ICHRA mistakes to avoid

The individual coverage health reimbursement arrangement (ICHRA) gives employers a flexible and cost-efficient way to provide health benefits. With the ICHRA, employers offer their employees a set amount of tax-free funds to pay for their individual health plan premiums and, in some cases, qualified out-of-pocket medical expenses. But the ICHRA is only truly valuable if you set it up and manage it properly.

ICHRAs must adhere to strict IRS, Affordable Care Act (ACA), and ERISA regulations. Even a minor administrative error can result in costly penalties, frustrated employees, or compliance issues that put your organization at risk. 

This article will guide you through common ICHRA mistakes that many employers encounter, so you can avoid the pitfalls and build a compliant health benefit from the start.

In this blog post, you’ll learn:

• The most common ICHRA compliance mistakes employers make and how to avoid them.
• How to properly design and administer your ICHRA to ensure employee satisfaction and regulatory compliance.
• Why partnering with Remodel Health can help simplify management, reduce risk, and keep your organization compliant year-round.

1. Failing to create legal plan documents

The federal government considers the ICHRA a formal group health plan under the Employee Retirement Income Security Act of 1974 (ERISA). Specifically, ERISA Section 402 requires you to create and keep a compliant written plan document on file and be able to provide it to employees upon request.

Failing to create or maintain these documents can expose your organization to legal risk, noncompliance penalties, and employee confusion about how the ICHRA benefit works. 

Tips to avoid this mistake:

• Prepare a formal plan document that clearly defines key details like eligibility, reimbursement rules, claim procedures, and rollover policies.
• Provide a summary plan description (SPD) that explains the ICHRA benefit to employees in plain language.
• Draft a summary of benefits and coverage (SBC) to help employees quickly understand coverage terms, exclusions, and cost-sharing.
• Send the ICHRA notice to eligible employees at least 90 days before the plan year begins (or as early as possible) to give them time to prepare and enroll in qualified, comprehensive coverage.
• Drafting these documents is complex and time-consuming, and isn’t a task you should handle on your own. If you partner with Remodel Health to administer your ICHRA, we’ll create your plan documents and notices for you and keep them updated to remain compliant with ERISA and IRS regulations.

2. Not educating employees on what’s considered qualifying individual health coverage

Employees can only participate in an ICHRA if they enroll in a qualifying individual health insurance plan. Eligible coverage includes ACA-compliant individual or student health plans, Medicare Parts A and B together, Medicare Advantage (Part C), and catastrophic plans (for those who qualify).

A common mistake is assuming employees know how to find or verify a qualifying plan. Without proper guidance, they may enroll in ineligible healthcare coverage, which will prevent them from participating in the benefit and put your plan at risk of noncompliance.

Tips to avoid this mistake:

• Communicate with your staff early and often. Provide educational resources that explain the types of coverage that qualify for the ICHRA and where your employees can shop for plans. But remember, as an employer, you can’t recommend specific policies or insurance carriers to your staff.
• Offer informational meetings, webinars, written guides, or Q&A sessions to clarify enrollment timelines and help employees feel secure navigating the individual health insurance market.  
• Remind employees that becoming newly eligible for an ICHRA is a qualifying life event, giving them a 60-day special enrollment period to buy a plan. For plans beginning January 1, employees can enroll in coverage during the annual Open Enrollment Period.
• Educate employees about how opting in or out of the ICHRA may affect their premium tax credit eligibility.
• Remodel Health’s licensed advisors can help your employees compare plans, understand coverage details, and enroll in a qualifying insurance policy. Our platform makes it easy to enroll in and compare qualifying plans. We also offer in-house Medicare support for employees who are eligible or are nearing eligibility.

3. Offering unaffordable ICHRA contributions

The ICHRA is available to businesses of any size. However, applicable large employers (ALEs) must adhere to the ACA’s employer mandate — even if they’re offering an ICHRA. An ICHRA can satisfy the employer mandate’s requirements if you provide it to at least 95% of full-time employees and dependents, and your monthly contribution meets affordability standards.

For 2026, the federal government considers your ICHRA affordable if an employee’s portion of the premium for the lowest-cost silver plan (after applying their ICHRA contribution) doesn’t exceed 9.96% of their total household income. 

