Small businesses often face two challenges when it comes to offering health benefits: starting health benefits for the first time and keeping existing group plans affordable. CHOICE Arrangements (formerly known as Individual Coverage Health Reimbursement Arrangements, or ICHRAs) provide flexibility and an affordable option for small businesses to offer health benefits without having to sponsor a traditional group health plan.
CHOICE Arrangements let an employer set aside money to reimburse employees for their individual health insurance premiums and certain medical expenses, subject to federal rules. This approach can help small employers attract and retain talent, manage costs more predictably, and give employees more choice over their coverage.
Who this page is for:
- New to benefits: small business owners who do not yet offer health insurance but want a cost‑controlled, compliant way to support employees’ health coverage
- Considering a switch: employers with group health plans who are weighing whether CHOICE Arrangements could reduce costs, simplify administration, or offer employees more choice
CHOICE Arrangements are a flexible alternative to traditional group health plans, especially for small businesses struggling with rising premiums or limited plan choices.
Key benefits for employers
- Predictable costs: you decide how much to contribute per employee and can vary contributions by objective classes (for example, full-time vs. part-time), consistent with federal rules.
- Tax advantages: employer reimbursements that meet CHOICE Arrangements requirements are generally tax-deductible business expenses and not subject to payroll tax.
- Easier administration: instead of choosing and maintaining a group plan, you reimburse employees for qualified individual plans that they select themselves.
- Scalability: employers of any size with at least one W‑2 employee can establish CHOICE Arrangements.
Key benefits for employees
- More Options: employees shop for and enroll in individual health insurance (on HealthCare.gov or through state-based marketplaces or private carriers) that meets minimum federal standards, then receive reimbursements through the CHOICE Arrangements.
- Portability: employees’ coverage is not tied to one group plan; if they change jobs, they may be able to keep their individual plan, subject to plan rules.
- Tax-free reimbursements: qualified reimbursements through CHOICE Arrangements are generally not treated as taxable income to employees.
Basic federal requirements to know
- Employees must be enrolled in qualifying individual coverage (or Medicare in some cases) to receive reimbursements under CHOICE Arrangements.
- Employers must provide a written notice to eligible employees before the start of each plan year explaining the CHOICE Arrangements terms and interaction with marketplace coverage.
- Affordability determinations use a benchmark plan (such as the lowest-cost silver plan) for employees’ location, consistent with IRS guidance.
- CHOICE Arrangements: an employer-funded arrangement that reimburses employees for individual health insurance premiums and certain medical expenses, instead of providing a traditional group plan
- Qualified individual coverage: individual health insurance that meets federal standards for essential benefits, preventive services, and limits on cost sharing; employees must enroll in such coverage (or Medicare, where allowed) to use CHOICE Arrangements
- Affordability (CHOICE Arrangements context): a measure used to determine whether a CHOICE Arrangement offer is considered affordable for purposes like employer shared responsibility, based on benchmark plan premiums for the employee’s location
- HRA (Health Reimbursement Arrangement): a broader term for employer-funded Arrangements that reimburse employees for medical expenses; CHOICE Arrangements is a specific type tied to individual coverage
- Model notice: a standard notice template published by the Department of Labor to help employers explain CHOICE Arrangements to employees, including how the benefit interacts with marketplace coverage and premium tax credits