ICHRA Compliance Essentials: What Brokers Need to Know Before Recommending the Switch

ICHRA is a relatively straightforward arrangement at its core — employer funds an HRA, employee uses it to pay for individual health insurance. But the compliance framework surrounding it involves IRS rules, ACA integration requirements, DOL notice mandates, and non-discrimination standards that brokers need to understand before recommending the arrangement to clients.

Getting the compliance right is not optional — violations can result in the arrangement being treated as taxable income to employees, excise taxes, and ACA penalties. This article covers the key compliance requirements that brokers need to have working knowledge of.

Notice requirements: the 90-day rule

Employers offering ICHRA are required to provide written notice to all eligible employees. The timing requirements are:

• Standard Rule: For employees eligible at the start of the plan year: notice must be provided no later than 90 days before the plan year begins.
• Mid-Year Eligibility: For employees who become eligible mid-year (new hires, class changes): notice must be provided by the first day of the employee's ICHRA eligibility.
• New Plan Exception: If an employer is setting up an ICHRA for the first time and the plan starts less than 90 days after the employer decides to offer it, the notice is not required 90 days in advance. Instead, it must be provided on or before the first day of the plan year.

The notice must include specific information prescribed by the regulations:

• The dollar amount of the ICHRA available to the employee (which may differ from other employees by class and age-banding)
• A description of the employee's right to opt out of the ICHRA and waive future reimbursements
• Notice that if the ICHRA is affordable under ACA standards, the employee will not be eligible for premium tax credits for the months the ICHRA is available
• Information about the requirement to have qualifying individual health coverage to use ICHRA funds
• A statement of the permitted uses of ICHRA funds (premiums and qualifying medical expenses)
• Contact information for questions

The Department of Labor has published model notice forms that employers can use as a starting point, though they should be customized for the specific ICHRA design. Failure to provide timely and complete notice is one of the most common ICHRA compliance mistakes.

Qualifying individual health coverage requirement

To use ICHRA funds, employees must maintain "qualifying individual health coverage" — defined as individual health insurance that is not excepted benefits (such as dental-only or vision-only plans), short-term limited duration insurance, or certain other limited coverages.

ACA-compliant individual market plans purchased through the Marketplace or directly from a carrier meet the qualifying coverage requirement. Employees must attest to having qualifying coverage and must substantiate their coverage and expenses in order to receive reimbursements.

Employers must establish reasonable procedures for employees to substantiate their individual coverage and qualifying medical expenses. This typically involves monthly attestation and submission of proof of premium payment, managed through an HRA administrator or platform.

ACA affordability and the premium tax credit interaction

The ACA affordability rules create the most important and often most misunderstood compliance dimension of ICHRA.

For any month in which an employee is offered an ICHRA that is "affordable" under ACA standards, the employee is not eligible for ACA premium tax credits on the Marketplace for that month. An ICHRA is affordable for a given employee if the monthly amount the employee would pay for the lowest-cost silver plan for self-only coverage in the employee's rating area (after subtracting the ICHRA contribution) does not exceed the ACA affordability threshold expressed as a percentage of household income. For plan years beginning in 2026, that threshold is 9.96% of household income.

The three affordability safe harbors

Because employers typically do not know employees' household income with precision, the IRS provides three safe harbors that employers can use to determine affordability:

• W-2 wages safe harbor: Use the employee's W-2 Box 1 wages from the prior calendar year to estimate affordability.
• Rate of pay safe harbor: Use 130 hours per month multiplied by the employee's hourly rate (or 100% of monthly salary for salaried employees) as the income estimate.
• Federal poverty line safe harbor: Treat the federal poverty line for a single individual as the employee's household income. This is the simplest safe harbor and is most commonly used, though it may result in some employees receiving a more generous ICHRA than necessary for affordability.

Employers can choose different safe harbors for different employee classes, which provides flexibility in managing the affordability determination across a diverse workforce. The same safe harbor must be applied consistently to all employees within a given class.

