What is a CHOICE Arrangement (aka ICHRA)? Understanding the Custom Health Option and Individual Care Expense Arrangement
Key Takeaways
- A CHOICE Arrangement (formerly ICHRA) is a health benefit that lets employers set a tax-free healthcare budget while employees choose their own individual insurance plan. Small businesses get predictable costs, and employees get coverage that fits their needs.
- Unlike traditional group health insurance, a CHOICE Arrangement has no minimum participation requirements, no annual contribution caps, and no restrictions on business size. Employers can tailor allowances by employee class, location, age, and family status.
- Individual plans come with trade-offs employees should know about before they enroll, including fewer PPO options, plan menus that vary by county, and more of the shopping falling on each employee.
- The average family premium for employer-sponsored health insurance reached $26,993 in 2025, which is pushing small business owners to look for sustainable alternatives.
Understanding the Basics of a CHOICE Arrangement
If you run a small business, you already know that offering health benefits is one of the most effective ways to attract and keep good employees. You also know how expensive and complicated traditional group health insurance can be. The CHOICE Arrangement was designed to solve that problem.
A Custom Health Option and Individual Care Expense (CHOICE) Arrangement is an employer-funded health benefit that reimburses employees tax-free for individual health insurance premiums and other qualified medical expenses. Instead of selecting and managing one group plan for everyone, the employer sets a monthly allowance. Each employee uses that allowance to buy their own coverage, either directly from an insurance carrier or through the ACA Marketplace.
The benefit used to be called the Individual Coverage Health Reimbursement Arrangement, or ICHRA. On September 3, 2026, CMS and the SBA renamed it the CHOICE Arrangement. The rules didn’t change, so everything below applies whichever name your broker or plan documents use.
How Does a CHOICE Arrangement Work?
The mechanics of a CHOICE Arrangement are straightforward, and that simplicity is a big part of its appeal for small businesses.
The employer sets a budget.
You decide how much you want to contribute toward each employee’s healthcare. This amount can vary by employee class, so you can set different allowances for full-time and part-time workers, salaried and hourly employees, or employees in different locations. There are no minimum or maximum contribution requirements, which gives you full control over your investment.
Employees choose their own plans.
With the employer’s allowance in hand, each employee selects an individual health insurance plan that works for their situation. Employees can usually choose from a broader set of plans than a typical group offering includes.
Contributions are tax-advantaged.
Employees can receive funds through reimbursement or a prepaid virtual debit card to cover premiums and qualified medical expenses. Reimbursements are tax-free for the employee and tax-deductible for the employer.
How a CHOICE Arrangement Differs from Traditional Group Health Insurance
If you’ve shopped for group health insurance as a small business owner, you know the cycle. You get a limited set of plan options, annual renewals with unpredictable premium increases, and a hard time finding one plan that works for employees with very different healthcare needs.
A CHOICE Arrangement changes that dynamic in several important ways.
With a traditional group plan, the employer selects one or a few insurance plans and offers them to all eligible employees. The group’s claims experience drives what the employer pays. If the group has a bad year medically, renewal rates can spike. For small businesses, this volatility can be especially painful because there are fewer people to spread the risk across.
With a CHOICE Arrangement, the employer moves to a defined contribution model. You set the budget, and that number doesn’t change based on how your employees use their coverage. There are no surprise renewals and no carrier negotiations. Employees buy individual market plans, so the risk sits with the insurance carrier instead of on the employer’s balance sheet.
Participation requirements are another key difference. Traditional group plans typically require a certain percentage of eligible employees to enroll before the plan can be offered. A CHOICE Arrangement has no minimum participation requirements. Businesses of any size can offer health benefits, even if only a handful of employees choose to enroll.
For employees, the biggest change is choice. Rather than picking from two or three options selected by their employer, employees can choose from the ACA-compliant individual plans available in their area. They can select the carrier, the doctor network, and the level of coverage that makes the most sense for their health and their family.
Why Small Business Owners Are Turning to the CHOICE Arrangement
The growth numbers tell a clear story. The HRA Council’s 2026 report, now in its fifth year of tracking the market, found that CHOICE Arrangement enrollment doubled year over year and passed 500,000 employees at the start of 2026.
Retention is high, too. The same report found that approximately 92% of employers who offered an HRA in 2024 continued doing so in 2025, a sign that businesses stick with the model once they’ve tried it. Decisely’s breakdown of the HRA Council report covers what that growth means for small employers.
Several factors are driving this momentum for small businesses specifically.
Rising group plan costs are unsustainable for many small employers. The KFF 2025 Employer Health Benefits Survey found that the average annual premium for family coverage reached $26,993. Employees at small firms faced average deductibles of $2,631 for single coverage, compared to $1,670 at larger firms. Small businesses are paying more and getting less. A CHOICE Arrangement offers a way to provide meaningful coverage without absorbing those escalating costs. For a closer look at what to budget next year, see Decisely’s guide to small business healthcare costs in 2027.
