How Employee Class Flexibility Creates More Targeted Health Benefits
In today’s competitive job market, employers need healthcare solutions that balance cost management with attractive benefits. The Individual Coverage Health Reimbursement Arrangement (ICHRA) has emerged as a powerful tool, particularly due to its flexible approach to employee classification. This flexibility allows businesses to create more targeted, equitable health benefit strategies across their workforce.
What is an ICHRA?
Introduced in 2020, the Individual Coverage Health Reimbursement Arrangement (ICHRA) represents a paradigm shift in employer-sponsored health benefits. Unlike traditional group health plans, ICHRAs allow employers to reimburse employees tax-free for individual health insurance premiums and qualified medical expenses.
This model shifts from the one-size-fits-all approach of group plans to a more personalized system where employees choose individual market plans that best suit their needs, while employers maintain predictable costs.
The Power of Employee Classes in ICHRA Design
What truly sets ICHRAs apart is their robust employee classification system. Employers can divide their workforce into distinct classes and offer different contribution amounts to each class, creating a more tailored benefit strategy.
The 11 Permissible ICHRA Employee Classes
The IRS and Departments of Labor and Health and Human Services have established eleven allowable employee classes:
- Full-time employees
- Part-time employees
- Seasonal employees
- Employees covered by a collective bargaining agreement
- Employees in a waiting period
- Foreign employees who work abroad
- Employees in different geographic locations (based on rating areas)
- Salaried employees
- Hourly employees
- Temporary employees from staffing firms
- Non-resident aliens with no US-based income
Strategic Applications of Employee Classification
This classification flexibility enables several strategic approaches:
Geographic Customization: Companies with employees across multiple regions can adjust reimbursement amounts based on local health insurance costs, ensuring equitable benefits regardless of location.
Balancing Full-Time and Part-Time Benefits: Employers can offer scaled benefits to part-time workers without the all-or-nothing approach of traditional group plans, helping to attract and retain valuable part-time talent.
Addressing Collective Bargaining Requirements: Organizations with union and non-union employees can design separate benefit structures that honor collective bargaining agreements while maintaining flexibility for non-union staff.
Workforce Transition Management: For businesses acquiring new companies or managing workforce changes, ICHRAs allow for phased benefit integration through strategic class design.
Class Design Best Practices
To maximize ICHRA effectiveness through class design:
Maintain Non-Discrimination: While contribution amounts can vary by class, employers must offer the same terms to all employees within each class. The arrangement cannot favor highly compensated employees.
Consider Class Size Minimums: When offering both a traditional group health plan and an ICHRA, certain minimum class sizes apply to prevent adverse selection. These range from 10 to 20 employees depending on employer size.
Document Your Classification Strategy: Clear documentation of how and why classes were established helps demonstrate compliance with non-discrimination requirements.
Communicate Class Distinctions Clearly: Employees should understand how their classification affects their benefits and why different classes receive different contribution amounts.
Real-World ICHRA Classification Success
Consider a mid-sized manufacturing company with facilities in both urban and rural locations. By establishing geographic classes, they offered higher reimbursement amounts to employees in high-cost insurance markets while providing appropriate allowances in lower-cost regions. This approach created cost equity across their workforce while reducing overall benefit expenses compared to their previous one-size-fits-all group plan.
Looking Forward: The Evolving ICHRA Landscape
As ICHRAs gain popularity, we anticipate potential regulatory changes that may further expand classification options. Forward-thinking employers are already exploring how to leverage these existing classifications to create more personalized benefit experiences.
The employee classification flexibility within ICHRAs represents a significant advancement in health benefit design. By thoughtfully implementing these classification options, employers can create more equitable, cost-effective, and personalized health benefits that better serve both their workforce and their bottom line. As health insurance costs continue to rise, this targeted approach may become not just an option but a necessity for competitive benefit packages.