CHOICE Act Creates New Employer Health Plans, Offers Small Businesses $1,200 Tax Credit

The “Choice Arrangement Act of 2025” is setting up a whole new way for employers to help pay for health insurance. This bill doesn’t create a new government program; instead, it formalizes a specific type of employer-funded account called a “CHOICE arrangement” (Custom Health Option and Individual Care Expense arrangement), which is essentially an HRA (Health Reimbursement Arrangement) tied directly to the individual health insurance market.

The New Employer-Funded Health Option

What is a CHOICE arrangement? It’s an account funded entirely by your employer to cover medical costs, but you can only use it if you are enrolled in individual health insurance (purchased on or off the marketplace) or Medicare Parts A and B (Section 2). This is a big deal because it allows employers to contribute tax-free dollars toward an employee’s individual market premium and expenses, essentially pushing employees out of traditional group plans and onto the individual market while still providing financial support.

For employers to offer this, they have to jump through a few hoops, primarily around nondiscrimination. The law allows employers a lot of flexibility in defining “classes” of employees—like full-time, part-time, or those in different geographic areas (Section 2). They must offer the CHOICE arrangement on the exact same terms to everyone within a specific class. While this sounds fair, it also means employers can separate employees into classes to manage costs, potentially offering the CHOICE arrangement to one group while keeping a traditional group plan for another, which adds complexity to who gets what kind of benefit.

A Tax Break for Small Business and Employees

This bill introduces two major financial incentives, both kicking in after December 31, 2025. First, if your employer offers a CHOICE arrangement, you get a tax benefit: you can use pre-tax dollars from your cafeteria plan (like a Section 125 plan) to pay for your individual health insurance premiums (Section 3). Normally, there are strict limits on this, so this change means real money back in the pocket of an employee who might otherwise be paying those premiums with after-tax dollars. This is a clear win for employees enrolled in these plans.

Second, the bill creates a brand new tax credit for smaller employers who adopt the CHOICE arrangement (Section 4). If you’re a small or medium-sized business—specifically, not an “applicable large employer” (ALE)—you can claim a credit of $100 per employee per month for the first year, and $50 per employee per month for the second year. That’s up to a $1,200 credit per employee in the first year alone. This is a significant incentive for smaller companies that struggle to afford traditional group coverage, giving them a subsidized way to help employees with health costs. However, it also means that the biggest employers (ALEs) are left out of this subsidy entirely.

The Real-World Trade-Off

While the tax breaks and flexibility are attractive, the core mechanism of the CHOICE arrangement is a shift from employer-sponsored group coverage to the individual market. For an employee, this means their health coverage quality and cost are now tied to the individual market where they live, not the group purchasing power of their employer. For example, a construction worker whose employer switches to a CHOICE arrangement will now be responsible for navigating the individual marketplace to find a plan that works, even if their employer is giving them funds to pay for it.

This structure could be a double-edged sword: it gives employees more choice in selecting a plan, but it also places the burden of finding and managing that coverage entirely on them. Furthermore, the bill explicitly requires employers to report the total amount of benefits paid out under the CHOICE arrangement on the employee’s W-2 form starting in 2026 (Section 2), adding a new reporting requirement for businesses and a new line item for employees to track.