<img src="//bat.bing.com/action/0?ti=5067266&amp;Ver=2" height="0" width="0" style="display:none; visibility: hidden;">
SIGN UP

Small Business Employee Benefits and HR Blog

What are the W-2 requirements for a QSEHRA?

When the 21st Century Cures Act introduced the qualified small employer health reimbursement arrangement (QSEHRA) in 2017, many small businesses raised questions about the new benefit’s taxation.

Specifically, they wanted to know how the QSEHRA would be taxed, which filing requirements they would be subject to, and how they should report the benefit on their employees’ W-2s.

The IRS answered these questions in IRS Notice 2017-67. In the document, the agency tackles 79 questions on the QSEHRA, covering tax-filing requirements and W-2 instructions along with other topics.

In this post, we’ll go over the IRS guidelines as well as general QSEHRA taxation questions.

What are the basic rules surrounding QSEHRA taxation?


The QSEHRA was created as a formal, tax-free benefit. In practice, that means that reimbursements issued through the QSEHRA are always free of payroll tax for small businesses and their employees.

Reimbursements can be free of income tax for employees, too, if they have minimum essential coverage (MEC).

Total tax savings, assuming employees have MEC, reach an average 35 percent compared with taxable wages.

How does my business report the QSEHRA on my employees’ W-2s?


Small businesses offering a QSEHRA must report the benefit on every eligible employee’s W-2.

Box 12, code FF is reserved specifically for the QSEHRA benefit. Businesses should report the total amount of allowances the employee was entitled to receive during that calendar year, without regard to the amount of payments or reimbursements the employee actually received.

The permitted benefit amount should include only newly available QSEHRA funds. Any carryover amounts from previous years should not be included.

If the business uses a noncalendar-year QSEHRA, it should report a prorated amount of the permitted benefit for the calendar year. For example, if you offer $200 a month and your QSEHRA plan year begins on June 1, 2018, you would report $1,400 on the employee’s 2018 Form W-2 ($200 x seven months of permitted benefit in 2018).

Similarly, if an employee’s eligibility or allowance changes during the year, the company should prorate the amount reported on their W-2 to reflect the change. For example, if an employee is eligible for $200 a month as a self-only employee from January 1, 2018, to May 31, 2018, and $400 as a married/family employee from June 1, 2018, to December 31, 2018, the business should report $3,800 on the employee’s 2018 Form W-2 ($200 x five months of permitted self-only-status benefit + $400 x seven months of permitted family-status benefit).

How does my business account for QSEHRA reimbursements that are taxable due to lack of MEC?


Employees who don’t have minimum essential coverage can still receive reimbursements through the QSEHRA, but those reimbursements are subject to income tax. Businesses should track employees’ coverage status throughout the year and report as taxable income on their W-2 any reimbursements made while the employee didn’t have MEC.

Specifically, any taxable reimbursements should be included as other compensation in box 1, Wages, tips, and other compensation.

If the business discovers an employee lacks MEC after filing their W-2, it should provide the employee with a Form W-2c, Corrected Wage and Tax Statement, and file the form with the Social Security Administration (SSA).

These payments won’t affect the amount reported in box 12, code FF.

How does my business account for other taxable QSEHRA reimbursements?


Some businesses provide for taxable reimbursements through their QSEHRA of over-the-counter drugs purchased without a doctor’s note or premiums paid on a pretax basis for an employee’s spouse’s group health policy.

If this is the case, the business should report the amounts paid to employees that year as wages subject to tax withholding in box 1.

These payments won’t affect the amount reported in box 12, code FF.

What are my business’s PCORI fee responsibilities?


Because the QSEHRA is a self-insured health plan, it’s subject to the Patient-Centered Outcomes Research Initiative (PCORI) fee.

Businesses offering a QSEHRA must report this fee annually on IRS Form 720. The fee is based on the number of eligible employees included in the benefit for that tax year.

For 2018, the PCORI fee and the completed Form 720 are due by July 31, 2018.

Conclusion


If your business chooses to offer the QSEHRA, you’ll face new reporting and tax-filing requirements—including on your employees’ W-2s.

General guidelines are listed here, but for additional help, contact your certified public accountant.