Budget bill provisions could make ICHRAs more appealing to businesses

The budget reconciliation bill that passed in the U.S. House of Representatives in May 2025¹ includes provisions intended to make ICHRAs – Individual Coverage Health Reimbursement Arrangements – easier to use and more financially attractive for small businesses.

Three sections of the bill address these health reimbursement arrangements integrated with individual-market coverage, currently known as ICHRAs. The changes include providing a tax incentive for small businesses that start reimbursing employees for the cost of individual health insurance and relaxing some existing administrative rules. The budget bill also calls for ICHRAs to be rebranded as Custom Health Option and Individual Care Expense (CHOICE) Arrangements.

New tax credit for small businesses that offer CHOICE Arrangement

Section 110203 of the House budget bill creates a nonrefundable tax credit that would be available to small employers (those with fewer than 50 full-time equivalent employees) during the first two years they offer a CHOICE Arrangement to their employees. The tax credit would be $100 per employee per month for the first year and $50 per employee per month in the second year. Both amounts would be adjusted for inflation in years after 2026.

Although ICHRA utilization has increased significantly in recent years,⁵ it still accounts for a very small segment of employer-sponsored health benefits.⁶ But the addition of a federal tax credit available to employers nationwide might incentivize more small employers to begin offering ICHRA benefits to their employees.

Indiana began offering a two-year tax credit in 2024, to small employers that offer ICHRAs to their employees.⁷ But while Indiana’s tax credit provides a maximum of $400 per employee in the first year, the federal tax credit in the House’s budget legislation would provide up to $1,200 per employee in the first year.

More widely available pre-tax premium contributions for employees

Under current rules, an ICHRA can be used to reimburse employees for individual-market coverage purchased through the ACA Marketplace / exchange or outside the exchange. If the employer’s ICHRA contribution is not enough to cover the full premium, the employee is responsible for covering the remaining premium.

Employers that utilize Section 125 cafeteria plans⁸ can allow employees the option to use a pre-tax salary reduction to pay the employee’s share of the premiums, but only if the plan is purchased outside the Marketplace⁹ (meaning the plan is purchased directly from an insurer, with or without the assistance of an agent or broker, without utilizing the health insurance Marketplace).

Section 110202 of the House budget bill would change that. It would allow employees to utilize pre-tax salary reductions (if offered by the employer) for the employee’s share of an individual-market plan, even if the plan is obtained in the Marketplace.

If implemented, this would help to create a “no wrong door” environment for taking advantage of an employer’s offer to reimburse premiums, in situations where the employer also offers a way for the employee’s share of the premium to be paid on a pre-tax basis.

Employers would be able to offer a choice between CHOICE or a traditional small-group plan

Under current rules, an employer can offer both an ICHRA and a traditional group plan, but only if they’re offered to different employee classes. In other words, no employee can be offered a choice between a traditional group plan and an ICHRA.¹⁰

Section 110201(a)(2)(C) of the House budget bill would relax this rule for small employers. If all of the employees in a class are offered a fully insured small-group health plan, those employees could also be offered the option to be reimbursed for individual-market coverage with a CHOICE Arrangement instead.

It’s unclear whether small employers would utilize this option however, as doing so would require the administrative burden of offering both a CHOICE Arrangement and a small-group health plan.

The future of CHOICE Arrangements

The House passed the One Big Beautiful Bill on May 22, 2025 and sent it to the Senate.¹ Senate Majority Leader, John Thune, has said that his goal is for the Senate to vote on the bill by the 4th of July, but the Senate is also preparing to modify the bill in various ways.¹¹

So it is unclear whether the bill will pass in the Senate, and if so, what provisions of the House bill will remain intact after the Senate’s revisions.¹¹ But while many aspects of health policy are politically contentious, ICHRAs have enjoyed broad bipartisan support since their debut.¹²[/efn_note]

It’s worth noting that the budget bill’s fairly brief sections dealing with CHOICE Arrangement contain far fewer regulatory details than the existing ICHRA rules, although it appears the House intends to keep the existing ICHRA rules unless otherwise specified in the legislation.³ But additional details could be included in the Senate’s version of the budget bill, or could be addressed in additional administrative rulemaking.

---

Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written hundreds of opinions and educational pieces about the Affordable Care Act for healthinsurance.org.

1. “H.R.1 – One Big Beautiful Bill Act” Congress.gov. Passed House May 22, 2025
2. “Health Reimbursement Arrangements and Other Account-Based Group Health Plans” Internal Revenue Service; Employee Benefits Security Administration; Health and Human Services Department. June 20, 2019
3. “The House Republican Budget Reconciliation Legislation: Unpacking The ICHRA And HSA Changes” Health Affairs. May 22, 2025
4. “H.R.3799 – CHOICE Arrangement Act” Congress.gov. Passed House June 21, 2023
5. “Growth Trends” HRA Council. Vol. 3, 2023-2024. Accessed May 23, 2025
6. “Employer Health Benefits, 2024 Annual Survey” KFF.org. Oct. 9, 2024
7. “Income Tax Information Bulletin #122 — Health Reimbursement Arrangement Tax Credit” Indiana Department of Revenue. Dec. 2024. And “New tax credit available for Indiana small businesses that offer ICHRAs” CareSource. Oct. 12, 2023
8. “FAQs for government entities regarding cafeteria plans” Internal Revenue Service. Accessed May 23, 2025
9. “FAQs on New Health Coverage Options for Employers and Employees” (Question 1) Internal Revenue Service. June 13, 2019
10. “FAQs on New Health Coverage Options for Employers and Employees” (Question 5) Internal Revenue Service. June 13, 2019
11. “Senate GOP preps for ‘one big, beautiful’ rewrite” Politico. May 22, 2025
12. “The story of ICHRA: Origins, timelines, impact, & bipartisan support” Thatch. Oct. 9, 2024