ICHRA Minimum Class Size Rule: Thresholds, Counting, and Penalties

The ICHRA minimum class size rule requires an employer offering an Individual Coverage Health Reimbursement Arrangement to some employees while keeping a traditional group health plan for others to place at least 10, 10 percent, or 20 employees in each ICHRA class, depending on total workforce size.¹ The rule exists to keep employers from isolating a few high-cost employees into one arrangement and everyone else into another. Getting it wrong triggers an excise tax of $100 per day for each affected employee, so the stakes are real even when the mistake is unintentional.

When the Rule Applies

The trigger is a split offering. You must be giving a traditional group health plan to at least one class of employees and an ICHRA to at least one different class for the minimum class size rule to activate.¹ If both groups receive the same type of coverage, the rule stays dormant.

An employer that moves every class to an ICHRA and drops its traditional plan entirely has no minimum class size concerns. The same is true for a company that offers a traditional plan to some classes and no coverage at all to others. Only the split-offering scenario is regulated here, because that is where the temptation to sort by risk is strongest.

One boundary worth naming: you cannot offer both a traditional group health plan and an ICHRA to the same class of employees.² Each class gets one or the other.

The Three Numerical Thresholds

When the rule applies, the minimum number of employees in each ICHRA class depends on total employer size, determined before the plan year begins:¹

Fewer than 100 employees: the ICHRA class must include at least 10 employees.
100 to 200 employees: the class must include at least 10 percent of the total workforce, rounded down to a whole number.
More than 200 employees: the class must include at least 20 employees.

The threshold counts employees offered the ICHRA, not employees who enroll. If you extend the arrangement to 25 people and only 12 sign up, you remain compliant because the offer met the threshold. Employees who decline coverage or find insurance elsewhere do not shrink your class for compliance purposes.

Which Classes Actually Trigger the Rule

Not every class type activates the minimum size requirement. Only five do, and only when offered an ICHRA alongside a traditional plan for another class:¹

Full-time employees
Part-time employees
Salaried employees
Non-salaried (hourly) employees
Employees grouped by geographic rating area

Even within those five, there are carve-outs. The full-time and part-time classes only trigger the rule when one of the two gets a traditional plan and the other gets an ICHRA. If both are offered ICHRAs, no minimum applies to either. Geographic rating area classes are exempt when the area is defined as an entire state or a combination of whole states.

Classes built around collective bargaining agreements, seasonal status, waiting periods, non-resident aliens, or temporary staffing agency employees are never subject to the minimum class size rule on their own. The waiting-period class is especially useful in combination structures: pairing one of the five applicable classes with a waiting-period class removes the minimum size requirement from that combined class.¹ For combinations more generally, the rule applies whenever at least one of the five applicable classes is in the mix, unless the waiting-period class is also part of the combination.

How to Count Your Workforce

The total employee count decides which tier applies, and the regulation requires you to lock it in before the plan year starts. Two methods are acceptable:

First day of the plan year: count every employee on the roster as of day one.
Prior-year average: average headcount across the preceding calendar year, which smooths out seasonal swings and turnover.

New employers without a full prior year of data can base their count on a reasonable expectation of average headcount during the current year.³ That estimate should reflect realistic hiring plans, not aspirational ones. If the workforce grows sharply mid-year, the employer generally keeps the classification established at the start of the plan year.

The Controlled Group Trap

Businesses under common ownership or otherwise related under Section 414 of the Internal Revenue Code are treated as a single employer for workforce counting.³ If a parent owns two subsidiaries with 60 and 80 employees, the combined 140-employee count sets the tier. Each member of the controlled group is individually responsible for its own ICHRA compliance, but the aggregated headcount can push a small subsidiary into a higher tier than it would occupy on its own. This catches employers off guard more often than any other part of the counting rules.

Same Terms Within a Class

An ICHRA must be offered on the same terms to every employee within a class. You cannot give one full-time employee $500 per month and another full-time employee $300 per month based on claims history or perceived risk. The regulation allows two variations: contribution amounts may differ based on employee age, and they may differ depending on whether the employee is covering just themselves or family members. Age-based differences must follow a 3-to-1 ratio, so the amount offered to the oldest eligible employee in the class cannot exceed three times the amount offered to the youngest.

Penalties for Getting It Wrong

An ICHRA that fails the class size requirement is treated as a group health plan that violates federal requirements. The excise tax under the Internal Revenue Code is $100 per day for each individual affected by the failure.⁴ For a class of 15 employees, that is $1,500 per day, more than $547,000 over a year. The math moves quickly.

The statute provides several protections for honest mistakes:

Reasonable diligence defense: no tax applies during any period when the employer did not know, and reasonably could not have known, that the failure existed.⁵
30-day correction window: if the failure was due to reasonable cause and not willful neglect, the tax is avoided entirely by correcting within 30 days of discovery.⁵
Annual cap for unintentional failures: when failures are due to reasonable cause, the total excise tax for the year is capped at the lesser of 10 percent of prior-year group health plan spending or $500,000.⁵
Secretary waiver: the IRS can waive some or all of the tax if paying it would be disproportionate to the failure.

None of these protections apply to willful violations. An employer that knowingly structures its classes to work around the minimum size rule faces the full $100-per-day-per-person penalty without any cap. Once the IRS has issued an examination notice, uncorrected failures carry a minimum penalty of $2,500 per individual, rising to $15,000 if the violations are more than minor.⁵

1
eCFR. 26 CFR 54.9802-4 – Special Rule Allowing Integration of Health Reimbursement Arrangements
2
Centers for Medicare & Medicaid Services. Individual Coverage Health Reimbursement Arrangements Policy and Application Overview
3
Internal Revenue Service. Determining if an Employer Is an Applicable Large Employer
4
Office of the Law Revision Counsel. 26 U.S. Code 4980D – Failure to Meet Certain Group Health Plan Requirements
5
Office of the Law Revision Counsel. 26 USC 4980D – Failure to Meet Certain Group Health Plan Requirements