ICHRA vs HSA: Understanding the differences and how they benefit employees

ICHRAs and HSA are both tax-advantaged vehicles that can help cover the cost of healthcare. 

However, who can contribute, what expenses the account covers, and contribution limits vary by type of account. Learn what ICHRAs and HSAs do and how they can work together to help cover the cost of health care.   

What is an ICHRA?

An Individual Coverage Health Reimbursement Arrangement, or ICHRA, is a growing alternative to traditional employer-sponsored healthcare and small business health insurance. With an ICHRA, employers set aside an allowance for qualifying employees and reimburse them for medical expenses, including premiums, copays, prescriptions, and more. 

How do ICHRAs work?

An ICHRA is a tax-free reimbursement allowance funded by an employer. Employees can use the allowance to reimburse individual plan premiums and in some cases qualifying healthcare expenses. 

Employees who have paid a healthcare-related expense can apply for reimbursement through the ICHRA. If the expense is approved, the employee draws from their ICHRA allowance to cover the cost. 

For example, if an employee picks a plan on the marketplace, they can apply for reimbursement each month to cover the monthly premium cost. The same can be done for copays and additional healthcare costs, as long as they fall under a qualifying expense.

An employer can also make a payment directly to the provider, bypassing a reimbursement process. 

Unlike other tax-advantaged employer healthcare arrangements, there are no annual contribution limits for ICHRAs.

Advantages of ICHRAs

ICHRAs have several benefits for both employees and employers compared to traditional group health insurance.   

• Flexibility. ICHRAs give employees the power to choose their own coverage and budget accordingly. 

• Tax-advantaged. Contributions to an ICHRA are tax-free for the employer. The reimbursements are tax-free for the employee. ICHRAs are also not eligible for employer payroll taxes.  

• Portable. Since employees choose their own plan, they can take it with them if they change jobs or leave their employer. As long as the employee pays the healthcare premium, they’ll be covered. 

• Potential savings. Employers set a fixed monthly contribution for employees, which could benefit them in terms of budgeting and predictability.

Who can use an ICHRA?

With ICHRAs, employers can divide eligible employees into 11 distinct classes and create a tailored benefits package for each group. This can benefit companies with different types of employees, including full-time, part-time, or contract employees.

What is an HSA?

A Health Savings Account, more commonly known as an HSA, is a tax-advantaged account to which employees and employers can contribute. HSAs can help people cover the cost of healthcare bills and serve as a long-term savings and investment vehicle. 

How do HSAs work?

Unlike ICHRAs, HSAs can be funded by both the employee and employer. The employee can set up tax-free recurring transfers from their paycheck, and an employer might offer a monthly or annual HSA contribution as a perk.

A person getting healthcare coverage through the marketplace can also take advantage of an HSA if they’re enrolled in a high-deductible health plan (HDHP). 

While HSAs do not have an employer contribution limit, the IRS sets an annual contribution limit for them. In 2024, the limit for an individual with an HDHP is $4,150, and a family with HDHP coverage can contribute up to $8,300.

When funds are added to the HSA, they can be used for qualifying health expenses. Employees can either pay the cost through a provided debit card or apply retroactively for reimbursement. Withdrawing from the account to cover the associated expenses is tax-free.  

For example, if an employee was charged a $40 copay for a specialist visit, they could use their HSA to cover the cost. The employee could use a health plan-provided debit card to pay for the transaction or withdraw $40 from the HSA retroactively.   

Unlike an ICHRA, HSAs can’t be used to cover the cost of healthcare premiums. However, they can cover other qualifying expenses, such as copays, bills, and prescriptions.

HSAs can be paired with a high-deductible health plan (HDHP) to help ease the cost of high bills a person might incur. According to the Bureau of Labor Statistics, over half of all employees are enrolled in an HDHP, giving them access to an HSA. 

Advantages of HSAs

HSAs have a fair number of benefits for employers and employees. 

• Tax-free. For employees and employers, contributions to the HSA are pre-tax. When an employee withdraws funds from the HSA for a qualifying medical expense, it is also tax-free. Finally, you can draw down, tax-free, on an HSA for nonmedical reasons if you are over the age of 65.   

• Flexible. An HSA allows employees to cover qualifying medical expenses with tax-free savings, allowing them to cover costs when needed and save on premiums with an HDHP.

• Portable. Employees can still keep their HSA if they leave their jobs or change healthcare coverage. However, if they aren’t enrolled in an HDHP, they can only draw down from the HSA and not contribute to it.

• Long-term investment potential. As mentioned above, anyone 65 and older can draw down on their HSA, tax-free, for non-medical expenses. Investing in an HSA long-term could translate into some serious savings to pull from post-retirement.

Who can use an HSA?

To qualify for an HSA, employees need to be enrolled in an HDHP. They also must meet the following qualifications: 

• No other coverage. Any other non-HDHP insurance can’t cover you, with the exception of dental or vision coverage.

• Medicare. You can’t contribute to an HSA if you are 65+ and enrolled in Medicare.

• Status. You can’t be claimed as a dependent on someone else’s tax return.

Can you use an ICHRA with an HSA?

ICHRAs and HSAs have some similarities, but both health savings programs can complement each other. Here’s how the two can work together for more comprehensive coverage. 

• HDHP Enrollment. If an employee selects an HDHP through the marketplace, they’ll also have the option for an HSA. The ICHRA can help cover the cost of premiums, which an HSA can’t cover. 

• Reimbursement. If your ICHRA reimburses for medical expenses not covered by the HDHP, those reimbursements can impact your HSA eligibility. To maintain HSA eligibility, ensure the ICHRA does not reimburse expenses that would otherwise qualify as deductible medical expenses under an HDHP. 

• Contributions. As long as you meet all other HSA eligibility requirements, you can still contribute to your HSA while using an ICHRA.

• Coordinate. Coordinating between your ICHRA and HDHP is essential to ensure you maximize your benefits without jeopardizing your HSA contributions. 

ICHRAs and HSAs: A good match with Thatch

Taking advantage of an HSA through an ICHRA can be a smart way for employees to have affordable coverage, with tax-free savings to cover large expenses along the way. ICHRAs offer the flexibility for employees to find coverage that fits them and fits their budget best.

Ready to get started with small business health insurance? Reach out to Thatch today to learn more.