A New IRS Rule Interpretation and ICHRA Growth Will Propel Elevated HSA Deposits and Investment

Today, I want to share some recent developments that are set to significantly boost HSA deposits and investments in the coming years. Two key factors are at play: a recent IRS ruling that offers greater flexibility in allocating employer contributions, and the rapid adoption of Individual Coverage Health Reimbursement Arrangements (ICHRAs).

The Game-Changing IRS Ruling

The IRS recently issued a private letter ruling (PLR 202434006) that allows employees to allocate their employer contributions across various benefits—including HSAs, retirement plans, and even student loan repayments. This shift is monumental for a few reasons:

Enhanced Employee Flexibility: Employees can now tailor their benefits to align with personal financial goals. Those prioritizing healthcare savings can channel more funds into their HSAs.
  
Boosted Investment Opportunities: Higher HSA balances mean more funds available for investment. This not only benefits account holders but also stimulates growth in HSA investment products industry-wide.

Maximized Tax Advantages: HSAs offer triple tax benefits—pre-tax contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses. With the new ruling, employees can optimize these benefits like never before. 

This combination of employee-directed funding of benefit dollars with the growing awareness of the many advantages of health savings accounts should drive an increase in funding of these accounts.

The ICHRA Surge: A Catalyst for HSAs

Simultaneously, we're witnessing a significant uptick in ICHRA adoption. Since 2023, ICHRAs have surged by 30%, and projections show a staggering 255% growth by 2025. This is crucial for HSAs because:

Expanded Access to HSA-Eligible Plans: ICHRAs give employees the freedom to choose individual health plans, including High Deductible Health Plans (HDHPs) that are HSA-compatible. Importantly, ICHRA platforms typically include a screening feature that allows the user to filter plans by whether they are HSA-eligible.
  
Increased HSA Participation: More employees opting for HDHPs translates to higher HSA enrollment and contribution rates.
  
Employer Contributions Amplified: ICHRAs can be structured to allow employer reimbursements to flow directly into HSAs, further boosting deposits.

Crunching the Numbers: Projected Growth

Let's delve into the data to see how these developments might impact HSA growth. Prior to these changes, the forecasts by Devenir, a leading HSA research group, were as follows (in billions):

Revised Projections Incorporating IRS Ruling and ICHRA Growth:

Considering the IRS ruling and the explosive growth of ICHRAs, we can adjust our forecasts:

Deposits:
2025: Expected to reach $93.2 billion, up from the original $89.0 billion.
2026: Projected to hit $103.5 billion, surpassing the initial $95.3 billion estimate.

Investments:
2025: Anticipated to grow to $73.2 billion, above the original $69.1 billion.
2026: Expected to soar to $88.6 billion, exceeding the previous $79.5 billion projection.

What Does This Mean?

Significant Increases: We're looking at an additional $4.2 billion in deposits and $4.1 billion in investments for 2025 alone compared to original forecasts.
  
Compound Growth: The combined effects of the IRS ruling and ICHRA adoption are not just additive—they're multiplicative, creating a more robust growth trajectory for HSAs.

Implications for Employers and HSA Providers

For Employers:

Attractive Benefits Packages: By leveraging the IRS ruling and offering ICHRAs, employers can provide more personalized and competitive benefits, aiding in talent acquisition and retention.
  
Cost Management: HSAs paired with HDHPs can help control healthcare costs while still offering valuable benefits to employees.

For HSA Providers:

Market Expansion: Anticipate a surge in HSA account openings and higher average balances.
  
Innovative Solutions: Opportunity to develop integrated platforms that simplify fund allocation across HSAs, retirement accounts, and other benefits.
  
Educational Outreach: Now is the time to ramp up efforts in educating both employers and employees about the enhanced benefits of HSAs in this new landscape.

Empowering Employees

The combined effect of the IRS ruling and ICHRA growth is particularly beneficial for employees:

Personalized Financial Planning: Employees can now align their benefit allocations with personal financial goals, whether that's saving for healthcare expenses, retirement, or paying down student debt.
  
Enhanced Savings Potential: By maximizing contributions to HSAs, employees can take full advantage of tax benefits and investment growth opportunities.
  
Long-Term Financial Security: Higher HSA balances and the ability to invest those funds contribute to improved long-term financial wellness.

Looking Ahead

These developments signal a paradigm shift in how we approach healthcare savings and employee benefits. As we move towards 2025 and beyond, I anticipate:

Continued Policy Evolution: Regulatory bodies may introduce further changes that could impact HSAs and employee benefits. Staying informed will be crucial.
  
Greater Collaboration: Employers, providers, and policymakers will need to work together to navigate this evolving landscape effectively.
  
Increased Financial Literacy: As options expand, so does the need for education. Empowering employees with knowledge is key to maximizing these benefits.

Final Thoughts

At HealthyWealth, we're excited about the opportunities these changes present—not just for our industry, but for the millions of individuals who stand to benefit. The convergence of the IRS ruling and ICHRA growth is more than just a statistical uptick; it's a meaningful shift towards greater financial empowerment and flexibility for employees.

We're committed to helping our clients navigate these changes and capitalize on the new possibilities they bring. If you have questions or would like to discuss how these developments might impact your organization or personal financial strategy, feel free to reach out.

Let's embrace this new era of growth and work together to build a healthier, wealthier future.

Sign up for HealthyWealth's HSA Intelligence Report Newsletter Here