Understanding CHOICE Arrangements
A CHOICE Arrangement is an employer-funded health reimbursement arrangement that helps eligible employees pay for individual health insurance instead of enrolling in a traditional employer-selected group health plan.
Employees choose coverage based on their own premiums, prescriptions, providers, expected healthcare needs, and preferred balance between monthly and out-of-pocket costs.
This guide explains how CHOICE Arrangements work, how they interact with Marketplace coverage and financial assistance, and what employers and employees should consider before participating.
Employer Funding, Employee Choice
The employer provides a fixed amount of tax-free money that eligible employees may use for approved healthcare expenses under the terms of the arrangement.
Instead of choosing one group plan for everyone, the employer gives employees the opportunity to select qualifying individual health insurance coverage that fits their circumstances.
Reimbursements are generally tax-free to employees and tax-deductible to employers when applicable requirements are satisfied.
Traditional Group Coverage and CHOICE Arrangements
Both approaches can help employers support employee healthcare needs, but they operate differently.
Traditional Group Health Plan
The employer selects the plan options
- The employer chooses one or more group plans or designs a self-funded plan.
- Employees select from the options offered by the employer.
- The employer works with the issuer or administrator on enrollment and renewal.
- Employees may lose access to the group plan when employment ends, subject to continuation rights.
CHOICE Arrangement
The employee selects individual coverage
- The employer defines a reimbursement contribution instead of selecting an individual policy.
- Employees choose qualifying individual coverage based on their own needs.
- Employees generally own the policy and may keep it after leaving the job if they continue paying premiums.
- The arrangement itself is funded only by the employer.
Different Employees May Choose Differently
A CHOICE Arrangement can support different plan decisions within the same workforce.
Lower Monthly Premium
An employee who rarely uses medical care may prefer a Bronze plan with a lower monthly premium and higher costs when care is needed.
Lower Costs When Receiving Care
An employee who expects more healthcare services may prefer a Gold plan with a higher premium and generally lower cost sharing.
Preferred Providers
An employee may prioritize a plan whose network includes a preferred doctor, hospital, specialist, or pharmacy.
What Coverage Can Be Integrated with a CHOICE Arrangement?
To participate, an employee and any participating family member must be enrolled in qualifying individual health insurance or eligible Medicare coverage.
Qualifying Coverage
- Individual health insurance purchased through a Marketplace
- Individual health insurance purchased outside the Marketplace
- Medicare Part A and Part B
- Medicare Advantage, also known as Part C
Other Potential Reimbursements
If the employee has qualifying coverage and the plan document permits it, the arrangement may also reimburse eligible expenses such as:
- Medicare Part D or Medigap premiums
- Separate dental and vision premiums
- Other qualified medical expenses under Internal Revenue Code Section 213(d)
Employers Decide What the Arrangement Will Reimburse
Premium-Only Design
The arrangement reimburses eligible insurance premiums. This can provide a simpler administrative experience.
Premiums and Other Medical Expenses
The arrangement may also reimburse permitted expenses such as doctor visits, hospital services, prescriptions, mental health services, medical equipment, certain over-the-counter products, pregnancy and postpartum care, and certain long-term care services.
How Employers Can Structure a CHOICE Arrangement
There is no single standard design. Employers have flexibility, but every design must remain within federal requirements.
Eligibility
Decide which employees may participate and whether eligible spouses and dependents are included.
Contributions
Set the employer-funded amount and determine whether permitted variations will apply.
Expenses
Choose whether the arrangement reimburses premiums only or premiums plus other qualified medical expenses.
Unused Funds
Decide whether unused amounts may roll forward. Unused CHOICE Arrangement funds cannot be transferred to an HSA.
Administration
Determine whether responsibilities will be handled internally or through a TPA and other service partners.
Employee Support
Plan how employees will receive neutral education, enrollment assistance, and ongoing support.
Employers May Offer Different Benefits to Certain Classes
An employer may use one class or combine two or more permitted classes, such as part-time employees working in the same rating area.
