Can I offer an ICHRA only to out-of-state employees?

The flexibility of individual coverage health reimbursement arrangements (ICHRAs) makes them ideal for employers who want to provide health benefits to a diversified workforce, especially those with remote workers or locations in multiple states.

However, the ICHRA's minimum class size requirements leave many wondering whether this type of health benefit is an option for employers with only one or two employees across different locations.

In this guide, we’ll explain how an ICHRA works and whether you can offer it only to out-of-state employees.

In this blog post, you'll learn:

• How an ICHRA compares to a group health plan.
• How state-based employee classes work.
• When you can avoid the minimum class size requirements.

What is ICHRA?

An ICHRA is an employer-funded health benefit. Unlike traditional group health insurance, an ICHRA is a stand-alone HRA that allows employers to reimburse employees for coverage instead of offering a group plan. This makes it especially useful for remote, hybrid, and multi-state teams.

Employers offer employees a tax-free monthly allowance to use on more than 200 eligible medical expenses, including individual health insurance premiums.

Here's how an ICHRA works:

• The employer sets a monthly allowance. Employers can vary allowances by 11 employee classes, such as full-time and seasonal employees, by employee age, and by family status.
• Employees purchase their own individual plans through a health insurance broker, health insurance provider, or the Health Insurance Marketplace. ICHRA administrators, like PeopleKeep by Remodel Health, also provide integrated shopping tools on their platforms.
• Employees submit proof of coverage and eligible healthcare expenses.
• The employer provides tax-free reimbursements to employees up to their allowance amount.
• With PeopleKeep, unused funds stay with the employer at the end of the year.

What are the minimum class size rules for ICHRA?

The ICHRA Final Rules¹ outlines minimum class size requirements. It's designed to prevent employers from unfairly segmenting employees into different health benefit groups.

When minimum class size rules apply

Minimum class size rules only apply if you:

• Offer a traditional group health plan, and
• Offer an ICHRA to a different class of employees

If you offer only an ICHRA (and no group health plan), minimum class size rules don't apply. So, if you’re looking to offer an ICHRA to only out-of-state employees, you need to be aware of these class size minimums.

Minimum size thresholds

If the rules apply, the required class size depends on your organization’s size:

• If you have fewer than 100 eligible employees, your class must include at least ten employees
• If you have between 100 and 200 employees, your class must include at least 10% of your employees
• If you have more than 200 employees, your class must have at least 20 employees

These thresholds ensure that employee classes are large enough to meet compliance standards.

Which classes trigger rules

Minimum class size rules apply to the following ICHRA classes:

• Full-time employees
• Part-time employees
• Salaried employees
• Non-salaried employees
• Certain geographic classes

Important clarification: Geographic classes only trigger minimum class size rules when they’re defined below the state level (such as counties, metropolitan statistical areas, or rating areas).

State-based and multi-state classes are exempt from minimum class size requirements.

If you combine classes (for example, offering an ICHRA only to part-time employees in a specific location while offering a group health plan to full-time employees), minimum class size rules apply.

Can I offer an ICHRA to my employees in other states?

Yes, you can offer an ICHRA to your employees in other states, including remote workers and employees outside of the organization’s home state.

All W-2 employees can participate in an ICHRA as long as they're enrolled in qualifying individual health insurance coverage. This includes Medicare Parts A and B together and Medicare Part C. Employees can't receive tax-free reimbursements if they're enrolled in a group plan only, including a spouse’s employer-sponsored health insurance plan.

Can I offer an ICHRA to only out-of-state employees?

You can choose to offer an ICHRA to only specific classes of employees instead of all employees. You can create employee categories based on employee classes, including geographic location. This includes state-based and rating area-based classes.

By using a state-based or rating area-based employee class, you can offer your ICHRA only to employees in a particular location. For example, suppose your organization is in Oregon, but you only want to offer an ICHRA to your employees in Michigan. You can use a state-based employee class to only offer your ICHRA to Michigan employees.

If you use PeopleKeep by Remodel Health to administer your ICHRA, we only support full-time, part-time, salaried, non-salaried, seasonal, and state-based employee classes. However, if you need to vary ICHRA allowances and eligibility by rating area, Remodel Health’s ICHRA+ platform supports this feature.

Designing ICHRA classes for out-of-state employees

If you choose to offer a group plan to employees in one state (for example, in your organization's home state) and offer an ICHRA to employees in other states, you don't need to worry about ICHRA minimum class size requirements, assuming that’s your only class distinction. However, if you choose to use rating areas, you will need to consider minimum class sizes.

This structure is common for employers with distributed or remote teams.

Many employers choose to:

• Create separate state-based ICHRA classes
• Adjust allowance amounts based on regional premium differences
• Align benefits strategy with local insurance markets

You can also offer an ICHRA to all W-2 employees, regardless of location. This gives employers greater control over their benefits budget while allowing employees to choose the individual health plan that best fits their needs.

How PeopleKeep by Remodel Health can help

Designing an ICHRA that meets federal requirements while supporting a distributed workforce can be complex. If you're looking to offer an ICHRA, PeopleKeep by Remodel Health can help simplify administration.

With PeopleKeep by Remodel Health, you can:

• Easily create and manage employee classes
• Stay compliant with ICHRA regulations
• Offer personalized, tax-advantaged employee health benefits
• Support employees across multiple states

Our platform also streamlines reimbursement requests and provides an integrated shopping experience so employees can compare and purchase individual health insurance plans directly from their dashboard.

Conclusion

ICHRA minimum class size requirements only apply in limited situations, primarily when employers offer both a group health insurance plan and an ICHRA. By structuring your ICHRA thoughtfully, you can avoid unnecessary restrictions and create a benefits strategy that scales with your organization.

Interested in offering an ICHRA to your out-of-state employees? Schedule a call with a PeopleKeep by Remodel Health HRA specialist today!

This blog article was originally published on August 13, 2020. It was last updated on May 1, 2026.

References

1. https://www.federalregister.gov/documents/2019/06/20/2019-12571/health-reimbursement-arrangements-and-other-account-based-group-health-plans