Tips to avoid this mistake:

• Use the ACA’s safe harbor methods, such as the federal poverty line (FPL), rate of pay, or W-2 wages, to calculate premium affordability when designing the benefit.
  • For example, for 2026, the FPL safe harbor considers your benefit affordable as long as an employee’s share of the premium for the lowest-cost silver plan premium doesn’t exceed $129.90 per month.
• Remodel Health helps ALEs design contribution strategies that meet ACA affordability and employer mandate requirements so you avoid costly tax penalties.

4. Misclassifying employees or using age and family status variations incorrectly

When setting up an ICHRA, employers can create different employee classes and adjust allowance amounts based on factors like age or family size. For example, you can give your salaried workers a higher monthly contribution of $500 and your hourly workers a smaller amount of $300 per month. You can also give your older employees or those with families more ICHRA funds to offset higher plan premiums and healthcare costs. You’ll need to ensure that these allowances are affordable to satisfy the employer mandate.

However, if you don’t apply these customization options fairly, such as giving different allowances to employees within the same class, your plan may violate nondiscrimination rules and be noncompliant. 

Tips to avoid this mistake:

• Only use the 11 federally defined employee classes, such as full-time, part-time, or seasonal workers. You can also create combination classes. Additionally, all employees within the same class must receive the ICHRA on equal terms.
• Apply age-based variations consistently using the 3:1 ratio rule. This means the highest contribution for your oldest employee must not exceed three times the amount you contribute to your youngest employee.
• If you’re varying contributions by family status, you must apply the rules equally within each class.
• By partnering with Remodel Health, we can help you select compliant employee classes, age bands, and family-based contribution structures that work with your budget and meet all applicable federal regulations.

5. Ignoring substantiation requirements

To stay compliant, employers must confirm that employees and their dependents are enrolled in qualifying individual health insurance throughout the plan year and verify every reimbursement request for out-of-pocket expenses properly. This process, known as substantiation, protects you and your employees from financial risks and potential compliance issues.

Failing to collect accurate documentation or review proof of coverage puts you at risk of reimbursing ineligible healthcare expenses or losing your plan’s tax-advantaged status.

Tips to avoid this mistake:

• Before the plan year begins, require all employees and their dependents to complete the annual coverage attestation form as proof of active health insurance.
• Each time an enrolled employee submits a reimbursement request, they must provide the ongoing coverage substantiation form and include valid claim documentation, such as a receipt, invoice, or explanation of benefits (EOB).
• When onboarding new hires or adding newly eligible employees midyear, confirm they’ve submitted their substantiation forms before adding them to the health benefit.
• Keep organized records of all substantiation forms and claim documents in case of an audit.
• With Remodel Health, you don’t have to manage these steps manually. When employees shop for coverage through Remodel Health, we can automatically substantiate their premiums. If you choose to allow qualifying medical expense reimbursement, our team will handle medical claim verification and documentation storage to ensure you meet IRS requirements.

6. Not fulfilling your tax reporting requirements

ICHRA contributions and reimbursements are tax-free for both employers and employees. But they still have annual reporting obligations. Many employers believe that because they don’t have to report ICHRAs on their employees’ W-2 forms, they don’t have to file any other tax forms. But that’s not the case. Missing a reporting deadline or filing the incorrect form can result in IRS penalties.

Tips to avoid this mistake:

• Submit Form 1094-B or C (depending on your business size) to the IRS each year to report details about your offered coverage. The deadline is February 28 for paper filers and March 31 for electronic submissions.
• Provide Form 1095-B or C (depending on your business size) to each eligible employee by January 31, explaining how you calculated affordability and the coverage details.
• Under ERISA, you must file Form 5500 annually to disclose your plan’s financial condition and operations if you have 100 or more employees.
• Pay the Patient-Centered Outcomes Research Institute (PCORI) fee by July 31 following the end of the plan year and file Form 720. This fee, extended through 2029, funds national healthcare research initiatives.
• Use Remodel Health’s ICHRA+® platform and stay up to date with regular federal filing requirements. We help employers navigate each step of their tax reporting obligations, ensuring compliance without the administrative headache.

