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.
What are the 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 does an HSA work?
HSAs can be funded by both the employee and employer. Employees can set up tax-free recurring transfers from their paycheck, and employers may offer a monthly or annual HSA contribution as a benefit.
To qualify for an HSA, an employee must be enrolled in a high-deductible health plan (HDHP). The IRS sets annual contribution limits each year. In 2025, the limit is $4,300 for individuals and $8,550 for families. [CHANGED]
When funds are in the HSA, they can be used for qualifying health expenses. Employees can pay with a provided debit card or apply retroactively for reimbursement. Withdrawals for qualifying expenses are tax-free.
Unlike an ICHRA, an HSA cannot be used to cover health insurance premiums. It covers other qualifying expenses such as copays, bills, and prescriptions.
What are the advantages of HSAs?
HSAs have a fair number of benefits for employers and employees.
Triple tax advantage: Contributions go in pre-tax, grow tax-free, and come out tax-free when used for qualifying medical expenses. After age 65, employees can also withdraw for non-medical expenses tax-free.
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 must meet all of the following:
Enrolled in a qualifying high-deductible health plan (HDHP)
No other non-HDHP health coverage, with the exception of dental or vision
Not enrolled in Medicare
Not claimed as a dependent on someone else's tax return
Can you use an ICHRA with an HSA?
Yes, but whether they can work together depends on how the ICHRA is set up. The IRS has specific rules that determine HSA eligibility when an ICHRA is in play.
When ICHRA and HSA can work together: the premium-only ICHRA
If an employer sets up the ICHRA to reimburse health insurance premiums only, and the employee is enrolled in a qualifying HDHP, the employee can still contribute to an HSA. This configuration is called a premium-only ICHRA.
In this setup:
The ICHRA covers the monthly premium cost
The HSA covers out-of-pocket expenses like copays, prescriptions, and costs incurred before the deductible is met
Both benefits are tax-free, and the HSA is portable if the employee changes jobs
This is the most common and cleanest way to pair the two benefits.
When ICHRA and HSA cannot work together
If the ICHRA reimburses both premiums and out-of-pocket medical expenses, the employee is disqualified from contributing to an HSA. The IRS treats an ICHRA that covers general medical expenses as disqualifying coverage for HSA purposes, because it removes the out-of-pocket cost exposure that HDHPs are designed to create.
In this case, the employee may still have an existing HSA balance they can draw from, but they cannot make new contributions while the ICHRA is active.
How do ICHRA and HSA work together in practice?
Taking advantage of both an HSA and an ICHRA can give employees affordable coverage with tax-free savings to cover large expenses along the way. Here is a practical example of how the two work together:
An employee enrolls in an HDHP through the marketplace. Their employer offers a premium-only ICHRA, which reimburses the monthly premium cost. Because the ICHRA only covers premiums and the employee is on an HDHP, they remain eligible to contribute to their HSA. They use ICHRA funds to pay their premium each month and contribute to their HSA to build a tax-free reserve for copays, prescriptions, and other out-of-pocket costs.
The result is comprehensive coverage with two tax-free streams: one covering premiums, one covering expenses.
Ready to get started with small business health insurance? Reach out to Thatch today to learn more.
