New tax credit for Indiana employers that offer an HRA
Health Benefits • December 11, 2023 at 9:40 AM • Written by: Chase Charaba
Starting in 2024, Indiana employers will have a new tax credit available if they decide to offer their employees a health reimbursement arrangement (HRA) instead of group health insurance. This will allow small businesses and nonprofits to offer affordable and personalized health benefits in The Hoosier State.
This article will cover everything you need to know about the new Indiana tax credit for HRAs, including what House Bill 10041 is, how the tax credit works, and what organizations are eligible for the credit.
What is Indiana House Bill 1004 and Public Law 203?
As personalized health benefits become more popular across the United States, Indiana lawmakers introduced HB 1004 to provide a tax credit incentive for qualifying small businesses to offer HRAs.
Lawmakers introduced the bill to committee in January 2023. After months of changes, the Indiana House and Senate adopted the bill in April 2023 by a super-majority vote. Governor Eric Holcomb signed HB 1004 into law on May 4, 2023, as Public Law 2032.
Under the new law, which is effective on January 1, 2024, organizations with fewer than 50 employees can claim a state tax credit for the next two years. Employers can claim up to $400 per covered employee in the first year if the HRA provides equal or greater value than the organization’s previous health plan in the previous plan year. This drops to $200 in the second year.
Assuming a qualifying organization has 49 employees enrolled in the HRA, it could receive up to $19,600 in tax credits the first year. However, the amount of the credit can’t exceed the organization’s state tax liability for the year. The state also caps total approved credits at $10 million for the fiscal year.
The law uses the definition of an HRA from IRC Section 9831(d)3, meaning you can offer a qualified small employer HRA (QSEHRA) or individual coverage HRA (ICHRA) instead of a traditional group health plan. A group coverage HRA (GCHRA) isn’t a qualifying HRA under the law since it still requires the employer to offer a group health insurance plan.
Why offer an HRA instead of group coverage in Indiana?
Individual health insurance coverage is cheaper than group rates in many Indiana counties. Small group health insurance premiums in some Indiana counties can be as high as $736 per month4 for single employees. But, the average individual insurance premium for a 50-year-old on a bronze plan can be as low as $416 per month. This makes paying for your employees’ individual insurance premiums more feasible.
That’s where an HRA comes in. An HRA is an employer-funded health benefit that allows you to reimburse your employees tax-free for their individual health insurance premiums and qualifying out-of-pocket medical expenses.
With an HRA, you set a monthly allowance for your employees. Your employees’ health benefit costs can’t exceed that allowance, giving you greater cost control than a group plan. Any unused funds at the end of the plan year stay with you, not the employee, giving you even more benefits savings.
A QSEHRA is only available to organizations with fewer than 50 full-time equivalent employees (FTEs). The IRS caps annual QSEHRA allowances, meaning you’ll never spend more than the maximum contribution limit per employee. All W-2 full-time employees are automatically enrolled in the benefit, but you can choose to include part-time employees as well. It’s the perfect solution for small businesses and nonprofits in Indiana looking to save on health benefit costs. But, it may not work for every organization.
If you want more customization, you can offer an ICHRA. An ICHRA allows you to offer a greater allowance than the QSEHRA caps and customize benefit eligibility and allowances by employee class. That way, you can offer the benefit to certain employees while excluding others, such as if you want to offer a traditional group health plan to full-time employees and an ICHRA to part-time employees. Just remember you must offer an HRA instead of a group health plan to be eligible for the Indiana tax credit.
No matter which type of the above HRAs you choose, your eligible employees can purchase the individual health insurance policies that best fit their needs from brokers, private exchanges, or the federal Health Insurance Marketplace.
What organizations are eligible for the Indiana tax credit for HRAs?
As mentioned earlier, only organizations with fewer than 50 employees can claim the credit. But, there are some additional requirements businesses must meet.
Small businesses are eligible for the credit if:
- It has fewer than 50 employees
- The organization is a qualified taxpayer with any state tax liability
- The organization offers an HRA of equal or greater value to its previous health benefits
- The organization offers an HRA instead of a traditional group health plan
According to the law, state tax liability means “a qualified taxpayer’s total tax liability that is incurred under (1) IC 6-3-1 through IC 6-3-7 (the adjusted gross income tax); (2) IC 6-5.5 (the financial institutions tax); and (3) IC 27-1-18-2 (the insurance premiums tax) or IC 6-8-15 (the nonprofit agricultural organization health coverage tax).”
The qualified taxpayer must claim it on their tax return to get it. The Indiana Department of Insurance records the returns claiming the credit on a first-come-first-serve basis until the state reaches the annual credit limit.
Does the Indiana HRA tax credit carry over?
Public Law 203 allows organizations with tax credits that exceed their state tax liability for the taxable year to carry over the excess to the succeeding year. These carryover credits can’t be used for any taxable years beginning more than 10 years after the return the credits came from. Taxpayers aren’t entitled to any carrybacks or refunds for unused credits.
Are there any reporting requirements for the credit?
Indiana Public Law 203 comes with various reporting requirements for organizations that decide to offer an HRA and claim tax credits.
According to the law text, “qualified taxpayers that claim the credit under this chapter are required to report to the Department of Insurance every three years following the allowance of a credit under this chapter in a manner prescribed by the Department of Insurance.”
This report must state whether your organization continued to offer an HRA or switched back to a traditional employer-sponsored group plan. If you continue to offer an HRA, you must report the amount of the benefit.
How PeopleKeep can help Indiana small businesses offer an HRA
If you’re an Indiana business looking to offer an HRA, but you don’t know where to start, PeopleKeep can help. Since starting in 2006, we’ve helped thousands of employers nationwide set up and manage their HRAs and employee stipends. Our employee benefits administration software makes it easy to offer your employees a QSEHRA or ICHRA so you can take advantage of the Indiana tax credit.
With PeopleKeep, we automatically generate the required plan documents and your summary plan description (SPD) so your benefit can comply with federal ERISA and Affordable Care Act (ACA) regulations. Our expert team even reviews your employees’ reimbursement requests, so you don’t have to interpret the IRS guidelines on your own. We simply let you know when we verify an expense so you can approve the amount and reimburse your employees.
Conclusion
There’s no better time for Indiana employers to ditch group health insurance and offer an HRA instead. Reimbursing employees for their individual health coverage premiums and out-of-pocket healthcare expenses is cheaper than a group plan across The Hoosier State. With the new tax credit for offering an ICHRA or QSEHRA becoming available for tax years after December 31, 2023, you can save even more on your health benefits.
If you aren’t sure whether your organization is eligible for the tax credit, we recommend speaking with an attorney or tax professional in Indiana.
Ready to enhance your employee benefits with PeopleKeep?
Chase Charaba
Chase Charaba is the content marketing manager at PeopleKeep. He started with the company as a content marketing specialist in early 2022. Chase has written more than 350 blog posts for various companies and personal projects throughout his career. He’s worked for digital marketing agencies, in-house marketing teams, and as the editor for national award-winning high school and college newspapers. He’s also a YouTuber, landscape photographer, and small business owner.