On May 22, 2025, the U.S. House of Representatives passed the One Big Beautiful Bill Act (H.R. 1). Title XI, Part 3 of the bill, “Investing in the Health of American Families and Workers,” codifies and expands the regulatory framework for individual coverage health reimbursement arrangements (ICHRAs), rebranded as custom health option and individual care expense (CHOICE) arrangements, and introduces sweeping reforms to health savings accounts (HSAs). As of June 16, 2025, the bill has not been approved by the Senate. This summary provides a high-level overview of the current proposals for changes to ICHRAs and HSAs.
CHOICE Arrangements
The bill codifies the June 20, 2019 Final Rule, allowing employers to offer ICHRAs, which are HRAs integrated with individual market coverage, without violating group health plan requirements under the Affordable Care Act (ACA). Under the bill, ICHRAs are now termed “CHOICE arrangements.” The following proposed changes and new requirements are effective for taxable years beginning after December 31, 2025.
CHOICE Arrangement
A CHOICE arrangement has five core requirements:
- It is an HRA in its most basic form: an employer-provided group health plan funded solely by employer contributions to provide payments or reimbursement of medical care subject to a fixed dollar maximum for a given period.
- Payments or reimbursements may be made only for medical care during periods during which a covered individual is also covered under individual health insurance coverage offered in the individual market (other than coverage that consists solely of excepted benefits) or Medicare Parts A and B or C.
It meets certain:
- Nondiscrimination requirements.
- Substantiation requirements.
- Notice requirements.
Eligibility
CHOICE arrangements must be offered on the same terms to all employees within a specified class. Employers may designate any of the following as a specified class of employees for purposes of offering CHOICE arrangements:
- Full-time employees.
- Part-time employees.
- Salaried employees.
- Non-salaried employees.
- Employees whose primary site of employment is in the same rating area.
- Employees covered by a collective bargaining agreement (CBA).
- Employees who have not satisfied a waiting period under the group health plan.
- Seasonal employees.
- Employees who are nonresident aliens with no U.S.-source earned income.
- Any other class of employees as designated by the Secretary of the Treasury.
These are the same classes as in the 2019 Final Rule’s allowable employee classes except that the 2019 Final Rule also allowed a class for staffing company employees. Similar to the 2019 Final Rule, CHOICE arrangements also permit employers to combine multiple classes. In addition, CHOICE arrangements allow flexibility for the Secretary of the Treasury to designate additional classes, potentially expanding the original nine applicable classes.
Variations in benefit amounts are permitted based on age (up to 300% of the lowest maximum dollar amount) or number of dependents. Employers may prospectively offer CHOICE arrangements to newly hired employees in a class while maintaining traditional coverage for existing employees.
Nondiscrimination requirements
The bill states that CHOICE arrangements comply with the nondiscrimination provisions in Section 9802 of the Internal Revenue Code and Section 2705 of the Public Health Service Act (PHSA). To meet the nondiscrimination requirements of the bill itself, employers may not offer to those eligible for the CHOICE arrangement any other group health plan coverage other than a fully insured small group market plan or coverage consisting solely of excepted benefits.
Substantiation requirements
Employers must implement “reasonable procedures” to verify that covered individuals are enrolled in qualifying individual market or Medicare coverage. The bill does not describe what reasonable procedures are, which may signal an intent to provide sponsors and administrators with greater flexibility.
Notice requirements
Employers must provide notice of CHOICE arrangement rights and obligations at least 60 days before the plan year begins. This shortens the timeframe from 90 days under the 2019 Final Rule for ICHRAs.
Summary of benefits and coverage
CHOICE arrangements that otherwise satisfy the bill’s requirements are treated as satisfying PHSA Section 2715, which requires group health plans and health insurance issuers offering group or individual coverage to provide a standardized summary of benefits and coverage.
Tax reporting
Employers must report total permitted benefits for enrolled individuals under a CHOICE arrangement on Form W-2 for such employees.
Effective Date: Plan years beginning after December 31, 2025.
