CHOICE is a type of health benefits plan that allows employers to reimburse employees for some or all of the premiums they pay for individual health insurance policies. A CHOICE Arrangement allows employers to reimburse employees for some or all of the premiums they pay for individual health insurance policies.
Attracting and retaining top talent is vital to any business’s success. But with rising healthcare costs, offering an extensive benefits package can feel like a financial burden. This is where CHOICE Arrangements come in.
A custom health plan empowers employers to provide tax-deductible reimbursements to employees for their individual health insurance premiums. This allows employees to choose a plan that best suits their needs and budget while offering employers greater control over healthcare costs and administrative burdens.
CHOICEs create opportunities for businesses of all sizes to better meet their employees’ needs. Small businesses are lining up to adopt CHOICEs, with recent data from the Health Reimbursement Arrangements Council (HRA Council) indicating that small businesses represent a staggering 84% of the newest CHOICE adopters.
CHOICEs can also lead to significant cost savings for employers and employees, with a recent NPR story revealing that one small college saved $1.4 million in health care costs by switching to a CHOICE while their employees cut their premiums by an average of $1,200 each.
In the following sections, we'll clarify what CHOICE is and isn’t, examine the benefits of CHOICEs for both employers and employees, and provide a step-by-step guide to help you navigate implementing a custom health plan for your business.
What is CHOICE?
CHOICE is an employer-sponsored health benefit that reimburses employees for individual health insurance premiums (and optionally other qualified medical expenses) on a tax-free basis. Available to employers of any size, it's a flexible alternative to traditional group health insurance.
Instead of shopping for one group plan and asking every employee to accept it, the employer sets a monthly budget per employee. Each employee then buys the individual plan that best fits their needs and gets reimbursed up to that amount. The employer never has to pick a plan, negotiate with a carrier, or absorb surprise renewal hikes.
CHOICEs were created by a federal rule issued in 2019 and became available on January 1, 2020. Adoption has grown every year since — by 2026, an estimated 800,000 to 1 million people were covered by CHOICE benefits (per Health Sherpa and SureCo analyses), a record high.
How does CHOICE work?
A CHOICE works in four straightforward steps:
The employer sets an allowance. The employer decides how much to reimburse each month and can vary the amount across employee classes (for example, full-time vs. part-time, salaried vs. hourly, or by geographic location). There is no cap on how much an employer can offer.
Employees buy their own plan. Each employee chooses and purchases an individual health insurance plan — from the ACA marketplace or another individual-market source — that fits their doctors, coverage level, and budget. If they already have a plan they like, they can often keep it, and the plan stays with them if they leave the company.
Employees submit proof. Employees show proof of qualifying coverage and submit their premium (and any other eligible expenses) to the employer or a third-party administrator.
The employer reimburses, tax-free. Once verified, the employee is reimbursed up to their allowance. Reimbursements are tax-free for the employee and tax-deductible for the employer.
Read on to learn more, or download our CHOICE ebook for an in-depth analysis.
CHOICE vs. traditional health insurance: what's the difference?
Compared to traditional plans, CHOICE generally offers more personalization and flexibility. Choosing between the two can be a significant decision for employers, potentially impacting employee satisfaction and the bottom line.
Here are some key differences between CHOICEs and traditional health insurance:
Flexibility: CHOICEs offer significantly more flexibility for both employers and employees. Employers can set contribution levels and eligibility criteria, while employees get to choose individual health insurance plans that best suit their needs. In contrast, traditional plans typically offer a limited number of preselected plans for all employees, restricting their ability to choose coverage that aligns with their individual needs.
Cost control: While both plans can help manage healthcare costs, CHOICEs provide employers with more control by allowing them to set fixed contribution amounts. Traditional group plans, on the other hand, can be unpredictable due to potential rate hikes, new fees, or changes in cost-sharing.
Administration: Compared to traditional group plans, CHOICEs often involve less administrative burden for employers. There's less paperwork involved as employees manage their own plans and claims. However, employers still have some responsibility for record-keeping and compliance with CHOICE regulations.
Ultimately, the right choice depends on your goals, budget, and workforce.
