A main concern of those drafting final rules for the Individual Coverage HRA was that health insurance markets could be negatively impacted if employees with more costly health insurance profiles were moved to an ICHRA, while younger and healthier workers remained on a traditional group health plan. One way the Departments (DOL, HHS, and IRS) aim to prevent this is the ICHRA minimum class size rule.

Avoiding adverse selection

When the Departments issued a proposed rule for the ICHRA in October 2018, the document solicited comments from stakeholders including employers, insurers, medical providers, and anyone else with an interest in the proposed HRA model.

One of the main concerns was that the ICHRA would lend itself to adverse selection. That is, employers shifting employees and dependents that are more expensive to insure to the ICHRA while continuing to provide a traditional group health plan to younger and healthier participants.

While the Departments agreed that avoiding adverse selection is critical to maintaining the stability of health insurance markets, they also agreed that the flexibility of the ICHRA will be key to its adoption by more employers.

To meet both goals, the final rule for ICHRAs includes a minimum class size rule.

When minimum class size applies

The rule applies when an employer with two or more employee classification groups (1) offers at least one group of employees an ICHRA while offering any other employee group a traditional group health plan, and (2) the employee groups are defined by a combination of one or more applicable classes and one or more other class, excepting the waiting period class.

The Departments also allow an exception for grandfathering existing employees into a group health plan while new employees are offered an ICHRA.

The minimum class size applies to the group offered the ICHRA. It does not apply to a group offered the GHP or no plan at all.

Applicable and other classes

The rule applies only when employee groups are defined by at least one status from each class group.

Applicable classes

• Salaried;

• Non-salaried;

• Full-time;

• Part-time; and,

• Employees within the same rating area, with an exception for rating areas comprised of an entire state or a combination of 2 or more entire states

Other classes

• Collective Bargaining Agreement;

• Under age 25; and,

• Non-resident alien.

Determining minimum class size

Since minimum class size only applies . . .

1. when an employer offers an ICHRA to one group of employees and a traditional group health plan to another, and

2. when the employee classes are defined by a combination of

   • one or more applicable class, and

   • one or more other class,

. . . the rule will apply to few employers.

When the rule does apply, however, the minimum class size for the employee group offered an ICHRA is determined by number of employees as follows:

Sample employee groups

Following are examples of employee classification groups where the minimum class size rule would and would not apply.

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