Geographic Classes, Rating Areas, and Why They Matter
Deep dive into geographic class design: how rating areas work, why premium variance by geography matters for contribution strategy, class size minimums when mixing ICHRA and group, and the practical decisions employers face in multi-state workforces.
Geographic Classes, Rating Areas, and Why They Matter
Ask most brokers what makes ICHRA complicated, and geographic classes come up quickly. It's one of the concepts that sounds more technical than it is — but it's also one where getting it wrong has real consequences for employers and employees alike.
Here's what's actually going on, and why it matters in practice.
The Problem Geographic Classes Solve
Individual health insurance premiums vary significantly by geography. A 40-year-old in Nashville might pay $450/month for a silver plan. The same person in rural Wyoming might pay $900. In parts of New York, premiums are higher still. In some suburban markets with strong carrier competition, they're lower.
This is the fundamental challenge for any employer with employees in multiple locations. A single reimbursement amount — say, $600/month — might be generous in one market and inadequate in another. The employee in Nashville gets a benefit that meaningfully covers their premium. The employee in rural Wyoming has a gap between their reimbursement and their available plan options that may make individual coverage feel unaffordable.
Geographic classes exist to solve this problem. They allow employers to set different reimbursement amounts for different groups of employees based on where they live and work — so the benefit can be calibrated to the actual cost of individual market coverage in each location. It smooths the buying power for employees across varied markets.
How Geographic Classes Actually Work
The IRS permits employers to define geographic classes based on rating areas — the geographic units the ACA uses to set individual market premiums. There are 500+ rating areas across the country, defined at the state level and generally corresponding to counties or groups of counties.
Employers can define a geographic class as broadly as a single state or even region, or as narrowly as a single rating area. In practice, most employers land somewhere in between — grouping rating areas with similar premium levels into a single class with a single reimbursement strategy.
A few rules govern how this works:
Classes must be defined by a legitimate geographic boundary. You can't define a class in a way that effectively discriminates based on employee characteristics — the class has to be based on where employees live or work, not on who those employees are.
When an employer offers ICHRA to some employees and a group plan to others, minimum class size rules apply. If an employer wants to offer ICHRA to employees in one class and traditional group coverage to employees in another, the ICHRA class must meet a minimum size threshold: 10 employees for employers with fewer than 100 employees, 10% of the workforce for employers with 100–200 employees, and 20 employees for employers with more than 200 employees. These minimums don't apply if the employer offers ICHRA to all employees or if classing employees at the state-level — only when splitting populations between ICHRA and group.
Reimbursement amounts can vary by age within a class — up to a 3:1 ratio between the oldest and youngest employees. This mirrors how ACA premiums are structured and allows contribution strategies to be age-adjusted so that the benefit remains meaningful across age cohorts. The amount can also vary by coverage levels.
The Rating Area Connection
Rating areas aren't just administrative units — they're the driver of premium variation that makes geographic class design necessary.
For ICHRA purposes, the rating area matters in two specific ways:
It determines what the benchmark plan costs. Affordability calculations for ACA purposes use the lowest-cost on exchange silver plan available to the employee. An employer setting reimbursement amounts to hit the affordability safe harbor needs to know what that benchmark plan costs in each rating area where their employees live — and that number varies meaningfully across geographies.
It affects what employees can actually buy. Not every carrier participates in every rating area. An employee in a competitive urban market might have 100 plan options across multiple carriers. An employee in a rural area might have 20 or 30. Geographic class design needs to account for this — a reimbursement amount that makes sense when there are many options may need to be different when there are fewer.
Practical Class Design Decisions
When working through geographic class structure with an employer, a few questions drive most of the design:
How many distinct premium environments does this workforce actually span? An employer with employees in 10 states might find that those states sort into 3 or 4 meaningful premium tiers — and that a 3 or 4 class structure captures most of the variation without creating administrative complexity for each individual rating area.
Is the employer splitting ICHRA and group, or going ICHRA-only? If splitting, the minimum class size rules are in play and need to be factored into class design from the start. An employer who wants to offer group coverage to their home-office employees and ICHRA to their remote workforce needs to make sure the ICHRA class is large enough to qualify, depending on how it is structured.
How does the employer want to handle outlier geographies? In almost every multi-state employer situation, there are one or two rating areas where premiums are significantly higher or lower than the rest. The decision of whether to create a separate class for those outliers — or include them in a broader class with a higher reimbursement amount — involves a tradeoff between precision and simplicity.
What's the contribution strategy goal? If the employer wants to hit ACA affordability for all employees, the class structure needs to support reimbursement amounts calibrated to the benchmark plan in each class's highest-cost rating area. If the employer is offering ICHRA without ALE mandate exposure, the tradeoffs are different.
Why This Matters More Than Most Employers Realize
Geographic class design is where ICHRA moves from concept to reality for a multi-location employer. A well-designed class structure means employees in every location have a benefit that's meaningful, relative to their local market. A poorly designed one means some employees may have a generous benefit and others have a gap — and the employees with the gap are the ones who will form the lasting impression of how ICHRA worked for them.
Getting this right requires individual market data at the rating area level, affordability calculation tools, and a team who understands how to translate that data into a class structure that serves the employer's goals. It's not guesswork — it's analysis. And it's the kind of analysis that becomes routine with the right infrastructure in place.
Kyndly provides an enablement layer for TPAs and GAs operating ICHRA programs — the tools, integrations, and operational infrastructure to run defined contribution health benefits at scale.