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 wanting to provide health benefits to a diversified workforce. Because it gives employers the ability to define custom allowances and establish various employee classes, an ICHRA can work with organizations of all sizes.

Given the rise in remote work, many employers are looking for ways to provide health benefits to their remote workers in multiple states. However, the ICHRA’s minimum class size requirements leave many wondering whether this type of health benefit is an option if they only have one or two employees in different states.

This article will explain if you can offer an ICHRA to only out-of-state employees.

Learn more about individual coverage HRAs (ICHRAs) in our complete guide

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

Yes, you can offer an ICHRA to your employees in other states. All your W-2 employees, including those located in your organization’s state, can use an ICHRA if they have qualifying individual health insurance coverage.

Employees covered by a group plan can’t participate in an ICHRA. This includes a spouse’s or parent’s plan.

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

You can choose to offer an ICHRA to only certain classes of employees instead of all employees. You can separate your employees into different groups based on 11 ICHRA 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 to administer your ICHRA, we only support full-time, part-time, salaried, non-salaried, seasonal, and state-based employee classes.

When does the minimum class size rule apply to ICHRA employee classes?

The ICHRA Final Rule¹ defines minimum class size rules. Minimum class size requirements only apply to organizations that offer a traditional group health insurance plan to at least one class of employees and an ICHRA to another.

They also vary based on the size of your organization:

• If you have fewer than 100 eligible employees, your class must include at least ten employees
• If you have between 100-200 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

If you only offer an ICHRA, minimum class size rules don’t apply to your organization.

Minimum class size rules apply to the following ICHRA classes:

• Salaried employees
• Non-salaried employees
• Full-time employees
• Part-time employees
• Geographic location (only if the rating area is smaller than the state level, such as a county or metropolitan statistical area)

If you offer a state-based or multi-state ICHRA class, minimum class size rules don’t apply. If you offer a combination class that includes any of the above classes (such as offering an ICHRA only to part-time employees in a particular state while offering a traditional group health plan to full-time employees), minimum class size requirements apply.

Designing ICHRA classes for out-of-state employees

If you choose to offer a traditional group health 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.

It’s common for employers in this situation to create ICHRA classes for each state. Employers can define different allowances for each of these classes based on the cost of each state’s individual health insurance premiums.

You can also offer an ICHRA to all your W-2 employees, no matter where they live. With an ICHRA, you can better control your benefits budget by setting custom allowances to reimburse your employees for their qualified medical expenses. This allows you to reimburse your employees for the medical expenses that matter most to them. It also gives your employees more say in their benefits because they can purchase the individual health plan that best meets their needs.

Conclusion

Many employers offer a traditional group plan to employees located in the state where they’re headquartered, sometimes pairing it with a group coverage HRA (GCHRA), while offering out-of-state employees an ICHRA. With employee classes, you can easily customize your benefit to fit your needs.

If you’re looking to offer an ICHRA, PeopleKeep can help. Our HRA administration software allows organizations of all sizes to set up and manage their benefits in minutes.

Schedule a call with a personalized benefits advisor to get started

This blog article was originally published on August 13, 2020. It was last updated on June 7, 2023.

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