diff --git a/packages/core/src/babel-plugin-inline-hbs.ts b/packages/core/src/babel-plugin-inline-hbs.ts
index 7184b040f..28e4b6bda 100644
--- a/packages/core/src/babel-plugin-inline-hbs.ts
+++ b/packages/core/src/babel-plugin-inline-hbs.ts
@@ -1,7 +1,6 @@
 import {
   TaggedTemplateExpression,
   CallExpression,
-  isStringLiteral,
   templateLiteral,
   templateElement,
   ExpressionStatement,
@@ -10,6 +9,8 @@ import {
   Program,
   functionExpression,
   blockStatement,
+  throwStatement,
+  newExpression,
 } from '@babel/types';
 import { NodePath } from '@babel/traverse';
 import { join } from 'path';
@@ -119,19 +120,44 @@ function handleTagged(path: NodePath<TaggedTemplateExpression>, state: State) {
 }
 
 function handleCalled(path: NodePath<CallExpression>, state: State) {
-  if (path.node.arguments.length !== 1) {
-    throw path.buildCodeFrameError('hbs accepts exactly one argument');
-  }
-  let arg = path.node.arguments[0];
-  if (!isStringLiteral(arg)) {
-    throw path.buildCodeFrameError('hbs accepts only a string literal argument');
-  }
-  let template = arg.value;
+  let { template, insertRuntimeErrors } = getCallArguments(path);
+  let compilerInstance = compiler(state);
+
   if (state.opts.stage === 1) {
-    let compiled = compiler(state).applyTransforms(state.file.opts.filename, template);
+    let compiled: string;
+    try {
+      compiled = compilerInstance.applyTransforms(state.file.opts.filename, template);
+    } catch (err) {
+      if (insertRuntimeErrors) {
+        // in stage 1 we just leave the bad template in place (we were only
+        // trying to run transforms and re-emit hbs), so that it will be handled
+        // at stage3 instead.
+        return;
+      }
+      throw err;
+    }
     (path.get('arguments')[0] as NodePath).replaceWith(stringLiteral(compiled));
   } else {
-    let { compiled, dependencies } = compiler(state).precompile(state.file.opts.filename, template);
+    let result: ReturnType<TemplateCompiler['precompile']>;
+    try {
+      result = compilerInstance.precompile(state.file.opts.filename, template);
+    } catch (err) {
+      if (insertRuntimeErrors) {
+        path.replaceWith(
+          callExpression(
+            functionExpression(
+              null,
+              [],
+              blockStatement([throwStatement(newExpression(identifier('Error'), [stringLiteral(err.message)]))])
+            ),
+            []
+          )
+        );
+        return;
+      }
+      throw err;
+    }
+    let { compiled, dependencies } = result;
     for (let dep of dependencies) {
       state.dependencies.set(dep.runtimeName, dep);
     }
@@ -179,3 +205,28 @@ function amdDefine(runtimeName: string, importCounter: number) {
     ])
   );
 }
+
+function getCallArguments(path: NodePath<CallExpression>): { template: string; insertRuntimeErrors: boolean } {
+  let [template, options] = path.node.arguments;
+
+  if (template?.type !== 'StringLiteral') {
+    throw path.buildCodeFrameError('hbs accepts only a string literal argument');
+  }
+
+  let insertRuntimeErrors =
+    options?.type === 'ObjectExpression' &&
+    options.properties.some(
+      prop =>
+        prop.type === 'ObjectProperty' &&
+        prop.computed === false &&
+        prop.key.type === 'Identifier' &&
+        prop.key.name === 'insertRuntimeErrors' &&
+        prop.value.type === 'BooleanLiteral' &&
+        prop.value.value
+    );
+
+  return {
+    template: template.value,
+    insertRuntimeErrors,
+  };
+}
diff --git a/packages/core/tests/inline-hbs.test.ts b/packages/core/tests/inline-hbs.test.ts
index 803806ec2..8361f213a 100644
--- a/packages/core/tests/inline-hbs.test.ts
+++ b/packages/core/tests/inline-hbs.test.ts
@@ -27,6 +27,17 @@ function stage1Tests(transform: (code: string) => string) {
     expect(code).toMatch(/return hbs\("<div/);
     expect(code).toMatch(/embroider-sample-transforms-result/);
   });
+
+  test('runtime errors are left in place in stage 1', () => {
+    let code = transform(`
+      import hbs from 'htmlbars-inline-precompile';
+      export default function() {
+        return hbs("<div>", { insertRuntimeErrors: true });
+      }
+      `);
+    expect(code).toMatch(/import hbs from 'htmlbars-inline-precompile'/);
+    expect(code).toMatch(/return hbs\("<div>",\s*\{\s*insertRuntimeErrors: true\s*\}\)/);
+  });
 }
 
 function stage3Tests(transform: (code: string) => string) {
@@ -50,6 +61,16 @@ function stage3Tests(transform: (code: string) => string) {
     expect(code).not.toMatch(/import hbs from 'htmlbars-inline-precompile'/);
     expect(code).toMatch(/return Ember.HTMLBars.template\({/);
   });
+  test('runtime errors become exceptions in stage 3', () => {
+    let code = transform(`
+      import hbs from 'htmlbars-inline-precompile';
+      export default function() {
+        return hbs("<div>", { insertRuntimeErrors: true });
+      }
+      `);
+    expect(code).not.toMatch(/import hbs from 'htmlbars-inline-precompile'/);
+    expect(code).toMatch(/throw new Error\("Unclosed element `div`/);
+  });
 }
 
 describe('inline-hbs', () => {