Can I use an ICHRA with an HSA?

Navigating the world of healthcare can be challenging, especially when it comes to choosing the right health benefit for your organization. Both individual coverage health reimbursement arrangements (ICHRAs) and health savings accounts (HSAs) can maximize savings for you and your employees. But can they work together? The answer is yes, but there are some restrictions.

In this article, we'll compare both health benefits options and explain how to offer them at the same time.

Did you know you can use an HRA and HSA together? Find out how in our guide

What is an ICHRA?

An individual coverage HRA (ICHRA) is an excellent alternative to a traditional group health plan. It gives organizations of all sizes more flexibility and budget control than traditional employer-sponsored group insurance. With an ICHRA, employees aren't stuck with a traditional, one-size-fits-all group policy. Instead, they choose the individual health insurance coverage that's right for them. Then, you can reimburse employees tax-free for their monthly premiums and other out-of-pocket medical expenses.

An ICHRA satisfies the Affordable Care Act’s (ACA) employer mandate, which requires applicable large employers (ALEs) to provide minimum essential coverage (MEC).

There are other types of HRAs, like the qualified small employer HRA (QSEHRA) and the integrated HRA. Compared to a QSEHRA, an ICHRA offers more flexibility in terms of employer contributions.

What is an HSA?

An HSA is a tax-advantaged savings account employees can use with a high-deductible health plan (HDHP). Like an ICHRA, pre-tax money deposited in an HSA helps employees pay for eligible out-of-pocket expenses. This includes medical, prescription, dental, or vision expenses not covered by an individual market health plan or an employer-sponsored group plan.

ICHRA vs. HSA comparison chart

The chart below compares an HSA and an ICHRA.

Can an ICHRA and HSA work together?

Combining an ICHRA with an HSA is a powerful way to maximize medical savings. The IRS has specific rules for an ICHRA and an HSA to work together.

An employee can contribute to their HSA if the ICHRA offered by their employer only reimburses monthly insurance premiums and the employee is covered by a high-deductible health plan. The employee can utilize their ICHRA to buy an individual health insurance plan, contribute to an HSA, and use their HSA funds to cover other eligible healthcare expenses until they meet their deductible.

If an employer sets an ICHRA up to reimburse both individual insurance premiums f and other medical expenses, then employees participating in an ICHRA can't also contribute tax-free money to their HSAs. But HRA funds expire, while HSA funds don't. That means an employee could choose to disregard their HSA while their employer offers an ICHRA. Once they stop participating in an ICHRA benefit, they can pick up where they left off with their HSA.

As an alternative, employers can let their employees choose their preferred benefits. According to Cornell Law School’s Legal Information Institute¹, employers could offer an HSA-compatible ICHRA and a non-HSA-compatible ICRHA to employees in the same class and leave the decision up to them.

Conclusion

HRAs and HSAs can help offset medical costs for employees. By combining the two, employers can make the most of their healthcare budgets while employees maintain comprehensive health coverage. However, it's important to understand the restrictions and eligibility requirements that come with pairing them together.

If you’re new to offering an ICHRA, PeopleKeep can help. Schedule a call with one of our personalized benefits advisors now!

This blog article was originally published on June 14, 2023.

1. https://www.law.cornell.edu/cfr/text/45/146.123