Which statement about Health Reimbursement Arrangements (HRA) is correct?

• A. Employers fund an HRA entirely
• B. Reimbursements are never tax-free
• C. Reimbursements for qualified expenses may be tax-free
• D. HRAs require mandatory monthly contributions

Answer: (C)

Health Reimbursement Arrangements are employer-funded plans that reimburse employees for qualified medical expenses. The key tax rule is that when a reimbursement is used for a qualified medical expense, it is excluded from the employee’s gross income, making the payment tax-free. That’s why the statement about reimbursements for qualified expenses being tax-free is the best answer: it captures the essential tax-advantage of HRAs. In practice, HRAs are funded by the employer (not by employee salary deferrals), and they reimburse only qualified expenses; if the funds are used for non-qualified expenses, the tax treatment would not apply.