When an "unaffordable" ICHRA is intentional

An "unaffordable" ICHRA can be a deliberate design choice to allow lower-income employees to access potentially larger Marketplace tax credits. However, this strategy is generally only safe for small employers. Large Employers (ALEs, generally any company with 50 or more FTEs) must be cautious: if an ICHRA is unaffordable and a full-time employee receives a tax credit, the employer will likely incur an ACA 'B-Penalty' for that employee.

Non-discrimination requirements

ICHRA is subject to the non-discrimination rules. The most important to note are:

• Cannot discriminate based on health status: Contribution amounts and eligibility cannot vary based on employees' health status, medical history, or claims experience. The permitted bases for variation are limited to the employee class system and age-banding described in the regulations.
• Cannot design classes to circumvent rules: The class structure must reflect a genuine business rationale. An employer cannot create a class structure that effectively isolates high-cost employees and offers them a less generous ICHRA.
• Minimum class size rules: When an employer offers a traditional group health plan alongside ICHRA (to different classes), minimum class size requirements apply to the group receiving ICHRA.

  Employer size	Minimum class size
  Fewer than 100 employees	10 employees
  100–200 employees	10% of total number of employees
  More than 200 employees	20 employees

  These rules prevent employers from using class structures to split off small groups of employees from the group plan.

ICHRA vs. Excepted Benefit HRA: avoiding a common confusion

The Excepted Benefit HRA (EBHRA) is a separate, distinct arrangement that is sometimes confused with ICHRA. The key differences:

• EBHRA can be offered alongside a traditional group health plan to the same employees — ICHRA cannot.
• EBHRA is limited to $2,200 per employee per year (2026 limit, adjusted annually) — ICHRA has no statutory limit.
• EBHRA is limited to reimbursing out-of-pocket medical expenses and premiums for excepted benefits (such as dental or vision). Unlike ICHRA, it cannot be used to pay for individual health insurance premiums.
• EBHRA does not affect ACA premium tax credit eligibility — ICHRA does.

Brokers who encounter clients currently offering an EBHRA alongside their group plan should be clear that this is a fundamentally different arrangement from ICHRA. Moving to ICHRA would require eliminating the group health plan for the affected class.

Common compliance mistakes and how to avoid them

• Late or incomplete notice: The 90-day notice requirement is frequently missed, particularly for new hires and when classes change. Build notice delivery into the ICHRA administration workflow, not as a one-time plan-year task.
• Incorrect affordability calculation: Using the wrong safe harbor or failing to apply the correct plan-year affordability percentage results in mischaracterizing the ICHRA as affordable or unaffordable. This affects employee subsidy eligibility and employer mandate compliance.
• Offering ICHRA and group health to the same class: An employer cannot offer traditional group health insurance alongside an ICHRA to employees in the same class. This is one of the fundamental design rules and must be enforced at the class level, not the individual employee level.
• Inadequate substantiation procedures: Reimbursing employees without requiring substantiation of qualifying individual coverage and medical expenses risks having reimbursements treated as taxable income. A formal substantiation process, typically managed by a third-party administrator, is required.
• Failure to document opt-outs: Employees who decline the ICHRA must formally opt out. Undocumented opt-outs can create ambiguity about whether those employees were eligible for ACA subsidies in a given month.

Plan documentation and record-keeping

An ICHRA must be established through a formal plan document, similar to other ERISA-governed health plans. The plan document must define the eligible classes, contribution amounts, permitted expenses, and substantiation procedures. Employers should maintain records of employee notices, substantiation submissions, opt-out elections, and reimbursement activity for a minimum of six years — consistent with general ERISA record retention requirements.

Most employers will engage a third-party HRA administrator to manage the plan document, notice delivery, substantiation, and reimbursement processing. The broker's role is to advise on the design — class structure, contribution strategy, affordability approach — and ensure the employer understands the compliance framework before the arrangement goes live.