How to use an ICHRA with an HSA and a HDHP

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

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Employers across the country are trying to maximize their health benefit value and control their actual health benefit costs. When the new HRA regulations announced this summer 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 new ICHRA and HSA will work together.

First, let’s start with the difference between the two. There are certainly some similarities, especially in their ability to help business afford benefits through tax-advantaged tools, but their design is fundamentally different.

What is an ICHRA?

An ICHRA (Individual Coverage Health Reimbursement Arrangement) is a new tool (coming Jan. 2020)that allows employers of any size to reimburse any amount per month for healthcare expenses incurred by employees on a tax-free basis. Instead of signing up for a pricey employer-sponsored group plan, an employer can scale benefits across 11 customizable classes of employees and each employee chooses an individual health plan on the marketplace that works best for their families, their doctors, and their prescriptions. Employees submit receipts for things like doctor visit copays, lab work, monthly premiums, and qualified medical expenses (if the plan design allows) online and they are reimbursed through payroll. Employers can say goodbye to annoying paperwork, administrative burden and creeping group plan costs!

A few other details you won’t want to miss:

  • Employees musthave an individual marketplace or Medicare plan to participate. That means individuals covered through spouse group plans, sharing ministries, or TRICARE are not eligible.
  • This is a health reimbursement account, not a health savings account, so the employer only pays when receipts for care are submitted. If money is leftover, it stays with the employer.
  • A special enrollment period is triggered when an employer begins to offer an ICHRA, which means that employees will have 60 days to enroll in a major medical plan instead of waiting until open enrollment.
  • If the ICHRA is considered “unaffordable,” employees have the option to opt out of receiving ICHRA reimbursements and choose to keep their tax credit instead.

Ok, moving on.

What is an HSA?

An HSA (health savings account) is an easy and smart way to pay for qualified medical expenses for you and your dependents. With its tax-advantages, easy access to savings, and future growth potential it’s an effective savings vehicle that provides benefits today and in the future. Both employers and employees can contribute to the FDIC-insured account and contributions are tax-free, meaning you’ll lower your taxable income. In fact, it’s tax savings trifecta: contributions are 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 High Deductible Health Plan (HDHP).

How do an HSA and ICHRA work together?

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 using 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.

Take Command Health and Lively HSA have a long partnership as two health tech startups trying to make healthcare more affordable for individuals and business. Take Command Health’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. Lively offers HSAs for employers and individuals. HSAs work alongside HSA compatible plans to make healthcare easier for everyone.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.