Budget predictability matters when margins are tight. With a CHOICE Arrangement, you know exactly what you’re spending on healthcare benefits every month. There’s no annual renewal negotiation and no risk of a steep rate increase because one employee had a high-cost claim. You set the allowance, and that’s your cost.
Diverse workforces need diverse coverage. Small businesses often employ people at different life stages with very different healthcare priorities. A CHOICE Arrangement lets each employee select coverage that fits their needs instead of placing everyone in the same plan.
Limitations Employees Face When Choosing Individual Plans Over Group Coverage
A CHOICE Arrangement moves the plan decision from the employer to each employee. That gives people more say over their coverage. It also means some features employees are used to in group coverage work differently in the individual market. None of these rule a CHOICE Arrangement out, and most can be addressed through plan design and enrollment support. Employees make better choices when they know about them before enrollment opens.
Fewer PPO options and narrower networks
Most individual market plans are HMOs or EPOs, which generally cover care only from providers in the plan’s network, except in an emergency. PPOs, which cover out-of-network care at an added cost, are less common.
A 2025 analysis from the Robert Wood Johnson Foundation found that only 14% of 2025 Marketplace plans were PPOs, compared to about 40% of small group plans. Off-Marketplace individual plans had more, at 23%. The same analysis found that 37% of U.S. residents live in a state with no PPO plans on the Marketplace. Employees who want to keep a specific doctor or specialist should check each plan’s provider directory before they enroll.
Plan choices depend on where employees live
Individual plans are sold by location, so two employees at the same company can see very different options. KFF found that 165 counties have only one Marketplace insurer in 2026, up from 93 in 2025. The average number of insurers per state dropped from 9.6 to 9.0 over the same period.
An employee in a rural county may have a much shorter plan list than a coworker in a metro area. Networks also tend to be local. Employees who travel often, or who have a dependent living in another state, should look at how a plan handles care outside its service area. Employers can offset some of these differences by setting allowances by geographic rating area.
Older employees pay more for the same plan
Individual market premiums are age-rated. According to HealthCare.gov, premiums “can be up to 3 times higher for older people than for younger ones.” A flat allowance covers more of a 25-year-old’s premium than a 60-year-old’s. CHOICE Arrangement rules let employers vary allowances by age within a class, up to the same 3-to-1 ratio, so contributions can track that difference.
More of the enrollment work falls on each employee
With group coverage, the employer picks the plans and runs enrollment. With a CHOICE Arrangement, each employee compares plans, enrolls during their enrollment window, and keeps their coverage active to stay eligible for reimbursement. Under the federal rules, family members also need their own individual coverage (or Medicare) for their expenses to be reimbursed. Depending on how the arrangement is set up, some employees may pay premiums first and wait for reimbursement. For employees who have never bought their own insurance, this is where plan-selection support makes the biggest difference.
Costs above the allowance and tax credits
If a plan costs more than the allowance, the employee pays the difference. Employers can add a Section 125 cafeteria plan so employees can pay that remainder pre-tax, but only for plans bought off the Marketplace. The tax code doesn’t allow pre-tax salary reductions for Marketplace coverage, a restriction noted in the same 2019 federal rules.
Employees also can’t combine a CHOICE Arrangement allowance with an ACA premium tax credit. If the offer counts as affordable, the employee loses access to the credit even if they opt out. The FAQ below explains how affordability is measured.
Each of these trade-offs is manageable, but together they’re why the choice between group coverage and a CHOICE Arrangement depends on the team. A workforce concentrated in one metro area with established doctor relationships may lean one way, and a spread-out team with varied needs may lean the other.
Who Is Eligible for a CHOICE Arrangement?
A CHOICE Arrangement is flexible around eligibility. Employers can define employee classes and offer different allowance amounts to different groups. The IRS recognizes several employee classes for CHOICE Arrangement purposes, including full-time employees, part-time employees, seasonal workers, salaried employees, hourly employees, and employees in different geographic rating areas.
Employers can also distinguish between employees who have and haven’t satisfied a waiting period, as well as temporary staffing firm employees. This flexibility is especially valuable for industries with mixed workforces, such as hospitality, retail, staffing, healthcare, and food service.
A few important rules apply. Employers can’t offer an employee a choice between a CHOICE Arrangement and a traditional group health plan. If you offer a CHOICE Arrangement to a class of employees, everyone in that class must be offered the CHOICE Arrangement. Employees can decline the offer if they prefer to keep other coverage or claim ACA premium tax credits on their own. Whether they can claim those credits depends on whether the offer is affordable.
CHOICE Arrangement vs. QSEHRA: What’s the Difference?
If you’ve been researching health reimbursement options, you’ve likely come across the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). Both are standalone HRA options that let employers reimburse employees for individual health insurance. They differ in a few important ways.
