What are ICHRAs? How Do They Fit into the World of HSAs?

ICHRAs are gaining some traction in the market. Do they conflict with Health Savings Accounts? It depends.

Individual-Coverage Health Reimbursement Arrangements were created by the Trump Administration by executive order in 2019 and became available to employers effective Jan. 1, 2020. They're a way for companies to offload their responsibility for offering employer-sponsored medical coverage and instead provide funds to eligible workers, who then shop for the coverage that best meets their needs.

The Administration projected that when ICHRAs were mature, they'd enroll about 11 million Americans, including 800,000 who previously lacked coverage. The rest would be employees whose company switched from group coverage and people who already bought plans in the nongroup market but now would receive an employer subsidy to offset some of the premium cost.

Defining an ICHRA

An ICHRA allows a company to give employees a monthly tax-free stipend to purchase a nongroup medical plan of their choice, rather than the employer's sponsoring one or more plans.

The key benefits to employers:

• Employers don't have to guess which one or two or three plans will meet the needs of most employees.
• Employers can adjust their ICHRA stipend annually to meet their financial needs, irrespective of premium increases. Their contribution doesn't need to rise with premium increases (though it can).
• Companies don't need to employ benefits specialists to manage employer-sponsored coverage.

The key benefits to employees:

• Each worker can choose a plan in the nongroup market that works best for her family.
• Employees maintain the same plan (with the same benefits, physicians, and deductibles accumulated) even if they leave their jobs.

In full disclosure, there are challenges as well. Most workers have never bought coverage outside of their employer. Companies may not adjust their annual stipend to match premium increases, thus forcing workers to pay more of the higher premium or switch to a plan with a lower premium and corresponding higher deductible and other out-of-pocket responsibility. Plans in the nongroup market vary from state to state, in some cases limited to plans with high cost-sharing and narrow provider networks. And employers no longer sponsor wellness programs and other activities to manage premium costs, since they're not sponsoring a plan or paying premiums.

How ICHRAs Work

Employers can offer ICHRAs to all or part of their work force (but they're restricted on how they can divide the population). They simply announce to employees that they're no longer offering a group plan. They then provide eligible workers with a monthly stipend - which can vary depending on the family size and age of the employee or all family members covered). Employees who are eligible for benefits then shop for coverage through a federal- or state-facilitated marketplace (public exchange), via a private marketplace, or directly from an insurer.

Employees apply the ICHRA stipend to their monthly premium. Their employer may allow employees to cover the remaining premium via payroll deductions (which may be pre- or post-tax, depending on whether workers buy their coverage through a public exchange or from a private seller). Employees can't deposit their share of the premium into the ICHRA because federal tax law limits contributions into all Health Reimbursement Arrangements to employers only.

The mechanics of how the ICHRA reimburses the employee (or the insurer directly) differ from company to company.

Two Distinct ICHRA Designs

ICHRAs are designed to pay premiums. But employers can offer a design that allows employees can reimburse other qualified expenses. Here are the two designs:

Premium-only ICHRA. As the name implies, only premiums can be paid from this account. Usually, employers don't fund ICHRAs to cover the full premium, so this plan design works in most cases. It may be called an HSA-eligible ICHRA or an HSA-qualified ICHRA.

Example 1: Paige's company deposits $600 into her ICHRA monthly. She bought a high-deductible plan with premiums of $550 monthly. She can't spend the additional $50 on out-of-pocket medical expenses. (She'll probably buy a richer plan next year and spend the full employer stipend.)

Full ICHRA. A full ICHRA (it may go by other names as well) allows employees who have funds remaining after they pay their monthly premium to use the balance to reimburse other qualified medical, dental, vision, and over-the-counter expenses (subject to limitations, if any, imposed by the employer). Rarely do employees have funds remaining, but it's possible if the employer contribution is generous, the stipend isn't age-adjusted or is adjusted with broad age ranges, and a young employee chooses a plan with a low premium.

Example 2: Paige's husband Matt's employer offers an ICHRA with a $600 monthly stipend. He enrolls in the same nongroup plan. His ICHRA design allows him to spend his extra balance (after he pays his premium in full) on deductible expenses. He can cover $600 ($50 balance monthly for 12 months) of his deductible with his ICHRA stipend.

ICHRAs and Health Savings Accounts

Employees with ICHRAs can shop for any coverage, including HSA-qualified plans. But the design of their ICHRA determines whether they can fund a Health Savings Account.

If their ICHRA reimburses premiums only (Example 1 above), the ICHRA isn't disqualifying. That's because the ICHRA can't reimburse any qualified medical expenses before the employee (and her family, if she covers other members) assumes responsibility for at least the first $1,500 (self-only) or first $3,000 (family) of deductible expenses.

Example 3: Paige (above) can enroll in an HSA-qualified plan and then open and fund a Health Savings Account. Although she can't pay any of her out-of-pocket expenses with her ICHRA balance, she can contribute to a Health Savings Account to pay those qualified expenses with pre-tax funds.

On the other hand, if the ICHRA allows employees to spend extra balances (beyond the full premium) on other qualified expenses (Example 2 above), the ICHRA design is disqualifying.

Example 4: Matt (above) can choose an HSA-qualified plan to lower his premiums. He can't, however, open or fund a Health Savings Account. The design of his ICHRA is disqualifying because he can reimburse deductible expenses from the ICHRA once he's paid his monthly premium. He's disqualified even if he doesn't spend the ICHRA balance, or uses that money to reimburse expenses (like dental and vision services) that aren't disqualifying.

Note that the design of the full ICHRA is disqualifying even if the employee doesn't spend his balance on qualified medical expenses. The fact that the plan design allows him to do so is disqualifying.

The Bottom Line

HSA-qualified plans are a great financial option for employees who purchase their own coverage in the nongroup market. These plans usually have lower premiums (the trade-off for a high, broad deductible), which limits how much employees pay in premiums beyond the employer's ICHRA stipend. And the Health Savings Account itself allows qualified enrollees to set aside thousands of pre-tax dollars annually to reimburse current or future qualified expenses.

But the best-laid plans can go awry if the company's ICHRA design is disqualifying. If you're offered an ICHRA (or you're an employer or benefits advisor designing an ICHRA program), be sure you understand how the design of the ICHRA can affect Health Savings Account eligibility.

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