How Would Permanent ICHRA Rules Affect HSA Participation?

House Republicans are trying to codify ICHRA rules. How will doing so affect Health Savings Accounts?

Today, the House Ways and Means Committee is considering HR 3799, a bill sponsored by Rep. Kevin Hern (R-OK) to incorporate Individual-Coverage Health Reimbursement Arrangements, or ICHRAs, into the federal tax code. If the bill passes both chambers of Congress, either as a stand-alone bill or part of larger legislation, and is signed by the president, it will become law and solidify the future of ICHRAs, which the bill renames CHOICE accounts.

Making ICHRAs permanent will result in more hard-working Americans' being able to enjoy the immediate and long-term benefits of a Health Savings Account.

What Is an ICHRA?

HRAs are employer-designed and -funded accounts that allow eligible enrolled employees and their dependents to reimburse certain qualified medical expenses with funds that aren't included in their taxable income. Traditionally, HRAs were integrated with a medical plan and designed to reimburse a portion of the plan's cost sharing.

Some companies funded HRAs as an alternative to employer-sponsored coverage in a design that provided employees with a tax-free stipend to pay premiums for coverage purchased in the nongroup market. The Obama Administration ruled that, under provisions of the Affordable Care Act that Congress passed in 2010, HRAs could not reimburse medical premiums.

The Trump Administration used executive authority in 2019 to design ICHRAs, and the new arrangements became effective as of Jan. 1, 2020. These regulations carry the weight of law, but they were created by the executive branch, rather than passed by Congress, and can be replaced by a future administration without congressional action. Thus, the current bill attempts to codify these rules into statute - a phrase that simply means that Congress would pass a law to place the program in the federal tax code, where it would remain until amended by Congress.

Thus, HR 3799, if passed, would create a level of stability that ICHRAs don't enjoy today. They would no longer be at the mercy of the next presidential election, where a president who didn't agree with this approach to coverage could follow a process to unwind the regulations.

How Does an ICHRA Work?

Employers who offer ICHRAs can't offer an employer-sponsored plan (often called a group plan or group coverage) to the same employees. Companies can either offer an ICHRA as their only coverage or divide their benefits-eligible employees into defined classes and offer an ICHRA to some classes and group coverage to others.

Example 1: Red Hawk Realty can no longer afford the premiums and administrative cost of maintaining an employer-sponsored plan. is a small company with a busy office staff. Instead, it introduces an ICHRA program. All benefits-eligible employees receive a tax-free stipend through an ICHRA.

Example 2: Acme Explosives offers its benefits-eligible employees an HMO. It recently purchased Boom Boom Demolition, a small company located in another state outside the HMO service area. Rather than introduce an employer-sponsored PPO or POS plan, Acme offers an ICHRA to the Boom Boom Demolition employees.

Example 3: Paradise Resorts values its seasonal and part-time employees, especially in a tight labor market. These workers don't qualify for coverage through the employer-sponsored plan. Paradise introduces an ICHRA to provide the seasonal and part-time workers with a tax-free stipend to help offset their cost of nongroup coverage.

ICHRAs themselves are a form of an employer-sponsored plan, so they satisfy an Applicable Large Employer's requirement to offer coverage if the stipend allows recipients to purchase coverage deemed affordable under federal regulations. Employers can divide employees into 11 distinct classes - the most popular are full-time versus part-time, salary versus hourly, or location. Other classes - union versus non-union, management versus non-management, or classes based on seniority - aren't permitted.

Employers can vary their stipends to employees, but only based on family size and age of family members - the two variables that affect premiums in the nongroup market.

Where Is the Health Savings Account Play?

How do ICHRAs and Health Savings Accounts interact? Most of the uptake of ICHRAs to date has been with smaller employers (although larger companies are adopting them in increased numbers) who offer only one medical plan. Often, that one plan isn't HSA-qualified. Thus, employees who enrolled wouldn't have the option to open and fund a Health Savings Account.

In contrast, companies don't choose a plan when they offer an ICHRA program. Rather, each employee can apply her stipend to whatever plan she chooses from among those offered in her geographic market.

Therein lies the beauty of ICHRAs for employees: They can choose the plan that provides the optimal balancing of breadth of insurer, network, premium, and out-of-pocket financial responsibility. It's fair to assume that a 25-year-old single worker, a 45-year-old married employee with a spouse and three children, and an older worker who covers herself and her disabled child consume different forms of medical care in different quantities and thus seek different balances of network breadth, premium, and cost sharing. When the company offers a single plan, they have no choice. When they have control of the employer subsidy, they can choose a plan tailored to their preferences.

Many companies still don't offer a Health Savings Account program. And many that do don't position it ideally, either by minimizing the price difference to employees among the plans offered or providing an inadequate employer Health Savings Account contribution. When employees control the funds and can choose their plan, they're more likely to select coverage that allows them to pay their out-of-pocket financial responsibility with pre-tax funds that they deposit into a Health Savings Account.

Thus, ICHRAs can open the door to Health Savings Accounts to employees who don't have access to these plans today.

A Caveat

But employers and employees must understand one important aspect of ICHRAs. There are two distinct ICHRA designs.

Full Section 213(d) reimbursement. This design allows employees with funds remaining in their ICHRA after paying their monthly premiums to use their balances to reimburse qualified medical, dental, and vision expenses.

Example: Hunks for Hire, a moving company, offers each employee a $400 stipend, regardless of age or family size. Dutch, who's 22 and single, finds a plan with a monthly premium of $345. He can use the remaining $55 monthly to reimburse his plan's high cost sharing) and out-of-pocket dental and vision expenses (the company doesn't provide coverage).

Most companies adjust their ICHRA stipends based on age and contract size, and in most cases employees don't have any remaining balance after paying the monthly premium. But it's possible.

This design disqualifies every employee - not just those who have a remaining balance that they use to reimburse other qualified expenses - from opening and funding a Health Savings Account.

Premium-only. This design restricts reimbursement to premiums only. Thus, in the example above, Dutch either would forfeit the remaining $55 monthly, or he'd choose a plan with a $400 premium and lower out-of-pocket financial responsibility. This design doesn't affect an employee's eligibility to open and fund a Health Savings Account because funds can't be used to reimburse any expense but premiums.

Companies can offer both designs and offer the premium-only option to employees who want to open and fund a Health Savings Account. Most employers avoid the issue entirely by offering the premium-only ICHRA - not because of Health Savings Account concerns, but rather because they view the ICHRA as a tool to reimburse premiums only.

The Bottom Line

The Trump Administration estimated that about 11 million workers would be covered by ICHRAs when the market matured. Of these, about 4 million would be workers who formerly were enrolled in employer-sponsored plans and close to 1 million would be new to commercial coverage. That's roughly 5 million workers, many of whom previously didn't have the opportunity to open and fund a Health Savings Account.

The uptake among these newly eligible employees probably won't dramatically affect a market that already has more than 34 million accounts. But, like the Starfish Story, this choice will help hundreds of thousands - perhaps a million or more - of hard-working Americans manage their current out-of-pocket qualified expenses and create a more secure financial future by opening and funding a Health Savings Account.

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The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.