ICHRA and HSAs: How to Keep Employees HSA-Eligible

One of the biggest fears employers have when switching to ICHRA is: "Will my employees lose their Health Savings Accounts?" The answer is no — but only if you structure the ICHRA correctly. Get this wrong, and your employees silently lose HSA eligibility without knowing it until tax season. Here's everything you need to know.

The Core Conflict: The "First Dollar" Rule

To act as a Benefits Architect, you must understand one specific IRS rule. Under IRC § 223, to contribute to an HSA, an employee must have a High Deductible Health Plan (HDHP) and no "disqualifying coverage."

Here's the conflict: the IRS views an ICHRA as a "secondary health plan." If that ICHRA reimburses medical expenses — like copays, prescription costs, or lab work — starting from day one, it is considered "disqualifying coverage." Why? Because if the ICHRA pays the deductible for the employee, the employee hasn't actually met the financial requirements that justify HSA funding.

The fix is architectural. You need to design the ICHRA so it stays in its lane.

The Three ICHRA Configurations

When designing a plan, you will choose between three structures to handle this conflict. Each has a different use case and trade-off.

Configuration 1: Premium-Only ICHRA (The Safe Route)

This is the most common configuration and the one you'll use for 80% of cases.

How it works: The ICHRA is restricted to reimburse insurance premiums only. It never touches out-of-pocket medical bills — no copays, no prescriptions, no lab fees.

Why it works: Because the ICHRA never interacts with the employee's medical spending, it doesn't count as "disqualifying coverage" under IRS rules. Employees are free to buy an HSA-qualified High Deductible Health Plan on the individual market and fund their HSA exactly as they did before.

How TPA enforces it: The TPA system is programmed to automatically reject any reimbursement request that isn't a premium invoice. If an employee submits a receipt for a doctor visit, the system blocks it. This isn't just convenient — it's the compliance guardrail that preserves HSA eligibility across the entire workforce.

Configuration 2: Post-Deductible ICHRA (The Advanced Route)

Use this configuration when the employer specifically wants to help employees with medical bills while still preserving HSA eligibility.

How it works: The ICHRA is programmed to "sit on the sidelines" until the employee meets the statutory IRS minimum deductible — currently $1,650+ for individuals and $3,300+ for families (2026). Once the employee proves they have spent that amount out-of-pocket, the ICHRA unlocks and starts reimbursing eligible expenses for the rest of the year.

Why it works: Because the employee has already satisfied the HDHP deductible requirement before any ICHRA dollars flow, the HSA eligibility is preserved. The ICHRA acts as a "second tier" benefit that only kicks in after the employee has real skin in the game.

When to use it: For employers who want to provide meaningful medical expense support beyond just premiums, but have employees who value their HSA accounts. It's a more generous design, but it requires a TPA that can track individual deductible accumulation.

Configuration 3: Employee Choice (The Individual Customization)

This is your pro-tip for mixed employee populations — companies where some employees are healthy and want to maximize HSA growth, while others have high medical needs and want immediate reimbursement help.

The scenario: Bob has chronic health conditions and wants "first dollar" reimbursement for every doctor visit. Alice is healthy, runs marathons, and wants to fund her HSA to the max as a tax-free investment vehicle.

The execution: During onboarding, the TPA system asks each employee: "Do you have an HSA?"

• If YES: The system automatically limits their ICHRA to "Premium-Only" mode, preserving their HSA eligibility
• If NO: The system unlocks "Full Medical Reimbursement," giving them first-dollar coverage for copays, prescriptions, and eligible medical expenses

This creates a personalized benefit experience from a single plan design — one ICHRA document, two operational modes, zero compliance risk.

The Executive Play: Suspending the HRA

Here's an advanced strategy from IRS Revenue Ruling 2004-45 that most agents don't know about.

Some high-earners — C-suite executives, senior partners, high-income employees — may prefer to forgo ICHRA reimbursements entirely to maximize their HSA growth potential. They don't need the immediate cash flow help; they want the tax shelter.

The mechanism: The IRS allows an employee to formally "suspend" their HRA. They stop receiving reimbursements for current medical expenses, which preserves their eligibility to contribute the maximum to their HSA ($4,300 individual / $8,550 family for 2026).

Why do this? The HRA funds (depending on plan design) may continue to accrue in the background, creating a "war chest" that can be used for premiums in retirement. Meanwhile, the HSA grows tax-free in the stock market. It's the ultimate wealth-building play for high-earners who don't need the immediate reimbursement.

FSAs: The Perfect Companion (With Rules)

Flexible Spending Accounts (FSAs) are the ideal companion to ICHRA — but there's a strict "No Double-Dipping" rule. An employee cannot be reimbursed for the same dollar twice. In the past, this was an audit nightmare. Today, modern TPAs solve it with Expense Stacking Logic:

1. Waterfall payment: When a claim is submitted, the system checks the ICHRA balance first
2. Automatic routing: If ICHRA pays the claim, the FSA is locked for that specific transaction. If ICHRA is empty or restricted to premiums, the claim flows down to the FSA
3. Stamp and record: The receipt is digitally "stamped" as paid by one account, preventing fraud without anyone touching a spreadsheet

Pro tip: The Limited Purpose FSA (LPFSA). If your client wants to offer HSAs, recommend an LPFSA alongside the ICHRA. The LPFSA only pays for dental and vision expenses, leaving the HSA funds untouched for long-term investment growth. It's the best of both worlds — immediate dental/vision coverage plus tax-free long-term savings.

The 7.65% FICA Bonus: The Pitch That Closes

Why should an employer care if employees fund their own HSAs or FSAs? Because it saves the employer real money.

When employees pay their share of premiums pre-tax via Section 125, it lowers the taxable wage base. The employer does not pay the 7.65% FICA match (Social Security + Medicare) on those contributions.

Here's the pitch that closes deals:

This is the pitch that makes the employer's CFO nod. You're not just selling a health benefit — you're showing them a measurable financial return.

The Ownership Distinction That Matters

When employees ask "What's the difference between my HRA and my HSA?" — this is the single most important distinction:

• ICHRA money = The employer's wallet. Funded by the employer only. Unspent money stays with the company when the employee leaves. Requires any individual ACA plan.
• HSA money = The employee's wallet. Can be funded by employer and employee. The money is portable — they keep it forever, even if they change jobs or retire. Requires a High Deductible Health Plan. Best used as a long-term tax-free investment vehicle.

When you frame it this way, employees understand immediately: ICHRA pays for today's premium. HSA builds for tomorrow's retirement. They work together, not against each other.