ACA compliance and ICHRA class requirements for 2027: Avoid the common pitfalls

Plan year 2027 benefits decisions are underway, and for employers using ICHRA (now called CHOICE Arrangement), employee class design deserves a close ACA compliance review. The name changed in 2026, while the class rules, nondiscrimination requirements, and penalties in this guide stayed the same.¹

What are ICHRA employee classes?

Employee classes are the groups an employer uses to decide who receives an ICHRA and how much they receive. Federal rules permit classes based on factors such as full-time or part-time status, salaried or non-salaried status, seasonal status, and work location, along with combinations of those classes.²

Employers use classes to:

• Set different allowances for different employee groups

• Offer an ICHRA to some classes and a group plan to others

• Transition to ICHRA gradually

For a full refresher, start with our guides to ICHRA class rules and strategic ways to define ICHRA classes. This post focuses on:

• The class design mistakes that can create ACA compliance exposure

• How nondiscrimination rules apply to ICHRAs

• The fines and excise taxes that can apply when an arrangement falls out of compliance

• Updated 2027 employer mandate figures and a planning checklist

Why ICHRA class design is an ACA compliance decision

An ICHRA satisfies the ACA’s ban on annual dollar limits and its preventive care requirements because it is integrated with individual health insurance coverage.³ Class rules and the same terms requirement are conditions of that integration,² so a class design error can become an ACA compliance problem.

For applicable large employers (ALEs), class decisions also affect who receives an offer of coverage and whether that offer is affordable under the employer mandate.

The class rules are designed to keep employers from steering employees with adverse health factors out of a group plan and into the individual market.² When reviewing your 2027 design, ask:

• Does each class use a permitted, objective definition?

• Does everyone in a class receive an offer on the same terms?

• Does the overall structure sort employees by health status, claims history, or Medicare eligibility?

• Does the arrangement operate the way the plan document says it does?

Pitfall 1: Planning ICHRA minimum class size with the wrong headcount can prompt ACA compliance penalties

When the ICHRA minimum class size rule applies

The rule applies only when an employer offers a traditional group health plan to at least one class and an ICHRA to another. It applies only to the class offered the ICHRA, and only when that class is based on one of the following:²

• Full-time or part-time status, when one of those classes receives the group plan and the other receives the ICHRA

• Salaried or non-salaried status

• A geographic area smaller than a state

• A combination that includes one of these classes, unless the combination is with employees in a waiting period

The rule does not apply to state-level classes or to classes such as collectively bargained or seasonal employees standing on their own.²

The minimum is 10 employees for employers with fewer than 100 employees, 10% of the workforce for employers with 100 to 200 employees, and 20 employees for employers with more than 200.²

How to avoid this ACA compliance pitfall

The decision: Which numbers to use to confirm that a class meets the minimum.

The mistake: Relying on today’s headcount or carrying last year’s count forward. Two separate numbers matter:²

• Employer size: The number of employees you reasonably expect to have on the first day of the plan year

• Class size: The number of employees offered the ICHRA in that class on the first day of the plan year, regardless of how many enroll

What to check:

• Whether a seasonal ramp-down, location closure, or reorganization will reduce a class before the plan year begins

• Whether combining classes creates a smaller group that falls below the minimum, such as full-time hourly employees in a single rating area

• Whether each geographic class covers an entire state or combination of states

• Whether every class still meets the minimum for the coming plan year

A class that meets the minimum on the first day still satisfies the rule for that plan year if turnover reduces it later.² However, classes and their definitions must be set before the plan year begins and cannot be changed during it.²

The new hire subclass option

If a class is too small to move to ICHRA, the new hire provision offers another path. An employer that offers a group plan to a class can offer an ICHRA to employees hired on or after a future date, while earlier hires keep the group plan.²

The minimum class size rule does not apply to this subclass unless the employer later subdivides it. The ICHRA must be offered on the same terms within the subclass, and neither group can choose between an ICHRA and the group plan.²

Pitfall 2: Designing ICHRA classes that track health risk can raise ACA discrimination concerns

An ICHRA is a group health plan, so federal nondiscrimination rules apply. Group health plans cannot base eligibility or benefits on health factors such as health status, medical condition, claims experience, medical history, genetic information, or disability.⁴

The decision: How to draw class lines.

