CHOICE Act

Bill Summary

What the CHOICE Act does, in plain terms, is take the “individual coverage HRA” (ICHRA) model that federal agencies created in 2019 and write it into the tax code with some updates, guardrails, and incentives for employers—especially small employers—to use it. An HRA is an employer-funded account that reimburses workers, up to a set dollar amount, for qualified medical expenses. In a CHOICE arrangement, those reimbursements are only allowed when the employee is actually enrolled in individual market health insurance (an ACA-compliant plan, not just excepted benefits) or Medicare A/B or Medicare Advantage. The bill deems these arrangements as satisfying several ACA market-reform requirements when integrated with individual coverage and sets out rules for who can be offered the benefit, how much employers can vary contributions, how enrollment is verified, and what notices workers must receive.

Key mechanics:

- Codifies CHOICE HRAs: The bill defines a “custom health option and individual care expense arrangement” as an employer-funded HRA with a fixed annual cap that can reimburse only while the participant has individual coverage or Medicare. It explicitly treats these arrangements as compliant with certain ACA protections (non-discrimination by health status, no lifetime/annual dollar limits on essential benefits, preventive services, and the SBC requirement) for purposes of the tax code’s cross-references to the ACA.

- Nondiscrimination and classes: Employers that offer a CHOICE HRA to a “specified class” must offer it on the same terms to everyone in that class and, generally, may not offer another group health plan to people in that class (with a notable exception allowing a small-group insured plan subject to ACA community rating to be offered alongside). Permissible classes mirror the 2019 ICHRA regs: full-time, part-time, salaried, hourly, rating area, collectively bargained unit, those in a waiting period, seasonal, certain nonresident aliens, some temporary-placement workers, same hire-date ranges, or other classes the Treasury may approve. Employers can combine classes. Employers may vary the annual HRA cap by family size and by age—but the age-based variation can’t exceed a 3:1 ratio, paralleling ACA age rating.

- Substantiation and notice: Employers must have reasonable procedures to verify that employees (and dependents) are actually enrolled in eligible individual/Medicare coverage and must substantiate reimbursement claims. Written notice of rights and obligations must generally go out at least 60 days before the plan year, with special timing rules for mid-year eligibles and newly formed employers.

- W-2 reporting: Employers must report the total amount of “permitted benefits” under a CHOICE arrangement on the employee’s Form W‑2, increasing transparency about the value of the benefit.

- Cafeteria plans for Exchange premiums: Today, employees generally cannot pay for ACA Exchange plans with pre-tax payroll dollars. This bill creates a narrow carve-out: employees who are in a CHOICE arrangement may use a Section 125 cafeteria plan to pay Exchange premiums pre-tax. This is a significant shift that lowers out-of-pocket costs for many middle- and higher-income workers who aren’t using premium tax credits (PTCs). Coordination rules with the PTCs will still matter; in general, pre-tax payment through a cafeteria plan and eligibility for PTCs don’t mix, so IRS guidance would be needed to operationalize the interaction under this new exception.

- Small-employer tax credit: To spur adoption, the bill creates a two-year general business credit for employers that are not “applicable large employers” under the ACA (typically, under 50 full-time equivalent workers). The credit equals $100 per month per enrolled employee in year one and $50 per month in year two (indexed after 2026). Crucially, the credit applies only if the CHOICE arrangement would make the employee “eligible for minimum essential coverage consisting of an eligible employer-sponsored plan” under Section 36B—that is, the HRA must be “affordable” under ACA affordability rules. That design discourages underfunded HRAs that would otherwise shift costs to public subsidies.

- Effective dates and regulatory alignment: The CHOICE HRA framework applies to plan years beginning after 12/31/2025; the cafeteria plan and credit provisions apply to tax years after 12/31/2025. The bill instructs Treasury, HHS, and Labor to harmonize existing 2019 rules with these statutory changes, and clarifies that references to CHOICE arrangements include ICHRAs for purposes of those rules.

Policy implications:

- This would likely expand the footprint of employer-funded, defined-contribution coverage and funnel more workers into the individual market, with employees choosing their own ACA-compliant plan. That could grow Exchange enrollment and portability, while reducing employer administrative burden.

- The cafeteria-plan change makes individual market coverage more tax-advantaged for workers in CHOICE arrangements, but it requires careful coordination with PTC eligibility to avoid confusion or inadvertent loss of subsidies for lower-income workers.

- The small-employer credit sweetens the deal for first-time adopters but is time-limited and conditioned on affordability, aiming to prevent cost-shifting to public subsidies.

- Allowing small-group insured plans to be offered alongside CHOICE HRAs within the same class is a notable departure from the 2019 framework and could create selection dynamics across options that regulators would need to monitor.

