One of the most powerful features of an ICHRA (Individual Coverage Health Reimbursement Arrangement) is the ability to design benefits using employee classes.
These 11 IRS-approved employee classes give you the ability to customize your health benefits by employee group, offering different reimbursement amounts to different types of workers based on legitimate, job-related criteria. Full-time employees can get one amount. Part-time staff can get another. Each group, including seasonal workers, hourly employees, and people in different geographic locations can have its own reimbursement structure.
That kind of flexibility simply doesn’t exist inside a traditional group health plan. When it’s done right, ICHRA employee classes turn your benefits from a one-size-fits-all expense into a strategic business decision that gets you out of the insurance management business and back to leading your company.
While this can be an incredible benefit, mishandling ICHRA employee classes is one of the most common ICHRA compliance mistakes business owners make. The IRS has strict rules about which classes you can use, how you treat employees within each class, and what happens when you pair an ICHRA with a traditional group plan. Get it wrong, and your entire ICHRA could be out of compliance.
This guide walks through all 11 approved ICHRA classes, explains the rules that come with them, and shows you how to use them strategically. Whether you’re running a 10-person shop or a 50-person operation spread across the state, you need to make sure you’re following these rules.
What Are ICHRA Employee Classes and Why Do They Matter?
An ICHRA lets employers reimburse employees tax-free for individual health insurance premiums and qualifying medical expenses. Rather than purchasing a group health plan where everyone gets the same coverage, you fund a set monthly reimbursement amount and your employees choose their own plans on the individual market.
ICHRA employee classes are the mechanism that lets you vary reimbursement amounts across different groups of employees. The IRS has defined 11 classes that employers can use to segment their workforce. You can use one class, several classes, or all 11.
Why this matters for your business:
Employee classes are where ICHRA becomes a strategic business decision. With the right class structure, you can:
- Offer stronger health benefits to the roles that are hardest to fill
- Extend some level of health benefit to part-time or seasonal staff who’d get nothing under a group plan
- Adjust reimbursement amounts based on where employees live and work (because insurance costs vary by location)
The key is understanding what the IRS allows and what it doesn’t.
The 11 Approved ICHRA Employee Classes
Here’s a breakdown of every ICHRA employee class the IRS allows. These are based on objective, job-related criteria, not job titles, departments, performance, or health status.
Class 1: Full-Time Employees
Full-time employees are workers who meet your company’s definition of full-time status. For ACA purposes, “full-time” generally means averaging 30 or more hours of service per week. You can define full-time as 30 or 40 hours for ICHRA design, but if you’re using the ICHRA to satisfy the ACA employer mandate, 30 hours is the threshold that matters.
How businesses use this class: Many employers direct their largest ICHRA reimbursement to full-time employees, since these are typically the roles they most want to attract and retain. Some employers keep full-time staff on a traditional group plan and offer ICHRA to other classes. Either approach works depending on your workforce and budget.
Class 2: Part-Time Employees
Part-time employees work fewer hours, typically under 30 hours per week for ACA purposes.
How businesses use this class: ICHRA allows you to extend health benefits to part-time workers who might otherwise be completely excluded under a traditional group plan. You can offer them a lower reimbursement amount than full-time staff. This is especially popular with restaurants, retail businesses, and any employer that relies on variable-hour workers.
Class 3: Seasonal Employees
Seasonal employees are workers hired for a specific, limited period during the year. This often includes holiday retail help, summer tourism staff, or harvest crews.
How businesses use this class: You can include seasonal workers in your ICHRA or exclude them entirely, depending on your budget and how competitive your local labor market is. When included, employers often offer lower allowances or align waiting periods with the expected employment duration.
A note on classification: Your seasonal designation needs to be genuine and consistent with how you actually employ people. You can’t label someone “seasonal” just to avoid offering benefits.
Class 4: Employees Covered Under a Collective Bargaining Agreement
This class covers union employees; workers whose wages, hours, and working conditions are governed by a collective bargaining agreement (CBA) between your company and a labor union.
How businesses use this class: Union employees often have their own negotiated health benefits written into the CBA. Employers typically keep CBA employees on their negotiated plans and either exclude them from the ICHRA or, if the contract allows, create a separate ICHRA class for them. Everyone in this class must be treated the same, you can’t pick and choose which union members get richer benefits.
Class 5: Employees in a Waiting Period
These are newly hired employees who haven’t yet completed your waiting period for health benefits. Federal rules cap waiting periods at 90 days.
How businesses use this class: You have a couple of options here. You can exclude waiting-period employees from any ICHRA benefit until their waiting period ends. Or you can offer them a limited ICHRA benefit during the waiting period, then move them into another class (like full-time) once the period ends.
