This bill amends the Internal Revenue Code to recognize a new form of employer-funded health reimbursement arrangement — labeled a “custom health option and individual care expense arrangement” (informally, a CHOICE arrangement) — as satisfying certain group‑health-plan and Public Health Service Act requirements when the HRA is integrated with individual market coverage or Medicare. It lays out design guardrails (nondiscrimination rules, substantiation and notice requirements), requires W‑2 reporting of total permitted benefits, and directs agencies to adjust existing HRA regulations to conform.
Separately, the bill creates a limited refundable employer tax credit for non-applicable-large-employers who establish a CHOICE arrangement ($100 per enrolled employee per month in year one and $50 per month in year two, with inflation adjustments), and allows CHOICE participants to purchase Exchange coverage through a cafeteria plan. Effective dates apply to plan years and taxable years beginning after December 31, 2025.
At a Glance
What It Does
The bill amends IRC section 9815(b) to treat specified employer HRAs integrated with individual insurance or Medicare as meeting section 9802 and PHSA requirements. It prescribes nondiscrimination, substantiation, and 60‑day pre‑plan-year notice rules, adds W‑2 reporting of permitted HRA benefits, and creates a two‑year employer credit for non‑ALEs.
Who It Affects
Employers that fund HRAs and want to pair them with individual market coverage (including small and mid‑sized employers), employees who use individual market plans or Medicare and receive employer reimbursements, individual market issuers and brokers, and tax/compliance professionals responsible for W‑2 reporting and claiming the new credit.
Why It Matters
The bill legalizes and standardizes a pathway for employers to steer employees into individual market coverage supported by employer dollars while creating tax incentives for non‑large employers. That shifts compliance work from group‑insurance underwriting to benefit design, alters reporting duties, and has consequences for risk pools and premium calculations in the individual market.
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What This Bill Actually Does
The bill creates a statutorily defined HRA model — called a custom health option and individual care expense arrangement — that employers may fund solely with employer contributions to reimburse medical care up to a fixed dollar cap and only for periods when the participant is enrolled in individual market coverage (not excepted benefits) or Medicare. By directing that these arrangements be ‘‘treated as meeting’’ section 9802 and key PHSA requirements (sections 2705, 2711, 2713, 2715), the bill removes a tax‑law barrier that otherwise could prevent such HRAs from being treated as compliant group health plans.
Design constraints are layered onto the definition. Employers must offer the arrangement on equal terms within any designated employee class and must not offer another non‑excepted group health plan to employees in that class (with narrow exceptions for small‑group coverage).
The statute lists permissible classes (full‑time, part‑time, salaried, rating area, collective bargaining units, etc.) and allows age‑ and dependent‑based dollar variations within limits (age‑banding limited to 300% of the lowest dollar cap). Employers must have reasonable procedures to substantiate that participants and dependents are enrolled in qualifying coverage at the start of the plan year and remain enrolled when claiming reimbursements.
They must also provide a written notice to eligible employees at least 60 days before the plan year (with rules for later hires and new employers).The bill adds a W‑2 reporting line: employers must show the total amount of permitted benefits under the CHOICE arrangement for each enrolled individual. It also amends cafeteria plan rules to let CHOICE participants purchase Exchange coverage through pre‑tax cafeteria plan payroll mechanisms.
Finally, it gives non‑applicable‑large employers a two‑year credit: $100 per employee per month during the first year the employer establishes a CHOICE arrangement and $50 per month in the second year, subject to inflation indexing and standard clerical integration into the general business credit and AMT rules. Agencies are directed to update existing HRA regulations to conform to these changes, and the statutory changes apply to plan years or taxable years beginning after December 31, 2025.
The Five Things You Need to Know
The bill defines a CHOICE arrangement as an employer‑funded HRA that reimburses medical care only when the enrollee is covered by individual market insurance (other than excepted benefits) or Medicare.
Employers must give eligible employees written notice at least 60 days before the plan year explaining rights and obligations under the arrangement, with special timing rules for late hires and new employers.
Employers may vary maximum reimbursement amounts by dependent count and age, but any age‑based increase cannot exceed 300% of the lowest dollar cap for that class.
The bill requires employers to report on Form W‑2 the total permitted benefits for each enrolled individual under a CHOICE arrangement.
Non‑applicable‑large‑employers qualify for a CHOICE arrangement credit equal to $100 per enrolled employee per month in year one and $50 per month in year two; the credit is part of the general business credit and is indexed after 2026.
Section-by-Section Breakdown
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Creates CHOICE arrangement definition and makes HRAs integrated with individual coverage compliant
This provision inserts a new paragraph into IRC §9815(b) that defines a ‘‘custom health option and individual care expense arrangement’’ and directs that such arrangements be treated as satisfying section 9802 and specified PHSA requirements. Practically, that legal recognition is the core change: it makes an employer‑funded HRA that only reimburses costs when the worker carries individual coverage (or Medicare) subject to the statutory guardrails rather than being automatically excluded as a non‑compliant arrangement. The clause thus opens a tax‑law route for employers to offer reimbursement support for individual market coverage while anchoring design standards in statute.
Nondiscrimination, permitted employee classes, and permitted benefit variation
The bill requires the arrangement to be offered on the same terms to all employees within a designated class and bars offering another non‑excepted group health plan to that same class (with a carve‑out for small‑group insured plans). It enumerates acceptable classes (full/part‑time, salaried, rating area, bargaining units, seasonal, etc.) and permits employers to mix classes prospectively. Importantly, benefit caps may increase with dependents and age, but age increases are capped at 300% of the lowest amount — a mechanism that allows limited age‑rating while capping extreme banding.
