A CHOICE Arrangement, formerly known as an Individual Coverage Health Reimbursement Arrangement (ICHRA), is an employer-funded health benefit that allows employers to reimburse eligible employees tax-free for individual health insurance premiums and, depending on the plan design, other qualified medical expenses.
How a CHOICE Arrangement works can be understood in two parts: setting up the benefit and administering it throughout the plan year.
Setting Up the CHOICE Arrangement
Most of how a CHOICE Arrangement works is established up front. The employer decides when the plan begins, which employees are eligible, what expenses can be reimbursed, how much allowance is available, whether family members can participate, and how approved reimbursements will be paid. Those decisions establish the rules that govern the benefit throughout the plan year.
Plan year
Every CHOICE Arrangement has a defined plan year. Plan years often follow the calendar year because individual health insurance is typically sold on a calendar-year basis. An employer can also begin a CHOICE Arrangement midyear, which may result in a shorter initial plan year before transitioning to January-through-December plan years.
Employee eligibility
Eligibility has two parts.
First, the employer determines which employees will be offered the CHOICE Arrangement. Employers do this by organizing employees into federally permitted employee classes and deciding which classes are eligible for the benefit. Different classes can have different plan terms.
Second, an employee must have eligible health coverage to participate. This generally includes qualifying individual health insurance purchased through the Health Insurance Marketplace or directly from an insurance carrier, as well as qualifying Medicare coverage.
For more information about the coverage and participation requirements, see Salusion’s ICHRA Compliance Requirements.
Eligible expenses
Whether an expense can be reimbursed comes down to three things: what, when, and who.
- What: The employer determines whether the CHOICE Arrangement reimburses individual health insurance premiums only or premiums plus other qualified medical expenses.
- When: The expense must be incurred during the applicable plan year.
- Who: The employer determines whether the plan reimburses expenses only for the employee or also for eligible spouses and dependents.
Employer allowance
The employer establishes the maximum allowance available for the plan year. That allowance is typically made available in monthly increments, with unused amounts accumulating throughout the plan year.
A plan can provide a run-out period after the plan year ends, giving employees additional time to submit eligible expenses incurred during the prior plan year.
For more information about how allowances work, see Salusion’s Setting the Allowance.
Reimbursement approach
The employer determines how approved reimbursements will be paid. An HRA administrator may process reimbursements on the employer’s behalf, or the employer may reimburse employees directly based on reimbursement information provided by the administrator.
For a closer look at allowances, reimbursements, and other plan mechanics, see Salusion’s What Are the Mechanics of an ICHRA?.
Administering the CHOICE Arrangement
Once the plan is established, the employer remains responsible for the benefit while an HRA administrator can handle much of the day-to-day work required to operate it. In practice, ongoing administration involves three groups: the employer, the HRA administrator, and the employee.
Employer Responsibilities
Once the CHOICE Arrangement is established, the employer’s ongoing responsibilities are relatively limited.
Employee eligibility. The employer determines when employees become eligible under the terms of the plan and keeps employee information current by adding employees when they qualify, updating information when their status changes, and removing employees when they are no longer eligible.
Funding reimbursements. The employer provides the funds needed to pay approved reimbursements. How those funds reach employees depends on the reimbursement approach selected when the plan was established.
Tax reporting. The employer is responsible for required federal reporting associated with the CHOICE Arrangement. Small employers generally use Forms 1094-B and 1095-B, while larger employers generally use Forms 1094-C and 1095-C. Employers are also responsible for the annual PCOR fee, reported on Form 720.
For more information about these requirements, see Salusion’s ICHRA Tax Reporting Requirements.
HRA Administrator Responsibilities
An HRA administrator or administration platform handles much of the ongoing administrative work required to operate the plan.
Compliance administration. This can include handling plan documents and required employee notices, verifying that participating employees have eligible health insurance, and providing a process for employees to opt in or opt out of the arrangement when applicable.
Expense capture and verification. The administrator provides a way for employees to submit reimbursement requests and supporting documentation, then verifies that each expense meets the requirements for reimbursement.
Reimbursement administration. Once an expense is approved, the administrator calculates the amount that can be reimbursed based on the employee’s available allowance and carries out the reimbursement process selected by the employer.
Accounting and recordkeeping. The administrator tracks allowances, expenses, reimbursements, and remaining balances throughout the plan year.
Employee Responsibilities
The employee’s role begins with onboarding. To participate, the employee must enroll in eligible health insurance and provide proof of that coverage.
Once participating, the employee must maintain eligible coverage and provide the documentation required for reimbursable expenses, such as insurance premium information or receipts for qualified medical expenses.
After an expense is verified and approved, the employee can be reimbursed up to the amount available under the plan.
The Bottom Line
Most of the important decisions behind a CHOICE Arrangement are made when the employer establishes the plan. Once those terms are in place, the employer keeps eligibility and funding information current, the HRA administrator handles much of the ongoing administrative work, and employees maintain qualifying coverage and submit eligible expenses. Together, those roles allow the benefit to operate according to the plan the employer established.
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