The Individual Coverage Health Reimbursement Arrangement (ICHRA) has emerged as a cornerstone of the modern American employee benefits landscape, offering a level of flexibility previously unseen in traditional group health insurance models. As the workforce continues to diversify and decentralize, with remote work and multi-state operations becoming the standard for many organizations, the ICHRA provides a scalable solution for employers seeking to provide equitable health benefits across various jurisdictions. However, as organizations look to implement these arrangements, understanding the nuances of federal compliance—specifically regarding minimum class size requirements and geographic distinctions—is essential for maintaining legal standing and financial efficiency.
The ICHRA represents a fundamental shift from the "defined benefit" model of traditional group health insurance to a "defined contribution" model. Under this framework, employers provide a tax-free monthly allowance to employees, who then purchase their own individual health insurance policies on the open market. This allows employees to select plans that best fit their personal medical needs and preferred provider networks, while employers gain predictable, fixed costs. Despite its benefits, the transition to an ICHRA requires a deep understanding of the regulatory framework established by the Departments of the Treasury, Labor, and Health and Human Services (HHS).
The Mechanics of the Individual Coverage Health Reimbursement Arrangement
At its core, an ICHRA is a stand-alone health reimbursement arrangement that allows for the reimbursement of individual health insurance premiums and other qualifying medical expenses. Unlike the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), which is limited to businesses with fewer than 50 full-time equivalent employees, the ICHRA is available to organizations of all sizes.
The process functions through a series of defined steps. First, the employer establishes the eligibility criteria and sets monthly allowance amounts. These allowances can be differentiated based on "classes" of employees, such as full-time, part-time, or those working in specific geographic locations. Once the plan is active, employees must enroll in qualifying individual health insurance or Medicare (Parts A and B, or Part C). Employees then pay their premiums and submit proof of coverage and expense to the employer or a third-party administrator. Finally, the employer reimburses the employee tax-free up to the established allowance limit.
This model is particularly advantageous for organizations with distributed teams. In a traditional group plan, an employer might struggle to find a single insurance carrier that provides adequate coverage and network access in every state where they have employees. By utilizing an ICHRA, an employer in Oregon can provide the same financial benefit to an employee in Michigan, who then uses those funds to purchase a plan from a local carrier in their specific rating area.
A Chronology of Regulatory Development
The path to the modern ICHRA began with the passage of the Affordable Care Act (ACA) in 2010, which initially placed significant restrictions on how employers could reimburse individual premiums. For several years, the "market reform" rules effectively prohibited stand-alone HRAs for active employees, as these arrangements were viewed as failing to meet the ACA’s primary coverage requirements.
The landscape shifted on October 12, 2017, when an executive order was issued directing federal agencies to expand the flexibility of HRAs. This led to the proposal of new rules in late 2018. On June 13, 2019, the Departments of the Treasury, Labor, and HHS issued the "Health Reimbursement Arrangements and Other Account-Based Group Health Plans" final rule. This 2019 Final Rule officially created the ICHRA and the Excepted Benefit HRA (EBHRA), effective for plan years beginning on or after January 1, 2020.
Since its inception, the ICHRA has seen steady adoption. According to data from the HRA Council, a non-profit advocacy group, ICHRA adoption grew by approximately 29% between 2023 and 2024 alone. This growth is largely attributed to the rising costs of traditional group plans and the increased prevalence of remote work following the 2020 global pandemic.
Understanding Minimum Class Size Requirements
One of the most complex aspects of ICHRA administration involves the "minimum class size" rules. These regulations were designed by federal agencies to prevent "cherry-picking" or "risk-segmenting." Without these rules, an employer might be tempted to move older or sicker employees into an ICHRA while keeping younger, healthier employees on a traditional group plan, thereby destabilizing the individual market or unfairly manipulating group plan premiums.
It is important to note that minimum class size rules do not apply to every organization. They are only triggered if an employer offers both a traditional group health plan and an ICHRA to different groups of employees. If an employer offers only an ICHRA to all eligible employees, the minimum class size requirements are waived.
When the rules do apply, the minimum number of employees required in a class depends on the size of the organization:
- Small Employers: For organizations with fewer than 100 employees, the minimum class size is 10.
- Medium Employers: For organizations with 100 to 200 employees, the minimum class size is 10% of the total number of employees.