Documentation and pre‑enrollment notice requirements
Employers must use ‘‘reasonable procedures’’ to confirm that participants (and dependents) are enrolled in qualifying individual or Medicare coverage at the start of the HRA plan year and to verify coverage at the time of reimbursement requests. The bill sets a 60‑day pre‑plan‑year written notice requirement describing rights and obligations, prescribes content by future regulation, and creates alternate timing for employees who become eligible after the notice or for very new employers. These rules build enforceable compliance steps that benefit administrators and regulators but add operational tasks for employers and vendors.
W‑2 reporting and regulatory conformity
The bill amends IRC §6051(a) to require employers to report on employees’ Form W‑2 the total amount of permitted benefits under the CHOICE arrangement. It also instructs Treasury, HHS, and Labor to amend the June 20, 2019 HRA rules where needed to conform—while saying the statutory change should not be read to alter the interpretation of those prior rules except as explicitly provided. The reporting line creates new payroll reporting work and provides a paper trail for tax and benefits enforcement.
Cafeteria plan exception to allow Exchange purchases
Section 3 adds a targeted exception to the cafeteria plan restrictions so that employees participating in a CHOICE arrangement may purchase Exchange coverage through a cafeteria plan. That change relaxes the historical barrier where Exchange premiums were generally ineligible for pre‑tax cafeteria plan treatment, and it standardizes the tax treatment of employer dollars used to buy individual coverage through payroll pretax mechanisms.
Two‑year employer credit for non‑ALEs and tax integration
This section creates a new tax credit (IRC §45BB) for eligible employers (those that are not applicable large employers) equal to $100 per enrolled employee per month in the first one‑year credit period and $50 per month in the second year. The credit is added to the general business credit, allowed against the AMT, subject to inflation indexing after 2026, and only applies during the first two one‑year periods after an employer first establishes a CHOICE arrangement. The provision is designed to incentivize smaller employers to adopt CHOICE arrangements but limits the window and employer size to restrict recurring Treasury cost.
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Explore Healthcare in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Small and mid‑sized employers that are not applicable large employers — they gain a statutory pathway to fund employees' individual coverage with predictable design rules and a two‑year tax credit to offset initial setup and subsidy costs.
- Employees who prefer individual market plans or Medicare — they can receive employer reimbursements for premiums and out‑of‑pocket costs while keeping individual coverage and (under the bill) may buy Exchange coverage through a cafeteria plan.
- Brokers, insurers, and third‑party administrators focused on the individual market — they gain potential new distribution channels and administration business as employers shift to HRAs tied to individual policies.
- Payroll and benefits compliance vendors — they benefit from new demand for W‑2 reporting, notice delivery, substantiation workflows, and cafeteria plan integration tools.
Who Bears the Cost
- Employers that adopt CHOICE arrangements — they face new administrative burdens (eligibility classes, substantiation, notices, W‑2 reporting) and must fund reimbursements and initial setup, with only a time‑limited credit to offset costs.
- Federal Treasury — the two‑year credit and potential shift of employer spending into tax‑favored HRAs will reduce tax receipts relative to fully taxable compensation, at least in the short term.
- Individual market insurers and risk pools — while some insurers may gain customers, the individual market could see selection effects if healthier employer‑linked populations are steered into Exchange plans with employer subsidies, potentially raising premiums for others.
- Regulatory agencies (Treasury, CMS, DOL, IRS) — they must rewrite guidance, draft regulations addressing substantiation, nondiscrimination, and coordination with existing HRA rules, creating an implementation resource burden.
Key Issues
The Core Tension
The central dilemma: the bill expands employer flexibility to subsidize individual coverage — a customer‑friendly and administratively light approach for some employers — but that flexibility risks shifting selection and subsidy dynamics in the individual market, creating enforcement and verification burdens and potential revenue loss; policymakers must balance enabling employer innovation against protecting market stability, subsidy integrity, and administrative clarity.
The bill resolves a legal barrier to employer‑funded HRAs tied to individual coverage by placing statutory recognition and guardrails around those arrangements. That clarity reduces legal risk for employers and vendors but shifts many practical questions into administrative processes.
The substantiation requirement — ‘‘reasonable procedures’’ to verify enrollment — leaves significant leeway to Treasury and HHS to define acceptable documentation; until regulations appear, plan sponsors will face uncertainty about what proofs suffice and how frequently to re‑verify coverage to avoid improper reimbursements.
The employer credit is explicitly limited to non‑ALE employers and to the first two one‑year periods after adoption, which targets the subsidy but raises questions about adoption dynamics: employers may race to adopt within the credit window, then reassess ongoing costs when the credit ends. Reporting the total permitted benefit on the W‑2 increases transparency but may also complicate employees’ eligibility for premium tax credits if the IRS treats reported amounts in coordination with Marketplace rules.
Agencies will need to provide clear rules tying CHOICE arrangement eligibility to minimum essential coverage tests for premium tax credit computations to avoid unintended loss of subsidies or double subsidization.
There is also a table of trade‑offs around market dynamics. Allowing employer dollars to buy or reimburse individual coverage makes employer contributions portable and flexible, but it alters who holds underwriting risk and how adverse selection might manifest.
If employers selectively design classes or offer arrangements to subgroups, individual market risk pools could skew; the statute’s class and nondiscrimination limits mitigate but do not eliminate those incentives. Finally, the mandate to conform the 2019 HRA rules means phased regulatory change across Treasury, HHS, and DOL, and the agencies will need to reconcile statutory language with prior administrative positions—an exercise that will affect many operational details not settled in the bill text.
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