Proper Reporting for QSEHRA Benefits
Introduced in 2017 via the 21st Century Cures Act, the QSEHRA is an employer-funded health benefit that enables tax-free reimbursements. Only small employers with fewer than 50 full-time employees and who do not otherwise provide a group health plan can offer a QSEHRA. In a nutshell, the employer provides a monthly allowance, which signifies the maximum monthly amount that's reimbursable to employees for personal health care expenses.
When the QSEHRA was initially enacted, many small employers questioned how it should be taxed. The IRS responded through Notice 2017-67, which also addresses W-2 reporting for the benefit.
In 2019, employers with a QSEHRA can offer up to $5,150 for employees with self-only coverage and up to $10,450 for employees with family coverage — increasing from $5,050 for self-only coverage and $10,250 for family coverage in 2018.
The employer does not pay any payroll taxes — including Social Security tax, Medicare tax and FUTA tax — on payments made within those ranges. However, the employee must have Minimum Essential Coverage (MEC) in order to receive tax-free reimbursements. Without MEC, the employee's reimbursements are taxable and must be included in his or her gross income.
In its W-2 instructions, the IRS added a new stipulation, specifically for employers with a QSEHRA.
Per the IRS, "a new box 12 Code FF has been added to report the total amount of permitted benefits under a qualified small employer health reimbursement arrangement (QSEHRA)."
Therefore, when reporting QSEHRA benefits on eligible employees' W-2, you will need to state in box 12 (using Code FF) the total amount the employee was eligible to receive for the calendar year. Note that the IRS is only interested in what the employee was entitled to, and this amount may vary from what the employee actually received.
The allowed benefit amount should not include carryovers from previous years, only the permitted available funds for the current year.
If the employee did not participate in the QSEHRA for the entire year, you will need to prorate the amount. Let's say an employee became eligible on June 1 for an allowed benefit of $3,000 for the year. You would report an allowed benefit of $1,750 ($3,000 x 7/12) for the year in box 12 using Code FF.
As long as the reimbursements are tax free, you do not need to report the QSEHRA benefit anywhere else on the W-2.
Taxable Versus Tax-Free Reimbursements
Tax-free reimbursements should not be included in the employee's W-2 federal wages, Social Security wages and Medicare wages. But if the reimbursements are taxable — such as reimbursements the employee received while without MEC — the amounts should be included in the employee's W-2 federal wages, Social Security wages and Medicare wages.
Taxable QSEHRA reimbursements include over-the-counter drugs purchased without a prescription and pretax premiums for coverage sponsored by the employer of the eligible employee's spouse.
Remember that Form W-2 requirements are subject to frequent change, so be sure to work from the latest versions as you get closer to filing time. For further insight into W-2 reporting for the QSEHRA, give us a call today.