This employer guide to the CHOICE Arrangement (formerly ICHRA) explains how employers can reimburse employees for individual health insurance premiums and expenses, offering cost savings, budget control, flexibility, and tax benefits over traditional group plans.
Written by the licensed agents at Health Plans of NC, an insurance agency authorized by Blue Cross and Blue Shield of North Carolina (Blue Cross NC).
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.
In today's rapidly evolving business landscape, employers are grappling with escalating health insurance costs, diverse employee needs, and the pressure to maintain competitive benefits packages. Traditional group health plans, once the gold standard, are increasingly seen as rigid and unpredictable, with premiums rising by an average of 9% in 2025, pushing per-employee costs beyond $16,000. Meanwhile, some organizations are resorting to simple taxable stipends—adding extra income to employees' paychecks to offset health expenses. While this approach seems straightforward, it often falls short, burdened by taxes that diminish its value and potential compliance risks. Enter the CHOICE Arrangement—formerly called the Individual Coverage Health Reimbursement Arrangement (ICHRA)—a flexible, tax-advantaged alternative that's gaining traction. According to the HRA Council's 2026 report, adoption among applicable large employers more than doubled on average from 2025 to 2026, and lives covered by CHOICE Arrangements passed 500,000 at the start of 2026. This guide, inspired by insights from Zizzl Health, explores why a CHOICE Arrangement might be the smarter choice for your business, offering cost savings, employee satisfaction, and compliance peace of mind.
A CHOICE Arrangement—known until September 2026 as an ICHRA, pronounced "ik-rah," for Individual Coverage Health Reimbursement Arrangement—is a modern health benefit model that empowers employers to reimburse employees a fixed monthly amount for health insurance premiums and related out-of-pocket expenses. Employees purchase their own individual health insurance plans, and the reimbursement covers these costs tax-free. This setup provides the same tax benefits as a traditional group plan but with greater flexibility. Unlike group plans, where employers lock into a single carrier and set of options, a CHOICE Arrangement shifts the power to employees while allowing businesses to control contributions.
Introduced in 2020 under federal regulations, the ICHRA (now the CHOICE Arrangement) has evolved into a powerhouse for cost management. In 2025, with individual market premiums on the rise due to factors like inflation and expiring ACA subsidies, the CHOICE Arrangement stands out by tying reimbursements directly to qualified plans under the Affordable Care Act (ACA). This means employers can offer robust benefits without the volatility of group plan rate hikes, which often stem from claims experience. For instance, if your company is currently adding taxable income to help employees buy insurance, you're likely losing 20-40% of that value to taxes—a CHOICE Arrangement eliminates this inefficiency, making every dollar go further.
One of the CHOICE Arrangement's most appealing features is its inclusivity. Employers of any size—from startups with a handful of staff to large corporations—can implement a CHOICE Arrangement. There's no minimum employee threshold, making it ideal for small businesses that might struggle with the costs and complexities of group plans. Participation extends to any type of worker, including full-time, part-time, seasonal, or even remote employees, as long as they meet basic eligibility criteria.
This broad accessibility is a game-changer in 2025, where workforce diversity is at an all-time high. For example, if your team includes gig workers or part-timers who aren't covered under traditional plans, a CHOICE Arrangement allows you to extend benefits equitably. According to the HRA Council's 2026 report, more than two-thirds of small businesses offering a CHOICE Arrangement previously offered no health coverage—a sign that it levels the playing field without the administrative burdens of group coverage. Compared to taxable stipends, which treat all employees the same regardless of needs, a CHOICE Arrangement lets you customize classes (e.g., by location or job type) while remaining compliant.
At its core, a CHOICE Arrangement flips the script on health benefits. Employers don't select the insurance company or specific plans—instead, they define a contribution amount, and employees shop for coverage that suits them. Plan rates are community-rated, meaning they're based on broad demographics rather than individual health conditions, claims history, or underwriting. Once an employee applies, insurers are obligated to sell the plan at the published rate, ensuring accessibility.
This contrasts sharply with group plans, where employers negotiate with carriers, often facing annual rate increases tied to the group's overall health. Taxable stipends, while simple, lack this structure—employees must navigate the market alone, and taxes erode the extra income. The CHOICE Arrangement's model promotes personalization: A young, healthy employee might choose a high-deductible HSA-eligible plan, while an older worker opts for comprehensive coverage. This employee-driven approach not only reduces administrative headaches for employers but also aligns with 2025 trends toward consumer-directed health care.
The benefits of a CHOICE Arrangement are multifaceted, starting with immediate cost savings. Many employers report 20-50% reductions in health benefit expenses upon transitioning, as they avoid the inflationary spirals of group plans. For instance, by setting fixed contributions, you gain superior budget control and predictability—no more surprises from high-claim years. Employees, freed to choose plans, often select more affordable options tailored to their needs, further amplifying savings.
