Reporting QSEHRA Benefits On the W-2

If you have an employee who is participating in your offered QSEHRA, you must report the total amount of the employee’s permitted benefit on Form W-2 in Box 12, using Code “FF.” The IRS description for this code is: “Permitted benefits under a qualified small employer health reimbursement arrangement.” This benefit is not counted as taxable income for the employee. 

It is important to note that over-the-counter medications used to require a prescription for reimbursement. However, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed in March 2020, has made over-the-counter medications eligible for reimbursement without a letter from a doctor or prescription. The medications should be reported on the W-2 Form as income in box 1 as well as in box 3, Social Security wages, and box 5.

Calculating The Benefits

When reporting on your W-2s, the permitted benefit amount should include only newly available QSEHRA funds. Any carryover amounts from previous years should not be included. However, if you use a non calendar-year QSEHRA, you will need to report a prorated amount.

Take the following example of a QSEHRA with a plan year that runs from August 1 to July 31:

• For the plan year beginning August 1, 2020, a QSEHRA benefit of $3,000 was available to every employee for August 1, 2020 through July 31, 2021. The amount reported on the employee’s 2020 Form W-2, box 12, code FF is $1,500 (for August-December 2020).
• In the new plan year (2021), the QSEHRA provides $3,500 to every employee for August 1, 2021 through July 31, 2022. The amount reported on the employee’s 2021 Form W-2, box 12, code FF is $3,250 ($1,500 for January-July 2021, and $1,750 for August-December 2021).

What About Carryovers?

When a QSEHRA has a carryover provision, only the newly available amounts are reported. If the QSEHRA allows for the use of carryover amounts from prior years, those amounts are not included in the amount reported for the current year. For example, if your employee has a remaining allowance of $1,000 in their QSEHRA allowance for 2020 and they receive $3,000 for the following year, only the $3,000 in new funds will be reported on their 2021 Form W-2 in box 12, Code FF.

What If An Employee Didn’t Participate?

Even if an employee did not participate in your QSEHRA, the benefits must still be reported on the employee’s W-2. You will report the amount of benefit that they were entitled to receive.

What About Employees With No MEC?

Employees who do not have the required minimum essential coverage (MEC) can still receive reimbursement through the QSEHRA, but will have to pay income tax on it. Specifically, any taxable reimbursements should be included as other compensation in box 1: Wages, tips, and other compensation.

If you issue a QSEHRA reimbursement and then later learn that the employee did not have MEC for the period in which the reimbursement occurred, the employee must repay the reimbursement as soon as possible.

However, if W-2 reporting is required before the employee has repaid the amount, that amount is taxable to the employee:

• The amount must be included in the employee’s gross income on Form W-2, box 1.
• The amount is not subject to FICA tax and should not be included in box 3, Social Security wages, or box 5, Medicare wages.

Have Questions?

If you choose to provide a QSEHRA to your employees, great! They are an excellent way to help your employees get the healthcare they need. But know that you will have to report these reimbursements on your W-2s, and it is important that you do it correctly in order to abide by the QSEHRA’s guidelines. If you need help exploring different types of small business HRAs, or have questions about offering healthcare in general, EZ can help. We will compare quotes, answer any questions and even sign you up for a plan at no cost to you. To get started, simply enter your zip code in the bar above, or to speak directly with an agent, call 888-998-2027.

Canceling Your Group Health Insurance Plan

The good news is that you can cancel your group health insurance plan if you really need to. Most group health insurance plans are a unilateral contract, meaning that you can cancel your plan at any time during the year. Some carriers require you to provide 30 days notice, but this is not always necessary. Be aware that some insurance carriers have penalties if you do decide to cancel early.

To get a better understanding of your carrier’s cancellation process, take a look at your contract; in fact, it is always a good idea to be fully aware of this information before you sign up for any plan. To get the cancellation process started, you will need to call a customer representative at your  insurance company. Once you’ve spoken with a representative, you will usually need to confirm your cancellation in writing, either by letter or fax; some companies will even accept an email. Be sure to confirm exactly what you need to do to cancel your coverage so you will not be billed for the following month. 

While you have every right to cancel your group insurance benefits, you should be aware that, under the Affordable Care Act, you are required to give employees at least 60 days advance notice prior to the cancellation date. This will allow them to take advantage of their 60-day Special Enrollment Period and choose a new insurance plan. 

Signing Up For A HRA

Even if you choose to cancel your traditional group health plan, you still have other options for helping your employees pay for healthcare. For example, you can choose to offer them a Health Reimbursement Arrangement (HRA). HRAs have been growing in popularity among employers because of their flexibility and lower costs when compared with traditional group healthcare. With these arrangements, you give employees a set monthly amount to spend on their own health insurance policy. Your employees have the option to use this allowance to buy their own individual health insurance plan and get reimbursed for qualified health insurance premiums up to the amount of their reimbursement allowance. The are a few different types of HRAs to choose from, including:

• QSEHRAs (Qualified Small Employer HRAs) are for businesses that have fewer than 50 employees. In order for employees to receive the tax-free reimbursement, they must have an individual health plan and submit a claim. With a QSEHRA, you can choose the monthly reimbursement amount, but you must offer the same amount to all employees, and there are set limits on how much you can reimburse them each month. 

