Can I use an ICHRA with an HSA?
ICHRA • June 14, 2023 at 7:49 AM • Written by: Holly Bengfort
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.
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.
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ICHRA |
HSA |
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What are the eligibility requirements? |
All employers with at least one W-2 employee can offer an ICHRA. Eligible employees must have coverage under a qualifying individual health insurance policy. |
An employee must have coverage under an HSA-eligible HDHP to make contributions. |
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Who owns the arrangement? |
The employer owns the HRA. At the end of the year, unused funds go back to the employer, contributing to further benefit savings. |
The employee owns the account and keeps the value when they leave the organization. |
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Who can contribute? |
The employer sets the allowance amount and makes contributions. |
The employee and employer can contribute to an HSA. |
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Can employers make different contributions to different employees? |
Employers can offer various allowance amounts to different employee classes, such as salaried employees and hourly employees. However, the allowance amount must be the same within each class of employees (although employers can differ allowances by age or family status within a class). |
All employees receive the same contribution from the employer based on comparable coverage. |
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Are there annual contribution limits? |
There are no annual contribution limits for an ICHRA. Employers can contribute as much or as little allowance as they'd like. |
There are annual limits for an HSA. |
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Are contributions tax-free? |
Contributions are tax-free for the employer. Reimbursements for eligible expenses are tax-free for employees. |
Contributions aren't subject to tax for employers or employees. |
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How do employees receive contributions from the business? |
Employees submit documentation of their eligible expenses for reimbursement. Employers approve the expense and reimburse employees. |
Employees receive a set contribution, tax-free, through their paychecks. |
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What can employees use the funds for? |
Employees can use ICHRA funds for qualified medical care expenses listed in IRS Publication 502, including individual health insurance premiums. |
Employees can use HSA funds for qualified medical care expenses. They can't use the funds to pay for health insurance plan premiums except in limited circumstances. |
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.
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 as long as you offer the ICHRAs on the same terms to all employees in the class.
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.
This blog article was originally published on June 14, 2023.
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Holly Bengfort
Holly Bengfort is a content marketing specialist at PeopleKeep, with two years of experience in HRAs and health benefits. Having experienced the QSEHRA firsthand as an employee, Holly provides invaluable insights into how it can benefit small businesses and their workforce. Before joining the team in 2023, Holly worked in television news as a broadcast journalist. With her experience as a news anchor and reporter, Holly has an exceptional ability to break down intricate stories into clear, compelling narratives that resonate with diverse audiences. Her talent for simplifying tricky topics ensures that everyone can fully grasp important information. Outside of work, Holly enjoys spending time outdoors, staying active, and relaxing on the beach.