One of the most exciting things that sets the individual coverage health reimbursement arrangement (ICHRA) apart from other HRAs is the flexibility to designate different employee classes.
With the ICHRA, employers can leverage up to11 different employee classes to categorize employees into groups and make it easier to customize benefits. When used well, these classes help businesses effectively use their health benefit to attract and retain valuable employees.
Below we’ll go over the 11 employee classes and how you can use them to define ICHRA benefit eligibility and allowance amounts, so they match your health benefit goals.
What is an ICHRA?
An ICHRA is an employee benefit that allows organizations of all sizes to reimburse employees on a pre-tax basis for individual health insurance premiums and qualifying out-of-pocket medical expenses. Reimbursements are free from income tax for employees as long as their health insurance plan meets minimum essential coverage (MEC).
ICHRAs provide significant health savings for small to mid-sized businesses that can't afford to offer their employees a traditional group health plan.
They’re also an attractive option for employers that want more health benefit flexibility because they allow employers to set their own allowance amount and let employees choose which healthcare expenses they’d like to use their allowance on.
How do ICHRA classes work?
First, let’s examine employee classes in general. Employee classes are a way of separating eligible participants into groups by legitimate job-based criteria.
Employers use employee classes in their benefit design for a variety of reasons. Because HRAs are a more flexible health benefit than a traditional group health plan, they make leveraging classes simple, making the benefit more effective for your staff.
For example, your organization might be most concerned about hiring and keeping full-time employees. In this case, your health benefits budget would be used most effectively if you decided to offer your ICHRA only to eligible employees in the “full-time” class.
Or, as is the case with many businesses now, your organization may be fully remote. This means you might have employees in another state where health benefits are more expensive.
In this case, you could structure eligibility to offer one specific ICHRA allowance to those in the “in-state” class of employees, and a different allowance amount to the “out-of-state” employee class.
With this added flexibility, your ICHRA will better serve your overall goal controlling your budget as well as hiring and retaining employees.
Which employee classes are available with an ICHRA?
An ICHRA allows employers to use 11 different classes of employees:
- Full-time employees: Employers can choose whether they define “full-time employment” as averaging 30 hours or more a week, or as averaging 40 hours or more a week.
- If you’re using your ICHRA to satisfy the employer mandate, you must consider full-time employees as those who average at least 30 hours a week.
- Part-time employees: Employers can choose whether to define “part-time employment” as averaging under 40 hours a week or as averaging under 30 hours a week.
- Seasonal employees: This type of employee is hired into a position on a short-term basis.
- Temporary employees of staffing firms: These employees provide temporary services for the organization, but are formally employed through a staffing firm.
- Salaried employees: Salaried employees are those who are paid on an annual basis and aren't eligible for overtime pay.
- Hourly employees: Hourly workers, or non-salaried workers, are paid on an hourly basis and can earn overtime.
- Employees covered under a collective bargaining agreement: These employees have entered into a written agreement between the organization and their trade union on the conditions of employment, rate of pay, hours of work, and other working conditions.
- Employees in a waiting period: These are employees who are currently in a waiting period for health benefits. Employers can choose to implement waiting periods of up to 90 days.
- Foreign employees who work abroad: These employees work outside the United States.
- Employees in different locations, based on rating areas: These employees live outside the individual health insurance geographic rating area1 of the organization’s physical address.
- If there’s no physical address, like with remote companies, the insurance rating area is where the most employees within the insurance company’s plan network live at the beginning of the coverage period.
- A combination of two or more of the above: Employers can also create additional classes by combining two or more of the above classes.
- For example, you may create a class of full-time employees and choose to alter allowance amounts by the employee’s location, such as offering $500 to employees in one state and $800 to employees in another.
Keep in mind that if you’re offering an ICHRA with the help of administration software, you may not be able to access all 11 employee classes. For instance, with PeopleKeep, only the full-time, part-time, seasonal, salaried, non-salaried, and state-based classes are available.
Can I give employees a different allowance based on their age?
When it comes to varying allowance amounts based on age, employers can only offer higher allowances to older employees. Employers can provide allowances to the oldest employees in the class that are up to three times higher than the allowances offered to the youngest employees in the class.
Can I give employees a different allowance based on their family status?
Similar to adjusting based on age, you can vary allowance amounts by an employee’s family size. For example, within each employee class you set, you can offer a greater allowance to employees who have a family over those who are single.
Beyond these customizations of family status and age, you must offer your ICHRA to each plan participant in the same class on the same terms.
Using employee classes to structure ICHRA eligibility
Now that we’ve covered the 11 employee classes, let’s talk about how you can use them. The first use for employee classes is to help you structure your eligibility requirements for the ICHRA, allowing you to focus the benefit on the employees you most want to hire and retain.
For example, employers mainly focused on hiring and retaining local full-time employees may limit ICHRA eligibility to full-time employees over age 25 who live in the organization's rating area.
You can also use employee classes to help you offer different benefits to different employees. For example, you can choose to offer a traditional group health plan to local employees while offering an ICHRA to employees who live outside the rating area.
Alternatively, you could offer employer-sponsored health insurance to full-time employees while reserving the ICHRA for part-time employees.
If you choose to offer both an ICHRA and traditional group health plan coverage based on full-time or part-time status, salaried or hourly payment structure, or geographic location, you must ensure your employee class size meets specific requirements.
The minimum class size requirement varies by company size:
- If you have fewer than 100 eligible employees, you need at least ten employees in a class.
- If you have between 100-200 employees, you need at least 10% of the total number of employees in a class.
- If your employee count is more than 200, you need at least 20 employees in a class.
Using employee classes to set ICHRA allowance amounts
Employee classes can also help employers offer different allowance amounts to different employees so you can better recruit the types of employees your organization needs most.
For most organizations, full-time employees bring the greatest value. In this case, it makes sense to offer your full-time employees larger allowance amounts ($500 a month, for example) than your part-time employees ($300 a month, for example).
You can also use an employee’s rating area to offer different allowance amounts. Because the individual health insurance market varies across the country, you might choose a standard (i.e., offering employees an amount equal to the lowest-cost silver plan in the area) and alter the allowance amount based on that standard to employees in different rating areas.
Remember, you can also choose to offer different allowance amounts to different employees within each class by the employee’s age and family status. Because there’s no annual maximum contribution limit with an ICHRA, you can tailor your budget to meet your needs.
While employers aren’t required to use employee classes to structure their ICHRA benefit, organizations that take advantage of them to design a more flexible benefit.
With employee classes, you can create allowance amounts according to the unique demographics of their organization so you can more effectively hire and keep your employees. Class combinations can get complicated, but you don’t have to go it alone! Contact our personalized benefits advisors, and we’ll guide you through setting up your ICHRA benefit.
This article was originally published on October 21, 2021. It was last updated on November 11, 2022.