New Legislation Enhances ICHRAs (Now CHOICE Arrangements): Key Benefits for Small Businesses
In May 2025, "The One Big Beautiful Bill Act" passed the US House of Representatives. The legislation codified ICHRAs, rebranded them as CHOICE Arrangements (Consumer Health Option and Individual Coverage Expense Arrangements), and made key improvements that particularly benefit small businesses.
ICHRAs (Individual Coverage Health Reimbursement Arrangements) were established through regulatory action in 2019, following an executive order. They allow businesses to provide tax-free funds to employees who purchase individual health insurance plans or Medicare. These funds can be used for medical expenses but are predominantly used to reimburse the cost of premiums.
Key Improvement #1: Marketplace Premiums Become Eligible for Cafeteria Plans
An ICHRA is defined as a group health plan. Logically, employees should be able to pay their portion of health insurance premiums with pre-tax dollars via a cafeteria plan, just like they do with more traditional group health plans.
However, a significant disparity existed: if an employee purchased individual coverage off the Marketplace, pre-tax contributions through a cafeteria plan were permissible for their share of the premium. If they bought the identical plan at the same price on the Marketplace (e.g., HealthCare.gov), they could not use pre-tax dollars through a cafeteria plan for that premium.
The primary reason for this previous restriction was rooted in Section 125 of the Internal Revenue Code, which governs cafeteria plans. An existing provision in this section generally prohibited using cafeteria plan funds to purchase individual health insurance plans offered through an ACA Marketplace. Even though an ICHRA is a group health plan, employees use those funds for individual policies. So, if the policy was from the Marketplace, this rule effectively prevented pre-tax payment of the employee's share of the premium through a cafeteria plan.
The new legislation directly resolves this. It amends Section 125 to create a specific exception for individuals participating in CHOICE Arrangements, now permitting them to use cafeteria plan funds for on-Marketplace plan premiums. The introduction of W-2 reporting for CHOICE Arrangement benefits (similar to how QSEHRA benefits are reported) likely provided lawmakers with the necessary framework for data transparency and accountability to comfortably make this legislative change, ensuring better overall coordination with Premium Tax Credit (PTC) calculations.
This is a notable benefit, especially for employees of small businesses. The broadest selection of health plans is found on the exchanges. This change allows employees to choose the best plan for their needs, regardless of where it's purchased, and still receive the appropriate tax advantages on their contributions.
Key Improvement #2: Introduction of Tax Credits for Small Businesses Offering CHOICE Arrangements
Another important development is the creation of a new tax credit for employers offering CHOICE Arrangements. This incentive is specifically aimed at smaller employers.
Here are the details:
- Eligible Employers:
The tax credit is available to "eligible employers," defined as those who are not Applicable Large Employers (ALEs) under ACA criteria (generally, businesses with fewer than 50 full-time equivalent employees). - Credit Amount:
- In the first year, an employer establishes a CHOICE Arrangement, they can receive a tax credit of $100 per month for each enrolled employee (up to $1,200 per employee annually).
- In the second year, the credit is $50 per month for each enrolled employee (up to $600 per employee annually).
- Condition for the Credit:
The CHOICE Arrangement offered must qualify as 'minimum essential coverage' (MEC) provided through an employer plan, according to specific ACA rules (these rules are linked to Section 36B(c)(2) of the tax code, which governs Premium Tax Credit eligibility). To meet this condition for their tax credit, the HRA dollar amount an employer offers through the CHOICE Arrangement must generally be substantial enough for the offer to be considered 'affordable' under established ACA criteria. Employers will typically use one of the existing ACA affordability safe harbors (e.g., based on the employee's W-2 wages, rate of pay, or the federal poverty line) when setting their HRA contribution amounts to meet this affordability standard. When an employer's HRA offer meets these ACA standards for MEC and affordability, a standard consequence under the ACA is that the employee would generally not also be eligible for Premium Tax Credits (PTCs) on the Marketplace. The new employer tax credit is thus tied to the employer making this type of qualifying, affordable HRA offer. - Effective Date:
These provisions, including the tax credits and the cafeteria plan amendment, are scheduled to apply to plan years or taxable years beginning after December 31, 2025.
Considering these factors – the established flexibility of defined contributions inherent in CHOICE Arrangements, combined with pre-tax premium payments for employees using Marketplace plans, and a direct tax credit for the employer – this model becomes a very compelling option. It enables businesses to manage benefits budgets predictably while empowering employees with plan choice, now with improved financial and tax efficiency.
Small businesses, in particular, may find that these enhancements make CHOICE Arrangements a highly viable and attractive approach to offering health benefits.
