significant changes to the HRA rules by establishing two new types of HRAs, the Individual Coverage HRAs (ICHRAs) and excepted benefit HRAs (EBHRAs). An ICHRA allows employers to provide tax free reimbursements to employees who purchase individual health insurance policies.