Cafeteria Plans
Generally, employees cannot use salary reduction contributions through a cafeteria plan to purchase individual health insurance coverage on an Exchange. Such coverage is specifically excluded from the definitions of a “qualified benefit” under IRS Code Section 125 cafeteria plan. The bill amends Section 125 to make an exception to this exclusion, allowing employees who are enrolled in a CHOICE arrangement offered by the employee’s employer to use salary reduction contributions under a cafeteria plan to purchase Exchange-based individual health insurance coverage. (Note: Code Section 125 rules require cafeteria plans to have a written plan document that lists the benefits offered through the plan.)
Effective Date: Taxable years after December 31, 2025.
Employer Credit
A new business tax credit is proposed for small employers (non-ALEs, or employers with fewer than 50 full-time equivalent employees) offering CHOICE arrangements. The credit is available to eligible employers during the “credit period,” which is the two-year period beginning with the month during which the employer first establishes a CHOICE arrangement. The proposed credit is currently $100 per month that the employee is enrolled in year one, and one-half of that amount (currently $50 per month) in year two. CHOICE arrangements must constitute affordable minimum essential coverage that provides minimum value to qualify for the tax credit. The proposed credit is allowed against the alternative minimum tax, and the $100 credit amount will be adjusted for inflation beginning in 2027.
Effective Date: Taxable years after December 31, 2025.
HSA Reforms
The following sections outline the proposed HSA reforms, highlighting their potential impact on HSA participants. Notably absent from the bill is an extension of the COVID-era telehealth exception that allows for HSA participants to receive telehealth (or other remote care) benefits before satisfying their annual deductible.
Individuals entitled to age-based Medicare Part A
Currently, a person enrolled in Medicare Part A is not an “eligible individual” for HSA purposes. A person generally becomes enrolled in Part A automatically upon applying for Social Security benefits.
Under the bill, individuals enrolled only in Medicare Part A based on age (assuming no enrollment in Part B or D) would not be disqualified from HSA eligibility solely because of the Medicare Part A enrollment. In other words, an individual who is otherwise an eligible individual but is enrolled in Medicare Part A can still establish and contribute to an HSA.
The bill departs from current rules and prohibits HSA-eligible individuals who are age 65 and over from using HSA funds to purchase health insurance and imposes the 20% additional tax on HSA distributions not used for qualified medical expenses.
Also note that late enrollment penalties under Medicare are not addressed in the bill and would therefore generally still apply unless eligibility for the high-deductible health plan (HDHP) coverage is a result of active employment (either the eligible individual’s or their spouse’s).
Effective Date: Months beginning after December 31, 2025.
Direct primary care
Direct primary care arrangements, as defined by the bill, would no longer disqualify individuals from HSA eligibility. Generally, a direct primary care arrangement for HSA purposes means an arrangement consisting solely of “primary care” services that are qualified medical care provided by a primary care provider in which a fixed periodic fee, irrespective of actual services provided, is the sole compensation. The bill excludes from this definition any arrangement if the aggregate fee for all direct primary care service arrangements exceed $150 per month (or 2x such amounts if coverage is for more than one person), adjusted annually. Primary care services do not include the following for purposes of this definition: general anesthesia-required procedures, prescription drugs other than vaccines, and lab services not typically administered in an ambulatory primary care setting.
Effective Date: Months beginning after December 31, 2025.
Bronze and catastrophic plans
The bill would treat bronze-level and catastrophic-level plans available as individual coverage through an Exchange as HDHPs, irrespective of the deductibles under such plans.
Effective Date: Months beginning after December 31, 2025.
On-site clinics
Certain “qualified items and services” provided at employer on-site clinics or clinics operated primarily for the benefit of the employer’s employees do not disqualify individuals from being able to contribute to an HSA. Qualified items and services include physical exams, immunizations (including antigen injections), drugs or biologicals (other than prescribed drugs), treatment for on-the-job injuries, preventive care for chronic conditions, drug testing, hearing/vision screening, and related services. While this is generally good news, employers that offer primary care coverage through an on-site clinic will presumably need to curtail benefits that go beyond the permitted HSA-compatible benefits described above. Note that telehealth services are not addressed by the bill.
Effective Date: Months beginning in taxable years after December 31, 2025.
