ICHRA Class Design for 2027: Where ACA Compliance Problems Start

Plan year 2027 benefits decisions are already underway, and for employers running an individual coverage HRA, the employee class structure deserves a hard look. The arrangement was renamed CHOICE Arrangement in 2026, but the class rules, nondiscrimination requirements and penalties haven't changed. If you're carrying last year's assumptions into the new plan year, that's where the trouble usually starts.

What employee classes actually do

Employee classes are the groups an employer uses to decide who gets an ICHRA and how large the allowance is. Federal rules permit classes built on full-time or part-time status, salaried or non-salaried status, seasonal status and work location, and combinations of those factors. Employers use them to set different allowances for different groups, to offer an ICHRA to some employees while others stay on a group plan, or to move toward ICHRA gradually.

Here's the thing: the classes themselves are the easy part. The compliance exposure comes from how those classes interact with the ACA's integration rules, the nondiscrimination standards and the employer mandate.

Why class design carries ACA weight

An ICHRA satisfies the ACA's ban on annual dollar limits and its preventive care requirements because it is integrated with individual health insurance coverage. Class rules and the same terms requirement are conditions of that integration. That means a class design error can turn into an ACA compliance problem, not just an administrative headache.

For applicable large employers (ALEs), class decisions also determine who receives an offer of coverage and whether that offer is affordable under the employer mandate.

The class rules exist to stop employers from steering people with adverse health factors out of a group plan and into the individual market. When you review a 2027 design, four questions do most of the work. Does each class use a permitted, objective definition? Does everyone in a class receive an offer on the same terms? Does the overall structure sort employees by health status, claims history or Medicare eligibility? And does the arrangement actually operate the way the plan document says it does?

Pitfall 1: Getting the minimum class size wrong

The minimum class size rule applies only when an employer offers a traditional group health plan to at least one class and an ICHRA to another. It covers only the class receiving the ICHRA, and only when that class is defined by full-time or part-time status (with one class on the group plan and the other on the ICHRA), by salaried or non-salaried status, by a geographic area smaller than a state, or by a combination that includes one of those classes, unless the combination is with employees in a waiting period. The rule does not apply to state-level classes, or to collectively bargained or seasonal employees standing alone.

The minimum headcount depends on employer size. Employers with fewer than 100 employees need at least 10 employees in the class. Employers with 100 to 200 employees need 10% of the workforce. Employers with more than 200 employees need at least 20.

The mistake most employers make is using today's headcount, or simply carrying last year's count forward. Two numbers matter. The first is employer size, meaning the number of employees you reasonably expect to have on the first day of the plan year. The second is class size, meaning the number of employees offered the ICHRA in that class on the first day of the plan year, regardless of how many of them actually enroll.

Before the plan year starts, check whether a seasonal ramp-down, a location closure or a reorganization will shrink a class. Check whether combining classes produces a smaller group that falls below the minimum, such as full-time hourly staff within a single rating area. Confirm that each geographic class covers an entire state or a combination of states, and that every class still clears the minimum for the coming year.

There's some breathing room here. A class that meets the minimum on day one still satisfies the rule for that plan year even if turnover reduces it later. But class definitions have to be set before the plan year begins, and they can't change during it.

The new hire subclass option

If a class is too small to move to an ICHRA, the new hire provision offers another route. An employer offering a group plan to a class can offer an ICHRA to employees hired on or after a future date, while earlier hires keep the group plan. The minimum class size rule doesn't apply to that subclass unless the employer later subdivides it. The ICHRA still has to be offered on the same terms within the subclass, and no one in either group can choose between the ICHRA and the group plan.

Pitfall 2: Classes that work as health-risk proxies

An ICHRA is a group health plan, so federal nondiscrimination rules apply. Group health plans can't base eligibility or benefits on health factors, including health status, medical condition, claims experience, medical history, genetic information or disability.

A permitted class can still break this rule if it functions as a proxy for health risk. Red flags include combination classes drawn so narrowly that they capture specific employees with high claims, reclassifying someone from salaried to hourly without a real change in their job, moving employees between classes shortly after a significant claim or diagnosis becomes known, and offering an ICHRA only to a group whose main distinguishing feature is higher expected health costs.

