Understanding ICHRA Class Sizes: Can Small Businesses Have Just One Employee Per Class?

TL;DR

Yes, some employers are allowed to have employee classes with just one employee. But this is only possible if they offer ICHRA-only healthcare, not a split setup with group coverage.  

Key Takeaways

• Employee classes: ICHRA allows employers to define healthcare reimbursement allowances that vary based on employee classes.
• IRS-approved classes: The IRS lists 11 different employee classes that can be used for ICHRA, including full-time, salaried, part-time, seasonal, and remote workers abroad.
• Class size limitations: If you offer ICHRA alongside a traditional group plan, employee classes have a minimum size requirement of 10 employees per class (increasing to 10% per class with 100-200 employees and 20 per class with 200+ employees).
• Exempted classes: Minimum class size rules don't apply to certain employee classes, namely temporary workers, individuals under a Collective Bargaining Agreement (CBA), seasonal workers, foreign nationals, and employees under a waiting period.
• Allowance variations in the same class: You can offer different reimbursement allowances inside the same employee class based on age and family size, but there are specific rules that moderate the gap between the highest and lowest reimbursement amounts.

As a small employer, being able to set different reimbursement allowances per employee class is one of the most appealing aspects of Individual Coverage Health Reimbursement Arrangement (ICHRA) plans.

However, there are a handful of rules and conditions that every employer needs to know before they begin onboarding.

For one, a lot of startups with a small workforce wonder if they should designate a single employee under a specific ICHRA class — or if they're even required to.

Suppose you only have two employees. Are you allowed to assign them to two different classes (one employee per class)?

Let's start by clarifying a few things:

Understanding ICHRA Employee Classes

There are a total of 11 IRS-approved employee classes you can use to define different ICHRA reimbursement plans:

1. Full-Time: Employees who perform around 30 hours of work or more per week.
2. Part-Time: Employees who work fewer hours than full-time employees (usually excluded from traditional group coverage by carriers).
3. Salaried: Workers who are paid on a fixed schedule regardless of the number of hours put in (exempt from overtime compensation).
4. Hourly: Employees who are strictly paid based on hours worked.
5. Temporary Hires: Employees who are hired through a staffing agency.
6. Seasonal Employees: Employees who do temporary work for a specific period, usually not lasting more than six months (i.e., summer staff).
7. Workers Under a Collective Bargaining Agreement (CBA): Union-represented employees following a CBA.
8. New Hires in Waiting Period: Employees who are still in your waiting period, up to 90 days.
9. Workers Abroad: Employees on foreign assignment outside the United States.
10. Location-Based: A group of employees based on a specific geographic rating area.
11. Combination: Employees who fall under two or more classes listed above.

With ICHRA, employee classes make it easier to customize your plan based on your budget. It also helps ensure employees get sufficient funds to cover their specific healthcare needs.

Just remember that employees within the same class must be treated fairly and uniformly.

Understanding Class Size Limitations

This is the confusing part for most small businesses.

If you also offer traditional group insurance alongside ICHRA to different classes, you need to observe the minimum class size rule.

The requirements vary depending on the size of your company:

• Fewer than 100 employees: Minimum of 10 employees per class
• 100-200 employees: Minimum of 10% of the total workforce per employee class
• 200+ employees: Minimum of 20 employees per class

Just take note that minimum class size rules do not apply to temporary workers, employees under a CBA, seasonal workers, foreign nationals, or employees in a waiting period. For example, even if you offer ICHRA and group coverage, you can still create an ICHRA class for seasonal workers or any of the exempted classes with just one employee.

The reason behind the employee size requirements is to make sure you're not "cherry-picking" who gets a specific type of healthcare.

Suppose you already offer group insurance to salaried employees and would like to offer ICHRA to your hourly employees.

The problem is, only nine of your employees are officially classified as hourly.

With a workforce of <100, you're not allowed to proceed because your hourly employee class doesn't clear the size requirement. What you can do instead is use a different employee class that's exempt from the rule (e.g., seasonal and employees in a different rating area) or adopt an ICHRA-only approach.

ICHRA Class Sizes: Your Questions Answered

With employee classes and the class size rule out of the way, let's address some of the common questions that small businesses have about ICHRA:

Can You Have Full-Time and Salaried Employee Classes for Just Two Employees (One Each)?

Yes, it's possible to use two employee classes with just one employee each — but only if you implement an ICHRA-only policy. If you're offering (or planning to offer) group coverage, this approach won't work because you don't have enough employees to clear the minimum class size requirement.

Do You Need to Use Multiple Employee Classes When Using ICHRA?

Employee classes hold the key to ICHRA's flexibility, but you don't need to use multiple classes if you don't have to. A single, well-defined class that applies to all your employees is permissible, which streamlines ICHRA setup and management at the expense of plan customizability.

Can Employees in the Same Class Receive Different Reimbursement Allowances?

While the standard approach is to set a fixed reimbursement allowance for the whole class, you can offer varied allowances based on factors like age and family size.

• Allowance variations by family size: Employers can scale allowances based on the number of dependents, but they must be uniformly tiered and fair across all employees in the class.  
• Allowance variations by age: To ensure fairness, the oldest employee's reimbursement allowance should not exceed three times that of the youngest (maximum 3:1 ratio for the oldest-youngest allowance variation).

It's also important to avoid creating arbitrary or "fake" employee classes in order to single out individuals and provide them with different allowances. Each employee class should be based on tangible differences in employment status and location.

Final Words

ICHRA employee classes and size rules can be intimidating. Rest assured, they are tools and guardrails to give predictable control to employers, while providing fair and reliable healthcare to employees.

We recommend checking out our full, step-by-step ICHRA setup guide if you have additional questions.

Or, reach out to us here and have all your ICHRA questions answered — whether you're an employee or an employer.