Fitness and wellness expenses
The bill would allow up to $500 (individual) or $1,000 (joint or head of household) annually, limited to one-twelfth of the total amount monthly, to be withdrawn tax-free from HSAs for qualified sports and fitness expenses. Qualified sports and fitness expenses are amounts paid “exclusively” for the “sole purpose” of participating in a physical activity, including memberships at a “fitness facility” and instruction in a physical exercise or activity. Private clubs owned and operated by its members that offer golf, sailing, hunting, or riding facilities would not qualify as a “fitness facility” if the health or fitness component were incidental to the overall function or purpose of the facility or the facility was not fully compliant with any state or federal antidiscrimination laws. Expenses for personal trainers are excluded, as are expenses for videos, books, and remote or virtual instruction (unless live). One-off expenses are not allowed – membership, participation, or instruction must continue for more than one day or one session.
Important: These proposed changes for qualified HSA expenses are in IRS Code Section 223, which specifically governs HSAs. The general provision for expenses that qualify as “medical care” for HSAs and other tax-advantaged arrangements (like health flexible spending accounts (FSAs) and HRAs) is Section 213(d). Importantly, the proposed change to include “fitness facility” expenses applies only to HSAs under Section 223 and does not extend to other tax-advantaged accounts governed by Section 213(d), such as health FSAs or HRAs. Unlike current rules under Section 213(d), the bill does not require the expense to be related to a diagnosed medical condition, marking a significant expansion in eligible uses.
Effective Date: Taxable years after December 31, 2025.
Catch-up contributions
The bill would allow married couples over 55 to each make catch-up contributions to a single HSA.
Effective Date: Taxable years after December 31, 2025.
Qualified rollovers from FSAs and HRAs
The bill generally reinstates (from 2012) and expands the ability to roll over unused FSA or HRA funds into an HSA (“qualified HSA distribution”) when transitioning to HDHP coverage, provided the individual was not covered by an HDHP in the prior four years. For a qualified HSA distribution made before the end of the plan year, the FSA or HRA must be converted to an HSA-compatible arrangement if the individual remains enrolled in the FSA or HRA for the remainder of the year.
For a given year, the total amount of qualified HSA distributions cannot exceed the annual limit for FSA contributions unless the eligible individual has family coverage under an HDHP, in which case the annual maximum is 2x this amount. Although the bill does not limit the number of qualified HSA distributions a person can make, the amount of the qualified HSA distribution reduces the limitation on deductible HSA contributions the eligible individual can make for the year.
The bill requires qualified HSA distributions to be reported on Form W-2 (presumably in Box 12).
Effective Date: Distributions made after December 31, 2025.
Pre-establishment medical expenses
The bill would allow medical expenses incurred up to 60 days before HSA establishment to be eligible for tax-free reimbursement. The HSA would be treated as having been established on the date coverage under the HDHP begins, but only for purposes of determining whether a medical expense is qualified.
Effective Date: Coverage beginning after December 31, 2025.
Spousal FSA exception
Coverage under a spouse’s FSA will not disqualify an individual from HSA eligibility if the aggregate amount of the reimbursements from the spouse’s FSA for the plan year do not exceed the aggregate amount of the eligible expenses for the plan year that do not include expenses incurred by the otherwise HSA-eligible individual. Presumably this could include expenses for covered children, so long as it does not include expenses for the spouse that is not enrolled in the FSA.
Effective Date: Plan years beginning after December 31, 2025.
Expanded deductible contribution limits
The bill increases the deductible limit for HSA contributions by $4,300 (self-only) and $8,550 (family), subject to income-based phaseouts starting at $75,000 (single) and $150,000 (joint) and ending at $100,000 and $200,000, respectively. This change would not apply to increases in employee contributions under IRS Code Section 125 plans or employer contributions, just to the deductible limit for employee contributions.
Effective Date: Taxable years after December 31, 2025.
A Look Ahead
We will continue to monitor the bill’s legislative trajectory closely since its enactment could result in substantial modifications to the current framework governing HRAs and HSAs.
The bill has not yet been approved by the Senate, so plan sponsors should be aware that amendments or delays could materially affect the scope, timing, or implementation of the proposed ICHRA and HSA provisions.
If you have any questions, or would like additional information, please contact one of the attorneys on our Employee Benefits & Executive Compensation team.
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