QSEHRA is designed for employers with fewer than 50 full-time equivalent employees who don’t already offer a group health plan. It comes with annual contribution limits set by the IRS, and employers can only vary allowances based on age and family status.
A CHOICE Arrangement is available to employers of any size, has no annual contribution caps, and lets employers tailor allowances by a wider range of employee classes. For small business owners who want more control over how they structure benefits, a CHOICE Arrangement offers a more flexible framework. QSEHRA can still be a strong fit for very small businesses that want a simple option with lower administrative overhead.
Getting Started with a CHOICE Arrangement
Setting up a CHOICE Arrangement involves a few key steps, and the process is manageable with the right partner.
You’ll start by establishing the CHOICE Arrangement plan document, which outlines the terms of the arrangement, including employee classes, allowance amounts, and reimbursement procedures. You’ll also need to give eligible employees written notice at least 90 days before the start of each plan year. That gives them time to evaluate their options and enroll in individual coverage.
From there, employees select their plans and reimbursements begin. Many employers work with a benefits platform or broker that specializes in CHOICE Arrangement administration to handle the administrative details, compliance requirements, and employee support.
Is a CHOICE Arrangement Right for Your Business?
A CHOICE Arrangement is a strong fit for small businesses that want to offer competitive health benefits without the cost swings and administrative burden of traditional group insurance. It works especially well for employers with geographically dispersed teams, high-turnover workforces, or employees with widely varying healthcare needs.
A group plan may be the better fit for a team in one location that wants broad PPO access or prefers to have enrollment handled for them. Many businesses use both, offering a group plan to one employee class and a CHOICE Arrangement to another.
If you’re spending more on group health insurance every year, or you’ve never offered health benefits because group plans felt out of reach, a CHOICE Arrangement is worth a serious look.
At Decisely, we help small businesses through every step of the CHOICE Arrangement process, from plan design and compliance to employee onboarding and personalized plan selection support. Our platform makes it easy to set your budget, manage reimbursements, and give your team access to the coverage they need, all in one place.
Ready to see whether a CHOICE Arrangement, a group plan, or a mix of both fits your team? Talk to the Decisely team about designing a benefits strategy that works for you and your employees.
Frequently Asked Questions
- Is a CHOICE Arrangement the same as an ICHRA?
Yes. On September 3, 2026, CMS and the SBA renamed the Individual Coverage Health Reimbursement Arrangement (ICHRA) the CHOICE Arrangement. The rules carried over unchanged, so a business that already offers an ICHRA keeps the same plan design, employee classes, and compliance obligations under the new name.
- Can business owners participate in a CHOICE Arrangement?
It depends on how the business is structured. Owners of a C corporation who work in the business are W-2 employees and can participate like anyone else on the team. Sole proprietors, partners, and shareholders who own more than 2% of an S corporation are treated as self-employed for tax purposes, so they can’t participate in their own company’s CHOICE Arrangement, although their W-2 employees still can.
- Can employees sign up for individual coverage outside open enrollment?
Yes. A CHOICE Arrangement offer opens a special enrollment period for individual health insurance. According to HealthCare.gov, employees generally enroll during the 60 days before their arrangement starts. New hires who become eligible mid-year can enroll up to 60 days before or after their start date. The required 90-day notice gives employees time to compare plans before that window opens.
- Can employees still contribute to a health savings account (HSA)?
They can if two conditions are met. The employee has to enroll in an HSA-eligible high-deductible health plan, and the CHOICE Arrangement has to be set up to reimburse premiums only. An arrangement that also reimburses other medical expenses, such as copays or prescriptions, generally makes the employee ineligible to contribute to an HSA under IRS Publication 969.
- How does a CHOICE Arrangement affect premium tax credits?
An employee can’t use a CHOICE Arrangement allowance and an ACA premium tax credit at the same time. If the arrangement counts as affordable, the employee can’t claim the tax credit even if they opt out. For 2026, it’s affordable when the employee’s remaining monthly cost for the lowest-cost self-only silver plan in their area, after the allowance, is no more than 9.96% of one-twelfth of their household income, the threshold set in IRS Rev. Proc. 2025-25. If the arrangement is unaffordable, the employee can opt out and claim the credit instead, as long as they otherwise qualify.
About the Author — Jess Southwell
Jess Southwell is the SVP, GM of Amazon and CHOICE Arrangement at Decisely. With over 15 years of experience, she is a healthcare and technology leader focused on building and scaling client-centered teams and solutions in complex, highly regulated environments. Her background spans product, operations, and client experience, with expertise in health tech, benefits strategy, and consulting. At Decisely, Jess leads the Amazon client partnership, and the CHOICE Arrangement (formerly ICHRA) platform strategy, aligning product development, client success, and service delivery to create seamless, scalable solutions. Her work focuses on improving processes, integrating systems, and helping organizations deliver clearer, more accessible benefits experiences.
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