Overall, the bill solidifies and modestly expands the ICHRA model, adds a targeted incentive for small employers, and opens a path to pre-tax payment of Exchange premiums for workers offered a CHOICE HRA, with guardrails meant to limit discrimination and ensure affordability benchmarking.

Pros

Could increase coverage continuity and portability by letting workers take employer dollars to the individual market and choose ACA-compliant plans with essential health benefits and preexisting-condition protections.
Codifies guardrails: same-terms requirement within classes, capped age variation (3:1), substantiation to ensure real coverage, and advance notice to workers, limiting cherry-picking and surprise changes.
W-2 reporting adds transparency so employees understand the value of the employer’s contribution and can compare options more clearly.
The small-employer credit is conditioned on ACA affordability standards, discouraging inadequate contributions that would push workers onto public subsidies or leave them underinsured.
Permitting pre-tax payment of Exchange premiums for CHOICE participants lowers net costs for many moderate-income workers who do not qualify for premium tax credits.
Explicit inclusion of collectively bargained units as a permissible class supports labor-management flexibility without forcing changes to union-negotiated coverage immediately.
By channeling more people into the regulated individual market, the bill could deepen risk pools and stabilize Exchanges, especially in regions where employer coverage is sparse.

Expands choice and consumer control by letting employees pick the individual plan that fits their needs while using employer funds—portability over one-size-fits-all group plans.
Codifies the 2019 ICHRA flexibility in statute, providing certainty to employers and insulating a market-based reform from regulatory reversals.
Lightens the employer burden: a defined-contribution HRA model is simpler to budget for than managing a full group plan, particularly for small businesses.
Targets small business with a straightforward, time-limited tax credit to encourage adoption without creating a permanent entitlement; the affordability condition promotes responsible plan design.
Allows pre-tax payment for Exchange coverage for those in CHOICE arrangements, aligning tax treatment of individual and group coverage and reducing distortions.
Reasonable guardrails (class rules, 3:1 age variation, substantiation) combat gaming while preserving employer flexibility to tailor offerings to workforce realities (full-time vs. part-time, geography, seasonal, etc.).
Potential to reduce federal premium-subsidy spending if more workers are offered affordable employer arrangements and thus rely less on taxpayer-funded PTCs.

Cons

Risk of employer “dumping” from comprehensive group plans to fixed-dollar HRAs, shifting financial risk to workers if HRA funding doesn’t keep pace with premiums and out-of-pocket costs.
Lower-income employees may lose access to premium tax credits if the employer’s HRA is deemed “affordable” under formulas that don’t reflect their real financial strain, potentially making coverage less affordable than under today’s enhanced PTCs.
Allowing small-group plans to be offered alongside CHOICE HRAs within the same employee class may invite selection effects (sicker workers stay in the group plan, healthier ones opt for individual coverage), complicating market dynamics and potentially raising premiums somewhere in the system.
Age-based contribution variation up to 3:1, while aligned with ACA rating, can still leave older workers facing higher net costs unless employer dollars scale sufficiently.
The cafeteria-plan carve-out could create confusion: workers might take pre-tax payroll deductions and inadvertently forfeit premium tax credits they would otherwise receive; clear, enforceable guardrails are not spelled out in the statute.
Time-limited small-employer credits may subsidize a migration away from traditional ESI without ensuring long-term adequacy of employer contributions, and they reduce federal revenue.
Treating CHOICE HRAs as meeting certain ACA requirements by statute may be seen as weakening the spirit of benefit mandates for the account portion, placing more compliance burden on the individual plan rather than the employer-sponsored benefit.

Adds new statutory rules, notices, and IRS/HHS/Labor oversight—some conservatives may see this as further entrenching the ACA framework rather than streamlining it.
The small-employer credit, while targeted, is another federal incentive that reduces revenue and complicates the code; some may prefer broader tax reform or fewer targeted credits.
Conditioning the credit on ACA affordability standards ties employers to complex government formulas and Exchange benchmarking that can be administratively burdensome.
Allowing a small-group plan to coexist with a CHOICE HRA within the same class could create selection dynamics and operational complexity for employers and carriers.
The credit is modest and only lasts two years; it may be insufficient to drive adoption or may distort choices temporarily rather than sustainably reshaping the market.
By explicitly integrating with ACA Exchanges and preserving many ACA guardrails, the bill may be criticized by those who favor more sweeping deregulation or a fuller shift to HSAs and short-term or alternative coverage options.

This bill was introduced on September 18, 2025 in the Senate.

View on Congress.gov:
https://www.congress.gov/bill/119th-congress/senate-bill/2875

Sep 18, 2025

Read twice and referred to the Committee on Finance.
Sep 18, 2025

Introduced in Senate

10000

This bill has not yet been enacted into law.

Bill Summary

Pros

Cons

Introduction

History

Read twice and referred to the Committee on Finance.

Introduced in Senate

Laws Enacted

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