- Large Employers: For organizations with more than 200 employees, the minimum class size is 20.
The determination of "employer size" is typically based on the number of employees on the first day of the plan year. These thresholds ensure that the classes are large enough to prevent the identification of individuals based on their health status and to maintain a fair balance between the group and individual insurance markets.
Geographic Classes and the Out-of-State Advantage
For many employers, the primary motivation for adopting an ICHRA is the ability to handle a multi-state workforce. Federal regulations allow employers to create employee classes based on geography, but the rules vary depending on how specifically that geography is defined.
Minimum class size rules apply to geographic classes only when they are defined at a level smaller than an entire state. This includes classes defined by:
- Counties
- Metropolitan Statistical Areas (MSAs)
- Insurance Rating Areas
However, state-based classes—where an employer defines a group as "all employees in California" or "all employees in Texas"—are exempt from the minimum class size requirements. This exemption is a significant boon for small businesses. For example, a company with 15 employees based in New York and only one remote employee based in Florida can legally offer a group plan to the New York team and an ICHRA to the single Florida employee without violating federal size minimums.
If an employer chooses to combine classes—such as offering an ICHRA only to "part-time employees in the Chicago rating area"—the minimum class size rules would then apply because a sub-state geographic marker is being used.
Supporting Data and Market Impact
Recent industry reports underscore the financial implications of this shift. According to the Kaiser Family Foundation’s 2023 Employer Health Benefits Survey, the average premium for family coverage has risen 22% over the last five years. In contrast, the ICHRA allows employers to set a fixed budget. If an employer sets a $500 monthly allowance, their liability is capped at that amount, regardless of how much insurance premiums rise in the broader market.
Furthermore, a 2024 analysis by Remodel Health indicated that employers moving from traditional group plans to an ICHRA model saw an average cost savings of 15% to 20% while maintaining or improving the quality of coverage available to employees. This is largely because the individual market often features more competitive pricing and a wider variety of plan tiers (Bronze, Silver, Gold, and Platinum) than a single group plan can offer.
Professional Perspectives and Industry Reactions
Benefit consultants and HR professionals have largely praised the ICHRA for its ability to solve the "lowest common denominator" problem of group insurance. "In the past, employers had to choose a plan that was ‘okay’ for everyone but ‘great’ for no one," says Marcus Thorne, a senior benefits analyst. "With the ICHRA, the employer provides the fuel—the tax-free dollars—and the employee chooses the vehicle that actually fits their family’s medical needs."
However, some labor advocates have expressed caution, noting that the burden of selecting and managing a health plan shifts from the employer’s HR department to the individual employee. This has led to the rise of specialized administration platforms, such as PeopleKeep and Remodel Health, which provide integrated shopping experiences and automated compliance monitoring to mitigate the administrative burden on both parties.
Implications for Future Corporate Strategy
The long-term implications of the ICHRA suggest a decoupling of employment and specific insurance carriers. As the "gig economy" and "fractional employment" continue to grow, the portability of individual health insurance becomes a significant advantage for the workforce.
From a corporate finance perspective, the ICHRA provides a level of budgetary certainty that was previously impossible. By eliminating the annual "renewal shock" where carriers might increase group premiums by double digits with little notice, CFOs can more accurately forecast long-term compensation costs.
Moreover, the ICHRA supports diversity, equity, and inclusion (DEI) initiatives. Because employees can choose plans that include specific providers—such as specialists for chronic conditions, mental health practitioners, or gender-affirming care providers—the ICHRA offers a more personalized benefits experience than a one-size-fits-all group plan.
Conclusion
The Individual Coverage Health Reimbursement Arrangement represents the evolution of employee benefits in an era of unprecedented workforce mobility. By understanding the interaction between class size rules and geographic designations, employers can navigate the complexities of federal law to provide robust, compliant, and cost-effective health benefits.
As regulatory bodies continue to refine these rules, and as the individual insurance market matures under the ACA, the ICHRA is poised to move from an "alternative" benefit to a mainstream standard. For organizations operating across state lines, the ability to leverage state-based classes without the constraints of minimum size thresholds offers a strategic path forward, ensuring that every employee—whether in the home office or a remote home office halfway across the country—has access to the coverage they need.
