Module 2: Eligibility, Classes, & Structure

In traditional group insurance, agents are often forced to use a "blunt instrument." You have a single risk pool, a single network, and a single renewal date. If the group is too small, too sick, or too geographically dispersed, the traditional model breaks, leaving the employer with double-digit increases or a plan that no one can actually use.

For ICHRA you must transition from a salesperson into a Strategic Benefits Architect. In the world of ICHRA, we no longer view a company as one monolithic block. Instead, we use sophisticated technology to treat the employer’s census as a collection of strategic segments. This module provides the technical blueprints to build a compliant, scalable, and highly optimized health benefit.

The Shift: From Manual Math to Automated Modeling

While the regulations surrounding ICHRA classes and eligibility are complex, you are not expected to be a legal scholar. Your role is to set the vision and strategy, while the tools and TPA ensure you stay within the compliance guardrails and validate "Affordability" down to the penny.

1. Defining the Vehicle: Picking the Right Chassis

An good Strategic Benefits Architect analyzes the employer's census and goals to determine which HRA "chassis" is the right fit for the mission:

Traditional Group

• Ideal For: High-retention, local teams
• Employer Size: Any (subject to carrier)
• Risk Pool: Employer's own staff
• Contribution: % of Premium (Variable)
• Flexibility: Low (One-size-fits-all)
• Group Plan: Yes

QSEHRA (Small Biz)

• Ideal For: Teams < 50 looking for simplicity
• Employer Size: Strictly < 50 FTEs
• Risk Pool: State Individual Market
• Contribution: Fixed $ (Capped by IRS)
• Flexibility: None (Same for all)
• Group Plan: No (Prohibited)

ICHRA (The Scale Option)

• Ideal For: Growth, remote, and diverse teams
• Employer Size: No Limit (1 to 10,000+)
• Risk Pool: State Individual Market
• Contribution: Fixed $ (No Limits)
• Flexibility: Maximum (Class-based)
• Group Plan: Yes (Class-separated)

2. The 11 Permitted Classes: Your Strategic Toolkit

The IRS allows 11 distinct employee classifications (26 CFR § 54.9802-4). Terms must be uniform within each class, but can vary wildly between them. This is the "secret sauce" of ICHRA.

1. Full-Time Employees

• Definition: Employees who meet the full-time equivalent (FTE) standard (usually 30+ hours/week).
• Strategic Use: Often offered the highest ICHRA allowance to attract and retain core staff.

2. Part-Time Employees

• Definition: Employees who do not meet the full-time hours standard (< 30 hours/week).
• Strategic Use: Typically offered a lower ICHRA allowance, or sometimes no allowance, compared to Full-Time employees.

3. Salaried Employees

• Definition: Paid a fixed annual amount regardless of hours.
• Strategic Use: Useful for differentiating benefit levels between management/executive staff and the general workforce.

4. Non-Salaried (Hourly)

• Definition: Paid based on time worked.
• Strategic Use: Can be segmented to offer a different contribution strategy from salaried leadership.

5. Seasonal Employees

• Definition: Hired for specific durations (e.g., holiday rush).
• Strategic Use: May be excluded from ICHRA or offered a pro-rated/lower allowance to control costs during peak staffing.

6. Temporary (Staffing)

• Definition: Employees of a staffing firm or on short-term assignment.
• Strategic Use: Often excluded to avoid administrative overhead for short-term workers.

7. Union (Collective Bargaining)

• Definition: Employees whose benefits are negotiated by a union.
• Strategic Use: Must be classified separately as the terms of the ICHRA must align with the collective bargaining agreement.

8. Waiting Period Employees

• Definition: New hires who haven't reached their 30/60/90-day eligibility.
• Strategic Use: Allows employers to offer coverage only after a reasonable retention period.

9. Foreign Employees

• Definition: Non-resident aliens with no U.S.-based income.
• Strategic Use: Generally excluded as they are not eligible for US individual market plans.

10. Geographic Location

• Definition: Employees grouped by insurance rating area, state, or region.
• Strategic Use: Critical for equalizing buying power. Allows employers to offer higher allowances in expensive markets (e.g., California) vs. lower-cost areas (e.g., South Carolina).

11. Combination Classes

• Definition: You can combine any of the above to create hyper-specific segments.
• Examples:

1. Job Status + Collective Bargaining: "Part-Time" + "Union Member"

2. Job Status + Geographic Location: "Full-Time Hourly" + "Living in California"

3. Complex Multi-Class: "Union Member" + "Full-Time Hourly" + "Working in Texas"

3. S-Corp Owners & Ownership Taxation

The "Who Can Participate" question is the #1 point of friction during a sale.

