Imagine this: you’ve switched your Georgia small business from a traditional group health plan to an ICHRA (Individual Coverage Health Reimbursement Arrangements). Your ICHRA compliance is solid, or so you think. Then the Department of Labor audits you only to find gaps in your plan that were not properly addressed.
In most cases, an ICHRA is a smarter health benefits model for small businesses. You set a predictable budget and your employees choose their own insurance plans, allowing them to get coverage that actually fits their families and their lives. It’s a strategic move that gets you out of the traditional group insurance grind, where you’re stuck picking a one-size-fits-all plan and watching costs spike every renewal season.
But an ICHRA is still an employer-sponsored health benefit. The IRS, the Department of Labor, and ERISA all have rules about how you run it. ICHRA compliance details trip up more Georgia employers than you’d expect.
Here are the five most common ICHRA administration mistakes our team sees:
Mistake #1: Making Up Your Own Employee Classes
Why Employers Get Creative (and Why It Backfires)
This is the single most common ICHRA compliance issue we see at HRASimple. A business owner decides they want to give their management staff one reimbursement amount and their full-time warehouse crew a different amount. Makes sense, right?
The problem starts when they try to get creative, creating their own employee classes outside of what the IRS allows.
The IRS has defined exactly 11 approved employee classes for ICHRA purposes. You can use these, and only these, to group your employees and set different reimbursement amounts:
- Full-time employees
- Part-time employees
- Seasonal employees
- Temporary employees (staffing firm workers)
- Salaried employees
- Non-salaried (hourly) employees
- Employees covered by a collective bargaining agreement (union employees)
- Employees in a waiting period
- Non-resident aliens with no U.S.-source income
- Employees working in the same geographic rating area
- Any combination of two or more of the above
That’s it. You can’t create a class based on job title, department, tenure, or pay grade. You can’t say, “I want to give my sales team more than my admin team.” If “sales team” doesn’t fit into one of these 11 categories, it’s not a valid ICHRA class.
Another topic that trips employers up: within each ICHRA class, you have to treat everyone the same. The only variation the IRS allows is based on age and the number of dependents, and even those have stipulations around what you can and cannot do.
What to do instead: Before you set up your ICHRA, work with your administrator to map your employees into the IRS-approved classes. If you have a unique workforce structure, a good ICHRA administration partner can help you figure out which classes apply and which groupings you need to avoid.
Mistake #2: Ignoring the 3:1 Funding Ratio
The Age-Based Contribution Rule Most Employers Miss
This one flies under the radar for a lot of Georgia employers. Once you’ve set up your employee classes correctly, there’s still a rule governing how much you can vary your contributions within each employee class. This is where the 3:1 Funding Ratio comes in.
Here’s how it works: if you vary your ICHRA contribution amounts by age (which is allowed), the highest amount you offer to your oldest employee cannot be more than three times the amount you offer to your youngest employee in that same class.
A quick example: Most employers provide funding for each specific age starting from the floor of 21 and younger all the way to 64 and older. If the floor is $200, the most you can offer that 64-year-old is $600/month (3 × $200). If you bump it to $700? You’ve broken the 3:1 ratio, and your ICHRA is out of compliance.
This rule mirrors the ACA’s age-rating bands for individual insurance plans. It’s designed to prevent discrimination in how you fund your ICHRA.
A lot of employers want to give older employees more because their health insurance premiums tend to be higher. And the 3:1 ratio does allow for that, just within limits. The key is to plan your contribution amounts before you set them, not after.
What to do instead: When you’re designing your ICHRA plan, map out your contribution amounts across the full age range of your employees. Make sure the highest amount is never more than 3x the lowest. Your ICHRA administrator should flag this during plan design. If they don’t, that’s a red flag.
Mistake #3: S-Corp Owners Trying to Participate in the ICHRA
Your Business Structure Decides Whether You’re Eligible
If you own more than 2% of an S-corp, you cannot participate in your company’s ICHRA.
Under IRC § 1372, shareholders who own more than 2% of an S-corporation aren’t treated as regular employees for health benefit purposes. They’re classified as self-employed, which means they don’t qualify for Section 105 plans, and an ICHRA is a Section 105 plan.
Here’s where it gets even more complicated: the 2% ownership rule doesn’t just apply to you. Under the IRS attribution rules (IRC § 318), it extends to your family members: your spouse, parents, children, and grandchildren. If your daughter works at your S-corp and you own 51% of the company, she can’t participate in the ICHRA either, even though she’s a W-2 employee.
The legal structure of the business matters, and it’s one of the first things HRASimple checks when onboarding new Georgia clients.
A few important distinctions:
- S-corp owners (>2% ownership): Cannot participate in an ICHRA
- C-corp owners: Can participate in an ICHRA
- LLC members: Depends on how the LLC is taxed. If taxed as an S-corp, the >2% rule applies. If taxed as a C-corp, owners can participate.
- Sole proprietors and partners: Cannot participate
If your business is currently a C-corp and you’re thinking about converting to an S-corp for tax reasons, double-check how that change would affect your ICHRA eligibility. We’ve seen Georgia business owners make this switch without realizing it kicked them out of their own health benefit.
