Can you use an ICHRA with an HSA?

Wondering if you can use an ICHRA with an HSA? You’re not alone. Employers across the country are trying to maximize their health benefit value and control their actual health benefit costs. When the newest HRA regulations expanded tax-friendly benefits to a greater footprint of businesses, a lot of questions came in about how they interact with the popular and tax-advantaged HSA. Here’s how the ICHRA and HSA will work together.

First things first: what is an HSA?

An HSA (health savings account) is a savvy and hassle-free way to cover the cost of qualified medical expenses for both you and your dependents. With its tax benefits, easy accessibility to savings, and potential for future growth, it is an excellent savings tool that offers benefits today and tomorrow. Contributions to an FDIC-insured HSA account can be made by employers and employees alike, and they are tax-free, which means you can reduce your taxable income. In fact, it’s a tax-saving triple threat: contributions are either pre-tax or tax-deductible, interest and investment earnings are tax-free, and distributions for qualified medical expenses are tax-free as well.

And also worth noting:

While an ICHRA is non-transferable, employees can take their HSA anywhere!
Also different from an ICHRA, HSAs do not cover insurance premiums. Funds are only for medical expenses that fall under the health plan’s deductible.
There’s no “use it or lose it rule.” (Phew!). Those funds just stay in your account and grow until you need them.
HSA participants must have a qualified High Deducible Health Plan (HDHP) as defined by IRS rules.

→ Compare HRAs vs HSAs vs FSAs in more detail.

Here’s the good news. These two tax-advantaged powerhouses can be used together. But their integration depends on how they are set up and the details are pretty complex. In a nutshell, the rules are in place so folks don’t double dip when it comes to using tax-advantaged funds for medical expenses.

An ICHRA would have to be set up to reimburse premiums only for the employee to be eligible to make contributions to their HSA. If ICHRA reimburses premiums and medical expenses, then employees are disqualified from contributing towards the HSA. Since HSA funds don’t expire, employees can choose not to utilize their HSA during years the ICHRA reimburses expenses and will reap the benefits of the growing HSA funds down the road. This is a good strategy, despite the extra paperwork, considering HSA funds don’t expire.

For ICHRA and HSAs to work together, an individual must have a HDHP and no disqualifying health coverage.

A unique thing about ICHRA is that employers can offer expense reimbursement but employees can individually opt out and use their HSA, versus ICHRA’s predecessor, QSEHRA, which required the employer to offer it all or nothing.
Contributions can’t be made to an HSA for a worker if the worker can use his or her HRA to pay for general medical expenses before meeting the HDHP deductible.
An employer can offer employees in a class a choice between an HSA-compatible individual coverage HRA and an individual coverage HRA that is not HSA compatible because both types of individual coverage HRAs are offered to all employees in the class on the same terms.
If a plan sponsor chooses to offer an HSA-compatible individual coverage HRA that reimburses medical care expenses after the minimum deductible is satisfied, it is the employer’s responsibility—not the employee’s—to track medical care expenses incurred during the year and ensure that the individual coverage HRA does not reimburse medical care expenses incurred prior to the satisfaction of the minimum deductible.

Need help setting up?

Our team at Take Command thinks HRAs are great and we are excited that they can be paired up with our new favorite tax-advantaged tool, the ICHRA. We are proud to partner with fellow health startup Lively HSA to connect our clients to HSAs. Lively offers HSAs for employers and individuals. HSAs work alongside HSA compatible plans to make healthcare easier for everyone.

Take Command’s HRA platform to support the new ICHRA brings simplicity and ease of use for CPAs, benefits consultants, and employers to set up this benefit for employees.