Choice Arrangement

Bill Number: H.R. 5463
Origin Chamber: House
Congress: 119th Congress, Session 1
Policy Area: Taxation
Status: Introduced
Latest Action: 2025-09-18: Referred to the House Committee on Ways and Means.
Last Updated: 2026-07-10T08:06:43Z

AI-Generated Summary

Purpose

The Choice Arrangement Act of 2025 aims to expand flexible health benefit options for employers and employees by allowing certain employer-funded health reimbursement arrangements (HRAs)—called "custom health option and individual care expense arrangements" or CHOICE arrangements—that integrate with individual health insurance policies. These arrangements reimburse employees for medical costs only if they maintain qualifying individual coverage, such as marketplace plans or Medicare. The bill incentivizes small employers to adopt these plans through tax credits and aligns them with existing health laws, promoting choice in coverage without requiring traditional group health plans.

Key Provisions

Definition and Treatment of CHOICE Arrangements:
A CHOICE arrangement is an employer-provided group health plan funded only by employer contributions, with a fixed annual dollar limit for reimbursing medical care.
Reimbursements are allowed only for periods when the employee (and dependents) is enrolled in individual health insurance (excluding excepted benefits like dental-only plans) or Medicare Parts A, B, or C.
These arrangements are treated as complying with key Affordable Care Act (ACA) requirements, including nondiscrimination rules, preventive care coverage, and other consumer protections (under Internal Revenue Code Section 9815 and Public Health Service Act sections).

Nondiscrimination Requirements:
Employers must offer the arrangement on equal terms to all employees in a designated "class" (e.g., full-time, part-time, seasonal, or salaried workers; employees in the same geographic area; or new hires after a set date).
Employers cannot offer other group health plans (except account-based plans or excepted benefits) to the same class, with an exception for small-group market plans.
Variations are allowed for adding dependents or age-based increases (up to 300% of the base amount).
Employment status (e.g., full-time vs. part-time) is determined using rules similar to existing tax code provisions for health plans.

Substantiation and Notice Requirements:
Employers must have procedures to verify enrollment in qualifying individual coverage at the start of the plan year and for each reimbursement claim.
Employees receive written notice at least 60 days before the plan year (or upon eligibility for new hires/startups), explaining rights and obligations in simple, understandable language. The notice includes details prescribed by the Secretary of the Treasury.

Reporting and Cafeteria Plan Changes:
Employers must report the total value of CHOICE benefits on employees' W-2 forms (tax form for wages).
Employees in CHOICE arrangements can use pre-tax cafeteria plans (Section 125 plans) to buy health insurance through the ACA marketplace, bypassing prior restrictions.

Tax Credit for Employers (Section 45BB):
Eligible small employers (not "applicable large employers" under ACA rules, meaning fewer than 50 full-time equivalents) receive a credit for the first two years of offering a CHOICE arrangement.
Credit amount: $100 per enrolled employee per month in year 1; $50 per month in year 2 (inflation-adjusted after 2026 based on cost-of-living changes, rounded to the nearest $10).
The arrangement must qualify as "minimum essential coverage" under ACA rules to count employees.
The credit is part of the general business credit and can offset alternative minimum tax.

Conformance with Existing Rules:
Does not alter 2019 federal rules on individual coverage HRAs (ICHRAs); CHOICE arrangements are included under those rules.
Treasury, Health and Human Services, and Labor departments must update regulations to align with the new provisions.

Effective Date:
Applies to plan years and taxable years beginning after December 31, 2025.

