Managing employee health benefits while controlling costs is one of the biggest challenges facing employers today. The Individual Coverage Health Reimbursement Arrangement (ICHRA) offers a revolutionary approach that gives businesses unprecedented flexibility, but understanding ICHRA employer requirements and eligibility rules is crucial before making the switch.
Unlike traditional group health insurance with its one-size-fits-all approach, ICHRA allows employers to reimburse employees tax-free for individual health insurance premiums they choose themselves. This guide covers everything employers need to know about ICHRA eligibility, from basic requirements to helping you determine if an ICHRA is right for your business.
In this article:
- What are the Basic ICHRA Employer Requirements?
- ICHRA Employee Eligibility Rules: Who Can and Can't Participate
- ICHRA Employer Benefits: Why Companies Choose This Model
- Next Steps
- Frequently Asked Questions
What are the Basic ICHRA Employer Requirements?
Understanding ICHRA employer requirements starts with one simple rule: any employer with at least one W-2 employee can offer an ICHRA. This remarkable flexibility makes ICHRA accessible to businesses of all sizes, from solo entrepreneurs with their first hire to enterprises with thousands of employees. The federal government designed these requirements to be as inclusive as possible, opening doors for businesses that previously struggled to afford group coverage.
The types of employers who can offer ICHRA include private businesses of any size, nonprofit organizations, government entities at all levels, religious organizations and churches, educational institutions, and both startups and established enterprises. There’s no minimum or maximum employee count, which represents a significant departure from many traditional health benefit programs.
However, meeting the basic ICHRA employer requirements involves more than just having W-2 employees. Employers must ensure they cannot offer both group health insurance and ICHRA to the same class of employees. They must also provide equal offerings within each employee class, verify that employees have qualifying individual health coverage before reimbursing them, and comply with all applicable regulations including ERISA, HIPAA, and ACA requirements for applicable large employers. Additionally, proper employee notices must be provided at least 90 days before the plan year begins.
These foundational requirements create the framework for a compliant ICHRA program while maintaining the flexibility that makes this benefit option so attractive to diverse employers.
Is an ICHRA Right for my Business? Key Considerations
Determining whether an ICHRA is right for your business requires careful evaluation of your specific circumstances, workforce needs, and strategic goals. While ICHRA eligibility rules are straightforward, the decision to implement this type of health benefit deserves thoughtful consideration of multiple factors.
The question “is an ICHRA right for my business?” often comes down to three critical areas: cost predictability, workforce diversity, and administrative capacity. Businesses seeking fixed, predictable monthly costs without surprise premium increases find ICHRA particularly attractive. If your current group plan renewals have become unsustainable or you need to control benefits spending while still offering competitive coverage, ICHRA provides a solution that puts you in control of your benefits budget.
When ICHRA Makes the Most Sense
ICHRA employer benefits shine brightest for businesses with diverse workforce needs. Companies with employees spanning multiple states face varying insurance markets and regulations that make traditional group coverage complicated and expensive. If your workforce includes varied demographics with different health needs, or you employ a mix of full-time, part-time, and seasonal workers requiring different benefit levels, ICHRA’s class-based structure provides the flexibility to meet everyone’s needs appropriately.
The administrative advantages also make ICHRA appealing for many businesses. If you want to eliminate insurance carrier negotiations and plan management, or your HR team is small and needs to focus on strategic initiatives rather than benefits administration, ICHRA shifts the administrative burden away from your organization. You’re no longer the middleman between employees and insurance companies, which can significantly reduce HR workload and frustration.
Geographic considerations play a major role in the ICHRA decision. Businesses with remote or distributed teams often find that ICHRA simplifies benefits administration across state lines. Similarly, companies located in areas with robust individual insurance markets can offer employees more choices through ICHRA than through a single group plan.
Scenarios where Traditional Group Coverage Might Be Better
While ICHRA offers significant advantages, traditional group coverage might better serve some businesses. If your area has limited individual market options, employees may have few quality plans to choose from. Some workforces strongly prefer employer-managed group plans, particularly if they’ve had positive experiences with your current coverage. If you’ve negotiated exceptional group rates due to favorable demographics or your workforce is concentrated in one location with similar health needs, maintaining group coverage might make more financial sense.
Interested in exploring what individual health insurance is available to your employees? Check out Take Command’s Market Snapshot Tool.
ICHRA Employee Eligibility Rules: Who Can and Can't Participate
ICHRA eligibility rules determine which employees can participate in your program and what types of health coverage qualify for reimbursement. Understanding those rules helps employers design compliant plans that maximize value for both the business and employees while avoiding common pitfalls that could lead to compliance issues.