7. Mishandling employee claim documentation and privacy rules

Handling health-related documents, such as employees’ medical claim documentation, requires careful attention to HIPAA privacy laws. Another common mistake employers make is collecting or storing protected health information (PHI) without proper authorization or safeguards. This blunder can expose you to privacy violations, fines, and a loss of trust among your staff.

Tips to avoid this mistake:

• Include a HIPAA certification in your plan document confirming that you will protect your employees’ PHI and not use it for employment-related decisions.
• Choose a HIPAA privacy officer (often the ICHRA plan administrator) who will be responsible for reviewing and safeguarding PHI.
• Define who can view or process PHI, such as the privacy officer and any designated staff assisting with administering the ICHRA, in your plan documents. You should also outline how these individuals will handle, store, and share PHI according to HIPAA privacy and security rules.
• Remodel Health’s platform streamlines claim documentation and ensures privacy protection, so that all PHI remains secure and only viewed by authorized personnel. Remodel Health is HIPAA certified.

8. Participating in an ICHRA as an ineligible business owner

Not all business owners can participate in an ICHRA, and misunderstanding these eligibility rules can result in your plan being out of compliance. Eligibility depends on how you structure your business and how the IRS classifies your relationship to the company for tax purposes. For example, C-corporation owners and their families can take advantage of the ICHRA as employees. However, other types of owners are ineligible.

Tips to avoid this mistake:

• The IRS doesn’t view sole proprietors as employees, so they can’t participate in the ICHRA directly. However, if the owner’s spouse is a W-2 employee of the business, the owner may use the healthcare benefit as a legal dependent.
• The federal government considers partners to be self-employed, meaning they’re ineligible to use the benefit. However, like sole proprietors, a partner may participate in the ICHRA through a spouse who is a W-2 employee, as long as they aren’t also a partner.
• S-corporation owners who own more than 2% of company stock are ineligible to participate in the benefit, as the IRS taxes them like self-employed individuals.
• If you’re unsure which category applies to your company, Remodel Health can review your business structure and confirm eligibility to ensure your plan stays compliant.

9. Not coordinating your ICHRA with group plans or HSAs correctly

An ICHRA can complement other benefits, such as traditional group health insurance or health savings accounts (HSAs). However, you must structure them the right way. Combining these benefits without following compliance rules is a common pitfall that can lead to eligibility conflicts or IRS violations. 

Tips to avoid this mistake:

• You may offer traditional group health insurance to one employee class and an ICHRA to another. However, you can’t offer a group plan and an ICHRA to the same class of employees or give employees within the same class the choice between the two benefits.
  • However, you can offer group ancillary benefits to employees with an ICHRA.
• Employees can only contribute to an HSA if their ICHRA reimburses insurance premiums only. The employee must also have a high-deductible health plan (HDHP) that qualifies for HSA contributions.
• Remodel Health can help employers design an ICHRA that works compliantly alongside group health insurance and HSAs, so you and your employees avoid any confusion.

10. Trying to self-administer your ICHRA

While employers can technically administer an ICHRA on their own, it’s a complex and laborious process. Managing compliance requirements, processing premium payments, verifying substantiation, and staying current with IRS and ACA regulations can be overwhelming. One small mistake, such as those above, can result in fines and increased administrative burden.

Tips to avoid this mistake:

• You can pay for a software-only ICHRA solution to help you manage the benefit. However, these online portals may not provide support for every task that you may need, such as compliance management, document preparation, and employee communication.
• Supplement your software-only ICHRA with a third-party administrator (TPA) to fill the gaps your platform may miss for an additional fee. 
• A full-service ICHRA partner, like Remodel Health, can handle every aspect of your plan, freeing you up to focus on your business. We provide end-to-end ICHRA administration through our ICHRA+® platform, combining expert guidance with innovative technology and dedicated support. Our team works closely with you to ensure your benefit remains compliant and easy to manage.

Conclusion

Launching an ICHRA is a good move for employers seeking a personalized health benefit that offers greater flexibility and cost control. But your benefit’s success depends on proper compliance at every stage. The good news is that you don’t have to handle it alone. With expert guidance and support from Remodel Health, you can avoid the most common ICHRA pitfalls and design a benefit that works for you and your employees. Interested in learning more? Book a call with us today!