- Full-time employees
- Part-time employees
- Seasonal employees
- Salaried employees
- Non-salaried employees, such as hourly employees
- Temporary employees of staffing firms
- Employees covered by a collective bargaining agreement
- Non-resident aliens with no U.S.-based income
- Employees who have not satisfied a waiting period
- Employees whose primary sites of employment are in the same rating area
Consistency Within Each Class Matters
Same Terms
Employees in the same class generally must be offered the arrangement on the same terms.
Permitted Contribution Variations
Contributions may generally vary by employee age or number of covered dependents. An age-based contribution for the oldest employee in a class cannot exceed three times the contribution for the youngest employee.
No Midyear Contribution Changes
Employers generally cannot change the contribution amount during the plan year.
No Individual Choice Between Two Employer Offers
An employee cannot be offered a choice between a traditional group health plan and a CHOICE Arrangement. Different permitted classes may receive different offers, and special rules can apply to a prospective new-hire subclass.
Flexible Contributions Without a Statutory Annual Limit
Employers select a contribution strategy based on their budget, workforce, local premiums, recruiting goals, administrative needs, and ACA responsibilities.
Age
Contributions may vary by the employee’s age within the permitted 3-to-1 limit. They cannot vary based on the age of a spouse or dependent.
Family Size
Employers may offer different amounts for self-only, self-plus-one, and family participation, or use another consistent dependent-based structure.
Employee Class
Different permitted employee classes may receive different contribution structures when all applicable class rules are followed.
Employees May Be Able to Pay Their Remaining Premium Pre-Tax
If the individual premium is greater than the employer’s contribution, an employer may pair the CHOICE Arrangement with a Section 125 Cafeteria Plan so eligible employees can use pre-tax salary reductions for the remaining amount.
Monthly premium$700
Employer contribution− $500
Employee portion$200
Why the Employer Contribution Amount Matters
Affordability affects whether employees may qualify for Marketplace financial assistance and whether an Applicable Large Employer may owe an employer shared responsibility payment.
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Find the Applicable LCSP
Start with the monthly premium for the applicable lowest-cost Silver plan available through the Exchange.
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Subtract the Contribution
Subtract the employer’s monthly CHOICE Arrangement contribution from the LCSP premium.
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Compare the Result
Compare the employee’s required contribution with the applicable affordability threshold.
Illustrative Plan Year 2027 Example
Is the arrangement affordable?
This example uses the 10.22% required contribution percentage stated for Plan Year 2027 in the training materials.
Monthly LCSP premium$500
Employer contribution− $250
Employee required contribution$250
Monthly household income × 10.22%$5,000 × 10.22% = $511
Result$250 is less than $511, so the arrangement is affordable in this example.
Affordability Determines the Financial-Assistance Path
Affordable Offer
Marketplace assistance is generally unavailable
An employee offered an affordable CHOICE Arrangement is not eligible for APTC or cost-sharing reductions, even if the employee declines the arrangement.
Unaffordable Offer
The employee may have another option
An employee may decline an unaffordable CHOICE Arrangement and potentially qualify for Marketplace assistance if all other eligibility requirements are met.
When family members are included
If an affordable offer extends to the employee’s family members, neither the employee nor those eligible family members can receive APTC, even if they decline the arrangement.
When the offer is employee-only
If spouses and dependents are not eligible for the arrangement, the employee’s offer does not prevent those family members from receiving APTC if they otherwise qualify.
From Employer Evaluation to Reimbursement
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Evaluate the Arrangement
The employer reviews workforce needs, budgets, employee classes, local plan availability, reimbursement options, administrative capacity, and potential partners.
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Establish the Plan
The employer formally defines eligibility, contribution amounts, dependent access, reimbursable expenses, administration, the plan year, and any Section 125 Cafeteria Plan coordination.
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Provide Required Information
Employees receive applicable notices and plan information explaining the arrangement, participation requirements, and Marketplace considerations.
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Employees Select Coverage
Employees enroll or remain enrolled in qualifying individual health insurance, Medicare Parts A and B, or Medicare Advantage.
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Substantiate and Reimburse
The employee or administrator verifies qualifying coverage and confirms that coverage was active for the month in which an eligible expense was incurred before reimbursement.
