State ICHRA tax credits are multiplying: What it means for employers

Individual coverage health reimbursement arrangements, now officially known as CHOICE Arrangements (formerly ICHRA), have moved from a niche benefits strategy to a mainstream conversation in state legislatures across the country.

On September 3, 2026, the Centers for Medicare & Medicaid Services and the U.S. Small Business Administration announced the new name: CHOICE Arrangement, short for Custom Health Option and Individual Care Expense. It's a mouthful, and most of the industry, including this blog, will keep using ICHRA alongside it for a while. The rebrand changes nothing about how the benefit works, how it's regulated, or how employers administer it. It's simply a new name for a model that's gaining real momentum, especially at the state level.

That momentum shows up clearly in one specific trend: state govern ments are now paying employers to adopt ICHRA. Three states have passed dedicated tax credits so far, and several more have bills moving through their legislatures. This piece breaks down where things stand, why states are embracing this incentive, what it means for employers of different sizes, and what the trend signals about where CHOICE Arrangements are headed.

Where state ICHRA tax credits stand today

Three states currently have a dedicated tax credit on the books for employers who offer an ICHRA.

Indiana led the way, becoming the first state to pass ICHRA-specific tax credit legislation. Indiana's credit set the template other states have largely followed: a per-employee credit available to small employers who switch from a traditional group plan to an ICHRA, with the credit amount stepping down after the first year.

Mississippi followed in April 2026, when Governor Tate Reeves signed House Bill 343 into law. The Mississippi credit closely mirrors Indiana's structure:

• Employers with fewer than 50 employees can claim up to $400 per covered employee in year one and $200 per covered employee in year two.

• The employer's ICHRA contribution must match or exceed what it previously spent per employee on group coverage.

• The state capped total credits at $1 million per fiscal year, distributed first come, first served.

• Unused credit amounts can carry forward for up to 10 years.

Connecticut became the third state in May 2026, when Governor Ned Lamont signed the state's fiscal year 2027 budget adjustment bill, which included a new ICHRA tax credit. Connecticut's version is notably more generous:

• Employers with 50 or fewer employees can claim a credit of up to $1,000 per covered employee per year.

• The credit applies against corporate business, insurance, and state income taxes.

• The program is capped at $5 million annually and, like Mississippi's, runs on a first-come, first-served basis.

• Employers can only claim the credit during their first two years of offering an ICHRA.

More states are moving toward ICHRA tax credits

Three states with an active credit might sound modest, but the legislative activity behind it tells a bigger story.

States with bills actively moving:

• Ohio House Bill 133 passed the House unanimously in June 2025 and is currently in the Senate Ways and Means Committee. It would offer a $400 nonrefundable credit per covered employee to businesses with two to 50 employees that contribute at least $400 per employee to an ICHRA.

• Pennsylvania House Bill 2550 passed the House by a wide bipartisan margin and has moved to the Senate. It would create a tax credit for small employers that help fund employee premiums through the state's insurance exchange, Pennie.

• New Hampshire Senate Bill 635 advanced out of the Senate Ways and Means Committee in March 2026 but has since been tabled in the full Senate, meaning its path forward is currently uncertain.

States where a similar bill was introduced but hasn't advanced:

• Arizona House Bill 2694 would create a credit for employers with one to 50 employees that contribute at least $400 per employee to an ICHRA, starting with tax years after 2026. It remains in committee.

• Georgia has considered a bill offering a declining credit, starting at $600 per employee and phasing down over five years, for employers with 10 or fewer employees. It has stayed in the state House.

• Texas Senate Bill 1949, which would have created a franchise tax credit for small employers contributing to an ICHRA, died in committee during the 2025 session.

A bill not advancing in one session doesn't mean the idea is dead. Indiana's and Mississippi's laws show a common pattern: an initial bill stalls, momentum builds through employer and broker advocacy, and a revised version passes in a later session. Given how quickly this issue has moved since Indiana passed its law, more states are likely to join the list within the next year or two.

Why state ICHRA tax credits are catching on

A few forces are driving states to treat ICHRA adoption as worth subsidizing

• Small group markets are shrinking. In many states, carriers have pulled back from the small group market or raised rates to levels that put group coverage out of reach for smaller employers. ICHRA gives those employers a workable alternative, and a state tax credit softens the transition cost.

• The model has a track record now. ICHRA went live in 2020, and adoption has grown steadily since. According to CMS's rebrand announcement, the number of people covered under ICHRAs surpassed 500,000 at the start of 2026. States crafting new legislation aren't betting on an unproven idea. They're responding to a benefit that's already demonstrating traction.

• It's a politically palatable lever. Defined contribution health benefits tend to draw support across the political spectrum, since they appeal to fiscal conservatives focused on cost predictability and to lawmakers focused on expanding coverage access.  Connecticut's bill, for example, moved forward as part of a broader affordability push and drew support from small business advocacy groups who argued it would strengthen employers' bargaining power against shrinking group market options.

• Federal efforts have stalled, creating room for states to act. Congress has considered legislation more than once to codify and expand ICHRA at the federal level, including provisions tied to the CHOICE Arrangement name. Those efforts were removed from the version of H.R. 1 that became law in July 2025, and a follow-up push stalled again in December 2025. With federal action on hold, states have stepped in with their own incentives instead of waiting.

