The landscape of American employer-sponsored health insurance underwent a seismic shift in June 2019, when the Department of the Treasury, the Department of Labor, and the Department of Health and Human Services (HHS) issued a final rule regarding Individual Coverage Health Reimbursement Arrangements (ICHRAs). Effective since January 1, 2020, this regulatory development has provided a vital lifeline for organizations seeking to manage the rising costs of traditional group health plans while accommodating an increasingly distributed workforce. As remote work becomes a permanent fixture of the modern economy, employers are increasingly looking toward ICHRAs to provide health benefits to employees across different states. However, the complexity of "minimum class size" requirements remains a significant hurdle for human resources departments and business owners attempting to maintain compliance while offering flexible benefits.
The Evolution of the Defined Contribution Health Model
To understand the current state of ICHRAs, it is necessary to examine the historical trajectory of Health Reimbursement Arrangements (HRAs). Traditionally, HRAs were restricted to being integrated with group health insurance plans. The Affordable Care Act (ACA) initially limited the scope of HRAs, but the subsequent creation of the Qualified Small Employer HRA (QSEHRA) in 2016 and the ICHRA in 2020 signaled a return to "defined contribution" health benefits.
Unlike a "defined benefit" model, where an employer chooses a specific plan for all employees, the ICHRA model allows employers to provide tax-free monthly allowances. Employees then use these funds to purchase individual health insurance on the open market or through state exchanges. This shift allows employers to control their budgetary exposure—fixing their costs to a specific dollar amount—while providing employees with the autonomy to choose plans that best suit their specific healthcare needs and regional provider networks.
Understanding the ICHRA Class System
The primary mechanism that makes an ICHRA versatile is the ability to categorize employees into "classes." Federal regulations currently recognize eleven distinct classes of employees that can be offered different levels of benefits, or even different types of plans. These classes include:
- Full-time employees
- Part-time employees
- Seasonal employees
- Employees covered by a collective bargaining agreement (union workers)
- Employees who have not met a waiting period
- Non-resident aliens with no U.S.-based income
- Employees working in the same geographic rating area
- Salaried employees
- Non-salaried (hourly) employees
- Temporary employees provided by a staffing agency
- Any combination of the above classes
This structure allows an employer to, for instance, offer a traditional group plan to their headquarters-based staff while offering an ICHRA to their remote, out-of-state staff. However, to prevent employers from "cherry-picking" healthy employees for the group plan and moving higher-risk employees to the individual market, the federal government instituted "minimum class size" requirements.
The Mechanics of Minimum Class Size Requirements
The minimum class size rules are designed as an anti-discrimination safeguard. They apply specifically when an employer offers both a traditional group health plan and an ICHRA to different segments of their workforce. If an employer offers only an ICHRA to all employees, these size requirements do not apply.
When the rules are triggered, the required size of a class depends on the total number of employees at the firm:
- Small Employers (Fewer than 100 employees): The class must consist of at least 10 employees.
- Medium Employers (100 to 200 employees): The class must consist of at least 10% of the total number of employees.
- Large Employers (More than 200 employees): The class must consist of at least 20 employees.
Importantly, these thresholds apply at the time the ICHRA plan is established for the year. If the number of employees in a class drops below the threshold during the plan year due to attrition, the employer remains in compliance until the next plan year.
Geographic Distinctions and the "State-Level" Exemption
One of the most critical nuances for multi-state employers is how the government defines "geographic classes." Under the final rules, geographic classes trigger the minimum class size requirements only if they are defined at a level smaller than an entire state. This includes classes defined by counties, Metropolitan Statistical Areas (MSAs), or insurance "rating areas."
Conversely, if an employer defines a class at the state level—for example, "all employees residing in Michigan"—the minimum class size rule does not apply. This exemption is a strategic boon for organizations with one or two remote workers in several different states. It allows a company based in Oregon to offer a traditional group plan to its local staff while providing an ICHRA to a single employee in Michigan, without violating federal size thresholds.
Market Trends and Adoption Data
The adoption of ICHRAs has seen a steady upward trajectory since 2020. According to data from the HRA Council, a non-profit advocacy group, ICHRA adoption grew by 3.5 times between 2022 and 2023. This growth is largely driven by small to mid-sized enterprises (SMEs) that have struggled with the 4% to 7% annual premium increases common in the group insurance market.
Furthermore, industry analysis suggests that the ICHRA model is particularly popular in sectors with high turnover or diverse workforce structures, such as retail, hospitality, and professional services. For these industries, the ability to separate full-time and part-time employees into different benefit classes allows for more granular budget management.
Administrative Implications and Compliance
While ICHRAs offer flexibility, they also introduce administrative complexities. Employers must ensure that their ICHRA offerings meet "affordability" standards under the ACA’s employer mandate. If the ICHRA allowance is not sufficient for an employee to purchase a basic "silver-level" plan on the exchange for less than a certain percentage of their household income (9.12% in 2023, adjusted annually), the employer could face penalties.
Additionally, employers must verify that employees are actually enrolled in qualifying individual health insurance. This process, known as "substantiation," must occur before any reimbursements are made. Platforms such as PeopleKeep by Remodel Health have emerged to automate these processes, providing digital dashboards for employees to upload proof of coverage and for employers to track tax-free distributions.
Reactions from Industry Stakeholders
Benefits consultants and health policy experts have generally lauded the ICHRA’s ability to stabilize the individual insurance market. By moving more participants into the individual exchanges, ICHRAs contribute to a larger, more stable risk pool, which can lead to more competitive pricing from insurers over time.
However, some labor advocates have expressed caution, noting that the shift to a defined contribution model places the "shopping burden" on the employee. Unlike a group plan, where the employer negotiates benefits, the ICHRA requires employees to navigate the complexities of the health insurance marketplace themselves. To mitigate this, many ICHRA administrators now offer "integrated shopping experiences," where employees can compare plans directly through the benefit portal.
The Broader Impact on the Future of Work
The rise of the ICHRA is inextricably linked to the "work-from-anywhere" movement. Prior to the ICHRA, a company with 50 employees spread across 10 states faced a logistical nightmare: they either had to find a national PPO network (which is increasingly expensive and rare for small groups) or set up separate group plans in every state.
The ICHRA effectively "nationalizes" a company’s health benefit strategy by localizing the insurance. Because the employee buys a plan in their own zip code, they gain access to local networks and doctors that a remote group plan might not cover. This localized approach improves the "value" of the benefit to the remote employee, making the employer more competitive in the national talent market.
Conclusion and Strategic Outlook
As the 2020s progress, the Individual Coverage Health Reimbursement Arrangement is positioned to become a standard tool in the corporate benefits arsenal. By decoupling health insurance from a specific "group" and attaching it to the individual, the ICHRA mirrors the transition seen in the retirement sector decades ago, when 401(k) plans largely replaced traditional pensions.
For employers, the path forward requires a careful analysis of workforce geography and a clear understanding of the class-size rules. By leveraging the state-based exemption, even the smallest firms can support a distributed workforce without the compliance risks associated with sub-state geographic classes. As the regulatory environment continues to favor portable, individualized benefits, the ICHRA stands as a robust solution for the complexities of the modern, multi-state employment landscape.