Beyond finances, a CHOICE Arrangement enhances employee satisfaction and retention. In a market where talent is scarce, offering choice in health benefits can be a differentiator. Employees aren't stuck with a one-size-fits-all group plan; they pick coverage that matches their lifestyle, leading to happier, more engaged teams. Compared to taxable stipends, which net employees less after taxes (potentially putting them in higher brackets), a CHOICE Arrangement delivers full value tax-free. According to the HRA Council's 2026 report, more than 20,000 U.S. businesses now offer a CHOICE Arrangement or QSEHRA, and adoption among applicable large employers more than doubled on average from 2025 to 2026, underscoring its growing appeal.
Implementing a CHOICE Arrangement requires diligence, but it's straightforward with the proper support. Employers must prepare a plan document outlining terms and make it available to employees. Notices are crucial: Provide one before the initial effective date and at least 90 days before each subsequent plan year. Include an opt-out option, allowing employees to forgo the benefit if they prefer federal subsidies.
Additionally, maintain a Section 125 plan for pre-tax deductions of employee contributions. This ensures tax advantages flow through seamlessly. While these steps sound administrative, they're far less onerous than managing group plan enrollments or tracking taxable stipends for payroll taxes. Partners like Zizzl Health can handle much of this, making compliance effortless.
For employees, participation is structured but straightforward. They must purchase a qualified individual plan, submit proof of expenses for reimbursement, and opt out if seeking ACA subsidies instead of the CHOICE Arrangement contribution. This encourages accountability while giving them control over their health choices.
Unlike group plans, where coverage is automatic, or stipends that offer no guidance, a CHOICE Arrangement empowers employees to select from dozens of options, including HSA-eligible or co-pay plans. This personalization can lead to better health outcomes and satisfaction.
Reimbursements apply to premiums for individual health insurance plans providing minimum essential coverage under the ACA. In most states, employees have access to several dozen unique designs, from HSA-eligible high-deductible plans to traditional co-pay options. Medicare Parts A, B, C, D, and supplements also qualify (unless excluded), but group, dental, or vision premiums alone do not.
This breadth ensures employees find suitable coverage, often at lower costs than group equivalents. With ACA open enrollment aligning with CHOICE Arrangement timelines, transitions are timely.
Beyond premiums, a CHOICE Arrangement can cover out-of-pocket medical, dental, and vision expenses under IRS Code 213(d), including co-pays, deductibles, and co-insurance. Employers have flexibility: Exclude these, limit to remaining funds post-premium, or add extra reimbursements.
This extends benefits further than stipends, which might not specify eligible expenses, risking misuse or tax issues. For employers, it's a way to provide comprehensive support without inflating budgets.
Employers can pay premiums directly to insurers and deduct employee portions via payroll, mimicking a group plan's familiarity. Alternatively, employees pay upfront and seek reimbursement, though this may cause cash flow challenges.
Direct payment streamlines the process, reducing inconvenience compared to stipends, where employees handle everything independently.
A CHOICE Arrangement pairs seamlessly with Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs), allowing employers to offer one or both. This compatibility enhances tax savings—employees can use HSAs for long-term growth or FSAs for immediate needs.
In contrast, taxable stipends don't integrate with these vehicles, missing out on additional tax efficiencies.
Strategy begins with your benefit goals. Since individual premiums are age-rated (increasing with age), calculate age-specific contributions for equity—ensuring younger and older employees pay similar premium percentages. Cover employees and dependents or limit to employees only.
This fairness avoids the one-size-fits-all pitfalls of group plans or flat stipends, which can disadvantage specific demographics.
A CHOICE Arrangement is inherently ACA-compliant: Qualified plans meet minimum essential coverage, and contributions can be structured for affordability, satisfying the employer mandate. For employers with 20+ employees, COBRA applies, requiring continuation offers upon qualifying events. State continuations don't use, simplifying matters.
Unlike taxable stipends, which may trigger penalties if not handled correctly, a CHOICE Arrangement ensures full compliance without added risk.
While the plan year resets on January 1, switches can occur anytime. Success hinges on employee education, easy plan shopping, and payroll deductions for contributions.
In 2025, with tools from providers like Zizzl Health, transitions are smoother than ever. Avoid common pitfalls by partnering early for notices and documents.
As health costs climb, the CHOICE Arrangement offers a path to sustainability. Lives covered by CHOICE Arrangements passed 500,000 at the start of 2026, according to the HRA Council's 2026 report—a clear signal of its momentum. Ditch taxable stipends' inefficiencies and group plans' rigidity—embrace a CHOICE Arrangement for tax savings, choice, and control.
Ready to explore? Contact any Health Plans of NC agent for a free analysis. Your team—and budget—will thank you.