A strategic note: This class is transitional by nature. Minimum class size rules only apply when an employer offers an ICHRA alongside a traditional group health plan; if you’re offering ICHRA only, class size requirements don’t apply. For employers who do offer both, combining a waiting-period class with another class can relax some of those minimum size restrictions, a useful detail if you’re designing a more complex benefits structure.
Class 6: Non-Resident Aliens with No U.S.-Source Income
This class consists of foreign employees who work abroad and don’t earn income from U.S. sources. The classification is based on tax residency and income source, not citizenship.
How businesses use this class: If you have employees living and working outside the U.S., they likely aren’t eligible for U.S. individual health insurance or Marketplace plans. This class lets you separate them and design a different benefits approach that addresses their local market.
For most small businesses, this class won’t apply. But if you have any international team members, it’s good to know it exists.
Class 7: Salaried Employees
Salaried employees receive a fixed, regular payment and are typically exempt from overtime under wage-and-hour laws.
How businesses use this class: Separating salaried and hourly workers is one of the most common ICHRA class strategies. Employers often offer salaried employees a higher reimbursement amount (or keep them on a group plan) while providing ICHRA to hourly staff. Because salaried status is tracked through payroll, it’s straightforward to administer.
The rule to remember: Salaried vs. hourly is an objective payroll characteristic, it’s not a way to reward certain people or penalize others. The classification must follow wage-and-hour law definitions.
Class 8: Non-Salaried (Hourly) Employees
Hourly employees are paid based on hours worked and generally qualify for overtime pay.
How businesses use this class: ICHRA is especially useful for hourly workforces. Retail, hospitality, manufacturing, and construction employers often use ICHRA for hourly staff because it provides a defined, predictable cost per employee, something that’s hard to achieve with traditional group insurance when you have high turnover or fluctuating hours.
Class 9: Temporary Employees of a Staffing Firm
This class covers workers who are formally employed by a staffing or temp agency but assigned to work at client companies.
How businesses use this class: The staffing firm (not the client company) is typically the plan sponsor. Staffing agencies use ICHRA to provide consistent, portable benefits to temps as they move between assignments eliminating the need to manage multiple group plans for different client locations.
For business owners: If you use temp workers through a staffing agency, this class is the agency’s responsibility, not yours. But if you’re a staffing firm yourself, this class is worth understanding.
Class 10: Employees Working in the Same Geographic Location
Employers can group employees based on where they work. This can be by insurance rating area, state, or multi-state region. ACA rating areas are defined at the state level and sometimes broken down further by county or ZIP code.
How businesses use this class: This is a game-changer for businesses with employees in multiple locations. Individual health insurance premiums vary widely by geography. A plan that costs $350/month in rural South Georgia might cost $550/month in metro Atlanta. Geographic classes let you adjust reimbursement amounts to account for those differences, so employees across locations have roughly equivalent buying power.
An example: A Georgia company with its headquarters in Dalton and remote employees in Atlanta, Savannah, and Augusta could create geographic classes for each region, offering higher reimbursements in areas where premiums run higher.
Rating area note: If your company offers only an ICHRA (no traditional group plan), minimum class size rules don’t apply regardless of how you define your geographic classes. If you do offer ICHRA alongside a traditional group plan, minimum class size rules apply. Using narrower rating areas (county or ZIP code level rather than state level) can make those requirements more complex to manage.
Class 11: Any Combination of Two or More of the Above Classes
One of the benefits of ICHRA employee classes is that businesses have a lot of flexibility. You can combine any two or more of the first 10 classes to create a composite class. “Part-time employees in Atlanta” or “full-time hourly workers outside the headquarters rating area” are both valid combinations.
How businesses use these combined classes: Combination classes let you get granular with your benefits design to align reimbursements with your workforce structure, budget tiers, or talent strategy. An important guardrail is that the composite must still be drawn only from the 10 primary classes listed above. You can’t use combinations to sneak in an unapproved classification.
Minimum Class Size Compliance: If your company offers an ICHRA alongside a traditional group health plan and your combination includes classes that are subject to minimum class size rules (like full-time, part-time, salaried, hourly, or sub-state geographic), those minimums still apply — unless the combination includes the waiting-period class, which can relax some of those size restrictions. If you’re offering ICHRA only, minimum class size rules don’t apply to combination classes or any other class.
Employee Class Rules: Uniformity and the 3:1 Age Ratio
Once you’ve set up your employee classes, there are two rules that govern how you treat employees within each class.
The Uniformity Rule
Everyone in the same ICHRA class must be offered the ICHRA on the same terms. You can’t give one full-time employee $400/month and another full-time employee $600/month just because you want to. And you can’t offer employees within the same class a choice between an ICHRA and a group plan. It has to be one or the other for the entire class.