The foundation of ICHRA eligibility centers on the employment relationship and health coverage status. Employees must be classified as W-2 employees to participate, which excludes independent contractors, consultants, and in many cases, business owners themselves. This distinction is crucial for maintaining compliance with IRS regulations governing tax-advantaged health benefits.
Employee Eligibility Requirements
For employees to participate in your ICHRA program, they must meet several key requirements that ensure compliance with federal regulations. First and foremost, employees must be enrolled in individual health insurance that qualifies as Minimum Essential Coverage (MEC) under the Affordable Care Act. This requirement is non-negotiable, as the entire premise of ICHRA involves reimbursing employees for coverage they’ve independently obtained.
Employees must be enrolled in their own qualifying individual health insurance to receive ICHRA reimbursements. They cannot rely solely on coverage through a spouse's group health plan, though they may choose to decline their ICHRA benefit if they prefer to remain on spousal coverage. Any waiting period established by the employer must be completed before participation begins, and employees must provide proof of their own individual coverage monthly or as required by your reimbursement schedule. These requirements protect both the employer and the employee while ensuring the program operates within federal guidelines.
Qualifying Health Coverage for ICHRA
Understanding what constitutes qualifying health coverage under ICHRA eligibility rules is essential for proper program administration. The good news is that most comprehensive health insurance plans qualify for ICHRA reimbursement, giving employees significant flexibility in choosing coverage that meets their needs.
ACA Marketplace plans at any level (Bronze, Silver, Gold, or Platinum) qualify for ICHRA reimbursement, as do off-exchange individual health insurance plans that meet MEC requirements. Medicare beneficiaries can use ICHRA funds for Medicare Parts A and B or Medicare Part C (Medicare Advantage) premiums. Young adults under 30 or those with hardship exemptions¹ can use catastrophic plans, while students can apply ICHRA reimbursements to student health insurance through their educational institutions.
However, several types of coverage don’t qualify for ICHRA reimbursement. Short-term health plans, health sharing ministries (unless paired with qualifying coverage), discount plans, and accident-only or critical illness coverage cannot be reimbursed through ICHRA. This distinction is crucial for employee education and program compliance.
The 11 Employee Classes Under ICHRA
One of the most powerful features of ICHRA is the ability to segment your workforce into distinct classes, each with its own reimbursement amount. These ICHRA eligibility rules around employee classes provide flexibility while maintaining fairness and compliance with nondiscrimination requirements. Understanding how to structure these classes strategically can help you maximize ICHRA employer benefits while meeting diverse workforce needs.
The IRS recognizes eleven distinct employee classifications for ICHRA purposes. Employers can use these classifications individually or in combination to create a benefits structure that aligns with their compensation philosophy and budget constraints. Full-time employees, defined as those working 30 or more hours per week under ACA guidelines, often form the primary class for most iCHRA programs. Part-time employees, working less than 30 hours weekly, can receive different allowance amounts that reflect their different benefit needs and employment status.
Seasonal employees who work during specific periods throughout the year can be placed in their own class, allowing employers to offer benefits that align with their temporary employment status. Employees in waiting periods represent another distinct class, enabling employers to manage benefit costs while new hires complete probationary periods. Collectively bargained employees covered by union agreements can have separate ICHRA terms negotiated through the collective bargaining process.
Geographic and Compensation-Based Classes
Geographic employee classes based on rating areas provide crucial flexibility for multi-state employers. ICHRA employer requirements allow different reimbursement amounts based on location, recognizing that health insurance costs vary significantly across regions. This geographic flexibility helps employers maintain equity across their workforce while managing costs appropriately.
Salaried workers and non-salaried workers can be separated into different classes, allowing employers to align ICHRA benefits with their overall compensation strategy. Hourly employees represent another classification option, distinct from the salaried versus non-salaried categorization. Temporary employees who work for staffing firms can be placed in their own class, recognizing their unique employment relationship.
Foreign employees working abroad constitute another class, addressing the unique needs of international workers. Finally, employers can create combinations of these classifications, such as “full-time salaried employees in California” or “part-time hourly workers in the Midwest,” providing maximum flexibility in benefit design.
Minimum Class Size Requirements
To prevent discrimination and ensure ICHRA eligibility rules are applied fairly, the IRS imposes minimum class size requirements in certain situations. These requirements vary based on your total employee count and the types of classes you’re creating.
Understanding these thresholds is crucial for proper ICHRA design.
For businesses with fewer than 100 employees, there are no minimum class size requirements, providing maximum flexibility for smaller employers. Companies with 100 to 200 employees must maintain at least 10 employees in certain classes, particularly those based on full-time versus part-time status or salaried versus hourly classifications. Larger employers with more than 200 employees must ensure certain classes contain at least 10% of their total workforce.