CHOICE vs. QSEHRA vs. HRA
Understanding the differences between CHOICE, QSEHRA, and HRA can be critical for businesses looking to offer their employees effective health benefits. While they share the common goal of reimbursing employees for health-related expenses, each plan has distinct characteristics.
| CHOICE | QSEHRA | HRA | |
|---|---|---|---|
Full name | CHOICE | Qualified Small Employer Health Reimbursement Arrangement | Health Reimbursement Arrangement |
Eligibility | Open to all employers, regardless of size | Limited to small businesses with fewer than 50 full-time equivalent employees | A broader category encompassing various types of HRAs, some with eligibility restrictions (e.g., QSEHRA) |
Flexibility | Offers employers more control over contribution amounts and eligibility criteria | Provides some flexibility, allowing employees to choose individual health insurance plans | Varies depending on the specific HRA type. Some HRAs offer similar control to CHOICE, while others may have predetermined limits |
Integration | Can’t be offered alongside a traditional group health plan for the same employee class | Can be offered alongside existing employer-sponsored plans like spousal group coverage or TRICARE | Contributions are pretax; withdrawals are tax-free for qualified medical expenses |
By understanding these distinctions, employers can choose the health benefit plan that best aligns with their company's size, budget, and employee needs.
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CHOICE vs. FSA vs. HSA
With acronyms like CHOICE, FSA, and HSA interspersed throughout insurance literature, navigating the world of health benefits can be confusing. These plans offer various ways to manage healthcare costs but cater to different needs. To help you understand their key differences, we've created a handy chart that breaks down the important details about each plan.
| CHOICE | FSA | HSA | |
|---|---|---|---|
Full name | CHOICE | Flexible Spending Account | Health Savings Account |
Purpose | Reimburses employees for individual health insurance premiums and, in some cases, other qualified medical expenses | Reimburses employees for qualified medical expenses | Allows individuals to save pre-tax money for qualified medical expenses |
Eligibility | Available to all employers | Available to all employers | Available to individuals with a high-deductible health plan (HDHP) |
Contribution limits | Set by the employer | Set by the employer but cannot exceed the limit s et by the IRS (annual limit) | Set by the IRS (annual limit) |
Tax advantages | Reimbursements are tax-free for both employer and employee | Contributions are pre-tax, reimbursements are tax-free | Contributions are pre-tax, and withdrawals are tax-free for qualified medical expenses |
Carryover | May allow carryover of unused funds | Typically, a "use it or lose it" rule | Unused funds can be carried over indefinitely |
As the chart shows, CHOICE, FSA, and HSA offer distinct advantages for managing healthcare costs.
CHOICE offers employers greater flexibility in controlling contributions for individual health insurance premiums. FSAs are ideal for individuals with predictable medical expenses, while HSAs provide a long-term savings option for qualified medical expenses.
What are the benefits of CHOICE for employers and employees?
CHOICE offers numerous benefits for both employers and employees. By empowering employees to choose their health insurance plans, CHOICEs can enhance employee satisfaction, improve retention rates, and contribute to a more positive work environment.
Through CHOICEs, employers can enjoy greater control over healthcare costs, tax advantages, and the potential to attract and retain top talent. With the flexibility to customize plans and the potential for cost savings, CHOICEs can be a valuable tool for businesses seeking to offer competitive and effective health benefits.
CHOICE offers multiple advantages for employers seeking to effectively manage healthcare costs and provide attractive benefits to their employees.
Cost management: CHOICEs give employers greater control over healthcare costs by setting fixed reimbursement amounts. This can help predict and manage expenses more effectively compared to traditional group health plans, which can be subject to fluctuating premiums and benefit changes. As Tom Hemmingsen from Thatch Sales notes, "Controlling costs is easier with CHOICE because you give a fixed amount and provide your employees with a ton of choice."
Tax advantages: CHOICEs offer significant tax advantages for employers. The reimbursements provided to employees are tax-deductible for the business, reducing its overall tax liability. This can lead to substantial cost savings for employers.
Employee flexibility: By offering employees more choices in their health insurance plans, employers can demonstrate their commitment to employee well-being and potentially attract and retain top talent.
