in-20260930-IR-045260351NRA: DEPARTMENT OF STATE REVENUE

DEPARTMENT OF STATE REVENUE Information Bulletin #122 Income Tax September 2026 Effective Date: Upon Publication (Replaces Bulletin #122, dated December 2024) SUBJECT: Health Reimbursement Arrangement Tax Credit REFERENCES: IC 6-3.1-38 SUMMARY OF CHANGES Apart from technical, nonsubstantive changes, this bulletin has been updated to reflect the allowance for pass-through entities to pass through the credit for 2026 and later. In addition, this bulletin has been updated to reflect that the credit limit for 2026 and later is determined on a calendar-year basis, along with procedures associated with credits arising from pass-through entities. INTRODUCTION In 2023, the Indiana General Assembly enacted IC 6-3.1-38, which created a new Health Reimbursement Arrangement Tax Credit (the credit). The credit is available for employers who adopt health reimbursement arrangements after Dec. 31, 2023, in lieu of traditional employer-provided insurance starting in the 2024 taxable year. DEFINITIONS A "covered employee" means an employee who is covered by a health reimbursement arrangement provided by their employer. An "employer" means the person or entity for whom the covered employee performs services as an employer. In the case of a staffing agency, the staffing agency generally will be considered the employer. An employer does not include the following unless the employee actually performs services for that company: An "eligible employer" means an employer with fewer than 50 employees. For purposes of this determination, the maximum number of employees during the taxable year will be used to determine eligibility. If an employer has 50 or more employees at any time during the taxable year, the employer is not an eligible employer, though minimal, short-term variances may be permitted on a case-by-case basis. A "health reimbursement arrangement" means an arrangement described in IRC § 9831(d). A "pass-through entity" means an entity treated as a partnership, S corporation, estate, or trust for state and federal tax purposes. COMPUTATION OF THE CREDIT To qualify for the credit, an eligible employer must do one of the following: If the employer did not provide health insurance benefits during the previous year because it was a new employer as of the current year, the credit applies to the first two years starting in 2024 or later and in which the employer has a health reimbursement arrangement. The credit is the lesser of the employer's contribution to the health reimbursement arrangement for a covered employee or: The amount of the credit is based on the employer's taxable year of the credit, not the employee's year or other period of membership. For example, if an employer establishes a health reimbursement arrangement in 2024 and hires a new employee covered by the arrangement in 2025, the credit for the employee is a maximum of $200 rather than $400. In addition, the credit is computed on a per-employee basis. For example, if an employer establishes a health reimbursement arrangement in 2024 and contributes $300 for one employee and $600 for a second employee, the credit is $700 ($300 for the first employee plus a maximum of $400 for the second employee) rather than $800. For taxable years 2024 and 2025, if the eligible employer is a pass-through entity, the credit does not flow through to the entity's owners, and the owners may not claim their proportionate share of the credit. The credit also is not available to be applied against the Indiana Pass Through Entity Tax. For taxable years 2026 and later, if the eligible employer is a pass-through entity, the credit is available to be passed through to the entity's owners. For a credit arising from a health reimbursement arrangement established in 2025, the credit determined for 2026 (i.e., $200 or the contribution to the health reimbursement arrangement, whichever is less) can be passed through but the 2025 credit cannot be passed through. The credit can be applied against the Indiana Pass Through Entity Tax. REPORTING THE CREDIT AND SPECIAL PROCEDURES FOR 2024 To report the credit, Code 878 (or Code 1878 if applicable) must be used. The credit will be reported on Schedule IN-OCC, Part A, but without a PIN or Project Code. However, if the reporting software requires a PIN or project code, enter "1" for the code. Upon a credit claim for tax years starting in 2024 only, the department will send the eligible employer a letter requesting Form HRA-1 for reporting information to verify the credit. The Form HRA-1 should not be provided with the return at the time of filing. It must be submitted separately according to the instructions on the form. Once a completed Form HRA-1 is submitted, the department will review the completed form and either allow the credit or adjust the claim as necessary. Failure to complete Form HRA-1 may result in denial of the credit in full. ANNUAL CREDIT CLAIMS AND OVERALL LIMITATIONS The credit allowable to a taxpayer is limited to the taxpayer's state adjusted gross income tax liability or financial institutions tax liability for a taxable year after application of other nonrefundable credits allowable prior to this credit. If a credit is not allowable for a taxable year due to the limitation of the taxpayer's tax liability, the unused credit can be carried forward for up to 10 years after the first taxable year for which the credit was allowable and must be reduced as it is claimed. If any credit is carried forward, either to a future year or from a prior year, the credit must also be listed on Schedule IN-OCC, Part B. The total amount of the credit for all claimants statewide is $10 million per calendar year. For purposes of applying the limitation, the department will apply the limitation as follows: If you have any questions concerning this bulletin, contact the Tax Policy Division at taxpolicy@dor.in.gov. _________________________