Size minimums for ICHRA pools don’t always apply

If you provide company-sponsored health insurance, can you offer the next employee you hire an Individual Contribution Healthcare Reimbursement Arrangement instead?

Yes, you can. But you need to know what the rules are for grouping employees into ICHRA classes. While these rules set minimum class sizes, they also provide more loopholes than a whole box of Fruit Loops.

In a nutshell

Instead of offering insurance policies directly, companies that offer ICHRAs advise their employees to select the plan which best suits their needs. Premiums are then reduced by employer reimbursement. If the employee picks a plan off the Affordable Care Act exchanges – as most do – that reimbursement takes the place of the advance premium tax credit.

But there are ICHRA eligibility rules that need to be followed. A company can’t offer the same class of employee the choice between an old-style plan and an ICHRA; it’s one or the other. The company can, however clump employees together into classes. This blog has gone into detail on what constitutes those 11 classes, but here’s the nutshell:

Contractors can be slotted into these classes, as can Medicare recipients. (You can read more about ICHRA-reimbursed Medicare here. Only employees who are either covered by their spouse’s health plan or are part owners of the company are excluded. And as for those insured via their spouse’s plan, there’s something called a Spousal Incentive Healthcare Reimbursement Arrangement which, under the right circumstances, is tax-advantaged just like an ICHRA.

Unnatural selection

When the federal government first started drafting the rules for what would become Healthcare.gov and the similar state-level exchanges, the relevant agencies received a lot of comments about things that could go wrong. One concern was that employers might decide to insure only the youngest and most physically fit workers – that is, the ones who were cheapest to cover. The rest would be dumped onto Obamacare. The term of art is “adverse selection”.

A few years later, when the same agencies invited comment on the rules which would govern ICHRAs, adverse selection came up again. Let’s say your business has 75 full-time employees. They’re all full-time, hourly, non-union workers.

“Charlie in Sales is getting older, and it looks like he’s putting on weight,” your CFO observes. “If we keep him on our health plan, he could drive up premiums for all of us. But what if we told him he can work from home while the rest of us remain on-site? Then he can be put in a separate class as a remote worker under the ICHRA rules, direct him to the Obamacare exchange and reimburse his premiums up to a fixed amount. Then the rest of us can keep our old insurance.”

Sorry. The Internal Revenue Service and Department of Health and Human Services already though of that angle. That’s why they established minimum class sizes. If you’re going to slough off Charlie, others need to go with him … generally speaking.

We’ll get into the workarounds in a minute, but here’s the baseline information you need to know about ICHRA mimimum class sizes: If you have 100 or fewer eligible employees, each class must comprise at least 10 of them. If you have 200 or more, that minimum number becomes 20. If you’re in the 101-199 range, at least 10% of eligible employees must be within that class.

A class by yourself?

These minimums only relate to the first five classes listed above: full-timers, part-timers, salaried workers, hourly workers and remote or satellite office employees. Even in these classes, though, they don’t always apply. In fact, they don’t apply to the most intuitive, most frequently encountered divisions of a company’s work force.

Your company can choose to put all its salaried employees on a group plan and all its hourly employees on an ICHRA, without reference to class minimum sizes. Same with the full-time/part-time dichotomy. Your company can also offer ICHRAs for all employees under age 25 while offering a legacy plan to those over that cutoff age. It’s also legal to put U.S. citizens and resident aliens on a legacy plan and offering ICHRAs to non-resident aliens.

It’s also worth noting that, although you can’t kick old Charlie off the company’s group plan, you don’t have to offer the same benefit to the kid he’s breaking in. It’s perfectly within the rules to declare that all employees onboarded as of a certain date will be, regardless of class, offered an ICHRA instead.

Additionally, if all the employees are new because the company is new, you can choose to be all-ICHRA from the start. The caveat is that you’re limited to the five classes noted at the top of this heading. The other six are out of your scope.

But let’s close by returning to Charlie in Sales. You might decide that he can do his job just as well remotely and let him work from home. He’ll be thrilled. He might even be more productive. He might close that big deal, take his commission check and buy a nicer house. And, because he doesn’t have to go into the office anymore, he might move farther out into the exurbs, maybe into the next county.

And that’s when you can switch him over to an ICHRA.

There’s an exception for remote workers who live in an area different from where the rest of the employees live. These so-called “rating areas” are typically counties or Metropolitan Statistical Areas. An employee who crosses that arbitrary line can then be defined as a class of one.

We know ICHRAs, and we wouldn’t be recommending them if we didn’t believe they were in the long-term interest of the company, the employee and all Americans’ access to health care. We don’t know Charlie, but we don’t expect him to agree with us that this is a good move for him. We do expect that, once the fear, uncertainty and doubt are replaced by experience and familiarity, he’ll come around.