Improved employee satisfaction and retention: Offering CHOICE as an employee benefit can enhance job satisfaction and help increase employee retention rates. Providing employees with greater choice and control over their healthcare allows employers to demonstrate their commitment to their well-being. This can lead to a more positive and engaged workforce.
What are the advantages of CHOICE for employees?
CHOICE gives employees a degree of flexibility and control over their healthcare that is often not available with traditional group health plans.
Expanded healthcare options: CHOICEs provide employees with a wider range of health insurance plans to choose from. This flexibility allows employees to find a plan that best suits their needs, budget, and coverage preferences. Tom Hemmingsen from Thatch Sales pointed out a related benefit they’ve heard about from employees themselves, “Since employees have access to local plans that suit their needs, they don't have to carry the burden of unhappy employees.”
Tax advantages: Employees can benefit from tax advantages with CHOICE. The reimbursements they receive from their employer toward their individual health insurance premiums are generally tax-free, reducing their overall tax burden.
Greater control over healthcare spending: CHOICEs empower employees to have more control over their healthcare spending. A plan that aligns with their specific needs can help employees avoid paying for unnecessary coverage and potentially save money. Tom Hemmingsen says, “They feel the benefits package is more competitive with a CHOICE since employees have access to leftover funds to use on qualified medical expenses.”
Portability: CHOICEs can offer greater portability compared to traditional group health plans. If an employee changes jobs or relocates, they may be able to continue using their existing individual health insurance plan under the CHOICE, providing continuity of coverage.
Less paperwork: CHOICEs can often involve less paperwork for employees compared to traditional group health plans. As one Thatch customer noted, “I don't have to go to my insurance carrier’s website to get my benefits sorted. It’s very streamlined."
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Is CHOICE right for my business?
CHOICE is a good fit for most employers, particularly those who want cost predictability, have a geographically distributed workforce, or want to give employees more plan flexibility. Smaller businesses (under 50 FTEs) often prefer CHOICE for its simplicity; larger employers use it to satisfy the ACA employer mandate. It's generally not the right fit for employers who want to maintain a single group plan for a tightly knit, uniform workforce.
When considering implementing a custom health plan, businesses should carefully evaluate several factors:
Company size and structure: CHOICEs can be a valuable option for businesses of all sizes, but smaller businesses may find a QSEHRA more suitable due to its specific eligibility requirements.
Employee demographics: Consider your employees’ age, health status, and income levels. CHOICE can be particularly beneficial for employees with unique healthcare needs or those seeking more flexibility in their plan options.
Budgetary constraints: Assess your business's financial resources and determine how much you can allocate towards employee healthcare benefits. CHOICEs can provide a cost-effective solution, but it's important to set realistic reimbursement limits and manage costs effectively.
Administrative capacity: Consider the administrative burden of managing a custom health plan. While CHOICE administration can be less complex than traditional group health plans, there are still administrative tasks involved, such as record-keeping and employee communications.
What are the compliance requirements for CHOICE?
Understanding and adhering to CHOICE regulations is crucial for ensuring compliance and avoiding penalties. You’ll need to stay informed about federal and state-specific regulations that may apply to your business. Consulting with a benefits advisor or legal professional can help you navigate the complexities of CHOICE compliance.
How do I design a custom health plan?
Whether you do it yourself or get assistance from an employee benefits broker, designing an effective custom health plan involves several key considerations.
Reimbursement amounts: Determine the appropriate reimbursement amounts based on your budget and the desired level of employee support.
Eligibility criteria: Establish clear eligibility criteria for employees to participate in the custom health plan. Consider factors such as full-time employment status and length of service.
Plan documents: Create comprehensive plan documents that outline the terms and conditions of the custom health plan, including contribution amounts, eligibility requirements, and reimbursement procedures.
How can I control costs with CHOICE?
While CHOICEs can help manage healthcare costs, implementing strategies for cost control is essential.
Set reimbursement limits: Establish reasonable reimbursement limits to control the total amount spent on employee healthcare.
Employee education: Provide employees with information about cost-saving strategies, such as using generic medications, preventive care, and shopping for affordable plans.
Plan monitoring: Regularly review your custom health plan to ensure it remains effective and aligns with your business objectives.
