Small Business' Health Benefits Too Expensive? Consider Leveraging ICHRA Employee Classification
As the costs of health insurance continue to increase, it's becoming more common for employers to seek out alternatives to the traditional group health insurance plan model. Many businesses have realized that a one-size-fits-all approach isn't always effective when it comes to containing costs while providing important health benefits. Individual coverage health reimbursement arrangements, or ICHRAs, have emerged as a valuable option—offering employers flexibility in developing health insurance programs that best suit their employees' needs while simultaneously controlling costs. Often, the key to unlocking the value of an ICHRA program is understanding how the law allows employers to divide employees into different groups—and tailor their health insurance offerings based on each group's characteristics and needs.
ICHRA: Understanding the Basic Structure
Employers who offer ICHRAs are able to fund each employee's ICHRA with a fixed amount that fully or partially reimburses the employee for their health insurance costs. Employees then turn to the healthcare marketplace to purchase their own individual health insurance. Unlike with other types of health savings vehicles, there is not a cap on the amount the employer can contribute to the ICHRA.
If an individual ceases to be enrolled in individual coverage, the ICHRA can no longer reimburse their medical expenses (on a prospective basis only). Otherwise, the ICHRA can lose its tax-preferred status.
Employers who are classified as large employers for ACA purposes must also continue to comply with the employer mandate requirements, including with respect to the affordability of the employee's required contribution. ICHRAs are considered "affordable" for ACA purposes if the employee's required contribution does not exceed 9.96% of household income in 2026. Affordability is generally calculated in the same way as with respect to group health plans, using the lowest-cost silver plan in the marketplace after the ICHRA benefit is subtracted.
One key aspect to remember is that the employer need not contribute the same amount to each employee. They are permitted to group employees into different classes and offer different amounts to different groups.
Understanding and Leveraging the ICHRA Employee Classification System
The IRS has identified 11 permissible employee classifications for ICHRA purposes: (1) part-time employees, (2) full-time employees, (3) seasonal workers, (4) hourly workers, (5) salaried workers, (6) new hires, (7) workers employed through a temporary staffing agency (or not), (8) employees in different geographical areas (based on rating areas), (9) employees covered by a collective bargaining agreement, (10) employees who have satisfied a waiting period for coverage, and (11) non-resident aliens without U.S. income.
ICHRA contribution levels can vary depending on how the employee is classified within this system (contribution levels must be consistent for all employees within a group). This can be incredibly valuable from a cost-containment purposes.
For example, employers can contribute more for employees in a higher-cost rating area and less to employees with access to less expensive health coverage options. Employers can leverage the part-time classification option to offer some valuable benefits to attract part-time workers while providing higher contributions for full-time employees. Employees can elect to allow long-term employees to continue using their group health plan while offering only ICHRAs to new hires.
Considerations When Leveraging the ICHRA Employee Classification Option
It's important for employers to understand the non-discrimination requirements when varying contribution levels across employee classifications. The structure cannot discriminate in favor of highly compensated employees.
Employers are permitted to offer ICHRAs to one group of employees and traditional group health coverage to a different class of employees. That said, employees within the same group cannot be offered a choice between the ICHRA and group health plan.
Employers should also be aware of the minimum size requirements that apply when classifying employees. These minimums depend on the employer's number of employees—but they only apply if the employer is offering a traditional group health plan to a class of employees.
Best practices dictate that employers should carefully document their classification system, including why they have elected a certain classification system. When it comes to employees, it can also be helpful to communicate with employees, so they understand the employer's rationale for the classification.
Conclusion
ICHRAs can provide employees with a highly valuable, flexible option for offering health benefits to different classes of employees. With the ICHRA, the employer is able to develop a custom-tailored health benefits program—but it's important to pay attention to IRS rules to avoid disqualification.