How can organizations customize ICHRA contributions?

One of the perks of offering an individual coverage health reimbursement arrangement (ICHRA) is its customization options. Unlike traditional group health insurance plans with strict contribution rules, an ICHRA allows employers of all sizes to set a defined contribution amount that aligns with their benefit budget and goals.

However, it’s vital to understand how ICHRA contributions work, including the rules you must follow to customize them legally, so your employees get the most value from the benefit, and your organization complies with IRS and Affordable Care Act (ACA) requirements.

This guide will walk you through the various ways you can customize your ICHRA contributions to ensure compliance and guarantee employee satisfaction.

In this blog post, you’ll learn:

• How ICHRA contributions work, including affordability requirements for applicable large employers (ALEs).
• What customization options are allowed for ICHRA contributions.
• Best practices for designing a compliant ICHRA contribution strategy that balances flexibility, value, and cost control.

How do ICHRA contributions work?

With an ICHRA, employers choose a tax-free monthly contribution amount — also called an allowance — that employees can use to pay for individual health insurance plans and potentially out-of-pocket medical expenses. Unused ICHRA funds typically carry over from month to month. But in most cases, contributions don’t roll over from one plan year to the next.

One of the ICHRA’s greatest benefits is its flexibility. There are no minimum or maximum contribution requirements, allowing employers to set contribution amounts that work for their budgets and adjust them at the end of each plan year if they choose.

Employers may also tailor contributions by employee class, age, or family status. We’ll go over each of these in more detail in the sections below.

ICHRA contribution rules for ALEs

There are also special contribution rules for applicable large employers (ALEs):

• ALEs, which are organizations with 50 or more full-time equivalent employees (FTEs), must offer an affordable ICHRA allowance to at least 95% of their full-time workers and their dependents to comply with the ACA’s employer mandate.
• For 2026, the IRS considers your ICHRA to be affordable if employees don’t pay more than 9.96% of their annual household income for the lowest-cost silver health insurance plan on their local market after factoring in your ICHRA contribution.
• Your ICHRA’s allowance must meet or exceed this affordability threshold. If it doesn’t, the federal government will consider your employee benefit to be unaffordable, and you may have to pay a tax penalty if at least one employee declines coverage and claims a premium tax credit.
• To avoid the penalty and stay compliant, the IRS allows employers to use affordability safe harbors to ensure they meet the ACA’s requirements and select the right contribution amounts during plan design.

Now that we’ve explained affordability obligations for ALEs, here’s how you can customize ICHRA contributions.

1. Employee classes

Employee classes allow employers to divide their workforce into defined groups so they can vary benefit eligibility and ICHRA contribution amounts compliantly. Using employee classes helps you reflect differences in job roles, work schedules, or locations, and enables you to better customize your benefit to match the needs of your staff.

The ICHRA Final Rules permit employers to choose from the following 11 job-based employee classes¹:

1. Full-time employees: Employers may define full-time status as averaging 30 or more hours per week, 35 or more hours per week, or 40 or more hours per week. Specifically, employers may use the definitions of full-time in Code section 105(h) or 4980H.
1. If you’re an ALE subject to the employer mandate, you must define full-time employees as those averaging at least 30 hours per week to satisfy the employer mandate.
2. Part-time employees: Business owners may define part-time employment based on their chosen hours standards, such as section 4980H. This is commonly set as work averaging fewer than 30 or 40 hours per week.
3. Seasonal workers
4. Temporary employees of staffing firms
5. Salaried employees
6. Hourly workers
7. Employees covered under a collective bargaining agreement in which the plan sponsor participates
8. Employees in a waiting period for health benefits: Employers may apply a waiting period of up to 90 days before ICHRA eligibility begins.
9. Foreign employees who work abroad: These individuals are nonresident aliens with no United States-sourced income, as defined under 26 CFR 1.105-11.²
10. Employees working in different geographic locations: Business owners can create classes based on health insurance rating areas, states, or multi-state regions when employees live outside the company’s primary rating area.
11. A combination of two or more of the above: Employers may also form classes by combining two or more of the above categories.

By law, all employees within the same class must receive the ICHRA on the same terms to comply with nondiscrimination requirements. However, contribution amounts within a class may still vary by age or family status.

Minimum class size requirements

You can provide an ICHRA and a traditional group health plan at your company as long as you don’t offer both benefits to the same class or give employees within the same class the choice between the two.

Minimum class sizes prevent business owners from moving only higher-risk employees to the individual market. Minimum class size rules don't apply if you're only offering an ICHRA. However, if you do decide to offer the ICHRA and group health insurance, minimum class sizes may apply in some cases.

Minimum class size rules affect the following classes:

• Salaried workers
• Non-salaried employees
• Full-time workers
• Part-time workers
• Employees in the same rating area (if smaller than the state level)

For location-based classes, minimum class size rules apply only when the class is based on a rating area smaller than a state and the employer also offers group coverage. State-based classes are exempt from these requirements.

Minimum class sizes depend on the total number of eligible employees:

• Business owners with fewer than 100 workers must have at least 10 employees in a class.
• Employers with 100–200 employees must have a class that includes at least 10% of the workforce.
• Business owners with more than 200 employees must have at least 20 employees in a class.

2. Age

As mentioned above, you can adjust ICHRA contributions based on an employee’s age. This option helps account for the fact that individual health insurance premiums generally increase as employees get older.

The federal government allows you to use age-based variations as long as the highest allowance amount doesn’t exceed three times the lowest allowance within the same class. Additionally, you must apply age adjustments uniformly to all employees in a class to stay compliant.

3. Family size

You can also tailor ICHRA allowances based on family size. Within a class, you can offer higher contribution amounts to employees with dependents compared to single employees. This helps accurately reflect the higher health insurance premiums associated with family plans.

For example, you can offer different contributions to the following:

• Employee-only
• Employee + spouse
• Employee + dependents
• Employee + spouse + dependents

Like with age adjustments, you must apply family status variations consistently across the class so employees in similar circumstances receive the benefit on equal terms.

How Remodel Health can help employers customize their contribution amounts

Determining the right ICHRA contribution strategy is more than just choosing a number you think is right. You must balance affordability, IRS compliance mandates, employee satisfaction, and cost control. That’s where partnering with a quality ICHRA administrator can help.

As the nation’s largest ICHRA provider, Remodel Health takes a hands-on approach to ICHRA plan design, helping organizations align contribution amounts with their workforce demographics, goals, and finances. We’ll analyze your prior health benefits spend, discuss your current budget, and help you select the right contribution amounts, further customizing your ICHRA using employee classes, age, family size, and location.

Our experts also handle affordability testing and safe harbor calculations for ALEs to ensure their ICHRA meets ACA requirements, enabling them to keep their budget in check while complying with federal regulations.

Conclusion

Customizing your ICHRA contributions gives you greater flexibility and opportunity to meet your employees’ needs while maintaining cost predictability. However, the added flexibility comes with rules. Your employer contribution strategy — whether you decide to customize allowance by employee class, age, family size, or a combination of all three — must meet affordability standards if you’re an ALE, follow nondiscrimination rules, and comply with minimum class size requirements. But don’t panic! With the right plan design, you can craft an ICHRA that is both compliant and effectively supports your diverse workforce.

If you’re interested in offering an affordable ICHRA and want expert help designing a customized contribution strategy, Remodel Health is here to guide you every step of the way. Book a call with us today to learn more.

References

1. Federal Register: Health Reimbursement Arrangements and Other Account-Based Group Health Plans

2. 26 CFR 1.105-11