The mistake: Using a permitted class in a way that functions as a proxy for health risk. Red flags include:

• Combination classes drawn so narrowly that they capture specific employees with high claims

• Reclassifying an employee, such as from salaried to hourly, without a genuine change in their job

• Moving employees between classes shortly after a significant claim or diagnosis becomes known

• Offering an ICHRA only to a group whose main distinguishing feature is higher expected health costs

What to check: Document the business reason for every class when you create it. Payroll structure, work location, collective bargaining status, and hours worked all exist independently of anyone’s health.

Medicare eligibility is not a permitted ICHRA class

Age and Medicare status are not permitted classes.² Employers subject to the Medicare Secondary Payer (MSP) rules, generally those with 20 or more employees, also cannot offer incentives that encourage Medicare-eligible employees to drop group coverage. HHS lists a maximum civil money penalty of $11,823 per violation for offering these prohibited incentives.⁵

If your 2027 design pairs a group plan for most employees with an ICHRA for a class made up largely of employees aged 65 and older, review it with counsel before open enrollment.

Pitfall 3: Breaking the same terms rule within an ICHRA class can create ACA compliance risk

The decision: What to offer employees within each class.

The mistake: Treating allowances as negotiable. Same terms violations can include:

• Giving a manager or key hire a higher allowance than others in the same class

• Negotiating an individual allowance in an offer letter

• Granting an exception because an employee’s premium is high

• Building an age curve that exceeds the 3:1 ratio

• Letting employees choose between the group plan and ICHRA, which the rules prohibit for every employee, including those in a new hire subclass²

What to check: Confirm that any differences within a class fit a variation the rules allow. The main permitted variations are:²

• Age: Allowances can increase with age, as long as the oldest participants receive no more than three times the amount offered to the youngest.

• Family size: Allowances can increase with the number of covered dependents, as long as everyone with the same number of dependents receives the same amount.

• Mid-year hires: New participants can receive the full annual amount or a prorated amount, using one method set before the plan year begins.

• Carryover balances: Unused amounts can differ when every participant has the same access to them under the same method.

To give a group a different allowance, use a permitted class that fits that group, such as salaried employees, and apply it to everyone who meets the definition. A job title or an employee’s importance to the business does not create a class.

Pitfall 4: Overlooking Section 105(h) nondiscrimination in your ACA compliance review

Section 105(h) is an Internal Revenue Code rule that sits alongside your ACA requirements. It applies to ICHRAs that reimburse medical expenses beyond premiums. A premium-only ICHRA is treated as an insured plan and is not subject to these rules.⁶

The decision: Whether your design also works in practice.

The mistake: Assuming that meeting the same terms requirement ends the review. Final IRS regulations protect permitted class differences and same terms variations, including age-based increases.⁶ However, a plan must also be nondiscriminatory in operation. An ICHRA could fail if a disproportionate share of highly compensated individuals qualify for and use the highest allowances. Those individuals may then owe income tax on excess reimbursements.⁶

What to check:

• Whether your ICHRA reimburses only premiums or other medical expenses as well

• Which employees receive the highest allowances under your age curve

• Whether classes made up mostly of leadership receive richer allowances

• How these results change each year as your workforce changes

What happens when an ICHRA falls out of ACA compliance

Class rules, the same terms requirement, notice, substantiation, and opt-out rights are all integration conditions.² When those conditions are not met, the HRA generally loses the integration that satisfies the ACA requirements described above.³

ACA fines for employers: The Section 4980D excise tax

Group health plan failures can trigger an excise tax under Section 4980D:⁷

• Daily tax: $100 per day for each affected individual, from the date the failure begins until it is corrected

• Examination minimum: If a failure occurred or continued during the period under examination and is not corrected before the IRS sends a notice of examination, the tax for each individual is generally at least $2,500 or the amount otherwise owed, whichever is less. The $2,500 becomes $15,000 to the extent violations are more than de minimis. This minimum can apply even when the relief below would otherwise be available.