The practical test is documentation. Write down the business reason for every class when you create it. Payroll structure, work location, collective bargaining status and hours worked all exist independently of anyone's health. If you can't name the operational reason for a class, that's a warning sign.

Medicare eligibility is not a permitted class

Age and Medicare status are not permitted ICHRA classes. Employers subject to the Medicare Secondary Payer rules, generally those with 20 or more employees, also can't offer incentives that encourage Medicare-eligible employees to drop group coverage. HHS lists a maximum civil money penalty of $11,823 per violation for offering prohibited incentives of this kind.

If your 2027 design pairs a group plan for most employees with an ICHRA for a class made up largely of people aged 65 and older, that combination deserves review with counsel before open enrollment begins.

Pitfall 3: Treating allowances as negotiable

Within a class, every participant generally has to receive the same terms. Same terms violations tend to look innocent from the inside. Giving a manager or a key hire a larger allowance than others in the same class counts. So does negotiating an individual allowance in an offer letter, granting an exception because one employee's premium is high, building an age curve that exceeds the 3:1 ratio, and letting employees choose between the group plan and the ICHRA. That last one is prohibited for every employee, including those in a new hire subclass.

Differences within a class are allowed only when they fit a permitted variation. Four matter most:

• Age: Allowances can increase with age, as long as the oldest participants receive no more than three times the amount offered to the youngest.
• Family size: Allowances can rise with the number of covered dependents, as long as everyone with the same number of dependents gets the same amount.
• Mid-year hires: New participants can receive the full annual amount or a prorated amount, using one method set before the plan year begins.
• Carryover balances: Unused amounts can differ when every participant has the same access to them under the same method.

If you want a group to receive a different allowance, the answer is a permitted class that fits that group, such as salaried employees, applied to everyone who meets the definition. A job title or an employee's importance to the business doesn't create a class.

Pitfall 4: Stopping after the same terms check

Section 105(h) is an Internal Revenue Code nondiscrimination rule that runs alongside the ACA requirements. It applies to ICHRAs that reimburse medical expenses beyond premiums. A premium-only ICHRA is treated as an insured plan and falls outside these rules.

Passing the same terms test doesn't end the review. Final IRS regulations protect permitted class differences and same terms variations, including age-based increases. But the plan also has to be nondiscriminatory in operation. An ICHRA could fail if a disproportionate share of highly compensated individuals qualify for and use the highest allowances. Those individuals may then owe income tax on excess reimbursements.

Check whether your ICHRA reimburses only premiums or other medical expenses too. Identify which employees land at the top of your age curve. Look at whether classes made up mostly of leadership receive richer allowances. And track how these results shift each year as your workforce changes, because a design that passes in one year can drift out of line in the next.

What an ACA compliance failure costs

Class rules, the same terms requirement, notice, substantiation and opt-out rights are all integration conditions. When those conditions aren't met, the HRA generally loses the integration that satisfies the ACA requirements described above.

The bigger financial exposure comes from the Section 4980D excise tax on group health plan failures. Its main features look like this:

• Daily tax: $100 per day for each affected individual, running from the date the failure begins until it's corrected.
• Examination minimum: If a failure occurred or continued during the period under examination and isn't corrected before the IRS sends a notice of examination, the tax for each individual is generally at least $2,500 or the amount otherwise owed, whichever is less. That $2,500 rises to $15,000 to the extent violations are more than de minimis. This minimum can apply even when the relief below would otherwise be available.
• Relief: No tax applies for any period in which the employer didn't know of the failure and wouldn't have known through reasonable diligence. No tax also applies if the failure was due to reasonable cause, was not due to willful neglect, and is corrected within 30 days of when the employer knew or should have known about it.
• Correction standard: The failure must be undone retroactively to the extent possible, and the affected person must be placed in as good a financial position as if it had never happened.
• Annual cap: For failures due to reasonable cause and not willful neglect, the tax is capped at the lesser of 10% of the employer's prior-year group health plan spending or $500,000. The IRS may also waive some or all of the tax if it would be excessive.