What state ICHRA financial incentives mean for employers

Every state credit passed so far is built for small employers, generally those with fewer than 50 employees. Mid-market and large employers won't directly qualify for Indiana's, Mississippi's, or Connecticut's credits as currently written. That doesn't mean this trend is irrelevant to bigger organizations. It matters for a few practical reasons.

It signals where policy is headed. State legislatures don't typically create financial incentives for a benefits model they view as fringe or temporary. The fact that three states have already committed tax dollars, and several more are actively debating it, suggests lawmakers see ICHRA and CHOICE Arrangements as a durable part of the health benefits landscape rather than a passing trend.

It builds administrative infrastructure that benefits everyone. Every state credit program requires clearer guidance on how ICHRA contributions, eligibility, and reporting work. Indiana's Department of Revenue, for instance, has already issued implementation guidance clarifying how the credit applies to employers with no prior group plan. That kind of regulatory clarity tends to benefit administrators and employers of all sizes, not just the small businesses claiming the credit directly.

It strengthens the case for CHOICE Arrangements in employer benefits strategy conversations. For mid-market and large employers evaluating a shift away from traditional group coverage, state-level incentive programs add a useful data point. They demonstrate that policymakers and small businesses are moving in the same direction. That context can help HR and finance leaders build a stronger internal case for exploring a CHOICE Arrangement, even without a direct tax credit on the table.

Future credits could expand eligibility. Legislative proposals evolve. Connecticut's employee cap sits at 50, matching Mississippi's and Indiana's, but nothing prevents a future bill, in these states or others, from raising that threshold or introducing a separate incentive tier for larger employers. Employers that track this space now will be better positioned to act quickly if that happens.

What the growing popularity signals for ICHRA's future

Taken together, these state-level moves paint a picture of a benefits model gaining structural, not just anecdotal, momentum. A few takeaways stand out.

The credit model is becoming a template. Mississippi's and Connecticut's laws both closely followed the structure Indiana established first: a per-employee credit, a step-down after year one, a statewide cap, and a requirement that employer contributions match or exceed prior spending. That kind of convergence usually means other states will borrow the same framework rather than starting from scratch.

State action may eventually pressure federal action. As more states pass their own incentives, the patchwork itself could become an argument for federal standardization, particularly if employers operating across multiple states start requesting more consistent rules.

The rebrand reflects genuine growth, not just a marketing refresh. CMS and the SBA didn't rename ICHRA to CHOICE Arrangement in a vacuum. The name change followed years of steady adoption growth and multiple congressional attempts to codify and expand the model. A federal agency doesn't typically invest in renaming and promoting a benefit unless it expects that benefit to matter more, not less, in the years ahead.

Employers who get familiar with CHOICE Arrangements now will have an edge. Whether or not a given employer qualifies for a state tax credit today, understanding how ICHRA, now CHOICE Arrangement, works positions HR and benefits teams to move quickly as more incentives, guidance, and legislative activity emerge.

The bottom line

Three states, Indiana, Mississippi, and Connecticut, currently offer a tax credit specifically designed to encourage ICHRA adoption, and several more have bills actively moving through their legislatures. While these credits are aimed at small employers for now, the broader trend they represent, growing legislative confidence in defined contribution health benefits, is relevant to organizations of every size. As more states join the list and federal guidance continues to develop under the new CHOICE Arrangement name, employers who understand this landscape early will be better prepared to act when new opportunities open up.

References

1. Becker's Payer Issues – "CMS rebrands ICHRA" – https://www.beckerspayer.com/payer/ichra/cms-rebrands-ichra/

2. Indy Chamber – "New tax credit available for Indiana small businesses that offer ICHRAs" – https://indychamber.com/2023/10/12/new-tax-credit-available-for-indiana-small-businesses-that-offer-ichras/

3. Bloomberg Tax – "Mississippi Authorizes Income Tax Credit for Certain Employers" – https://news.bloombergtax.com/daily-tax-report-state/mississippi-authorizes-income-tax-credit-for-certain-employers

4. CT Mirror – "Lamont pushes health insurance tax credits for CT small businesses" – https://ctmirror.org/2026/04/15/lamont-pushes-health-insurance-tax-credits-for-ct-small-businesses/

5. Hartford Business Journal – "Lamont proposes tax credit to expand small business health coverage options" – https://hartfordbusiness.com/article/lamont-proposes-tax-credit-to-expand-small-business-health-coverage-options/

6. Ohio House of Representatives – "Ohio House Passes Craig's Bill to Offer Innovative Healthcare Solutions for Small Employers" – https://ohiohouse.gov/members/meredith-craig/news/ohio-house-passes-craigs-bill-to-offer-innovative-healthcare-solutions-for-small-employers-133625

7. Pennsylvania House of Representatives – Rep. Mazzocco statement on HB 2550 – https://pahouse.com/Mazzocco/EmailArchive/?id=143986

8. Arizona State Legislature – HB 2694 bill text – https://www.azleg.gov/legtext/57leg/2R/bills/HB2694P.htm

9. New Hampshire General Court – SB 635 bill text – https://gc.nh.gov/Senate_SessionDay/billtext.aspx?id=1413

10. Repairer Driven News – "Federal and state legislation could be game changer for how small businesses offer health insurance" – https://www.repairerdrivennews.com/2025/06/24/federal-and-state-legislation-could-be-game-changer-for-how-small-businesses-offer-health-insurance/

11. LegiScan – TX SB1949 bill status – https://legiscan.com/TX/text/SB1949/2025