8805 / What is a health reimbursement arrangement (HRA) and how is it taxed?

(1)  is solely employer-funded and not paid for directly or indirectly by salary reduction contributions under a cafeteria plan; and

(2)  reimburses employees for substantiated medical care expenses incurred by the employee and the employee’s spouse and dependents, as defined in IRC Section 152, up to a maximum dollar amount per coverage period.

A taxpayer is entitled to carry forward any unused amounts in the individual’s account to increase the maximum reimbursement amount in subsequent coverage periods.¹ HRAs are not available for self-employed individuals.

Employer-provided coverage and medical care reimbursement amounts under an HRA are excludable from an employee’s gross income under IRC Section 106 and IRC Section 105(b), assuming all requirements for HRAs are met.²