ICHRA Regulations: Classes, Allowances, and Notice Rules

ICHRA compliance rules for employers cover eight moving parts: verifying that every reimbursed employee has qualifying individual coverage, structuring offers around federally permitted employee classes, keeping contributions within the allowed variation limits, delivering a written notice 90 days before the plan year, substantiating each reimbursement, meeting affordability standards if you’re an applicable large employer, maintaining an ERISA plan document, and handling ongoing obligations like COBRA and the annual PCORI fee. Miss any of them and the arrangement can lose the tax-favored treatment that makes it worth offering in the first place.¹

Verify Individual Coverage Every Month

No employee can receive an ICHRA reimbursement in a given month unless they (and any dependents covered through the arrangement) are enrolled in individual health insurance that qualifies as minimum essential coverage, or in Medicare Part A and B or Part C.² A gap in coverage for even one month means no reimbursement for that month.

Verification is required before the first reimbursement each plan year and again for each subsequent month a claim is submitted. A written attestation from the employee satisfies the requirement, provided the employer has no reason to think it’s false.² Skip the verification and the arrangement’s tax treatment is exposed.

One structural boundary matters here: an employer cannot offer both a traditional group health plan and an ICHRA to the same class of employees. Different classes can get different treatment, but never the same class.¹

Use Only Permitted Employee Classes

Federal regulations define the classes an employer may use to decide who gets an ICHRA. Within a class, the offer has to be the same for everyone. Class structure is locked in before the plan year begins and cannot shift mid-year.³ The permitted classes are:

Full-time employees
Part-time employees
Salaried employees
Non-salaried employees, such as hourly workers
Seasonal employees
Employees in the same insurance rating area
Employees covered by a collective bargaining agreement
Employees who have not satisfied a waiting period
Non-resident aliens with no U.S.-source income
Temporary employees of staffing firms
Any combination of the above

A separate “new hires” class lets an employer keep existing employees on a group plan while offering the ICHRA to everyone hired after a specific date.³

Minimum Class Size

When some classes get a group plan and others get an ICHRA, certain classes have to meet a headcount floor, measured on the first day of the plan year. Employers with fewer than 100 employees need at least 10 people in the ICHRA class. Employers with 100 to 200 employees need at least 10 percent, rounded down. Employers above 200 need at least 20. If every class is offered an ICHRA and no group plan is in the mix, the minimum class size rules don’t apply.

Rating-area classes get a carve-out. The minimum only kicks in when the rating area is smaller than a full state, so a single remote employee in another state can sit in their own rating-area class without violating the rule.

Set Allowances Within the Variation Rules

There is no federal cap on the ICHRA allowance itself. Employers set whatever amount fits their budget.⁴ Within a class, though, the dollar amount generally has to be the same for everyone, with two permitted variations. The allowance can rise with the employee’s age, capped at a 3-to-1 ratio between the oldest and youngest participants in the class, and it can rise with the number of dependents covered.

Whether unused funds carry over into the next plan year or reset to zero is the employer’s call, decided before the plan year begins and spelled out in the plan document.

Nondiscrimination Testing

Because an ICHRA is a self-insured plan, the nondiscrimination rules under Internal Revenue Code Section 105(h) apply. Those rules block arrangements that disproportionately favor highly compensated employees in either eligibility or benefit amounts. Fail the tests and reimbursements to highly compensated employees become taxable to them. An ICHRA that reimburses only insurance premiums, and no other medical expenses, is treated as an insured plan and sits outside Section 105(h) entirely.

Deliver the 90-Day Employee Notice

Every eligible employee must get a written ICHRA notice at least 90 days before the plan year starts.⁵ For someone who becomes eligible mid-year, such as a new hire, the notice must go out no later than the date ICHRA coverage can begin. The 90-day window exists so employees can shop for and enroll in individual coverage during a special enrollment period.

The notice has to include:

The ICHRA allowance amount, and whether it extends to dependents
How the ICHRA affects premium tax credit eligibility on the Marketplace, including whether the offer is considered affordable
The special enrollment period the ICHRA offer triggers, allowing the employee to purchase individual coverage outside normal open enrollment⁶
The employee’s right to opt out of the ICHRA

A missing or late notice can invalidate the offer for purposes of the employer’s ACA obligations and leave employees with coverage gaps they didn’t plan for.

Premium Tax Credit Interaction

An employee cannot claim both ICHRA reimbursements and premium tax credits for the same coverage period. If the ICHRA offer is affordable, the employee is ineligible for PTCs whether they accept or decline it. If the offer is unaffordable, the employee can opt out and claim PTCs through the Marketplace instead.² This makes the affordability determination consequential on both sides, and it’s why the notice content requirements are so specific.

Substantiate Every Reimbursement

Every reimbursement needs documentation proving two things: that the employee has qualifying coverage, and that the expense itself qualifies. The coverage piece is the monthly verification described above.²

For the expense, the employee submits proof showing the date, amount, and description of the charge. Receipts and Explanations of Benefits both work. Eligible expenses include the premium for the employee’s individual health plan and any other qualified medical expenses the employer has chosen to cover. Reimbursing without adequate documentation is one of the fastest ways to lose the arrangement’s tax treatment.

