This bill amends the Internal Revenue Code to create a new category of employer-funded health reimbursement arrangements — called “custom health option and individual care expense arrangements” (CHOICE arrangements) — that are lawful when they are expressly integrated with individual-market insurance or Medicare. The change treats those arrangements as meeting certain statutory requirements that previously applied to group plans, while adding employer obligations around nondiscrimination, substantiation, and written notice.
Beyond defining CHOICE arrangements, the bill requires year-end reporting of permitted benefit amounts on employees’ wage statements, provides an exception allowing participants to use cafeteria-plan rules to purchase exchange coverage, and establishes a two-year, per-employee tax credit for smaller employers that set up a CHOICE arrangement. Together, the provisions expand employer flexibility to subsidize individual coverage while creating new compliance and administrative duties for employers and regulators.
At a Glance
What It Does
Amends section 9815(b) of the Internal Revenue Code to treat CHOICE arrangements as satisfying specified Public Health Service Act requirements and section 9802. It defines the arrangement (an employer-funded HRA payable only when the employee is enrolled in individual-market coverage or Medicare) and sets rules on who may be offered the arrangement, required substantiation and notices, and required reporting.
Who It Affects
Employers of all sizes that want to fund employees’ individual-market coverage, brokers and carriers in the individual market, payroll and benefits administrators, and federal agencies (Treasury, HHS, DOL) responsible for regulatory alignment. Small and mid-sized employers are the intended primary targets for the tax credit.
Why It Matters
The change formally clears a path for employers to use HRAs to subsidize individual-market plans and Medicare coverage without being treated as providing group health insurance for key statutory purposes. That alters employer benefits design options and the interaction between employer contributions and individual-market subsidy rules.
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What This Bill Actually Does
The bill creates a new, named vehicle — the CHOICE arrangement — and instructs the tax code to treat that vehicle as if it meets certain group-plan statutory requirements even though the reimbursements are only payable when the employee carries individual-market insurance or Medicare. Lawmakers accomplish this by amending the tax code provision that governs account-based group health arrangements and by expressly listing the public-health sections the arrangement is deemed to satisfy.
Design rules are central. Employers may fund CHOICE arrangements and restrict participation to a defined “specified class” of employees (examples include full‑time vs. part‑time, salaried vs. non‑salaried, geographic rating areas, collective bargaining units, new hires, seasonal workers, or other classes the Secretary designates).
The bill sets nondiscrimination guardrails: an employer must offer the arrangement on the same terms to all employees within the designated class and generally may not also offer a different group health plan to that same class (with a narrow small-group market exception).To prevent misuse, the bill requires reasonable substantiation — procedures to verify that participants (and dependents) actually are enrolled in qualifying individual coverage at the start of the plan year and remain so when they request payments — and it imposes written-notice obligations tied to the plan year. It also instructs Treasury, HHS, and Labor to revise the regulatory framework so the new statutory treatment fits alongside existing rules for HRAs and account-based plans.Separately, the bill changes payroll reporting rules to make employers show permitted benefit amounts on employees’ wage statements, creates a cafeteria-plan carve-out so CHOICE participants can buy exchange coverage through pre-tax elections in certain cases, and adds a temporary employer tax credit aimed at non‑applicable-large employers to offset startup costs of offering CHOICE arrangements.
The statutory changes take effect for plan and 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 pays only for medical care provided while the participant is covered by individual-market health insurance (excluding excepted benefits) or Medicare (Parts A/B/C).
Employers must provide written notice to eligible employees at least 60 days before the plan year (with specific exceptions for late hires and new employers), and must maintain reasonable procedures to substantiate initial and ongoing enrollment in qualifying coverage.
The nondiscrimination rules permit employers to limit the arrangement to specified employee classes (a list includes full-time, part-time, salaried, geographic rating area, collective bargaining units, new hires, seasonal workers, and others); permitted dollar-amounts may vary by dependents and age but may not exceed 300% of the lowest maximum for age-based increases.
Section 6051 reporting is amended so employers must report on Form W‑2 the total amount of permitted benefits under a CHOICE arrangement for each enrolled individual.
The bill creates a two-year employer credit for eligible (non-applicable-large) employers: $100 per enrolled employee per month in year one and half that amount in year two (subject to cost-of-living adjustments and rounding rules); the credit is added to the general business credit and is available against the AMT.
Section-by-Section Breakdown
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Creates the CHOICE arrangement and deems it to meet certain PHSA and 9802 requirements
This is the statutory heart: the bill inserts a new paragraph into 9815(b) that instructs that a custom health option and individual care expense arrangement be treated as satisfying section 9802 and PHSA sections 2705, 2711, 2713, and 2715 for purposes of the tax code. Practically, that tells tax and benefits administrators that these HRAs will not automatically be treated as impermissible or conflicting with certain ACA market reforms. The provision also supplies the formal legal definition of the arrangement, including the requirement that reimbursements only occur while the participant is covered by qualifying individual-market coverage or Medicare.