Geographic and collectively bargained classes have no minimum size requirements, recognizing the practical realities of business operations across multiple locations and union environments.
ICHRA Employer Benefits: Why Companies Choose This Model
The decision to implement ICHRA often comes down to the significant employer benefits this model provides compared to traditional group health insurance. Understanding these advantages helps businesses make informed decisions about whether ICHRA aligns with their strategic objectives and operational needs.
ICHRA employer benefits extend far beyond simple cost savings, though financial advantages certainly play a major role in adoption decisions. The model fundamentally changes how businesses approach employee health benefits, shifting from a one-size-fits-all group plan to a personalized reimbursement approach that empowers employee choice while maintaining employer cost control.
Financial Benefits That Drive ICHRA Adoption
Cost predictability stands out as one of the most compelling ICHRA employer benefits. Unlike traditional group plans where premiums can spike unexpectedly at renewal, ICHRA allows employers to set exact reimbursement amounts that remain fixed throughout the plan year. This predictability enables better budgeting and financial planning, eliminating the anxiety that comes with annual renewal negotiations.
The tax advantage of ICHRA matches those of traditional group coverage. Reimbursements are tax-deductible business expenses for the employer and tax-free for employees when used for qualifying medical expenses. Unlike group plans that often require 70% or higher participation rates, ICHRA has no minimum participation requirements, meaning the benefit remains available even if only a few employees choose to participate.
Budget flexibility represents another significant financial advantage. Employers can adjust allowances annually based on business performance, economic conditions, or strategic priorities. This flexibility proves particularly valuable for businesses with variable revenue or those navigating economic uncertainty.
Administrative and Operational Advantages
The administrative benefits of ICHRA often surprise employers accustomed to the complexity of traditional group plans. By shifting insurance selection and management to employees, ICHRA significantly reduces the HR burden associated with health benefits. Your team no longer needs to research plans, negotiate with carriers, manage enrollment periods, or field questions about coverage details and claim issues.
ICHRA eliminates many compliance complexities associated with group coverage. COBRA administration becomes simpler since employees own their individual policies. The program scales effortlessly whether you have 5 or 5,000 employees, using the same basic structure and processes. Multi-state employers find particular value in ICHRA’s ability to provide consistent benefits across different geographic regions without managing multiple group plans.
Strategic Business Advantages
From a strategic perspective, ICHRA employer benefits include improved recruiting and retention capabilities. Small and medium-sized businesses can offer health benefits comparable to larger competitors without the associated costs and complexities. Employees appreciate the ability to choose plans that meet their specific needs rather than being forced into a one-size-fits-all group plan.
The portability of individual insurance reduces friction when employees leave, as they keep their health coverage rather than losing it with their job. This can actually improve employee satisfaction and reduce the stress associated with job transitions. For growing businesses, ICHRA provides the flexibility to adjust benefits during expansion or contraction without the complications of changing group plans.
Common ICHRA Eligibility Mistakes to Avoid
Understanding common pitfalls helps employers implement ICHRA successfully while maintaining compliance with all eligibility rules. These mistakes can lead to tax penalties, employee dissatisfaction, or loss of the program’s tax-advantaged status.
One of the most frequent errors involves offering ICHRA and group coverage to the same class of employees, which is explicitly prohibited under ICHRA eligibility rules. Employers sometimes think they can give employees a choice between the two, but this violates federal regulations. Each employee class must receive either ICHRA or group coverage, not both.
Failing to verify employee coverage before reimbursing represents another common mistake that can jeopardize the program’s tax-advantaged status. ICHRA employer requirements mandate proof of qualifying health coverage, and skipping this step could result in improper reimbursements that become taxable income for employees and non-deductible for employers.
Discrimination and Compliance Issues
Discrimination within employee classes violates fundamental ICHRA eligibility rules. All employees within the same class must receive identical offers, regardless of health status, age, or other factors. Employers cannot provide higher allowances to executives within the same class as other employees or adjust amounts based on individual health needs.
Missing the 90-day notice deadline represents a serious compliance failure that can result in penalties. This requirement is strict, and employers must plan ahead to ensure proper notice delivery. Similarly, ignoring ACA affordability requirements for applicable large employers can trigger significant penalties under the employer mandate.
Many S-Corporation owners and partners mistakenly believe they can participate in their company's ICHRA, but ICHRA eligibility rules generally exclude these owners from receiving tax-free reimbursements. Understanding owner eligibility based on business structure prevents improper participation that could trigger tax consequences.