• C-Corp Owners: Treated as W-2 employees. They can participate tax-free.
• LLC/Partnerships: Owners (Partners) are not W-2 employees. They cannot receive tax-free reimbursements, but can often deduct premiums on their personal returns.
• S-Corp Owners (>2%):
• The Restriction: They cannot receive tax-free ICHRA reimbursements.
• The Workaround: Reimbursements must be added to their W-2 Box 1 as taxable income. However, they are generally exempt from FICA (Social Security/Medicare) taxes if handled correctly. The owner then takes the "Self-Employed Health Insurance Deduction" on their 1040, making it effectively pre-tax for income tax purposes.

4. Master: The Hybrid Strategy (Group + ICHRA)

The Hybrid Strategy allows an employer to "carve out" problematic segments of the population while protecting the core group benefit.

Scenario A: The Geographic Pivot

• The Problem: A tech company in Denver (High group rates) has 10 employees in rural Nebraska where no group network exists.
• The Fix: Move the Nebraska team to a "Geographic Class" and offer them an ICHRA to buy local plans.

Scenario B: The "New Hire" Rule (The Gradual Transition)

• The Problem: An employer wants ICHRA but is afraid of "employee revolt" if they cancel the current group plan.
• The Fix: Implement a "New Hire Sub-Class." Keep everyone hired before 1/1/2025 on the Blue Cross group plan. Everyone hired after that date goes into the ICHRA. Over 3–5 years, the group plan naturally sunsets through attrition.

5. Class Size Minimums (The Anti-Cherry-Picking Rules)

If an employer offers a Traditional Group Plan to one class and an ICHRA to another, they must meet minimum headcount requirements for the ICHRA class.

Who does this apply to?

This applies to ALL employers (Small Business and ALEs). The IRS enforces this to prevent small business owners from keeping a rich group plan for a few managers while "dumping" sick employees into the individual market.

• Fewer than 100 Employees: Minimum class size is 10 employees.
• 100 - 200 Employees: Minimum class size is 10% of the total workforce.
• More than 200 Employees: Minimum class size is 20 employees.

Important Exceptions

These minimums do NOT apply if:

1. The employer only offers ICHRA (no group plan involved).

2. The class is based on a "New Hire" subclass (Scenario B above).

6. The Affordability Equation: Avoiding the "Hammer"

For Applicable Large Employers (ALEs), an ICHRA must be "affordable" to satisfy the ACA's Section 4980H(b) penalty.

Crucial Distinctions:

• Employee-Only Cost: Affordability is based strictly on the cost of the employee's self-only Silver plan, even if they have a family.
• Employee-Only Income: It is calculated based on the employee's wages (e.g., W-2), not their total household income.

The Math:

1. Find the Self-Only Lowest Cost Silver Plan (LCSP) available to the employee based on their age and home zip code.

2. Subtract the Employer's ICHRA Allowance.

3. The remaining balance must be less than the IRS Affordability Percentage of the employee's wages.

The Three Safe Harbors:

Agents use these to "deem" a plan affordable without seeing the employee's tax returns:

1. W-2 Safe Harbor: Coverage is affordable if it costs < 9.96% of W-2 Box 1 wages.

2. Rate of Pay: (Hourly rate x 130) x 9.96%.

3. Federal Poverty Level (FPL): The "Gold Standard." If the employee pays less than ~$130/mo for the Silver plan after the HRA, it is affordable for everyone.

8. Operational Mechanics: The Lifecycle of a Claim

1. Selection: Employee shops via a link from your quoting platform or TPA portal.

2. Attestation: Employee must sign a statement confirming they have "Minimum Essential Coverage" (MEC) before any funds are released.

3. Payroll Deduction: The difference between the premium and the ICHRA allowance is deducted from the employee's paycheck (pre-tax via Section 125).

4. Consolidated Funding: The employer transfers the total funds (Employee Deduction + Employer Contribution) to the TPA.

5. Payment Facilitation: The TPA pays the insurance carrier directly. This ensures the carrier is paid on time and the employee does not have to "float" the premium costs.We

9. Ancillary Design & Compatibility

When architecting the allowance, two final design choices determine tax status and employee flexibility:

• Premium-Only vs. Full Reimbursement: Employers can limit the HRA to only reimburse insurance premiums. Alternatively, they can allow reimbursement for Section 213(d) medical expenses (copays, deductibles).
• HSA Compatibility: To remain eligible to contribute to a Health Savings Account (HSA), the ICHRA must be structured as a "Premium-Only" HRA or a "Post-Deductible" HRA. If the HRA pays for a doctor's visit before the high-deductible plan's deductible is met, it "disqualifies" the HSA.
• APTC Interaction: If an ICHRA is Affordable, the employee's eligibility for Premium Tax Credits (subsidies) is eliminated entirely. If it is Unaffordable, the employee must choose between the HRA and the Subsidy (no double-dipping).