Permits employer‑defined classes but imposes same‑terms rule and limits on offering other group plans
The bill allows employers to pick a ‘specified class’ of employees to offer the arrangement (enumerating many permitted classes) but requires that every employee within that class be offered the arrangement on the same terms. To avoid cherry-picking, the employer generally may not offer a different group health plan (other than account-based plans or excepted-benefit plans) to employees in that class. There are carve-outs for small-group union plans and procedures allowing employers to create subclasses for new hires.
Requires procedures to verify qualifying individual or Medicare enrollment
Rather than prescribing a single verification method, the statute requires the arrangement to adopt “reasonable procedures” to substantiate that participants and dependents are enrolled in qualifying coverage at the plan-year start and remain enrolled when filing reimbursement claims. That shifts much of the compliance design to plan sponsors and third‑party administrators while giving regulators authority to set standards by rule.
Mandates advance written notice to eligible employees
The arrangement must provide a written notice to eligible employees that is accurate, comprehensive, and understandable. The standard deadline is 60 days before the plan year, with special deadlines for employees who become newly eligible or for employers establishing the plan shortly before a plan year begins. The Secretary is tasked with defining required notice content by regulation.
Reporting, cafeteria-plan interaction, and employer credit
The bill amends W‑2 reporting rules to require inclusion of the total amount of permitted benefits under a CHOICE arrangement. It also amends section 125 so a cafeteria-plan prohibition does not block CHOICE participants from purchasing exchange coverage through a cafeteria plan. Finally, it creates a temporary, per-enrollee employer credit for smaller employers (with a two-year credit period and inflation adjustments), integrates that credit into the general business credit regime, and makes it available against the alternative minimum tax.
Directs agencies to align existing rules and sets an effective date
The bill preserves the 2019 HRA/account‑based plan rules to the extent they are not inconsistent with the new text, treats the new term as inclusive of previously defined individual coverage HRAs for those regulations, and directs Treasury, HHS, and Labor to modify their rules as necessary to conform. The effective date applies to plan years and taxable years beginning after December 31, 2025.
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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 — The CHOICE structure gives them a low-cost way to subsidize employee access to individual-market coverage (and Medicare) without taking on the regulatory and premium risk of a fully insured group health plan.
- Employees without access to employer group coverage — Workers at firms that set up CHOICE arrangements can receive employer-funded reimbursements that make individual-market insurance more affordable and may increase take-up of coverage.
- Individual-market insurers and brokers — Increased employer funding into individual plans can expand sales opportunities and broaden the pool of customers buying individual-market policies through employer‑linked channels.
Who Bears the Cost
- Federal budget/taxpayers — The two‑year employer credit and potential shifts in subsidy interactions carry fiscal costs; the bill creates new refundable/creditable tax expenditures and reporting burdens for administration.
- Employers and benefits administrators — They must design substantiation systems, produce the required notices, adapt payroll systems for the new W‑2 line, and manage the nondiscrimination constraints; smaller employers without sophisticated HR/payroll systems may incur outsized compliance costs.
- Individual-market risk pools and state marketplaces — If CHOICE arrangements attract healthier employees away from exchanges or change subsidy dynamics, carriers and marketplaces could face adverse selection, administrative complexity, or premium adjustments.
Key Issues
The Core Tension
The central tension is between expanding employer ability to fund individual coverage (increasing choice and employer cost-control) and preserving market integrity and consumer protections: making CHOICE arrangements flexible enough to be useful to employers risks creating selection effects, subsidy distortions, and compliance complexity that regulators will struggle to manage without precise, enforceable rules.
The bill navigates two opposing policy goals: expanding employer flexibility to subsidize coverage while maintaining consumer protections and market stability. The statutory definition tightly conditions reimbursements on concurrent individual-market or Medicare enrollment, but implementation will turn on the details regulators set for substantiation, acceptable verification methods, and acceptable notice content.
Those choices will determine whether CHOICE arrangements function as intended or become a vehicle for circumventing consumer protections (for example, by varying dollar caps to create de facto differential coverage).
A second challenge lies in integrating CHOICE arrangements with the premium-tax-credit regime and with state market rules. The statute requires that an employee’s eligibility for a CHOICE arrangement be treated in certain contexts as making them eligible for minimum essential coverage, which affects subsidy eligibility and employer shared-responsibility calculations — but the operational interaction between employer reimbursements, exchange eligibility, and premium tax credits is technically complex.
Treasury, HHS, and Labor will need to write conforming regulations that reconcile timing, verification, and how employer-funded reimbursements count toward affordability and MEC determinations. Those regulatory decisions create uncertainty for employers planning 2026 implementation.
Finally, the bill’s nondiscrimination framework allows employers to pick many different classes of employees, which raises a trade-off: permitting design flexibility to target workforce segments (for recruitment or cost reasons) versus protecting against selective offering that harms market risk pools or leaves subsets of employees without comparable group-plan options. Enforcement and clear rulemaking will be critical to prevent gaming while preserving legitimate use cases.
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