Employers report and pay this tax on IRS Form 8928. The math adds up quickly. A class error affecting 25 employees for 90 days comes to $225,000 before any caps or relief apply.

The 2027 employer mandate numbers

For ALEs, an ICHRA counts as an offer of coverage under the ACA employer mandate. The 2027 figures to plan around are these:

• Affordability percentage: 10.22% of household income for plan years beginning in 2027, up from 9.96% in 2026.
• Section 4980H(a) penalty: $3,780 per full-time employee, excluding the first 30, when an ALE fails to offer coverage to at least 95% of full-time employees and their dependents and at least one full-time employee receives a premium tax credit.
• Section 4980H(b) penalty: $5,670 for each full-time employee who receives a premium tax credit because the offer was unaffordable or didn't provide minimum value.

An ICHRA is affordable when the cost of the employee's lowest-cost silver self-only plan, minus the monthly self-only ICHRA allowance, doesn't exceed the affordability percentage of household income, or when an IRS safe harbor measure is met instead.

Class decisions can create mandate risk in several predictable ways. Employers leave a class of full-time employees without an offer. They use one flat allowance across very different rating areas. They overlook higher silver plan premiums for older employees. Or they carry 2026 affordability numbers into 2027. Each of these is a class decision that looks like an allowance decision on the surface.

Notices, substantiation, reporting and other requirements

Several operational requirements sit alongside class design, and missing any of them can create Section 4980D exposure because they're integration conditions.

• Annual notice: Eligible participants generally must receive written notice at least 90 days before the plan year begins. For a January 1, 2027 plan year, that date was October 3, 2026. For a July 1, 2027 plan year, it's April 2, 2027. Employees who become eligible later must receive notice by the date their ICHRA can take effect.
• Coverage substantiation: The ICHRA must verify enrollment in individual coverage for the plan year and before each reimbursement.
• Opt-out rights: Participants must be able to opt out of and waive reimbursements once each plan year.
• Plan documents: Private-sector employers need a written plan document and summary plan description.
• Form 5500: Plans with 100 or more participants at the start of the plan year generally must file. Late filing penalties can reach $2,739 per day.
• Form 1095-C: ALEs report ICHRA offers using codes 1L through 1U. Penalties can reach $340 per return for returns due in 2027. For more on the reporting side, see our guide to ICHRA reporting requirements.

A 2027 checklist before you finalize

Before locking in your design, confirm the following:

• Every class uses a permitted definition backed by a documented business reason.
• Class definitions are final before the plan year begins.
• Any class subject to the minimum class size rule meets it on the first day of the plan year.
• No class is defined by, or functions as a proxy for, health status or Medicare eligibility.
• Differences within a class fit a permitted variation, such as age within the 3:1 ratio or family size.
• No employee can choose between the group plan and an ICHRA, including in a new hire subclass.
• If you're an ALE, allowances meet the 2027 affordability standard for every full-time employee.
• If you're an ALE, at least 95% of full-time employees and their dependents receive an offer of coverage.
• Participant notices go out on time.
• Substantiation, opt-out, Form 5500 and Form 1095-C processes are in place.

Common questions about mid-year fixes and small employers

Can I fix a class mistake in the middle of the plan year?

Class definitions can't change during the plan year, so structural problems usually have to wait for the next plan year. Operational errors, such as an allowance applied incorrectly to one employee, should be corrected quickly. Section 4980D relief may apply when a failure was due to reasonable cause, wasn't due to willful neglect, and is corrected within 30 days of when the employer knew or should have known about it.

Do ACA penalties apply to small employers?

The Section 4980H employer mandate penalties apply only to ALEs. The ICHRA integration conditions, though, apply to employers of every size. The small employer exception in Section 4980D is limited to fully insured coverage, so it generally won't protect an ICHRA.

The takeaway for 2027

My read is that most 2027 ICHRA problems won't come from exotic structures. They'll come from ordinary decisions that were never documented: a class built around a payroll quirk, an allowance adjusted for one manager, a headcount that drifted below the minimum after a reorganization. Start with the documentation, then test each class against the minimum size, the same terms rules and the affordability math before open enrollment. The penalty figures are steep enough that the review is worth the time.