When you set up an Individual Coverage Health Reimbursement Arrangement (ICHRA), the IRS doesn't give you a blank check. You must define specific employee classes and apply consistent rules. Get this wrong, and you face corrective action, penalties, and potential discrimination claims.
Here's what you actually need to do.
What Are Employee Classes?
An employee class is a group of workers you define for ICHRA purposes. Each class gets its own contribution rate, eligibility rules, and reimbursement limits. You can't just give health benefits to whoever you feel like on any given Tuesday.
The IRS requires that classes be defined in writing, applied consistently, and defensible as business-reasonable. Think of it as drawing lines around groups—then staying within them.
Common examples:
- Full-time vs. part-time employees
- Salaried vs. hourly
- By department (sales, operations, IT)
- By job title (manager, individual contributor, temporary)
- By tenure (less than 90 days, more than 90 days)
The Core Rule: Non-Discrimination
This is where many HR leaders stumble. The "safe harbor" rule says you can classify employees differently if the classification is based on reasonable, objective criteria.
What the IRS is really saying: Don't use ICHRA to favor executives or high-paid employees.
The Safe Harbor Test
Your classification passes scrutiny if:
- It's written down – in your ICHRA plan document or benefits policy
- It's objective – not subjective or at a manager's discretion
- It's applied consistently – everyone in the class gets the same treatment
- It's reasonable – a typical employer would use this distinction
If you define "managers" as your preferred class and give them $400/month but "individual contributors" get $100/month, expect IRS interest—especially if managers skew toward higher earners or one demographic group.
What Gets Scrutinized
The IRS focuses on whether your classes create a prohibited benefit pattern. They look at:
- Compensation correlation – Does your ICHRA contribution track with salary? Higher salary = higher ICHRA contribution?
- Demographic skew – Do certain classes disproportionately include highly-compensated employees, men, or other protected groups?
- Eligibility waiting periods – Do certain classes have to wait longer to access ICHRA?
Example: A 200-person company gives executives ICHRA contributions of $500/month but applies a 6-month waiting period for individual contributors. Even if technically legal, this pattern raises red flags.
How to Structure Classes Without Triggering Risk
Start with legitimate business reasons
Your classification should reflect real operational differences:
- Hours-based distinctions – Full-time (30+ hours/week) vs. part-time, seasonal, or temporary
- Department or location – Different roles may have different market rates and benefit expectations
- Tenure – New hires under 90 days vs. established employees (common in healthcare, retail)
- Union vs. non-union – If some workers are unionized and others aren't
- Job classification – Distinguishing between roles that perform genuinely different functions
Avoid these proxies
Don't use classifications that hide discrimination:
- Pay grades (looks like favoritism toward high earners)
- Age or years of service (can create age discrimination risk)
- Vague "job category" (too subjective; lacks clear criteria)
- Geographic location as the sole criterion (can correlate with protected classes)
- Individual approval (discretionary, not consistent)
Setting Contribution Limits Per Class
Once you've defined classes, you decide how much you contribute to each. This is where the money actually flows.
The mechanics
You might decide:
- Full-time employees: $300/month toward their ICHRA
- Part-time employees (20–29 hours): $150/month
- Seasonal: Not eligible
- Employees under 90 days: $0 (waiting period)
These amounts don't need to be equal—but they need to follow a defensible logic. "We contribute more to full-timers because they work more hours" makes sense. "We contribute more to managers because they're more valuable" doesn't.
The contribution cap
Your total ICHRA contribution per employee cannot exceed the monthly self-only coverage limit set by the IRS. For 2026, that's around $150/month (this adjusts annually). Some employers max it out; others go lower.
If you have dependents, the family coverage limit is roughly $300/month. But only if you're running a family ICHRA—a separate, more complex design.
Eligibility: Who Gets In, When
Define who's even eligible to participate. Again: write it down.
Common eligibility criteria:
- Must be employed for 90+ days
- Must work 30+ hours per week
- Must be classified as full-time
- Must not be in a waiting period
- Must be age 18+
- Union members excluded (if applicable)
Important: If you make employees wait for benefits (e.g., 90-day waiting period), that waiting period applies to ICHRA just like group health insurance. Make sure it's consistent with your other benefits.
The waiting period risk
If you offer a group health plan to one class but make another class wait, that waiting period must be identical across benefits. You can't say: "We wait 90 days for health insurance but immediate eligibility for ICHRA." That inconsistency can trigger discrimination questions.
Documentation: Your Legal Shield
The IRS will ask: "Where's your plan document?" You need:
- Written plan document that defines your employee classes, eligibility rules, and contribution rates
- Nondiscrimination certification (Form 5500 or equivalent if you have other plans)
- Consistent application records – payroll records, enrollment logs that show you're following your own rules
- Policy manuals that explain who qualifies and why
If it's not documented, it didn't happen from the IRS perspective.
Red Flags That Trigger Audits
- Classes that perfectly mirror salary bands
- A small group of executives with dramatically higher ICHRA contributions
- Frequent changes to class definitions from year to year
- No written documentation of how classes are defined
- Contribution rates that spike for certain demographics
- Employees in identical roles placed in different classes
The Practical Playbook
Here's how to avoid trouble:
- Define classes first – Before you run a single payroll under ICHRA, decide how many classes you'll have and what defines each one
- Write it down – Add it to your plan document and review it with legal counsel or a benefits consultant
- Test the pattern – Before launch, pull a sample of employees and see: Does your contribution structure disproportionately benefit any group?
- Train managers – They need to know the rules so they apply them consistently
- Audit annually – Once a year, verify you're actually following what you documented
- Keep records – Save enrollment forms, contribution calculations, and eligibility determinations for at least three years
What Happens If You Mess Up
If the IRS finds a prohibited pattern in your classes:
- You may owe back contributions to employees in disfavored classes
- You face excise tax penalties (20% of the excess contribution)
- You could be forced to restructure your ICHRA entirely
- Employees may have grounds for discrimination lawsuits
That said, the IRS hasn't aggressively audited ICHRA discrimination yet—the plan is still new. But compliance risk is real. Don't assume you can get away with a sloppy design.
Bottom Line
Employee classes are mandatory. You get to decide how to define them, but those definitions must be objective, consistent, and applied without bias. Your safest move: use common, defensible business criteria (hours worked, tenure, job function), document your choices, and audit yourself annually.
If you're designing classes and you hesitate—if you can't easily explain why one group gets more than another—that's a sign you need legal guidance before you launch.