What to do instead: Before you set up an ICHRA, confirm your business entity type and understand the ownership rules. If you’re an S-corp owner with more than 2% ownership, you’ll need to get your health insurance separately, but your W-2 employees (who aren’t related to you) can still participate.
Mistake #4: Missing Plan Documents and Notice Requirements
This sounds like more boring paperwork, until you realize the Department of Labor can fine you up to $110 per day per employee for getting it wrong.
An ICHRA falls under ERISA (the Employee Retirement Income Security Act), which means you need formal plan documents. This isn’t optional, and it’s not something you can skip just because you’re a small business with five employees.
At minimum, you need:
A written plan document that spells out who’s eligible, how much you’re reimbursing, what expenses qualify, your claims procedures, and how the plan can be amended. Think of it as the rulebook for your ICHRA.
A Summary Plan Description (SPD) that explains the plan in plain language your employees can understand. ERISA requires you to distribute the SPD within 90 days for new employees who become eligible.
On top of the plan documents, you also need to create an ICHRA employee notice. You’re required to give every eligible employee written notice at least 90 days before each plan year. These notices must happen every year and include specific information like:
- A description of the ICHRA and how it works
- The employee’s right to opt out
- How the ICHRA may affect their eligibility for premium tax credits on the marketplace
- The ICHRA contribution amount
- Information about the special enrollment period
Miss this deadline, skip a required element, or fail to send the notice at all, and you risk facing penalties from both the DOL and the IRS.
What to do instead: Work with an ICHRA administrator who handles plan document creation and annual notice distribution as part of their service. At HRASimple, we create these documents for our Georgia clients and make sure the notices go out on time every year. A trusted partner who handles compliance saves you from a headache you didn’t even know was coming.
Mistake #5: Failing at Substantiation and Documentation
Why “Set It and Forget It” Doesn’t Work With an ICHRA
Switching to an ICHRA can have enormous strategic benefits for your business, but it’s not a passive arrangement. It takes active participation.
Every month that an employee receives ICHRA reimbursement funding, you need to have documentation proving two things:
- Proof of qualifying coverage. Each employee must be enrolled in an individual health insurance plan that meets the ACA’s standard. You need evidence of this (not just their word for it) for every month they participate.
- Proof that reimbursed expenses are legitimate. For any qualified medical expenses or out-of-pocket costs you reimburse through the ICHRA, you need third-party documentation: what the service was, when it happened, how much it cost, and who provided it. These reimbursements are tax-free for both you and your employees, but only if they’re properly documented.
Here’s where a lot of small businesses trip up: they set up the ICHRA, employees enroll in their individual plans, and everyone assumes it’s handled. But substantiation is an ongoing process. Plans change. Employees switch coverage. Life events happen. If you’re reimbursing someone who’s no longer enrolled in a qualifying plan, or you’re reimbursing expenses you can’t document, you’re exposed to compliance risk.
Tracking all of this yourself as a small business owner is a heavy workload to manage on top of running your actual business.
What to do instead: This is one of the biggest reasons Georgia businesses work with an ICHRA administrator. At HRASimple, our verification team handles the heavy lifting: checking coverage documentation, verifying that plans qualify, and making sure reimbursements are properly substantiated.
The Bigger Picture: Why ICHRA Compliance Matters for Your Georgia Business
If you’ve made it this far, you might be thinking: “This is a lot of rules for a health benefit that’s supposed to be simpler.”
While it’s true that there are real compliance responsibilities that come with offering an ICHRA, it’s important to remember that traditional group health insurance has most of these same requirements. The difference is that with a group health plan, your broker or insurance carrier handles most of it behind the scenes, so you never see it.
The smart move is to switch to an ICHRA and work with an ICHRA administrator who can help take care of all of the details and paperwork so you can focus on your business. While you can technically have an ICHRA without an administrator, it’s nearly impossible to check all of the compliance boxes and keep up with all of the administrative details on your own.
With an ICHRA, you’re choosing a health reimbursement arrangement that gives you more control over your benefits budget and gives your employees the power to choose insurance plans that work for their families. Employers can offer different contribution amounts by employee class, adjust their budget each plan year, and stop worrying about annual premium hikes. That’s a strategic decision, not just a cost-saving move. But that control comes with the responsibility to handle ICHRA compliance properly.
The good news is that you don’t have to do it alone.
Don’t Let ICHRA Compliance Mistakes Undo a Smart Decision
An ICHRA is one of the smartest health benefits moves a Georgia small business can make. It lets you stop being an accidental insurance broker and start running your business strategically: setting a predictable budget, supporting your team with flexible benefits, and getting back to running your business.
Just keep in mind that the compliance side of ICHRA isn’t something where you can just “wing it” and hope for the best. The five mistakes we’ve covered are the ones our team at HRASimple sees most often. And every one of them is preventable with the right ICHRA administration partner.
Ready to get your ICHRA compliance right from the start? Schedule a free consultation with HRASimple and let’s talk about how to make your ICHRA work for you, not against you. We’re right here in Georgia, and we’d love to help.