• Relief: No tax applies for any period in which the employer did not know of the failure and would not have known through reasonable diligence. No tax also applies if the failure was due to reasonable cause, was not due to willful neglect, and is corrected within 30 days of when the employer knew or should have known about it.

• Correction standard: The failure must be undone retroactively to the extent possible, and the affected person must be placed in as good a financial position as if it had not occurred.

• Annual cap: For failures due to reasonable cause and not willful neglect, the tax is capped at the lesser of 10% of the employer’s prior-year group health plan spending or $500,000. The IRS may also waive some or all of the tax if it would be excessive.

Employers report and pay this tax on IRS Form 8928.⁸ For example, a class error affecting 25 employees for 90 days adds up to $225,000 before any caps or relief apply.

ICHRA and the employer mandate: 2027 penalty exposure

For ALEs, an ICHRA counts as an offer of coverage under the ACA employer mandate.⁶ The 2027 figures are:

• Affordability percentage: 10.22% of household income for plan years beginning in 2027, up from 9.96% in 2026⁹

• Section 4980H(a) penalty: $3,780 per full-time employee, excluding the first 30, when an ALE fails to offer coverage to at least 95% of full-time employees and their dependents and at least one full-time employee receives a premium tax credit¹⁰

• Section 4980H(b) penalty: $5,670 for each full-time employee who receives a premium tax credit because the offer was unaffordable or did not provide minimum value¹⁰

An ICHRA is affordable when the cost of the employee’s lowest-cost silver self-only plan, minus the monthly self-only ICHRA allowance, does not exceed the affordability percentage of household income or an IRS safe harbor measure.⁶

Class decisions can create mandate risk when employers:

• Leave a class of full-time employees without an offer

• Use one flat allowance across very different rating areas

• Overlook higher silver plan premiums for older employees

• Carry 2026 affordability numbers into 2027

Other ICHRA and ACA compliance requirements

• Annual notice: Eligible participants must generally receive written notice at least 90 days before the plan year begins. That date was October 3, 2026, for a January 1, 2027 plan year, and it is April 2, 2027, for a July 1, 2027 plan year. Employees who become eligible later must receive notice by the date their ICHRA can take effect.²

• Coverage substantiation: The ICHRA must verify enrollment in individual coverage for the plan year and before each reimbursement.²

• Opt-out rights: Participants must be able to opt out of and waive reimbursements once each plan year.²

• Plan documents: Private-sector employers need a written plan document and summary plan description.

• Form 5500: Plans with 100 or more participants at the start of the plan year generally must file. Late filing penalties can reach $2,739 per day.¹¹

• Form 1095-C: ALEs report ICHRA offers using codes 1L through 1U.¹² Penalties can reach $340 per return for returns due in 2027.¹³ See our guide to ICHRA reporting requirements.

Notice, substantiation, and opt-out rights are integration conditions, so missing them can create Section 4980D exposure.

ACA compliance checklist for 2027 ICHRA class design

Before finalizing your design, confirm that:

• Every class uses a permitted definition backed by a documented business reason

• Class definitions are final before the plan year begins

• Any class subject to the minimum class size rule meets it on the first day of the plan year

• No class is defined by, or functions as a proxy for, health status or Medicare eligibility

• Differences within a class fit a variation the rules allow, such as age (within 3:1) and family size

• No employee can choose between the group plan and an ICHRA, including in a new hire subclass

• Allowances meet the 2027 affordability standard for every full-time employee, if you are an ALE

• At least 95% of full-time employees and their dependents receive an offer of coverage, if you are an ALE

• Participant notices go out on time

• Substantiation, opt-out, Form 5500, and Form 1095-C processes are in place

How Take Command helps employers with ACA compliance and ICHRA classes

Take Command helps employers:

• Model class structures and review minimum class size requirements before the plan year begins

• Run affordability calculations by class, rating area, and age

• Deliver required notices and automate coverage substantiation

• Support Form 1095-C reporting for applicable large employers

Ready to pressure-test your 2027 class design? Connect with a Take Command ICHRA expert.

