HRAs and W-2 annual reporting

What is an HRA?

Let’s first review how an HRA works. An HRA is a health benefit that allows employers to reimburse their employees tax-free for qualified out-of-pocket medical expenses. Employers are increasingly using this benefit as an alternative to group health insurance and levering an HRA to reimburse employees’ individual health insurance premiums.

With an HRA, you give eligible employees a monthly allowance to spend on healthcare. Once an employee buys an eligible medical expense and shows the proper claim documentation, you reimburse them tax-free up to their allowance amount. Allowances can roll over monthly. But, unused HRA funds generally stay with you at the end of the year and if an employee leaves your company.

HRAs are tax-advantaged for both business owners and employees. Reimbursement amounts are tax-deductible and free of payroll taxes for employers and income-tax-free for employees.

The following are three HRAs you can administer with PeopleKeep:

1. The individual coverage HRA (ICHRA). An ICHRA is for organizations of all sizes that can reimburse employees for individual health insurance premiums and out-of-pocket expenses. It has no minimum or maximum contribution limits and allows for customization by employee classes. Employees must have a qualifying form of individual health insurance coverage to use the benefit.
   1. Applicable large employers (ALEs) can use an ICHRA to satisfy the employer mandate as an alternative to traditional group health insurance.
2. The qualified small employer HRA (QSEHRA). The QSEHRA is for small employers with fewer than 50 full-time equivalent employees (FTEs). Employers can reimburse insurance premiums only or premiums plus other eligible expenses. While it has no minimum contribution limits, the IRS sets annual maximum limits. Employees must have a health insurance plan with minimum essential coverage (MEC) to participate.
3. The group coverage HRA (GCHRA). Also known as an integrated HRA, a GCHRA supplements traditional group coverage. With a GCHRA, employees can receive reimbursements for out-of-pocket medical expenses their group plan doesn’t fully cover. Like the ICHRA, it has no annual limits and offers employee class customization options. Only employees enrolled in their employer’s group health plan coverage can participate.

Now, let’s go over the Form W-2 reporting regulations for each type of HRA.

What are the W-2 reporting requirements for ICHRAs?

The Affordable Care Act (ACA) requires employers to report the cost of employer-sponsored group health plans. While the IRS considers an ICHRA a group health plan, employers offering an ICHRA don’t have to report the benefit on their employees' W-2s.

Although the ICHRA doesn’t require W-2 reporting, employers with an ICHRA have other rules they must follow to avoid costly penalties.

ICHRA reporting can include:

• Forms 1094-B or 1094-C
• Forms 1095-B or 1095-C
• Form 5500

Check out our blog to learn about the other ICHRA reporting requirements.

What are the W-2 reporting requirements for QSEHRAs?

According to IRS Notice 2017-671, a QSEHRA isn’t considered a group health plan¹. But it still has Form W-2 reporting requirements.

Here are some highlights of what you must report on Form W-2 if you offer a QSEHRA:

• You must report your QSEHRA benefit in Box 12 with code FF of your employees’ Form W-2.
  • You should report the total allowance amount each employee was eligible to receive on a calendar-year basis, not the actual payments or reimbursements the employee received. You should exclude carryover amounts from the previous year.
  • For example, suppose you offered an employee $4,000 in QSEHRA allowances for the year. But, the employee only used $3,000 of their allowance. You’d report the total $4,000 you offered in Box 12 with code FF.
• If you reimburse an employee through a QSEHRA during a month when they didn’t have MEC you must report this amount as taxable income.
  • If you find out an employee doesn’t have minimum coverage after filing their W-2, provide the employee with a W-2c form, Corrected Wage and Tax Statement². Then, file the form electronically with the Social Security Administration (SSA)³.

Read our blog to get more details about QSEHRA W-2 reporting rules.

What are the W-2 reporting requirements for GCHRAs?

Like the ICHRA, you don’t have to report a GCHRA benefit on Form W-2, even though the IRS considers it a group health plan. But you still have reporting requirements for the traditional group coverage your GCHRA is supplementing.

Here’s a snapshot of what you must report on Form W-2 if you offer a traditional group health plan:

• If you have "applicable” employer-sponsored health coverage, you must report the cost of the benefit, including the amounts paid by you and the employee, in Box 12 with Code DD⁴.
  • Group health insurance coverage is a pre-tax benefit. This means recording the cost of coverage on Form W-2 is only for informational purposes and doesn’t affect your employees’ tax liability.
• ALEs offering a GCHRA must also follow ALE reporting requirements for their group coverage. This includes filling out Form 1095-C and the 1094-C transmittal form⁵.

Summary of HRA W-2 requirements

Here’s a summary of the W-2 reporting requirements for HRAs.

Conclusion

With an HRA, businesses of all sizes can save money while offering a tax-free employee benefit. While the ICHRA and GCHRA have no W-2 reporting requirements, employers who provide a QSEHRA must follow proper IRS guidelines at the end of the year.

Meeting your reporting and tax-filing obligations can be intimidating if it’s your first time. But there are people who can help. A CPA or tax professional can answer your questions and help you fill out your employees’ W-2 Forms during the tax season so you avoid errors and penalties.

If you're interested in offering customized health benefits, PeopleKeep can help! Contact one of our HRA specialists for additional assistance.

1. IRS Notice 2017-67

2. IRS Form W-2c

3. SSA filing instructions for eligible employers

4. IRS Form W-2 reporting the cost of health coverage

5. IRS Form 1094-c