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.
The use of employee classes allows employers to differentiate or categorize employees into groups to make it easier to customize benefits. Classes had been tightly regulated in HRAs ever since the stand-alone HRA was eliminated in 2013.
However, when the ICHRA became available in 2020, the employee classes feature was restored. The ICHRA comes with 11 different employee classes employers can leverage to structure benefit eligibility and allowance amounts. When used well, these classes help businesses both big and small effectively use their health benefit to hire and keep valuable employees.
In this post, we’ll explain what the 11 employee classes are as well as how to use them to define ICHRA eligibility and allowance amounts so they match your goals for health benefits.
How do ICHRA classes work?
First, let’s examine employee classes in general. Employee classes are a way of separating employees into groups by legitimate job-based criteria.
Historically, employers have used employee classes to get the most out of their investment into HRAs. After all, HRAs are used as a tool to hire and keep employees, so the more freedom employers have in structuring the benefit, the more effective and efficient the benefit is in achieving its purpose.
For example, your organization might be most concerned about hiring and keeping full-time employees. In this case, your benefits budget would be used most effectively if you decided to offer your ICHRA only to 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 your ICHRA only to those in the “in state” employee class, or you could offer different allowance amounts to the “in state” employee class and the “out of state” employee class.
With this added flexibility your organization can use these classes and your ICHRA will contribute a lot more to your overall purpose of hiring and keeping employees.
Which employee classes are available with an ICHRA?
An ICHRA allows employers to use 11 different employee classes:
- 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. However, if you’re intending to use your ICHRA to satisfy the employer mandate, you’ll need to consider full-time employees as averaging 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: Seasonal employees are those who are hired into a position on a short-term basis.
- Temporary employees who work for a staffing firm: 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 employees are those who 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.
- Foreign employees who work abroad: These employees work outside of the United States.
- Employees in different locations, based on rating areas: These employees live outside the individual health insurance rating area of the organization’s physical address.
- 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 who live outside your organization’s rating area.
Within each class, employers can also choose to alter allowance amounts by the employee’s age and family size. For example, you could offer $500 to full-time employees who are single and $800 to full-time employees who have a family.
When it comes to varying allowance amounts based on age, employers can only offer higher allowances to older employees. Employers can offer 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.
Beyond these customizations of family status and age, you must offer your ICHRA to each employee in the same class on the same terms.
Using employee classes to structure ICHRA eligibility
Now that we’ve covered what the 11 employee classes are, 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 that are primarily focused on hiring and retaining local full-time employees may choose to 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 group health insurance policy to local employees while offering an ICHRA to employees who live outside the rating area. Alternatively, you could choose to offer group health to full-time employees while reserving the ICHRA for part-time employees. It’s all completely up to you!
If you choose to offer both an ICHRA and group health insurance based on full-time or part-time status, salaried or hourly payment structure, or geographic location, you must ensure your employee classes are of a certain size.
However, the minimum class size does not apply if the geographic area defining the class is a state or a combination of two or more states.
Those minimum employee class sizes vary by employer size:
- If you have fewer than 100 employees, you need at least 10 employees in a class.
- If you have between 100 and 200 employees, you need at least 10 percent of the total number of employees in a class.
- If you have more than 200 employees, 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 type 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 market varies across the country, you might choose a standard (offering employees an amount equal to the lowest-cost silver plan in the area, for example) 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. This flexibility allows employers to tailor their budgets to the outcomes they most desire with the ICHRA.
While employers aren’t required to use employee classes to structure their benefit, organizations who take advantage of them have the freedom to make decisions on benefit eligibility or allowance amounts according to the unique demographics of their organization. Employee classes enable employers to use their ICHRA to more effectively hire and keep valuable employees—the ultimate goal of all health benefits.
We know that some class combinations can get complicated, but you don’t have to go it alone! Our personalized benefits advisors are here to guide you every step of the way when setting up your ICHRA benefit.
This article was originally published on March 5, 2019. It was last updated September 3, 2021.