FAQs

Can I fix an ICHRA class mistake in the middle of the plan year?

Class definitions cannot change during the plan year, so structural issues usually need to be addressed for the next plan year.² Operational errors, such as an allowance applied incorrectly to one employee, should be corrected quickly. Section 4980D relief may apply when a failure was due to reasonable cause, was not due to willful neglect, and is corrected within 30 days of when the employer knew or should have known about it.⁷

Do ACA penalties apply to small employers?

Section 4980H employer mandate penalties apply only to ALEs. However, the ICHRA integration conditions apply to employers of every size. The small employer exception in Section 4980D is limited to fully insured coverage, so it generally will not protect an ICHRA.⁷

References

1. Centers for Medicare & Medicaid Services, “What Is a CHOICE Arrangement?” https://www.cms.gov/files/document/choice-arrangements-overview.pdf

2. Electronic Code of Federal Regulations, 26 CFR 54.9802-4, “Special rule allowing integration of health reimbursement arrangements (HRAs) and other account-based group health plans with individual health insurance coverage and Medicare.” https://www.ecfr.gov/current/title-26/chapter-I/subchapter-D/part-54/section-54.9802-4

3. Federal Register, “Health Reimbursement Arrangements and Other Account-Based Group Health Plans,” final rule, June 20, 2019. https://www.federalregister.gov/documents/2019/06/20/2019-12571/health-reimbursement-arrangements-and-other-account-based-group-health-plans

4. Electronic Code of Federal Regulations, 26 CFR 54.9802-1, “Prohibiting discrimination against participants and beneficiaries based on a health factor.” https://www.ecfr.gov/current/title-26/chapter-I/subchapter-D/part-54/section-54.9802-1

5. U.S. Department of Health and Human Services, “Annual Civil Monetary Penalties Inflation Adjustment,” Federal Register, January 28, 2026. https://www.federalregister.gov/d/2026-01688

6. Thomson Reuters EBIA, “Final IRS Regulations Address Application of Employer Shared Responsibility and Nondiscrimination Rules to ICHRAs” (T.D. 9949), January 21, 2021. https://tax.thomsonreuters.com/blog/final-irs-regulations-address-application-of-employer-shared-responsibility-and-nondiscrimination-rules-to-ichras/

7. 26 U.S. Code § 4980D, “Failure to meet certain group health plan requirements,” Legal Information Institute, Cornell Law School. https://www.law.cornell.edu/uscode/text/26/4980D

8. Internal Revenue Service, “About Form 8928, Return of Certain Excise Taxes Under Chapter 43 of the Internal Revenue Code.” https://www.irs.gov/forms-pubs/about-form-8928

9. Internal Revenue Service, Revenue Procedure 2026-26. https://www.irs.gov/pub/irs-drop/rp-26-26.pdf

10. Internal Revenue Service, Revenue Procedure 2026-22. https://www.irs.gov/pub/irs-drop/rp-26-22.pdf

11. U.S. Department of Labor, “Federal Civil Penalties Inflation Adjustment Act Annual Adjustments for 2026,” Federal Register, May 27, 2026. https://www.federalregister.gov/d/2026-10456

12. Internal Revenue Service, “Instructions for Forms 1094-C and 1095-C.” https://www.irs.gov/instructions/i109495c

13. Internal Revenue Service, Revenue Procedure 2025-32. https://www.irs.gov/pub/irs-drop/rp-25-32.pdf