Meet Affordability Rules If You’re an ALE

Applicable large employers, meaning those with 50 or more full-time equivalent employees, carry an extra layer. An ICHRA counts as an offer of minimum essential coverage, but if that offer isn’t affordable, the ALE risks a shared responsibility payment under Section 4980H of the Internal Revenue Code.⁷

Affordability is calculated by taking the cost of the lowest-cost silver plan available to the employee on the Marketplace, subtracting the monthly ICHRA allowance, and comparing the employee’s remaining cost to a percentage of household income. For plan years beginning in 2026, that threshold is 9.96% of household income.⁸ If the employee’s remaining share exceeds that percentage, the offer is unaffordable.

Safe Harbors

Employers rarely know an employee’s household income, so the IRS permits safe harbors that substitute accessible figures:⁹

W-2 wages, using the employee’s Box 1 wages from the prior year
Rate of pay, using the current hourly rate or monthly salary
Federal poverty level for a single individual

ALEs offering an ICHRA can also use a location-based safe harbor, which determines the lowest-cost silver plan by the employee’s primary worksite rather than their home address. That matters for remote workers and multi-location employers because silver plan premiums vary sharply by geography.

Two penalty structures sit under Section 4980H. One applies when an ALE fails to offer coverage to at least 95 percent of its full-time employees, calculated on total full-time headcount minus a statutory offset. The other applies when coverage is offered but is either unaffordable or fails to provide minimum value, calculated per employee who enrolls in Marketplace coverage and receives a PTC.⁷ Both amounts are adjusted for inflation each year. The affordability calculation is where most ALEs either pass or fail.

Maintain an ERISA Plan Document and SPD

The federal government classifies ICHRAs as group health plans, which puts them under ERISA. A formal written plan document has to be in place before the arrangement takes effect. It should cover eligibility, benefit structure, claims procedures, the plan administrator and fiduciary, amendment procedures, and termination procedures.

A Summary Plan Description has to go out alongside it, written so participants can understand it. New plans have 120 days from the ICHRA’s effective date to deliver the SPD. For employees who join an existing ICHRA, the SPD is due within 90 days of eligibility. If an amendment reduces benefits, participants have to be notified within 60 days of the change.

The plan document also has to address HIPAA privacy obligations, including designating a privacy officer, and explain how the arrangement interacts with FMLA and USERRA leave protections. Operating an ICHRA without a compliant plan document is operating without legal footing.

Handle COBRA, HSA Design, and PCORI Filings

COBRA applies to ICHRAs the same way it applies to traditional group health plans, provided the employer has 20 or more employees.¹⁰ When an employee has a qualifying event such as job loss or reduced hours, the employer has to offer the option to continue the ICHRA temporarily. The employee pays the full cost plus a 2 percent administrative fee and still has to maintain their own individual coverage to receive reimbursements, so most employees are better off simply continuing to pay their individual premiums directly. Electing COBRA mainly makes sense when there’s a meaningful unused ICHRA balance that would otherwise be forfeited.

HSA Compatibility

A standard ICHRA that reimburses both premiums and out-of-pocket medical expenses before the employee meets the plan deductible will disqualify the employee from contributing to a Health Savings Account. Two designs preserve HSA eligibility:

A premium-only ICHRA, limiting reimbursement strictly to individual health insurance premiums
A post-deductible ICHRA, reimbursing medical expenses only after the employee meets the annual plan deductible

Both designs can coexist within the same employee class, letting employees who want HSA contributions pick the premium-only version. Starting in 2026, bronze and catastrophic plans on the individual market qualify as HSA-eligible high deductible plans even when their deductibles fall below the standard HDHP minimums, which widens the pool of employees who can pair an ICHRA with HSA contributions.¹¹

PCORI Fee

Because an ICHRA is a self-insured plan, the employer owes the annual Patient-Centered Outcomes Research Institute fee. For plan years ending after September 30, 2025, and before October 1, 2026, the rate is $3.84 per covered life, counting the employee plus any covered spouses and dependents. The fee is paid on IRS Form 720, due July 31 of the year following the last day of the plan year, and it’s reported only on the second-quarter filing even though Form 720 is technically a quarterly excise tax return.¹² The IRS accepts three methods for calculating average covered lives: an actual count, a snapshot method, or the Form 5500 method. The fee itself is small, but missing the filing creates avoidable exposure.

1
Centers for Medicare & Medicaid Services. Individual Coverage Health Reimbursement Arrangements Policy and Application Overview
2
HealthCare.gov. Individual Coverage HRAs
3
eCFR. 26 CFR 54.9802-4 – Special Rule Allowing Integration of Health Reimbursement Arrangements
4
Peterson-KFF Health System Tracker. Explaining Individual Coverage Health Reimbursement Arrangements
5
U.S. Department of Labor. Individual Coverage HRA Model Notice
6
HealthCare.gov. Getting Health Coverage Outside Open Enrollment
7
Office of the Law Revision Counsel. 26 USC 4980H – Shared Responsibility for Employers Regarding Health Coverage
8
Internal Revenue Service. Revenue Procedure 2025-25
9
Internal Revenue Service. Minimum Value and Affordability
10
U.S. Department of Labor. Continuation of Health Coverage (COBRA)
11
Internal Revenue Service. IRS Notice 2026-5
12
Internal Revenue Service. Patient Centered Outcomes Research Trust Fund Fee Questions and Answers