As states explore ways to help businesses modernize healthcare offerings, Individual Coverage Health Reimbursement Arrangements (ICHRAs) are emerging as a flexible and cost-effective solution. ICHRAs allow employers—large and small, public and private—to offer tailored, affordable coverage while empowering employees to choose the plan that best fits their needs. However, ensuring compliance is critical. Failing to meet federal requirements can expose employers to penalties, legal risks, and employee dissatisfaction.
Below are the most common compliance pitfalls public sector employers must avoid when implementing an ICHRA.
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Violating ACA Affordability Requirements
Employers subject to the Affordable Care Act (ACA) must ensure their ICHRA offering is affordable for full-time employees.
Affordability is determined based on the lowest-cost silver plan on the marketplace, minus the employer’s ICHRA contribution. For 2025, coverage is considered affordable if the employee’s required contribution does not exceed 9.02% of their household income.
Tip: Employers should use affordability calculators or work with benefits experts to test plan designs against ACA thresholds. Inaccurate affordability can lead to loss of premium tax credit eligibility for employees and trigger penalties under the Employer Mandate.
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Failing to Offer Class-Based Consistency
ICHRA rules allow employers to divide employees into distinct classes—such as full-time, part-time, seasonal, union, and geographic groups—and vary reimbursement amounts accordingly. However, misapplying or inconsistently administering employee classes can result in discrimination claims or regulatory violations.
Review the Classification Rules to ensure:
- Classes are legitimate and clearly defined.
- Reimbursements are consistent within each class.
- Avoid practices that could discourage high-risk individuals from participating.
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Skipping Required Employee Notices
Notice requirements for ICHRAs are comprehensive and critical:
ICHRA Notices
Employers must provide written notice to eligible employees at least 90 days before the plan year begins. Notices must include:
• How the ICHRA works
• How it affects premium tax credit eligibility
• Enrollment instructions for their individual coverage option
ERISA Notices and Disclosures
Since ICHRAs are considered group health plans under ERISA, employers must also comply with:
- A Summary Plan Description (SPD) must be distributed within 90 days of enrollment.
- A Summary of Material Modifications must be distributed within 210 days after the end of the plan year in which a change is adopted.
- A Summary of Material Reduction must be provided within 60 days of the adoption of a reduction.
- A Summary Annual Report is due 9 months after the end of the plan year.
- If an employer covers more than 100 participants, they must also file Form 5500 annually. Penalties for failure to file can be as high as $2,586 per day.
Providing clear, timely notices supports employee understanding and protects the employer from compliance exposure.
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Neglecting Substantiation and HIPAA Privacy Rules
To remain compliant, employers must require employees to substantiate that they have qualified individual health coverage for any month they are reimbursed.
This requires:
- Monthly substantiation or attestations from employees
- Secure, HIPAA-compliant handling of protected health information (PHI)
- Careful control over who can view employee-submitted receipts and health plan documents
Tip: Using a HIPAA-compliant third-party administrator is often the safest and easiest way to manage documentation and privacy. Learn more about substantiation rules from Healthcare.gov’s ICHRA Overview.
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Overlooking Coordination with Medicare or Medicaid
If your workforce includes employees eligible for Medicare or Medicaid, ICHRAs can create complications. While Medicare-eligible employees can participate, careful plan design is needed to avoid conflicts with federal rules.
Read CMS guidance to understand coordination requirements
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Overlooking COBRA Administration
An ICHRA is still a group health plan under federal law, which means it is subject to COBRA requirements.
Employers must:
- Offer COBRA continuation coverage to qualified beneficiaries who lose eligibility (e.g., due to employment termination).
- Properly calculate COBRA premiums—not based on the remaining balance of an employee’s unused ICHRA funds.
Ignoring COBRA obligations can lead to costly fines and lawsuits.
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Neglecting PCORI Fee Payment
Employers offering an ICHRA are responsible for paying the Patient-Centered Outcomes Research Institute (PCORI) fee annually.
- Reported on IRS Form 720, due July 31 following the end of the plan year.
- Based on the average number of lives covered during the year.
- Applicable even if the employer also offers fully insured coverage (in which the carrier pays PCORI separately).
Nonpayment or late payment of PCORI fees can result in additional IRS penalties.
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Failing to Address Premium Tax Credit Opt-Out Options
Employees must be given the option to opt out of the ICHRA if the ICHRA is unaffordable, and they want to claim a premium tax credit (PTC) through the individual marketplace.
Employers must:
- Clearly explain opt-out rights in employee notices.
- Provide a simple opt-out process annually.
- Ensure employees understand the tax consequences of participating or opting out.
Protecting employee choice supports marketplace enrollment and ACA compliance.
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Incorrect Reporting on IRS Forms 1094/1095
ICHRA offerings must be reported to the IRS as minimum essential coverage. Government employers may be required to complete IRS Forms 1094-C and 1095-C—especially if subject to ACA’s Employer Mandate.
Missing deadlines or incorrect reporting can trigger IRS penalties.
Conclusion: Avoid Compliance Mistakes, Protect Your Program
ICHRAs offer a modern path for employers to deliver affordable, flexible healthcare benefits tailored to today’s diverse workforce needs. However, compliance is critical to ensuring that these benefits are sustainable and accessible. States can play a pivotal role by promoting education, resources, and trusted vendor partnerships that help businesses implement compliant, employee-friendly ICHRA programs.
When done right, ICHRAs empower businesses, support employee choice, and expand health coverage access—creating a win for employers, employees, and the broader state economy.
For information on how CITIZ3N can support compliance within ICHRA offerings, visit CITIZ3N.
