CHOICE Act Creates New Employer Health Plans, Offers Small Business Tax Credit Starting 2026

The Custom Health Option and Individual Care Expense Act, or CHOICE Act, is setting up a new type of employer-funded health reimbursement arrangement (HRA) that employers can offer starting in 2026. Think of it as a dedicated health allowance you get from your boss, but with a twist: you can only use that money if you are already enrolled in your own individual health insurance plan (or Medicare).

This new arrangement, funded solely by the employer, sets a maximum limit for what they will reimburse you for medical costs. The big change here is that it formally allows employers to integrate their contribution with the individual market, meaning they can subsidize your private plan premium. For employees, this is a win on the tax front: Section 3 of the bill allows employees participating in a CHOICE arrangement to pay for their individual health coverage premiums using pre-tax dollars through a Section 125 cafeteria plan. This is a significant tax break that makes individual coverage immediately more affordable for those who qualify.

The Small Business Health Playbook

This bill is clearly aimed at small and mid-sized businesses. Section 4 introduces a new, temporary tax credit specifically for “eligible employers”—meaning those who are not subject to the Affordable Care Act’s employer mandate (the Applicable Large Employer rule). For the first two years the employer offers the CHOICE arrangement, they get a tax credit for every enrolled employee. This credit is $100 per employee per month in the first year, and $50 per employee per month in the second year. For a small business with 20 employees, that’s a $24,000 tax credit over two years, provided the arrangement meets minimum coverage standards.

This financial incentive is designed to push smaller employers who currently offer little or no coverage to start contributing to their employees’ health costs. However, it also means that larger employers—those already required to offer coverage—don't get this break, which could create a competitive disadvantage for them when recruiting, as they don't get the same subsidy for offering a similar benefit.

The Fine Print on Flexibility

Employers get a lot of flexibility in deciding who gets this new arrangement. Section 2 allows them to define “specified classes” of employees based on factors like full-time status, location, or even whether they are new hires. While the bill requires the employer to offer the arrangement on the exact same terms to everyone within a defined class, the ability to carve out groups based on things like location or hire date gives employers significant control over who benefits. For example, an employer could choose to only offer the CHOICE arrangement to new hires starting after a certain date, or only to employees in a specific state.

Crucially, this arrangement encourages a structural shift away from traditional employer-sponsored group health insurance toward the individual market. If your employer switches from a group plan to a CHOICE arrangement, you might gain the tax benefit, but you are now responsible for navigating the individual marketplace and selecting your own plan. While this offers choice, it also shifts the administrative burden and the risk of finding adequate coverage entirely onto the employee. This is a key point for busy people: your employer may be giving you money, but they are also handing you homework.

Finally, Section 2 also mandates that employers must have procedures in place to confirm employees are actually enrolled in individual coverage when they request reimbursement. They also have to provide clear written notice—at least 60 days before the plan year starts—explaining the arrangement’s rules. Plus, employers will now have to report the total amount of benefits paid out through the CHOICE arrangement directly on the employee’s W-2 form, adding a new line item to tax reporting for everyone involved. These changes are set to apply to plan years beginning after December 31, 2025.