Important Responsibilities Continue After Launch
Notices and Plan Documents
Employers must provide required notices and plan information so employees can understand the benefit and its effect on Marketplace eligibility.
Substantiation
Reasonable procedures must verify qualifying coverage for the plan year and confirm active coverage for each month connected to a reimbursement.
Privacy and Records
Documentation must be collected, reviewed, and stored appropriately, especially when it contains sensitive health information.
Reporting and ACA Duties
Employers should coordinate applicable tax reporting, plan administration, and employer shared responsibility obligations with qualified professionals.
COBRA
Because the arrangement is a group health plan under federal law, employers subject to COBRA may need to offer qualified beneficiaries continuation coverage after certain qualifying events.
Clear Employee Communication
Employees need understandable instructions covering eligible expenses, reimbursement requests, documentation requirements, enrollment timing, and support contacts.
How TPAs, Agents, and Brokers May Help
Third-Party Administrator
A TPA may support employee onboarding, enrollment verification, substantiation, reimbursement processing, document storage, reporting, tax compliance, payroll integrations, and ongoing employee service.
Employers should compare more than price. The employee experience, included services, platform integrations, documentation workflows, and support model all matter.
Agent or Broker
An agent or broker may help employers evaluate design choices, contribution strategies, vendors, employee communications, enrollment workflows, and ongoing renewals.
They may also help employees compare premiums, provider networks, prescription coverage, deductibles, and out-of-pocket costs based on each employee’s needs.
Agent or Broker of Record
Because employees enroll in individual policies, the Agent of Record or Broker of Record relationship generally exists at the individual-policy level rather than the employer-group level. Employers and brokers should understand how a TPA platform assigns the AOR/BOR, handles commissions, and coordinates post-enrollment service.
A Flexible Option, but Not the Right Fit for Everyone
A CHOICE Arrangement may be especially relevant for an employer seeking a defined contribution approach, serving employees in several states, supporting remote workers, or responding to uneven group-plan network access.
However, the arrangement may require more employee education, careful affordability analysis, and new reimbursement and documentation workflows.
Questions to Evaluate
- What problem is the employer trying to solve?
- Are suitable individual plans available where employees live?
- How comfortable are employees comparing individual plans?
- What level of employee education and enrollment support is needed?
- Can the employer manage ongoing substantiation and reimbursement?
- Would a TPA or enrollment partner improve the experience?
- How will contributions affect affordability and employee costs?
- Does the approach fit each permitted employee class?
CHOICE Arrangement FAQ
Is a CHOICE Arrangement an insurance policy?
No. It is an employer-funded health reimbursement arrangement. Employees use it with qualifying individual health insurance or eligible Medicare coverage.
Can employees use the arrangement with Marketplace coverage?
Yes. Qualifying individual health insurance may be purchased through a Marketplace or outside the Marketplace. Marketplace financial assistance rules still apply.
Can an employee receive APTC and use the CHOICE Arrangement?
No. An employee who enrolls in the arrangement cannot receive APTC. An employee offered an unaffordable arrangement may decline it and potentially qualify for APTC if all other requirements are met.
Can the employer choose the employee’s individual plan?
No. Employees select their own individual coverage. Employers must avoid steering employees toward a specific issuer, policy, or product.
Can unused funds be moved into an HSA?
No. Unused CHOICE Arrangement funds cannot be transferred into a Health Savings Account. Whether funds remain available in a later plan year depends on the terms established by the employer.
Can an employee keep individual coverage after leaving the job?
Generally, yes. The employee owns the individual policy and may keep it by continuing to pay the premium. Access to employer reimbursements may end, subject to applicable continuation rights such as COBRA.
Does every employer need a TPA?
No. Some employers may administer a simple arrangement internally. Many use a TPA because ongoing substantiation, reimbursements, documentation, privacy, integrations, and employee support can become complex.
CHOICE Arrangement Resources
Rules, affordability percentages, Marketplace procedures, and plan-year requirements can change. Review current official guidance before making decisions.
CMS Help Desks
For additional assistance, contact the HRA Email Help Desk at HRA@cms.hhs.gov or the Agent/Broker Email Help Desk at FFMproducer-assisterhelpdesk@cms.hhs.gov.