Significant Changes to Existing Law

Expands HRA Exceptions: Amends Internal Revenue Code Section 9815 to create a new exception for CHOICE arrangements, treating them as compliant with ACA group health plan rules (e.g., Sections 9802, 2705, 2711, 2713, 2715 of the Public Health Service Act). Previously, HRAs integrated with individual coverage (like ICHRAs) had limited flexibility; this adds specific classes of employees and protections against discrimination.
Cafeteria Plan Access: Modifies Section 125(f)(3) to allow CHOICE participants to use pre-tax dollars for marketplace insurance, reversing a prior exclusion for employer-sponsored plan participants.
New Tax Incentive: Introduces Section 45BB, a novel credit targeted at small employers to encourage shifting from traditional group plans to integrated individual coverage options. This builds on but differs from existing credits like the small business health care tax credit.
Reporting Addition: Adds W-2 reporting under Section 6051(a)(20) for CHOICE benefits, increasing transparency similar to other fringe benefits.
No Retroactive Impact: Preserves 2019 ICHRA regulations without implying changes, ensuring continuity for existing arrangements.

Potential Impacts

On Citizens/Employees: Increases access to employer-subsidized individual health plans, potentially lowering out-of-pocket costs and offering more personalized coverage options. Employees in designated classes gain flexibility to shop on the ACA marketplace with reimbursements, but must maintain continuous coverage to qualify for benefits. This could benefit part-time, seasonal, or new workers who might otherwise lack affordable options.
On Employers: Small businesses gain a cost-effective alternative to group plans, with tax credits reducing adoption costs (e.g., up to $1,200 per employee in year 1). Larger employers are excluded from the credit but could use similar structures. Overall, it may shift some employers away from group markets, easing administrative burdens.
On Government Agencies: The IRS will handle new credits, W-2 reporting, and rule-making, potentially increasing administrative workload. Departments of Treasury, HHS, and Labor must coordinate updates to ACA regulations, which could affect marketplace enrollment and subsidy calculations. No direct impact on international relations.
Broader Effects: May boost individual market enrollment, stabilizing ACA exchanges by increasing subsidized buyers, but could reduce group market participation, affecting insurer risk pools.

Main Stakeholders Affected

Employers: Primarily small businesses (under 50 full-time equivalents) eligible for credits; all employers offering health benefits may adopt CHOICE arrangements for flexibility.
Employees and Dependents: Workers in eligible classes (e.g., full-time, part-time, seasonal, or geographic groups) who gain reimbursement support for individual coverage.
Health Insurance Issuers: Individual market providers (including ACA marketplace plans) benefit from potential enrollment growth; group market insurers may see reduced demand.
Government Entities: IRS (tax credits and reporting), HHS (ACA compliance), DOL (plan oversight), and employees via marketplace subsidies.
Other: Unions (for collective bargaining classes) and temporary staffing agencies (for placement workers).

Notable Legal, Constitutional, or Political Implications

Legal: Enhances ACA compatibility by exempting CHOICE arrangements from certain group plan mandates while requiring proof of individual coverage, avoiding conflicts with minimum essential coverage rules. It mandates regulatory updates, potentially leading to litigation if substantiation or nondiscrimination rules are challenged as overly burdensome. Builds on 2019 ICHRA guidance without overriding it.
Constitutional: No apparent issues; aligns with Congress's taxing and spending powers under Article I, Section 8, and does not infringe on state powers over health insurance.
Political: Promotes "choice" in health coverage, appealing to efforts to increase market-based options post-ACA. Could reduce reliance on employer group plans, influencing debates on health reform affordability and small business support, but may face criticism for fragmenting coverage pools or favoring individual over group markets. Neutral on partisanship, as it expands existing HRA frameworks.

This summary was generated by AI and may contain inaccuracies. Refer to the official source document for the authoritative text.

Sponsor

Rep. Hern, Kevin [R-OK-1]

Cosponsors (10)

Rep. Van Duyne, Beth [R-TX-24], Rep. Tenney, Claudia [R-NY-24], Rep. Malliotakis, Nicole [R-NY-11], Rep. Steube, W. Gregory [R-FL-17], Rep. Miller, Max L. [R-OH-7], Rep. Yakym, Rudy [R-IN-2], Rep. Fitzgerald, Scott [R-WI-5], Rep. Moran, Nathaniel [R-TX-1], Rep. Van Orden, Derrick [R-WI-3], Rep. Onder, Robert F. [R-MO-3]