If you’re a small business owner in Indiana, you’ve probably felt the squeeze of rising health insurance costs and wondered whether there’s a better way to take care of your team without blowing your budget. More and more employers are finding that answer in HRAs—an employer-funded benefit that lets you reimburse employees directly for their health care costs.
But what is an HRA, and how can it help your business offer meaningful health benefits while maintaining more control over costs? Whether you run a growing company in Lafayette, Indiana or manage a small team elsewhere, HRAs can offer a flexible alternative to traditional group health insurance.
In this guide, we’ll break down how Health Reimbursement Arrangements work, the differences between QSEHRAs and ICHRAs, potential tax advantages for Indiana businesses, and why more small employers are exploring HRAs as a strategic employee benefits solution.
What is an HRA?
A Health Reimbursement Arrangement (HRA) is an employer-funded benefit that allows you to reimburse your employees for health insurance premiums and qualifying out-of-pocket medical expenses like copays, deductibles, and procedures not covered by their insurance plan.
In and of itself, an HRA is not an insurance policy. Instead, each of your employees selects and registers for their own health insurance plans, and employers cover part of the costs for these plans afterwards from a designated fund.
Unlike traditional group health insurance plans, where you pick one policy for everyone, an HRA gives your employees the freedom to choose a plan that fits their individual needs while you still provide meaningful support.
However, it’s also important to note that because it’s not considered an insurance plan, it often doesn’t meet the Affordable Care Act (ACA) requirements for businesses with over 50 full-time employees. However, if your business has fewer than 50 full-time employees, you’re not constricted by these requirements—making an HRA one of the most affordable and flexible ways to offer health benefits and attract quality talent.
There are a few types of HRA, the most notable being QSEHRAs and ICHRAs.
What is the difference between a QSEHRA and an ICHRA?
At their cores, QSEHRAs (Qualified Small Employer Health Reimbursement Arrangement) and ICHRAs (Individual Coverage Health Reimbursement Arrangement) are HRAs with the same functions. They are both employer-funded, tax-advantaged arrangements, but they differ in important ways.
QSEHRA: Qualified Small Employer Health Reimbursement Arrangement
A QSEHRA is designed specifically for small businesses.
- Size: Fewer than 50 full-time equivalent employees
- Eligibility: Same benefit across eligible employees
- Contribution Limits: Set annually by the IRS
- Insurance Requirement: Most cover the Minimum Essential Coverage. Usually, Individual, Medicare, Spouse’s employer plan, COBRA, or TRICARE.
ICHRA: Individual Coverage Health Reimbursement Arrangement
An ICHRA is a more flexible option with broader applicability for larger businesses.
- Size: Any size
- Eligibility: Can vary depending on employee classification (full-time, part-time, etc.)
- Contribution Limits: No limit
- Insurance Requirements: Most meet Affordable Care Act (ACA) requirements. Usually, Individual or Medicare.
Which is better: QSEHRA vs ICHRA?
The decision of QSEHRA vs ICHRA completely depends on your business and needs.
Requiring less ongoing administration, a QSEHRA is simpler and easier to implement than an ICHRA. For small businesses with fewer than 50 full-time equivalent employees that want a straightforward, low-maintenance benefits option, this is often the best starting point.
An ICHRA is much more effective for bigger or growing businesses. For businesses with 50 or more employees, the ICHRA’s flexibility and customization options make it a compelling benefits plan. You can customize your benefits to offer larger stipends to full-time employees and smaller stipends to seasonal or part-time employees.
How do HRAs benefit small businesses?
For many small business owners in Indiana, offering health benefits can feel like a balancing act. You want to take care of your employees and remain competitive when hiring, but traditional group health insurance plans can quickly become expensive and difficult to manage. That’s one reason HRAs are gaining traction among Indiana businesses.
From predictable budgeting to potential tax advantages, HRAs offer several benefits that make them especially appealing for small and growing companies.
Your Budget Stays Predictable
With a traditional group health plan, your premiums can jump 10-20% at renewal, and you often have little say in it. With an HRA, you or the IRS sets the monthly reimbursement amount, and it doesn’t change unless you decide to change it. For a small business managing tight margins, that kind of predictability is valuable.
Employees Get Coverage that Actually Fits
A 28-year-old single employee has very different needs than a 45-year-old with a family. With an HRA, each employee shops for and enrolls in their own individual plan and gets reimbursed by you up to your designated amount. They get the plan that fits their situation while receiving support from you that fits your budget.
Real Tax Savings on Both Sides
HRA contributions are generally tax-deductible for your business. This means the money you put toward employee health benefits reduces your taxable income. On the employee side, reimbursements received through a properly structured HRA are typically tax-free, so they’re getting the full dollar value of what you contribute. Other systems that simply raise wages to cover health costs, comparatively, cause both sides to lose a portion to payroll taxes.
No Complicated Offboarding When Someone Leaves
Anyone who’s managed a small team through turnover knows how tangled employee health coverage can get. With a group plan, when someone leaves, there’s COBRA administration, coordination with the carrier, and the risk of coverage gaps. With an HRA, the employee owns their individual policy. When they leave, you simply stop reimbursing. There’s nothing to untangle, no carrier to notify, and no loose ends for your HR process to manage.
Why are Indiana small businesses switching to HRAs?
With these benefits, HRAs are becoming increasingly attractive to Indiana small businesses. Indiana is consistently recognized as having some of the highest healthcare costs in the Midwest. Factors like concentrated hospital systems and limited price competition contribute to premiums and out-of-pocket costs that outpace neighboring states. When group health insurance is already expensive, and Indiana’s market makes it even more so, the predictable, employer-controlled costs of an HRA become a much more attractive option.
Plus, Indiana small businesses can now benefit from an extra tax advantage. Indiana's House Bill 1004, now codified as 2026 Public Law 74, introduced a direct tax credit for Indiana small businesses that adopt HRAs.
To qualify, businesses with fewer than 50 full-time employees need to adopt either an ICHRA or QSEHRA and claim a credit against their Indiana state tax liability. In the first year of having an HRA, the business will receive up to $400 per covered employee. In the second year, the credit decreases to $200 per covered employee. In order to qualify for the tax credit, your HRA contributions must be equal to or greater than what you contributed toward employee health benefits in the previous year.
To put this into perspective, a Lafayette, Indiana business with 20 employees could receive up to $8,000 in state tax credits in the first year alone, simply for making the switch to an HRA.
At Paradigm Consulting, we specialize in helping small businesses across Indiana design benefits strategies that make sense for their budgets, teams, and long-term goals. Whether you’re exploring an HRA for the first time, trying to decide between a QSEHRA or ICHRA, or looking to take advantage of Indiana’s House Bill 1004 tax credit, we’re here to walk you through the steps.
Please let us know if you have any questions. We understand that local companies have unique needs that most national firms don’t consider or struggle to identify. This leaves your people with a less effective, one-size-fits-all benefits plan. However, our ability to cater to the needs of our clients comes from decades of client partnerships. This perspective allows us to fully address unique needs and generate creative benefits plans.
You shouldn’t have to worry about just being a number, offering a generic plan, or getting the unique support you need. Call us today.
This Benefits Insights is not intended to be exhaustive nor should any discussion or opinions be construed as professional advice.