The 3:1 Age Ratio
You can vary your ICHRA contribution amounts by age within a class, but 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.
Example: If you set your floor at $200/month for employees age 21 and younger, the most you can offer a 64-year-old employee is $600/month (3 × $200). If you bump the older employee to $700, you’ve broken the ratio, and your ICHRA is out of compliance.
This ratio mirrors the ACA’s age-rating bands for individual insurance plans. It’s there to prevent age discrimination in how you fund benefits.
You can vary contributions by family size as well, offering more to employees who are covering a spouse or children. The same principle applies, so whatever formula you use has to apply consistently across the entire class.
Common ICHRA Employee Class Mistakes (And How to Avoid Them)
Mishandling ICHRA employee classes is one of the most frequent compliance errors our team at HRASimple sees. Here are the mistakes that trip up business owners most often:
Mistake #1: Inventing Your Own Classes
This is the number one class design error. A business owner wants to give their management team one reimbursement amount and their warehouse crew another. Makes sense from a business perspective, but if “management team” and “warehouse crew” don’t map to one of the 11 IRS-approved classes, it’s not a valid ICHRA class.
You can’t classify by job title, department, tenure, or pay grade. If you need different amounts for different groups, you have to find the approved class that fits such as salaried vs. hourly or full-time vs. part-time.
Mistake #2: Treating Employees in the Same Class Differently
Once you’ve defined a class, everyone in it gets the same deal. You can vary by age (within the 3:1 ratio) and by family size, but that’s it. Giving your favorite employee a bigger reimbursement than their same-class coworker is a compliance violation.
Mistake #3: Not Documenting Your Class Design Decisions
If your company offers an ICHRA alongside a traditional group health plan, you should be able to show a “reasonable estimate” at the start of each plan year that your classes meet minimum size requirements. If your workforce changes mid-year and a class dips below the minimum, you need to adjust. If you’re offering ICHRA only, minimum class size rules don’t apply.
How to avoid these costly mistakes? Work with an experienced ICHRA administrator who knows the rules and catches these issues before they become problems. At HRASimple, our team builds compliant class structures for businesses every day. It’s what we do and it’s one of the biggest reasons having a dedicated benefits administrator matters.
One more thing to watch:
If you’re an S-corporation owner with more than 2% ownership, your business can absolutely still offer an ICHRA. You just can’t participate in it yourself. This is a common point of confusion, and we’ve seen business owners walk away from the ICHRA model entirely when they hear about this rule, thinking it disqualifies them. It doesn’t. Your employees are still fully eligible, and many S-corp owners set up an ICHRA for their team while handling their own health coverage separately.
The reason for the exclusion comes down to tax treatment. Under IRC §1372, 2%+ S-corp shareholders are treated as self-employed for health benefit purposes, which means ICHRA reimbursements don’t carry the same tax-free advantage they do for regular employees. This rule extends to certain family members of the shareholder as well. It’s one of the first things we check at HRASimple when onboarding a new client.
Don’t Go It Alone: Why ICHRA Administration Matters
You can technically set up an ICHRA without an administrator. But managing employee classes, tracking minimum size requirements, documenting your plan design, processing reimbursements, verifying coverage, and staying current with IRS and DOL rules is a heavy lift on top of running your business.
That’s why so many small businesses work with HRASimple. As your benefits administrator, we handle ICHRA administration end-to-end. From building compliant class structures to processing reimbursements to keeping your plan documents current. And as your employees’ benefits advocate, we’re there to answer their questions and help them understand their options.
You set the budget. Your employees pick their plans. We make the whole thing work compliantly and simply.
Ready to see how ICHRA employee classes could work for your business? Schedule a free consultation with HRASimple and let’s design a benefits strategy that fits your team.
Frequently Asked Questions About ICHRA Employee Classes
What happens if I get my employee classes wrong? Non-compliant class definitions can invalidate your entire ICHRA. The IRS can impose penalties of up to $100 per day per affected employee under IRC §4980D, and the DOL can impose its own penalties of $110 per day per employee for plan document and notice violations. Working with an experienced ICHRA administrator is the best way to prevent these issues.
Can I create my own custom employee classes for ICHRA? No. The IRS has defined exactly 11 approved employee classes based on objective, job-related criteria. You cannot create classes based on job title, department, tenure, pay grade, or any other custom grouping. You can, though, combine two or more approved classes to create a composite class that fits your needs.
Can I offer different ICHRA amounts to different employees in the same class? You must offer the same terms to everyone within a class. The only allowed variations are by age (within a 3:1 ratio, meaning the highest amount can’t exceed three times the lowest) and by family size or number of dependents.