What Happens to Unused Amounts in an Employee’s HRA When Their Employment Terminates?

When an employee who has a balance in their health reimbursement arrangement (HRA) terminates from the plan (either due to termination of employment or any other reason that would cause them to lose eligibility, like a reduction in hours), the employer is not permitted to “cash out” the HRA. In other words, the employer is not allowed to provide cash or other benefits in an amount equal to some or all of the HRA balance. This is because cashing out would trigger taxation of all HRA distributions, even if they were used to pay qualified medical expenses.

There are three ways employers may decide to handle this situation:

  • The HRA may be designed so that employees forfeit their unused balances when employment ends (usually after they have been given a specified amount of time to submit reimbursements for expenses incurred before termination).
  • The HRA may allow employees to “spend down” their balances and receive reimbursement for eligible expenses incurred after employment termination until the HRA balance is depleted.
  • Alternatively, the HRA could be designed so that all but a nondiscriminatory class of employees forfeit unused amounts at termination.

The HRA plan document should clearly state the policy chosen and it should also be included in the summary plan description and other employee communication materials.

Also remember that if the employer is subject to COBRA, COBRA must be offered to the employee that is terminated from the plan. If COBRA coverage is purchased, the recipient will have access to the HRA balance and any account credits that would be received for the coverage period by a similarly situated non-COBRA beneficiary.