What to know: Reporting QSEHRA benefits on W-2s
The employer must report the total amount of reimbursement that the eligible employee is entitled to receive from the arrangement for the calendar year in box 12 of the W-2 using code FF.
*Please note, this amount may differ from what the employee actually received. The IRS is only interested in the amount the employee was entitled to.
How to Calculate the Benefit
Example 1: Employee is eligible all year.
A QSEHRA provides a permitted benefit of $3,000/year. Employee receives reimbursements of $2,000 from the arrangement.
Employer reports a permitted benefit of $3,000 in box 12 of W-2 using code FF because this is what the employee was entitled to (even though the employee didn't receive the full amount).
Example 2: Employee was not eligible until mid-year.
A QSEHRA provides a permitted benefit of $3,000, prorated by month for employees not eligible for the full year. Employee becomes eligible on May 1 for a permitted benefit of $2,000 ($3,000 x 8/12) for the year.
Employer reports a permitted benefit of $2,000 in box 12 of W-2 using code FF.
If the employee was not eligible to participate the entire year, the amount must be prorated.
Example 3: Employer did not begin QSEHRA until mid-year.
Employer provides a QSEHRA that begins on April 1st of the calendar year. The QSEHRA provides a permitted annual benefit of $2,000.
On the W-2, the employer reports a permitted benefit of $1,500 ($2,000 x 9/12) for the calendar year.
If the QSEHRA was not in effect for the entire year, the amount must be prorated
Example 4: Employee changes benefit level mid-year.
Employer provides a QSEHRA with a self-only permitted benefit of $3,960 and a family permitted benefit of $8,040. John Employee enrolls in self-only coverage from January 1 through July 31 and in family coverage from August 1 to December 31.
On the W-2, the employer reports a permitted benefit of $5,660 (($3,960 x 7/12) + ($8,040 x 5/12)).
The amount reported on the W-2 will be prorated to reflect the change the employee made during the year.
If your QSEHRA only allows for tax-free reimbursements, then that's it! There is no where else you have to report the benefit on the W-2.
Taxable Reimbursements
There is only one type of claim that is eligible for taxable reimbursement under QSEHRA:
premiums paid on a pre-tax basis for coverage under a group health plan sponsored by the employer of the eligible employee’s spouse (you can read more about this here)
When setting up the QSEHRA program you, as the employer, have the option of whether or not to include taxable reimbursements for these claims in your QSEHRA.
If you do offer taxable reimbursements, you will still report the offered benefit in box 12 as explained above.
You will also include the actual amount reimbursed on a taxable basis as Wages:
(a) The taxable reimbursements are wages subject to income tax withholding, and are included in box 1.
(b) The taxable reimbursements reported in box 1 are included in wages for purposes of FICA taxes (including Social Security and Medicare taxes) and FUTA taxes. Thus, the taxable reimbursements included in box 1 must also be included in box 3 and box 5.
Important Note on Taxable Reimbursements & Payroll Systems: If you have been providing taxable reimbursements to an employee at any point throughout the year, the gross amount should already be captured as wages in your payroll system. Therefore, there is likely no need for additional adjustments to be made to the W-2. This is also why Take Command does not separately report this amount (if any) to you at year end.