10. Compliance: The "Pre-Flight" Checklist

An ICHRA is an ERISA-governed welfare benefit plan. To avoid Department of Labor (DOL) audits and IRS penalties, our Platform automatically generates and maintains these five critical compliance pillars:

1. The "Rulebook": Written Plan Document & SPD

• The Problem: You cannot just "give employees money" for health insurance. Without a formal plan document, the IRS treats those payments as taxable income.
• The Fix: We generate a compliant Plan Document and Summary Plan Description (SPD). This legal wrapper turns the cash allowance into a tax-free benefit under IRS Section 105.

2. The 90-Day Notice (The Advance Warning)

• The Problem: Employees need time to shop on the individual market before their coverage starts.
• The Fix: The law requires you to send a specific notice 90 days before the start of every plan year. Our system automates this distribution, ensuring every employee receives their personalized allowance info in time to enroll.

3. COBRA for HRAs (The "Keep It" Rule)

• The Problem: When an employee is terminated, they are legally entitled to continue their HRA benefit.
• The Fix: Just like a group plan, the HRA is subject to COBRA. We administer this by offering the termed employee the option to pay 102% of the allowance value to keep the account open. (Note: Most employees decline this, but the offer is mandatory).

4. PCORI Fees (The Hidden Tax)

• The Problem: The "Patient-Centered Outcomes Research Institute" fee is a small annual tax on every life covered by a self-insured plan (which includes HRAs).
• The Fix: We calculate this headcount fee (typically a few dollars per employee) and prepare IRS Form 720 so the employer can pay it annually in July.

5. The "Shield": Form 1094-C & 1095-C

• The Problem: The IRS needs proof that the employer offered "Affordable" coverage to avoid the Employer Mandate penalty.
• The Fix: At year-end, our system generates the 1095-C forms for employees. We use specific "Safe Harbor Codes" (like Code 1L or 1V) to prove to the IRS that the ICHRA allowance was sufficient, shielding the employer from fines.

Module 2 Summary

1. The 11 Classes: Stop treating the company as one block. Use the 11 Permitted Classes (e.g., Salaried vs. Hourly, Geographic Location) to customize benefits and control costs.

2. S-Corp Owners are Out: >2% Shareholders cannot participate in an ICHRA on a tax-free basis. Their reimbursement is taxable income.

3. The Hybrid Strategy: You can keep a Group Plan for one class (e.g., "Legacy Employees") and offer ICHRA to another (e.g., "New Hires"), but you must meet Minimum Class Size requirements to prevent cherry-picking.

4. Controlled Groups: If a client owns multiple companies, the IRS treats them as one single employer. You cannot hide employees in shell companies to avoid mandates.

5. Affordability is Specific: It is calculated based on the lowest cost Silver Plan for the employee only. Family costs do not factor into the IRS affordability test.

Module 2 References

• Internal Revenue Service. (n.d.). 26 CFR § 54.9802-4 - Special rules for individual coverage health reimbursement arrangements (ICHRAs). Legal Information Institute. [https://www.law.cornell.edu/cfr/text/26/54.9802-4](https://www.law.cornell.edu/cfr/text/26/54.9802-4)
• Internal Revenue Service. (n.d.). Internal Revenue Code § 1372 - Partnership rules to apply for fringe benefit purposes. Legal Information Institute. [https://www.law.cornell.edu/uscode/text/26/1372](https://www.law.cornell.edu/uscode/text/26/1372)
• Internal Revenue Service. (n.d.). Internal Revenue Code § 414 - Definitions and special rules (Controlled Groups). Legal Information Institute. [https://www.law.cornell.edu/uscode/text/26/414](https://www.law.cornell.edu/uscode/text/26/414)
• Internal Revenue Service. (n.d.). Internal Revenue Code § 9831 - General exceptions (QSEHRA definitions). Legal Information Institute. [https://www.law.cornell.edu/uscode/text/26/9831](https://www.law.cornell.edu/uscode/text/26/9831)
• Internal Revenue Service. (2008, January 14). 2-Percent Shareholder-Employees of S Corporations. (Notice 2008-1). IRS.gov. [https://www.irs.gov/pub/irs-drop/n-08-01.pdf](https://www.irs.gov/pub/irs-drop/n-08-01.pdf)