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The individual coverage HRA (ICHRA)'s employee classes: how do they work?

March 5, 2019
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One of the most exciting things about the prospect of the individual coverage health reimbursement arrangement (ICHRA) is its employee classes feature.

Employee classes, which allow businesses to draw distinctions among employees in benefits, have been tightly regulated in HRAs since the stand-alone HRA was eliminated in 2013.

When the ICHRA becomes compliant in January 2020, it will restore that feature. The ICHRA comes with nine different employee classes businesses can leverage while structuring benefit eligibility and allowance amounts. When used well, these classes will help businesses more effectively use their benefit to hire and keep valuable employees.

In this post, we’ll explain what the nine 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.

Let’s get started.

What are employee classes and why would you want them?

First, let’s examine employee classes in general.

Employee classes are a way of separating employees into groups by legitimate job-based criteria, including tenure, hours worked, job title, or location.

Historically, businesses have used employee classes to get the most out of their investment into HRAs. HRAs are used as a tool to hire and keep employees, so the more freedom businesses have in structuring the benefit, the more effective and efficient the benefit is in achieving its purpose.

For example, your business 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 HRA only to employees in the “full-time” class.

Your business may also have employees in other states, where health benefits are more expensive. In this case, you could structure eligibility to offer the HRA 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.

The more your business uses these classes, the more your HRA will contribute to your overall purpose of hiring and keeping employees.

Which employee classes are available with the ICHRA?

The ICHRA allows businesses to use nine different employee classes:

  • Full-time employees. Businesses 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 the business is intending to use the ICHRA to satisfy the employer mandate, they need to consider full-time employees as averaging at least 30 hours a week.
  • Part-time employees. Businesses 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 for a short-term.
  • Employees covered under a collective bargaining agreement. These employees have entered into a written agreement between the business 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. Businesses can choose to implement waiting periods of up to 90 days.
  • Employees under age 25. These employees are younger than 25 and are often on a family member’s health insurance policy.
  • 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 business’s physical address.
  • A combination of two or more of the above. Businesses can also create additional classes by combining two or more of the above classes. For example, they may create a class of full-time employees who live outside the business’s rating area.

Within each class, businesses can also choose to alter allowance amount by the employee’s age and family size. For example, they could offer $500 to full-time employees who are single and $800 to full-time employees who have a family.

Beyond this, businesses must offer the HRA to each employee in the same class on the same terms.

Using employee classes to structure ICHRA eligibility

The first way businesses can use these nine employee classes is to help them structure their eligibility requirements for the ICHRA. This helps them focus the benefit on those employees they most want to hire and retain.

Businesses that are primarily focused on hiring and retaining local full-time employees, for example, may choose to limit ICHRA eligibility to full-time employees over age 25 who live in the business’s rating area.

Businesses could also use these classes to help them offer different benefits to different employees. For example, businesses that also want to offer group health insurance might decide to offer the group health policy to local employees while offering the ICHRA to employees who live outside the rating area. Alternatively, they could choose to offer group health to full-time employees while reserving the ICHRA for part-time employees.

By using employee classes in this way, businesses can ensure they’re tailoring the ICHRA specifically to their most valuable employees.

Using employee classes to set ICHRA allowance amounts

The second way businesses can use employee classes is to help them offer different allowance amounts to different employees. This helps them more efficiently use their benefits dollars while also targeting their most high-value employees.

For most businesses, full-time employees bring the greatest value to the company. In this case, it makes sense to offer full-time employees larger allowance amounts ($500 a month, for example) than part-time employees ($300 a month, for example).

Businesses can also use an employee’s rating area to offer different allowance amounts. Because the individual market varies across the country, the business might choose a standard (offering employees an amount equal to the lowest-cost silver plan in the area, for example) and altering allowance amount based on that standard to employees in different rating areas.

Remember, businesses can also choose to offer different allowance amounts to different employees within each class by the employee’s age and family size.

This flexibility allows businesses to tailor their budgets to the outcomes they most desire with the ICHRA.

Conclusion

There’s no requirement that businesses use employee classes to structure their benefit. Classes can be complex and require businesses to juggle a lot of numbers instead of just a few.

But when the stand-alone HRA eliminated employee classes, something was lost. Businesses no longer had the freedom to make decisions on benefit eligibility or HRA allowance amount according to the unique demographics of their business. Instead, they were compelled to offer the benefit on essentially the same terms to everyone.

With the ICHRA, that’s no longer the case. The ICHRA restores employee classes with nine different dynamic classes businesses can use to set eligibility requirements and offer different allowance amounts to different employees.

In that way, employee classes enable businesses to use the ICHRA to more effectively hire and keep valuable employees--the ultimate goal of all health benefits.

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