• ICHRAs (Individual Coverage HRAs) are for businesses of any size. With these arrangements, you can create “classes” of employees, such as part-time or full-time, and offer them different monthly reimbursement amounts. With an ICHRA you can offer as much money as you would like; there is no limit on monthly reimbursement amounts. 

ICHRAs are especially popular because you can customize them to meet your company’s needs. You can choose any monthly reimbursement amount, as well as whether to reimburse your employees for premiums only or premiums and qualified medical expenses. You can also choose whether to structure reimbursement the same for all employees or to vary the amount by family size.

Keeping Your Employees Notified

As mentioned above, you will have to notify your employees once you decide you are going to cancel your group insurance policy. If you choose to offer your employees a HRA instead, make sure to keep your employees in the loop about this as well. This is especially important if you decide to offer a QSEHRA, as they will need to have their own individual health plan to participate. Your employees might feel like they are “losing” healthcare if you switch from a traditional group plan to a HRA, so make sure to thoroughly explain the HRA that you chose and its benefits. There will also be new rules for them to get used to. 

If you choose to switch to a HRA, explain to your employees:

• How the HRA works
• The benefits of a HRA, such as more flexibility
• How to request reimbursement

Need Help?

If you’re looking to save some money and are ready to ditch your group health insurance plan, the first thing you should do is come to EZ.Insure. We will provide you with your own agent who will assess your business’ needs, and suggest ways to offer your employees the best health benefits possible without breaking the bank. When you use EZ.Insure, you will save time, money, and the headaches that come from trying to research and compare all the different plans out there. EZ understands how important it is to save money, which is why we will instantly compare all available plans in your area for free. To start saving, simply enter your zip code in the bar above, or to speak directly to an agent, call 888-998-2027.

Employers who have trouble providing their employees with a traditional group health insurance plan sometimes turn to health reimbursement arrangements (HRAs) to help. HRAs are not health insurance, they are employer-funded accounts approved by the IRS that help employees pay for qualified out-of-pocket medical expenses. They can also help pay for their individual health insurance plan’s premiums. HRAs work through a reimbursement system. Employers offer employees a monthly allowance of tax-free money that they can use to pay for healthcare services, including health insurance, and then the employer reimburses them up to their allowance amount. But what if you’re a sole proprietor? You can offer this arrangement to any employees you have, but can you participate in the savings from an HRA yourself?  In short, generally no, but there is a way you might be able to!

HRA Rules

Offering an HRA is a great way to help pay for your employees’ healthcare costs; these arrangements give you more control over how much you’re spending, and can help to lower your healthcare costs. HRAs only need to be funded when employees who participate in them incur expenses, and not all employees who participate will incur expenses up to the limit established by the employer. Any unused funds in the HRA stay with you, the employer. 

There are also tax advantages to HRAs: any reimbursements made to your employees are tax deductible for you and tax-free for your employees. HRAs are only available to:

• Current and former employees, and their spouses.
• Covered tax dependents.
• Children who will not be 27 years old by the end of the tax year.

  

Sole Proprietorship

As a sole proprietor, according to the IRS, there is no separation between you and your business. The Internal Revenue Code Section (IRC) 401(c) determines that owners who are self-employed individuals are not considered employees. This makes them ineligible to participate in a HRA. Ineligible owners include partners, sole proprietors, and more-than-2% shareholders in a Subchapter S corporation. 

However…

If you are married and your spouse is listed as a W-2 employee at your business, then there is a way for you to get a HRA, and enjoy all of its tax benefits. To work around the rule set by the IRS, you can set up a HRA in your spouse’s name and list yourself as a dependent of your spouse. However, this will only work if you don’t hire any other W-2 employees who would be eligible for either an ICHRA, QSEHRA or a One-Person 105 HRA. What you can do is:

1. Hire your spouse as a W-2 employee, and make their salary the amount you want to reimburse through the HRA.
2. Make your spouse the primary policy holder on your family health insurance plan.
3. Become a dependent on your spouse’s health insurance plan.
4. Set up a One-Person 105 HRA, ICHRA, or QSEHRA for your spouse. Consider:
   • The One-Person 105 option if you have medical expenses or other employees that are excludable under the rules.
   • A QSEHRA if your health expenses are less than the reimbursement limit under the QSEHRA rules.
   • An ICHRA if the reimbursement limit of a QSEHRA is too restrictive, since there are no limits on ICHRA contributions.
5. Save all of your medical bills so your company can reimburse them each month from a separate account. 

Get Help

To make sure that you are following the rules laid out by the IRS properly, it would be wise to speak with an insurance agent. EZ’s agents are highly trained and knowledgeable in the group health insurance industry, and can help you determine if participating in an HRA is possible for you. To find out if you are eligible, and to compare plans in your area for free, enter your ZIP code in the bar above, or to speak directly to an agent, call 888-998-2027.