State tax credits for ICHRA and QSEHRA: A look at the growing momentum

By Holly Bengfort on March 11, 2026 at 2:53 PM

Rising healthcare costs have employers searching for sustainable alternatives to traditional group health insurance. Health reimbursement arrangements (HRAs), specifically the individual coverage HRA (ICHRA) and the qualified small employer HRA (QSEHRA), have emerged as flexible, cost-controlled options.

Now, a new trend is taking shape. States are considering new tax credits designed to further encourage HRA adoption.

In this article, we'll look at one state that has successfully implemented a tax credit and several others trying to do the same.

In this blog post, you'll learn:

About Indiana House Bill 1004.
Why employers are choosing HRAs over group health insurance for employee health benefits.
What a lighter tax load means for employers considering HRAs.

Comparing the HRAs that employers choose most

The two most popular stand-alone HRAs are the ICHRA and the QSEHRA. Data collected by the HRA Council shows combined ICHRA and QSEHRA adoption increased 19% year over year from 2024 to 2025. ICHRAs are driving most of that growth, with the number of employers offering the health benefit rising by 21%.

This chart shows a quick comparison of the two benefits:

Feature	Individual coverage health reimbursement arrangement (ICHRA)	Qualified small employer health reimbursement arrangement (QSEHRA)
Employer eligibility	Large, midsize, and small businesses with at least one W-2 employee	Small businesses with fewer than 50 full-time equivalent employees (FTEs)
Employee eligibility	Employees need qualifying individual health insurance plans	Employees need health plans (individual or group) that provide minimum essential coverage (MEC)
Eligible expenses	Tax-free allowance for health insurance premiums and qualified out-of-pocket medical expenses	Tax-free allowance for health insurance premiums and qualified out-of-pocket medical expenses
Contribution limits	No federally mandated contribution limits. Employers choose their own contribution	IRS sets maximum annual contribution limits, but employers can choose a smaller amount
Affordable Care Act (ACA)	Meets the employer mandate for ALEs that offer an affordable allowance	Employer mandate doesn't apply to small businesses
Flexibility	Employers can vary contributions based on employee class, age, and family size	Employers can vary contributions based on employee age and family size

Indiana leads the tax relief charge

Indiana House Bill 1004¹ positioned Indiana as the national leader in state-level HRA incentives. Effective January 1, 2024, it created the first state tax credit² for small employers that replace traditional group health insurance coverage with an HRA, including both ICHRA and QSEHRA.

Here’s how Indiana’s tax credit works:

It's for employers with fewer than 50 FTEs.
The amount is up to $400 per covered employee in the first year, and up to $200 per covered employee in the second.

The design is intentional. Indiana lawmakers sought to reduce the financial hesitation small employers face when transitioning away from group health plans. The two-year structure provides a runway for employers to implement and evaluate HRAs without absorbing the full upfront cost alone.

Where states stand on HRA tax credits

While Indiana is the only state with an enacted credit, several others have introduced legislation or explored similar proposals.

The following table summarizes these changes in the health benefits landscape:

State	Status	Type of tax credit	Key details
Indiana	Enacted in 2024	Tax credit for ICHRA and QSEHRA	Up to $400 per covered employee in the first tax year Up to $200 per covered employee in the second tax year
Ohio³	Introduced in 2025 Passed the House Pending in the Senate	Proposed ICHRA tax credit	$400 per covered employee
Texas⁴	Introduced in 2025 Didn't pass	Proposed HRA tax credit	$400 per covered employee
Georgia⁵	Introduced in 2025 Remains a proposed bill	Proposed ICHRA tax credit	$600 per covered employee in the first three years $400 per covered employee in the fourth year $200 per covered employee in the fifth year
Connecticut⁶	Introduced in 2026 Pending legislative review	Proposed ICHRA tax credit	Would match employer contributions up to $1,000 per covered employee per year for the first two years. Total credits would be capped at $5 million.

Although most of these bills did not become law, their introduction is significant. It demonstrates increasing legislative recognition that HRAs can serve as a policy tool to address small business healthcare affordability. According to KFF⁷, only 59% of businesses with 10 to 199 workers offered health benefits to at least some of their workers. That’s compared to 97% of organizations with 200 or more workers.

Why states are offering HRA tax credits

Group health insurance costs are rising faster than inflation. Employers can't keep up with skyrocketing health insurance premiums. HRAs provide a practical way to offer quality, affordable coverage.

ICHRA and QSEHRA allow employers to:

Set predictable monthly contribution limits
Offer tax-free allowances for individual health insurance and out-of-pocket medical expenses
Avoid the annual rate hikes and minimum participation requirements of traditional group health insurance

For small businesses, the benefits of an HRA are clear. However, change can feel risky, especially when leaving a familiar group health plan structure.

State tax credits aim to lower that barrier by:

Offsetting early adoption costs
Reducing perceived financial risk
Encouraging health benefit innovation
Helping small employers compete for talent

Indiana’s program demonstrates how tax incentives can encourage employers to test a defined-contribution health benefit strategy.

What this means for employers

For employers, particularly small businesses with limited budgets, this tax relief trend is worth monitoring.

If additional states adopt HRA tax credits:

Employers could receive direct financial incentives to transition from group plans.
Advisors and health insurance brokers may see increased demand for ICHRA and QSEHRA implementation.
State competition could accelerate broader adoption.

As healthcare affordability remains a top concern nationwide⁸, expect continued experimentation with state-level incentives. If the current trajectory holds, Indiana may not stand alone for long.

How PeopleKeep by Remodel Health helps employers make the transition

State tax credits may help increase adoption, but regardless of where legislation stands, many employers are already exploring HRAs as a smarter alternative to traditional group health insurance.

At PeopleKeep by Remodel Health, we specialize in helping small and midsize employers offer HRAs with ease. With our ICHRA and QSEHRA administration software, you can provide a compliant, cost-effective health benefit to your team in just minutes each month. For larger organizations, our parent company, Remodel Health, offers ICHRA+, a solution built specifically for big businesses.

Conclusion

Indiana House Bill 1004 has paved the way for state-level HRA tax credits. While other states are still exploring similar incentives, the growing momentum is clear. For employers, ICHRA and QSEHRA plans offer a flexible, cost-controlled alternative to traditional group health insurance coverage. With expert support from PeopleKeep and Remodel Health, employers can confidently transition to HRAs, gaining flexibility and cost control over their healthcare benefits.