How to report QSEHRA benefits on IRS Form W-2 (with exceptions)
The IRS requires employers to report QSEHRA benefits available to employees on Form W-2. This amount must be reported on every employee's IRS Form W-2 whether or not the employee receives reimbursement from the QSEHRA; reporting will not have an effect on the employee's taxable income either way.
How to report QSEHRA benefits on Form W-2
The Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is a fairly new HRA plan design, available to employers since December 2016. With a QSEHRA, employers with fewer than 50 full-time employees can provide funds to help employees buy individual health insurance with pre-tax dollars, as long as the employer provides no group health plan to any active employee group.
Recent guidance (Notice 2017-67) provides details on the basics for reporting QSEHRA benefits on Form W-2, plus how to report variances that can come up in some employee-employer situations.
Standard Permitted Benefits in QSEHRA
The entire amount of the QSE-HRA benefit available to the employee must be reported on Form W-2 whether or not the employee uses it.
This amount is reported in box 12, using code FF. This is a new code especially for the QSE-HRA benefit amount available to the employee. The IRS description for it is, "Permitted benefits under a qualified small employer health reimbursement arrangement." It is not counted as taxable income for the employee.
Over-the-Counter Medical Expenses
An employer may choose to allow reimbursement of over-the-counter medical expenses (eligible per Publication 502) through the QSEHRA. When this option is made available to employees, records must be kept for year-end W-2 reporting.
When an employee receives reimbursement from the QSEHRA for over-the-counter drugs:
The amount is reported on Form W-2 as income in box 1 as well as box 3, Social Security wages, and box 5, Medicare wages.
Non-Calendar Plan Years
When a QSEHRA is run on a non-calendar plan year, the amount reported on Form W-2 is pro-rated accordingly.
For example, an employer provides a QSEHRA with a plan year of July 1 to June 30:
For the plan year beginning July 1, 2017, a QSEHRA benefit of $4,000 was available to every employee for July 1, 2017 through June 30, 2018. The amount reported on the employee's 2017 Form W-2, box 12, code FF is $2,000 (for July-December 2017).
In the new plan year (2018), the QSEHRA provides $4,500 to every employee for July 1, 2018 through June 30, 2019. The amount reported on the employee's 2018 Form W-2, box 12, code FF is $4,250 ($2,000 for January-June 2018, and $2,250 for July-December 2018).
Carryover Provisions
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