In September 2026, CMS and the SBA renamed the ICHRA the CHOICE Arrangement. The rules haven't changed, so you'll still see both names used.
Tax season is a good time to ask whether your health benefits are working as hard as your money could be.
Most small business owners know they can deduct health insurance premiums. What few realize is that a CHOICE Arrangement — formerly called an ICHRA (Individual Coverage Health Reimbursement Arrangement) — may offer more tax advantages than a traditional group plan, with added flexibility.
Here's a plain-language breakdown of how the tax treatment works.
What Is a CHOICE Arrangement?
Instead of buying a group health plan and choosing a single option for all your employees, a CHOICE Arrangement lets you set a monthly dollar allowance per employee. They use that money to buy their own individual health insurance — whatever plan fits their situation and their budget. You reimburse the premium. You pay exactly what you've budgeted, nothing more.
The arrangement was introduced in 2020 and has no annual contribution caps, no minimum employer size, and no maximum employer size.
The Tax Advantages
1. Your Contributions Are Fully Deductible
Every dollar you contribute through a CHOICE Arrangement is a qualified business expense — fully deductible, just like traditional group premiums. If you're contributing $500/month across 15 employees, that's $90,000 in deductible costs per year that directly reduces your taxable income.
2. No Payroll Taxes on Reimbursements
This is the one that surprises most employers. CHOICE Arrangement reimbursements aren't wages, so they aren't subject to FICA or FUTA. That means you save your share of payroll taxes (roughly 7.65%) on every dollar you contribute, and your employees receive the reimbursement completely income-tax free.
Compare that to a taxable cash stipend. If you give an employee $500/month to buy their own coverage, they might keep $350-$375 after federal and state taxes. The same $500 through a CHOICE Arrangement? They keep all of it.
3. You Only Pay for What Gets Used
With a group plan, you're paying your premium whether employees use the plan or not. With a CHOICE Arrangement, if an employee finds a plan that costs less than your monthly allowance, the unused portion stays with you. Younger or healthier employees who choose lower-cost plans don't cost you the full allowance. That can add up over the course of a year, especially in businesses with a mix of ages.
4. ACA Compliance Protection for Larger Employers
If you have 50 or more full-time equivalent employees, you're an Applicable Large Employer (ALE) and subject to the ACA employer mandate. Failing to offer affordable, minimum-value coverage can mean significant IRS penalties.
A properly structured CHOICE Arrangement satisfies the employer mandate. For 2026, the IRS affordability threshold is 9.96% of household income. If your contribution meets that standard, you're covered — no penalties.
5. You Can Tailor Contributions by Employee Class
A CHOICE Arrangement allows different contribution amounts for different classes of employees — full-time vs. part-time, salaried vs. hourly, employees in different states, and more. That means you can direct more of your benefit dollars toward the employees you most need to retain, without being locked into a one-size-fits-all contribution.
For businesses with employees spread across North Carolina and other states — or remote workers in different markets — this flexibility is especially useful. A group plan often can't cover everyone. A CHOICE Arrangement can.
One Thing to Keep in Mind
To maintain the tax-advantaged status of your CHOICE Arrangement, proper plan documentation and administration are required. Employees need to verify their qualifying coverage, and reimbursements must be processed through a compliant process. That's what a CHOICE Arrangement administrator like Zizzl handles—so you don't have to manage this yourself.
Is a CHOICE Arrangement Right for Your Business?
A CHOICE Arrangement isn't the right fit for every employer. If your current group plan has strong employee satisfaction, stable premiums, and good catastrophic protection, staying put may be the right call. But if you're dealing with rising renewal costs, employees in multiple states, or unpredictable HRA claims, a CHOICE Arrangement is worth a close look.
The best way to know is to run a side-by-side cost comparison specific to your group — including out-of-pocket exposure, not just premiums.
FAQs
Is a CHOICE Arrangement tax-deductible? Yes. Every dollar you contribute through a CHOICE Arrangement is a qualified business expense, fully deductible — just like traditional group health premiums.
Do employees pay income tax on CHOICE Arrangement reimbursements? No. Reimbursements are completely income-tax free. Compare that to a cash stipend, where employees lose 25-30% to federal and state taxes before they ever buy a plan.
Does the employer pay payroll taxes on CHOICE Arrangement contributions? No. Because CHOICE Arrangement reimbursements aren't considered wages, they're exempt from FICA and FUTA. You save roughly 7.65% in employer payroll taxes on every dollar you contribute.
What happens if an employee doesn't use their full CHOICE Arrangement allowance? The unused amount stays with you. Unlike a group plan, where you pay the same premium regardless of utilization, unspent CHOICE Arrangement funds flow back into your business.
Does a CHOICE Arrangement satisfy the ACA employer mandate for larger employers? Yes, if structured correctly. For 2026, your contribution needs to meet the IRS affordability threshold — set at 9.96% of household income. A properly designed CHOICE Arrangement protects you from Section 4980H penalties.
Can I offer different CHOICE Arrangement amounts to different employees? Yes. A CHOICE Arrangement allows you to set different contribution levels by employee class — full-time vs. part-time, salaried vs. hourly, or by state. You're not locked into one amount for everyone.
