CHOICE (ICHRA) vs Group Insurance
A CHOICE Arrangement (formerly ICHRA) and a traditional group health plan are two ways for an employer to fund health benefits. With a group plan, the employer chooses the insurance and employees enroll in it. With a CHOICE Arrangement, the employer sets a monthly allowance and each employee chooses an individual health insurance plan. Neither is right for every business; the answer depends on your workforce, your locations and how much budget certainty you need.
| Criterion | CHOICE Arrangement (formerly ICHRA) | Traditional group insurance |
|---|---|---|
| What it is | An employer-funded allowance that reimburses employees, tax-free, for individual health insurance they choose | A group health plan the employer buys from an insurance company for its employees |
| Who picks the plan | Each employee, from individual plans available where they live | The employer, usually offering one or a few plan options |
| Employer cost | Defined contribution: the employer sets a monthly allowance for each employee class, with no federal minimum or maximum | Premiums set by the insurer at each renewal; the average family premium rose 6% in 2025 |
| Tax treatment (general rule) | Reimbursements are generally excluded from the employee's income | Employer-paid premiums are generally excluded from wages; the employee's share can be paid pre-tax through a cafeteria plan |
| Multi-state teams | Each employee shops the individual market in their own area | One plan and network has to work for every location |
| Mixing models | Can go to some employee classes while others keep a group plan, but never both to the same class | Same rule: one model per employee class |
| Affordability test (50+ full-time employees) | For 2027 plan years, the employee's cost for the lowest-cost silver plan, after the allowance, must be no more than 10.22% of household income | For 2027 plan years, the employee's share of self-only coverage must be no more than 10.22% of household income |
| Often fits | Small employers new to benefits, varied or multi-state workforces, and employers who want a set budget | Employers whose teams value one shared plan and network, and employers with a stable, local workforce |
How a CHOICE Arrangement works
A CHOICE Arrangement (formerly ICHRA) lets employers of any size reimburse employees for individual health insurance and other qualified medical expenses. There are no limits on how much an employer can reimburse, and no minimum contribution [1]. CMS began calling these arrangements CHOICE Arrangements in September 2026; the rules did not change [1]. They first became available for plan years beginning on or after January 1, 2020, under federal rules issued in 2019 [2].
The basic steps:
- Define employee classes, such as full-time, part-time or by location. You can offer a group plan to one class and a CHOICE Arrangement to another, but not a choice between the two within the same class [1].
- Set a monthly allowance for each class. This becomes your benefits budget.
- Give employees written notice, generally at least 90 calendar days before the plan year begins [2].
- Employees choose and enroll in individual-market health insurance or Medicare [1]. Newly gaining access to the arrangement opens a Special Enrollment Period in the individual market [2].
- Reimburse employees up to the allowance after they show proof of enrollment.
How a traditional group plan works
With a group plan, the employer chooses an insurer and plan design, and the cost is set at each renewal. In 2025, the average annual premium for employer coverage was $9,325 for single coverage and $26,993 for family coverage, with workers contributing an average of $1,440 and $6,850 [3]. Family premiums were 6% higher than in 2024 [3]. Employees share one plan and network, which can be simple for a workforce in one area.
Tax treatment: the general rule
Reimbursements from a health reimbursement arrangement, including a CHOICE Arrangement, are generally excluded from the employee’s income and wages for federal income and employment tax purposes [2]. Under a group plan, employers can generally exclude the value of health benefits they provide from employees’ wages, and a cafeteria plan lets employees pay their share on a pre-tax basis [4].
This is general educational information, not tax or legal advice. Talk with a qualified tax professional about how this applies to your situation.
The affordability rule for employers with 50 or more employees
An employer is an applicable large employer if it had at least 50 full-time employees, including full-time equivalents, on average during the prior year [5]. For these employers, the offer of a CHOICE Arrangement or a group plan has to be affordable. For plan years beginning in 2027, the required contribution percentage is 10.22% [6]. For a CHOICE Arrangement, that means the employee’s cost for the lowest-cost silver plan available to them, after subtracting the allowance, should be no more than 10.22% of household income [1]. If the offer isn’t affordable, the employee may decline it and use Marketplace tax credits instead [1].