How do I communicate CHOICE to my employees?
Effective communication is vital for a successful custom health plan. Ensure that employees understand the plan’s benefits and limitations. Provide clear and concise information about eligibility requirements, reimbursement procedures, and available resources. Consider offering employee education sessions or online resources to help them navigate their health insurance options, including choosing the right individual plan within your CHOICE.
What is the CHOICE affordability rule?
The CHOICE affordability rule requires that an employer's reimbursement amount covers enough of the premium so that an employee's remaining cost does not exceed a set percentage of their household income, as defined annually by the IRS.
The Affordable Care Act (ACA) established the employer mandate, which requires large employers to offer affordable health coverage to their workforce. This means employers with 50 or more full-time equivalent employees (known as applicable large employers, or ALEs) must offer affordable health insurance to at least 95% of their full-time employees and their dependents.
This requirement helps ensure employees have access to quality health coverage through their workplace. When offering a CHOICE, these same affordability requirements apply. ALEs must ensure their CHOICE contributions make individual market coverage affordable for employees to satisfy this mandate and avoid potential penalties.
What is considered affordable?
A CHOICE is considered affordable under IRS/ACA regulations if the portion of the premium an employee must pay for health insurance (after the CHOICE reimbursement) does not exceed a certain percentage of their household income. For 2026, that threshold is 9.02%. In this instance, the employee and their family members cannot receive any premium tax credit (PTC) subsidies for Marketplace plans. (Even if an employee rejects an affordable CHOICE, the mere offer of affordable employer coverage makes them ineligible for subsidies under ACA rules.)
If a CHOICE offer is unaffordable for an employee, that employee (and any dependents offered the HRA) may qualify for PTCs on the Marketplace. In other words, an unaffordable CHOICE does not block an eligible employee from receiving subsidized health coverage, but to claim the tax credit, the employee must decline the CHOICE.
What happens if my CHOICE isn't affordable?
For ALEs subject to the ACA’s employer mandate, offering an unaffordable CHOICE can lead to potential penalties. ALEs are required to offer full-time employees health coverage that is affordable and provides minimum value. If an employer’s CHOICE is unaffordable and at least one full-time employee goes to the exchange and receives a premium tax credit as a result, the employer may incur an IRS employer shared responsibility penalty (sometimes called the Section 4980H(b) penalty).
This penalty is assessed on a per-employee basis. For instance, in 2025, it amounts to $4,350 per year (approximately $362.50 per month) for each full-time employee who receives a subsidized Marketplace plan because the CHOICE was not affordable.
Failing to meet affordability not only impacts employees’ access to subsidies but exposes the employer to financial penalties for falling short of ACA requirements.
In short, an unaffordable CHOICE means employees can seek tax credits (reducing their insurance costs), while the employer risks IRS penalties and would need to “pay” under the ACA’s “pay or play” rules — as opposed to “playing” by increasing contributions to achieve affordability.
Ensuring and verifying CHOICE affordability is made easier by various tools and official resources:
HealthCare.gov HRA Affordability Calculator: The federal Marketplace has an online affordability tool where employers or employees can input information (like the HRA offer amount, employee age, and location) to estimate whether a CHOICE offer will be considered affordable and how it affects eligibility for PTCs. This is a user-friendly way for employees to gauge if they should accept the HRA or seek a subsidy instead.
CMS Lowest-Cost Silver Plan Lookup: Because affordability calculations hinge on the lowest-cost Silver plan premium, the Centers for Medicare & Medicaid Services (CMS) publish an Employer LCSP Premium Look-up table/tool to help employers find the monthly cost of a self-only Silver plan in each area. Employers can use this resource to determine the reference premium for each employee’s location without having to manually research Marketplace plans.
Third-Party Support: While numerous benefits administrators and advisors offer free CHOICE affordability calculators, employers should still cross-reference official thresholds and guidance to ensure compliance. If you’re looking for a more personalized approach, consider booking a demo with our team at Thatch. We can walk you through affordability scenarios for your workforce, help you design a compliant custom health plan, and provide ongoing support so you can focus on running your business with confidence.
