ICHRA rules: what employers need to follow

The rules that keep an ICHRA compliant

An ICHRA''s tax-free status depends on following a handful of rules set by the IRS and the Departments of Labor and HHS. None are onerous, but skipping them can jeopardize the benefit. Here are the ones that matter, with the why behind each.

Rule 1: Employees must have individual coverage

Reimbursements can only go to employees enrolled in qualifying individual health insurance or Medicare. Employees must attest to and substantiate coverage before being reimbursed, and re-attest annually. This is the foundational rule — the ICHRA reimburses real coverage, not cash.

Rule 2: Same terms within a class

You can vary allowances by employee class (full-time, part-time, location, and others) and by age and family size — but everyone within the same class must be offered the ICHRA on the same terms. You can''t single out individuals within a class for different deals.

Rule 3: A class can''t get both an ICHRA and a group plan

A class of employees gets either a traditional group plan or an ICHRA — not both. You can offer different classes different things, subject to minimum class-size rules designed to prevent steering high-cost employees onto the individual market.

Rule 4: Provide the required notice

Employers must give eligible employees a written ICHRA notice, generally at least 90 days before the start of the plan year. It explains the allowance, how to use it, and how the ICHRA affects ACA premium subsidies. New hires are notified before their coverage begins. Missing or mistiming the notice is a common error.

Rule 5: Affordability and subsidies

If the ICHRA is considered affordable, employees generally can''t also take an ACA premium subsidy. For applicable large employers, an affordable ICHRA can satisfy the employer mandate. Affordability is calculated per employee against a benchmark plan and an annually adjusted IRS percentage — a calculation a broker can run for your allowance.

The substantiation requirement

Before reimbursing, you must substantiate that employees have qualifying coverage (and, for expense reimbursement, that expenses are eligible). Substantiation is what preserves the tax-free treatment; reimbursing without it can make payments taxable. Administration software or a broker automates this step.

Common compliance mistakes

• Reimbursing without proof of qualifying coverage.
• Missing or mistiming the 90-day employee notice.
• Offering the same class both an ICHRA and a group plan.
• Violating minimum class-size rules when splitting a group plan and ICHRA.
• Setting an allowance without checking affordability.

Rule 6: Nondiscrimination within a class

Within any class you offer, the terms must be uniform, varying only by age and family size, and the arrangement cannot be designed to favor owners or highly-compensated employees. The class system lets you differentiate by role or geography, not by seniority or pay.

Rule 7: Recordkeeping and reporting

Keep the signed plan document, every employee notice, and substantiation for each reimbursement. Applicable Large Employers also report their ICHRA offer on Form 1095-C, since it counts as an offer of coverage. Good records are what protect the tax-free treatment.