ICHRA and Minimum Essential Coverage: Compliance Questions Advisors Get Asked

Introduction

When Individual Coverage Health Reimbursement Arrangements (ICHRAs) first became available in 2020, they represented a significant shift in how small employers could approach health benefits. Yet years later, I’m still fielding questions about what’s compliant and what crosses into violation territory.

The regulatory gray zones around ICHRAs and minimum essential coverage create genuine uncertainty—and understandably so. The IRS guidance, while comprehensive, leaves room for interpretation. This post addresses the questions I hear most often from fellow advisors and the business owners they represent.

What Is an ICHRA, and Why Does Minimum Essential Coverage Matter?

Before diving into the complicated stuff, let’s establish the foundation.

An ICHRA is a type of HRA that allows employers to provide employees with tax-free reimbursements to purchase individual health insurance policies on the ACA marketplace or off-exchange. Unlike traditional group health plans, the employer doesn’t select the plan—the employee does.

Minimum essential coverage (MEC) refers to the threshold of health insurance that satisfies the Affordable Care Act’s individual mandate. If someone doesn’t have MEC, they potentially face tax penalties (though this varies by year and eligibility exceptions).

The intersection of these two concepts creates compliance complexity: employers using ICHRAs must ensure their arrangement doesn’t inadvertently leave employees without MEC, which could expose the employer to liability and penalties.

The Core Compliance Requirement: Universal Availability

Here’s the first major gray zone question I encounter: Can I limit my ICHRA to certain employees?

The answer: No, not really—with narrow exceptions.

Treasury regulations require that ICHRAs be made available on the same terms to all employees in a class. The IRS defines permissible classes as:

• Full-time vs. part-time employees
• Salaried vs. hourly employees
• Employees in different geographic locations
• Employees with different tenure (e.g., employees hired before/after a certain date)

What you cannot do is selectively offer an ICHRA based on individual characteristics unrelated to these categories. You can’t say, “We’re offering an ICHRA to our engineers but not our administrative staff.” That violates the universality requirement.

Practical implication: Document your class definitions clearly and apply them consistently. This documentation becomes critical if the IRS ever audits your arrangement.

The Contribution Amount Question

Another frequent gray zone: How much should I contribute to employees’ ICHRAs?

The regulations don’t specify a minimum or maximum contribution amount. What they do require is that contributions be:

1. The same for all employees in the same class (or predictably different based on legitimate factors like tenure or geography)
2. Reasonable in relation to the employee’s ability to purchase MEC

That second point is where advisors get tripped up. “Reasonable” isn’t defined in dollar terms.

The IRS provides this guidance: employers should consider whether the contribution amount, combined with what’s available on the marketplace, allows employees to afford MEC. If your contribution is so low that an employee in your area cannot purchase a Bronze plan (the minimum plan type qualifying as MEC) with your contribution plus their payroll deduction, you may be creating a compliance problem.

Real-world scenario: Let’s say you’re in West Michigan and offering a $200/month ICHRA contribution. A 30-year-old single employee might find Bronze plans in the $350-450/month range, making the employer contribution plus reasonable out-of-pocket costs feasible. But what about a 55-year-old? Age-rated premiums might push Bronze plans to $800+/month. That same $200 contribution might not be “reasonable” for that employee.

What to do: Research actual marketplace rates in your area for different ages and family situations. Calculate whether your contribution amount genuinely enables MEC access. If the spread is too wide, consider age-banded contributions, which are permitted.

Compliance with the No-Interference Rule

One of the most misunderstood requirements: the prohibition on interference with marketplace enrollment.

The rule states that employers offering ICHRAs cannot take actions that interfere with an employee’s right to purchase an individual health insurance plan. This sounds straightforward but creates practical questions:

Can I require employees to exhaust their ICHRA before seeking subsidies?

No. Employees have the right to decline ICHRA reimbursement and instead use premium tax credits on the AXP (the ACA marketplace). While this seems counterintuitive—why would an employee turn down reimbursement?—it’s a protected right. Some employees might qualify for subsidies that, when combined with a lower ICHRA contribution, result in a better overall outcome.

Can I restrict which marketplace plans employees can purchase and have reimbursed?

Mostly no. Employers cannot impose coverage requirements. Employees can purchase any health plan available on the marketplace, and the employer must reimburse according to the ICHRA terms (though some employers choose to reimburse only certain plan types, which is technically compliant but operationally complex).

Can I require proof of enrollment before reimbursing?

Yes. This is actually recommended. You should require employees to provide evidence of MEC before making ICHRA contributions. This protects both the employee and employer and helps document compliance.

Documentation and the Paper Trail

Here’s advice I give every client: documentation is your compliance shield.

The IRS won’t find you in violation of ICHRA rules if you can demonstrate:

1. Written ICHRA plan documents that clearly specify classes of employees, contribution amounts, and reimbursement procedures
2. Proof of employee communication showing that employees understood the arrangement and their marketplace enrollment rights
3. Records of contribution calculations if using age-banded or tenure-based variations
4. Evidence of MEC verification from employees

Many small employers operate on handshakes and email threads. With an ICHRA, you need formal documentation. This isn’t burdensome—it’s a few key documents that provide protection.

Common Pitfalls to Avoid

Pitfall 1: Seasonal or temporary employees. The universality rule still applies. If you have seasonal employees, you must either include them in the ICHRA or explicitly exclude them as a defined class in your plan document.

Pitfall 2: Retroactive plan amendments. Once the ICHRA plan year starts, changing contribution amounts or eligibility mid-year creates compliance risk. Plan amendments should be made between plan years.

Pitfall 3: Assuming off-exchange plans count as MEC. They do, but marketplace verification is harder. Stick with ACA marketplace plans unless you have a specific reason to reimburse off-exchange coverage.

Pitfall 4: Overly complicated contribution structures. I’ve seen employers design contribution formulas so complex that even they can’t explain them. Simplicity reduces errors and audit risk.

Moving Forward with Confidence

ICHRAs are legitimate tools for small employers. The compliance concerns aren’t insurmountable—they require clarity, documentation, and intentional decision-making.

Before implementing an ICHRA, work with a benefits advisor who understands the local marketplace, can help you set reasonable contribution amounts, and will establish proper documentation. The upfront effort pays dividends in peace of mind and audit protection.

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Nexus Benefit Solutions is an independent employee benefits advisory firm based in West Michigan. Questions? Reach out at jason@nexusbenefitsolutions.com or call 616-425-9740.