How to get started with CHOICE
Implementing a custom health plan requires careful planning and execution. Generally, employers can implement a CHOICE at any time throughout the year. However, there may be specific timing considerations based on your company's size and circumstances.
By following these steps and seeking guidance from qualified professionals, you can successfully integrate CHOICE into your business's benefits strategy.
Step 1: Am I eligible to offer CHOICE?
Before proceeding with CHOICE implementation, verify your eligibility. While most employers can offer CHOICE, certain businesses may have specific requirements. For example, applicable large employers (ALEs) with over 50 full-time employees in the prior calendar year may need to offer affordable coverage to 95% of their employees and dependents.
Step 2: How do I design my custom health plan?
Designing your custom health plan involves several key considerations:
Contribution Amounts: Determine the amount you will contribute to employee reimbursements.
Eligibility Criteria: Establish who is eligible to participate in the custom health plan (e.g., full-time employees, part-time employees).
Plan Documents: Create comprehensive plan documents outlining the terms and conditions of the custom health plan.
Step 3: How do I offer CHOICE to employees?
Once your custom health plan is comprehensively designed, you must offer it to your eligible employees. Provide clear communication about the plan's benefits and how employees can enroll. Employees must then accept the CHOICE offer to participate.
Step 4: How do I manage my custom health plan?
Efficiently managing your company’s custom health plan entails several key elements, including:
Inviting Employees: Extend the CHOICE offer to eligible employees.
Terminating Employees: Establish procedures for terminating employee participation in the custom health plan.
Reporting to the Federal Government: Ensure compliance with federal CHOICE reporting requirements.
What is CHOICE? FAQs
Do you still have questions about CHOICE? Find answers to common inquiries here and get even more details in the CHOICE Glossary.
How do CHOICEs work?
CHOICE Arrangements allow employers to reimburse employees for some or all of their individual health insurance premiums through three basic steps:
Employer Setup: The employer establishes a custom health plan, sets a specific reimbursement amount, and sorts their employees into one of 11 CHOICE classes (such as full-time, part-time, hourly, etc.).
Employee Enrollment: Employees choose an individual health insurance plan from the marketplace.
Reimbursement: The employer reimburses the employee for eligible premium costs, typically on a monthly basis.
The reimbursement is tax-free for both the employer and the employee, making it a financially advantageous benefit for both parties.
Who is CHOICE right for?
CHOICE can be a great fit for a variety of businesses! Smaller businesses and startups often find CHOICE's flexibility and cost-control features appealing, offering employees more choices in their healthcare plans.
However, even larger companies, including those considered applicable large employers (ALEs), can benefit from CHOICE's ability to cater to diverse employee needs.
What are the drawbacks of a custom health plan?
Custom health plans offer flexibility but also come with potential drawbacks. For employers, this means managing risks like over-reimbursement and navigating complex compliance. Employees may face a more complex decision-making process, potentially higher out-of-pocket costs, and increased administrative tasks. Additionally, employees not eligible for the premium tax credit may find CHOICEs more expensive than traditional group plans.
Can employees use CHOICE funds for dental and vision?
Yes. In addition to health insurance premiums, CHOICE funds can generally be used to reimburse qualified medical expenses as defined in IRS Publication 502, which includes dental and vision expenses. Employers can choose to limit reimbursements to premiums only or allow broader qualified medical expense reimbursements when designing their plan.
Taking the next step with CHOICE
Understanding CHOICE is essential for businesses seeking to offer competitive and flexible health benefits. By empowering employees to choose their own individual health insurance plans, CHOICEs can enhance employee satisfaction, improve retention rates, and contribute to a more positive work environment.
For employers, CHOICEs can provide greater control over healthcare costs, tax advantages, and the potential to attract and retain top talent. With the flexibility to customize plans and the potential for cost savings, CHOICEs can be a valuable tool for businesses of all sizes.
CHOICE adoption continues to grow, and proposed federal legislation in 2025 would codify and expand the arrangement under the name "CHOICE Arrangement," signaling strong long-term policy support for the defined contribution model.
If you're interested in exploring custom health plans for your company, we encourage you to schedule a demo with Thatch. Our team of experts can provide personalized guidance and support throughout the CHOICE journey.