Making the ICHRA Decision: Action Steps for Employers
Deciding whether ICHRA is right for your business requires systematic evaluation of your current situation, workforce needs, and local insurance markets. These action steps help employers make informed decisions about ICHRA implementation.
Start by analyzing your current health benefit costs comprehensively. Calculate not just premiums but also administrative costs, HR time spent on benefits management, and any broker or consultant fees. Project future costs based on your renewal history and industry trends. This financial baseline helps you understand the true cost of your current approach and evaluate whether ICHRA employer benefits could provide savings or better cost predictability.
Survey your workforce to understand their perspectives on health benefits. Assess satisfaction with current coverage, openness to choosing individual plans, and concerns about potential changes. Pay attention to geographic and demographic variations in responses, as these might inform your employee class structure if you proceed with ICHRA.
Evaluating Your Local Market
Research the individual insurance markets where your employees live and work. ICHRA works best in areas with robust individual markets offering multiple plan options at various price points. Compare individual market premiums to your current group rates, keeping in mind that individual plans might be more or less expensive depending on employee age and family status.
Consider engaging an ICHRA administrator or benefits consultant to help evaluate whether ICHRA eligibility requirements fit your situation. These professionals can provide market analysis, cost projections, and implementation guidance based on experience with similar businesses. They can also help you understand how ICHRA employer requirements would apply to your specific situation.
Next Steps: Implementing ICHRA for Your Business
ICHRA represents a fundamental shift in how employers approach health benefits. While the flexibility and cost control are attractive, success requires understanding ICHRA employer requirements, carefully evaluating whether an ICHRA is right for your business, and thoughtfully implementing a compliant program.
The journey from traditional group coverage to ICHRA doesn't have to be complicated. With proper planning, clear communication, and the right support, businesses can successfully transition to this innovative benefit model while maintaining employee satisfaction and regulatory compliance.
Ready to explore if ICHRA aligns with your business needs? Take Command's team of experts can analyze your specific situation, model potential savings, and guide you through ICHRA eligibility rules and implementation requirements. Our platform handles the complex compliance requirements while you focus on running your business.
Ready to see if ICHRA is right for your business?
If you’re an employee looking for a qualified ICHRA plan, you can shop and compare plans directly at Take Command. Employers interested in structuring coverage or comparing options can talk with an expert and get started with a custom design in minutes.
Additional resources →
- Learn about ICHRA Rules
- Learn about ICHRA Classes
- Learn about ICHRA Requirements
- Learn about ICHRA Regulations
- Learn about ICHRA Plan FAQs
- Learn about our ICHRA Administration Platform
This post was originally published in 2020 and has been updated in 2025 to reflect recent regulatory changes and policy updates.
Frequently Asked Questions About ICHRA Employer Requirements
Q: Can we offer different ICHRA allowances to different employees?
A: Yes, but only across different employee classes, not within the same class. All full-time employees must receive the same offer, but full-time and part-time employees can receive different amounts. You can create up to eleven different employee classes based on factors like full-time status, geographic location, salaried versus hourly, and more. Just remember that all employees within each class must receive identical ICHRA offers to comply with nondiscrimination rules.
Q: What happens if an employee doesn't have qualifying health coverage?
A: Employees without qualifying health insurance cannot receive ICHRA reimbursements. However, when an employee becomes eligible for ICHRA, they qualify for a special enrollment period allowing them 60 days to purchase individual health insurance outside of the regular open enrollment period. Employers must verify coverage before issuing any reimbursements. If an employee loses coverage during the year, ICHRA reimbursements must stop until they obtain new qualifying coverage.
Q: How do ICHRA employer requirements differ for large employers with 50+ employees?
A: Applicable large employers (ALEs) with 50 or more full-time equivalent employees must ensure their ICHRA offering meets ACA affordability standards to avoid employer mandate penalties. This requires calculating whether the employee's required contribution for self-only coverage on the lowest-cost silver plan (after applying the ICHRA allowance) exceeds 9.5% of their household income. The IRS provides safe harbors based on employee W-2 wages, rate of pay, or the federal poverty level to simplify these calculations. Small employers under 50 employees don't face these affordability requirements.
Q: Can business owners participate in their company's ICHRA?
A: It depends on your business structure. C Corporation owners who work in the business are considered W-2 employees and can fully participate in ICHRA. However, S Corporation owners with more than 2% ownership, sole proprietors, and partners in partnerships cannot receive tax-free ICHRA reimbursements because they're classified as self-employed rather than employees. LLCs face varying eligibility based on their tax election. Many business owners are surprised by these restrictions, so understanding your specific situation is crucial before including yourself in the ICHRA plan.
References
1 https://www.healthcare.gov/choose-a-plan/catastrophic-health-plans/
