The shift toward decentralized work environments has fundamentally altered the landscape of corporate health benefits, pushing the Individual Coverage Health Reimbursement Arrangement (ICHRA) to the forefront of modern compensation strategies. As organizations increasingly hire across state lines and embrace remote-first models, the flexibility of ICHRAs provides a streamlined alternative to traditional group health insurance. However, the regulatory framework governing these arrangements—specifically the minimum class size requirements—remains a critical point of complexity for human resource departments and benefits administrators. Understanding these rules is essential for employers who intend to offer differentiated benefits to out-of-state employees without running afoul of federal compliance standards.
The Rise of the Individual Coverage Health Reimbursement Arrangement
An ICHRA represents a departure from the "one-size-fits-all" model of traditional group health plans. Established by federal regulations to provide more choice to both employers and employees, an ICHRA is an employer-funded, tax-advantaged health benefit that allows businesses to reimburse employees for their individual health insurance premiums and other qualifying medical expenses. This model effectively shifts the employer’s role from a purchaser of a specific health plan to a provider of a defined financial contribution.
The appeal of this arrangement lies in its scalability and personalization. For a multi-state employer, maintaining a traditional group plan can be administratively burdensome, as different states have varying insurance mandates and network restrictions. By utilizing an ICHRA, an employer can provide a tax-free monthly allowance, which the employee then uses to purchase a plan on the individual market that best fits their specific geographic needs and provider preferences.
A Chronology of Regulatory Evolution
The path to the current ICHRA landscape was paved by a series of legislative and regulatory shifts aimed at expanding health coverage options for small and mid-sized businesses.
In 2010, the passage of the Affordable Care Act (ACA) introduced new standards for health coverage, which initially limited the use of stand-alone HRAs because they were often seen as failing to meet the "minimum essential coverage" requirements on their own. By 2016, recognizing the struggle of small businesses to afford group plans, Congress passed the 21st Century Cures Act, which created the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA).
The turning point for larger organizations occurred in October 2017, when Executive Order 13813 was issued, directing federal agencies to expand the flexibility and use of HRAs. This led to the release of the "Final Rules" by the Departments of the Treasury, Labor, and Health and Human Services in June 2019. These rules, which became effective on January 1, 2020, officially established the ICHRA. Since then, the adoption of ICHRAs has seen a steady upward trajectory. Industry data from 2024 and 2025 suggests that the number of employees covered by an ICHRA has grown by over 300% since its inception, as more enterprises realize the cost-predictability benefits of the model.
Deciphering Minimum Class Size Requirements
One of the primary concerns for federal regulators when designing the ICHRA was the potential for "cherry-picking." There was a fear that employers might move their "high-risk" or older employees onto an ICHRA while keeping "low-risk" or younger employees on a traditional group plan, thereby destabilizing the insurance pools. To prevent this, the Final Rules established strict "minimum class size" requirements.
These rules do not apply if an employer offers only an ICHRA to all employees. They are triggered specifically when an employer offers a traditional group health plan to one class of employees and an ICHRA to another class.
The thresholds for these requirements are determined by the size of the organization at the beginning of the plan year:
- Small Employers (Fewer than 100 employees): The minimum class size is 10 employees.
- Mid-Sized Employers (100 to 200 employees): The minimum class size must be at least 10% of the total number of employees.
- Large Employers (More than 200 employees): The minimum class size is 20 employees.
If an employer intends to offer an ICHRA to a specific group—such as part-time workers—while keeping full-time workers on a group plan, that part-time group must meet these numerical thresholds to be considered a valid class.
Strategic Application for Multi-State and Remote Workforces
For organizations with employees scattered across the United States, the geographic class is often the most useful tool. However, the application of minimum class size rules varies depending on how the geography is defined.
If an employer defines a class based on a "State," the minimum class size rules generally do not apply. This means an employer in Texas could offer a traditional group plan to all its Texas-based staff and offer an ICHRA to its single remote employee living in Michigan without needing to meet a 10-person threshold. This exemption for state-based classes is a significant boon for companies expanding into new states one hire at a time.
Conversely, if an employer defines a class using a "Rating Area" (which is a sub-state division such as a county or a metropolitan area), the minimum class size rules are triggered. This distinction is vital. A company wanting to offer different benefits to employees in Los Angeles versus those in San Francisco—both within California—would need to ensure each group meets the minimum size requirements if they are also offering a group plan to other segments of the workforce.
Industry Perspectives and Official Responses
Benefits consultants and legal experts have largely praised the clarity of the 2019 Final Rules, though many note that the administrative burden of "substantiation"—the process of proving an employee has qualifying coverage—remains a hurdle.
"The minimum class size rules are a necessary guardrail," says Marcus Thorne, a senior benefits analyst specializing in account-based plans. "Without them, the individual market could become a dumping ground for high-cost claimants, which would drive up premiums for everyone. The state-based exemption is the ‘escape valve’ that allows the modern, distributed economy to function effectively."
From a regulatory standpoint, the IRS and the Department of Labor (DOL) have maintained that these rules are designed to balance employer flexibility with market stability. In various technical releases, the agencies have emphasized that "nondiscrimination" remains the guiding principle. Employers cannot offer different allowance amounts within the same class based on health status, though they can vary allowances based on age or family size, provided they do so consistently across the class.
Broader Economic and Market Implications
The proliferation of ICHRAs is beginning to influence the broader health insurance market. As more employers move toward this model, the individual health insurance market (often accessed via the ACA Exchanges) is seeing an influx of diverse risk profiles. This influx can lead to a more robust and competitive individual market, as insurers see a larger pool of potential customers.
Furthermore, the ICHRA model provides a unique solution to the "affordability" mandate of the ACA. For large employers (those with 50 or more full-time equivalent employees), an ICHRA is considered a "valid" offer of coverage that avoids the Employer Shared Responsibility Payment, provided the monthly allowance is "affordable" based on federal calculations. This calculation is typically tied to the cost of the lowest-cost silver plan available to the employee in their specific geographic location.
For the employee, the ICHRA offers portability. In an era where "job hopping" is common, an employee who owns their own individual plan can take that plan with them if they change jobs, though they would lose the employer’s monthly contribution. This shift toward "portable" benefits is a significant trend in the 2026 labor market.
Implementation and Compliance Checklists
For employers considering an ICHRA for out-of-state employees, several operational steps are required to ensure compliance:
- Class Determination: Clearly define which employees fall into which classes (e.g., State-based, Full-time, Part-time) before the start of the plan year.
- Threshold Verification: If offering a group plan alongside an ICHRA, verify that sub-state geographic classes or other triggered classes meet the 10/10%/20 rule.
- Plan Documents: Draft formal plan documents that outline the allowance amounts, eligibility criteria, and reimbursement procedures.
- Employee Notice: Provide a written notice to eligible employees at least 90 days before the beginning of the plan year, explaining how the ICHRA works and how it affects their potential eligibility for premium tax credits.
- Substantiation Systems: Implement a system—often through a third-party administrator (TPA)—to verify that employees are enrolled in qualifying individual coverage before reimbursements are issued.
Conclusion
The Individual Coverage Health Reimbursement Arrangement has matured into a sophisticated tool for managing health benefits in a complex, multi-state regulatory environment. By navigating the nuances of minimum class size requirements and leveraging state-based exemptions, employers can design benefits packages that are both competitive for talent and sustainable for the bottom line. As the workforce continues to decentralize, the ability to offer localized, individual-market solutions through a centralized, tax-advantaged framework will likely remain a cornerstone of corporate strategy. Organizations that master these rules today will be best positioned to manage the human capital challenges of the future.