Which model fits your business?
A CHOICE Arrangement often fits if you are a small business that hasn’t offered benefits before, have employees in several states, have a mix of full-time and part-time staff, or want a fixed monthly budget instead of renewal surprises.
A group plan often fits if you have a workforce in one area that values a single shared plan and network, or employees who rely on a specific network of specialists.
Some employers layer in Direct Primary Care so employees get easy primary care access under either model; see our hybrid models comparison.
Timing for 2027
Plan ahead of your own renewal so employees get notice in time. Marketplace open enrollment for 2027 coverage runs November 1, 2026 to January 15, 2027, with December 15 as the deadline for coverage starting January 1 [7]. For a deeper walkthrough, read What Is CHOICE (ICHRA)? A Complete Guide for Employers, visit our employers page, or book a consultation to model both options side by side.
REFERENCES
[1] healthinsurance.org. “Individual coverage health reimbursement arrangement (ICHRA), or CHOICE Arrangement.” healthinsurance.org, 2026. https://www.healthinsurance.org/glossary/individual-coverage-health-reimbursement-arrangement-ichra/
[2] U.S. Departments of the Treasury, Labor, and Health and Human Services. “Health Reimbursement Arrangements and Other Account-Based Group Health Plans” (final rules). Federal Register, June 2019. https://www.govinfo.gov/content/pkg/FR-2019-06-20/html/2019-12571.htm
[3] KFF. “2025 Employer Health Benefits Survey.” KFF, October 2025. https://www.kff.org/health-costs/2025-employer-health-benefits-survey/
[4] Internal Revenue Service. “Publication 15-B (2026), Employer’s Tax Guide to Fringe Benefits.” IRS, 2026. https://www.irs.gov/publications/p15b
[5] Internal Revenue Service. “Determining if an Employer Is an Applicable Large Employer.” IRS, 2026. https://www.irs.gov/affordable-care-act/employers/determining-if-an-employer-is-an-applicable-large-employer
[6] Internal Revenue Service. “Rev. Proc. 2026-26: Indexing Adjustments for Applicable Percentage Table and Required Contribution Percentage for 2027.” IRS, July 2026. https://www.irs.gov/pub/irs-drop/rp-26-26.pdf
[7] HealthCare.gov. “Dates and Deadlines for 2027 Health Insurance.” U.S. Centers for Medicare & Medicaid Services, 2026. https://www.healthcare.gov/quick-guide/dates-and-deadlines/
Frequently asked questions
What is a CHOICE Arrangement?
A CHOICE Arrangement (formerly ICHRA) lets an employer of any size give employees a monthly allowance, then reimburse them, tax-free, for individual health insurance they choose. Employees must be enrolled in individual-market health insurance or Medicare to be reimbursed.
Is a CHOICE Arrangement the same thing as an ICHRA?
Yes. CMS began calling individual coverage health reimbursement arrangements CHOICE Arrangements in September 2026. Some paperwork may still say ICHRA, and the underlying rules have not changed.
Can I offer a CHOICE Arrangement and a group plan at the same time?
Yes, as long as they go to different classes of employees, such as full-time and part-time staff. You can't offer the same class a choice between the two.
What is the 2027 affordability threshold?
For plan years beginning in 2027, the IRS required contribution percentage is 10.22%. For a CHOICE Arrangement, the offer is generally affordable if the employee's cost for the lowest-cost silver plan, after subtracting the allowance, is no more than 10.22% of household income. The test matters for employers with 50 or more full-time employees, including full-time equivalents.
Are CHOICE Arrangement reimbursements taxable?
As a general rule, reimbursements from a health reimbursement arrangement are excluded from the employee's income and wages for federal income and employment tax purposes. This is general educational information, not tax or legal advice. Talk with a qualified tax professional about how this applies to your situation.
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