The 21st Century Cures Act, signed by President Obama in December 2016, allows certain small employers to reimburse employees for healthcare coverage purchased through the individual market. The law provides stipulations for the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), effective January 1, 2017.
Qualifying small employers can initiate reimbursements for medical premiums and qualified expenses, provided the following conditions are met:
- The plan is solely funded by the employer, without any employee wage contribution
- Employee provides proof of coverage
- All eligible employees must be allowed to participate
- Funds can be used for payment or reimbursement of eligible employees or eligible employee's family member medical expenses, including health insurance premiums
- Payments/reimbursements are limited to $5,150 for individuals and $10,450 for family (limits will be indexed annually)
- Reimbursements become taxable for any month the employee does not have coverage
- Employer is not considered an Applicable Large Employer (ALE); meaning less than 50 full-time employees and equivalents
- Employer does not offer a group health plan to any of its employees
For more information see Publication 15-B Employer'sTax Guide to Fringe Benefits.
Setting up QSEHRA in payroll
Payroll Update 21710 introduced the new tax-tracking type, Qual. Small ER HRA, which allows you to track and report the amount of payments and reimbursements that you make available annually to each employee under a QSEHRA plan. This amount is without regard to the amount of payments or reimbursements you actually paid to the employee. For more information you can click here and under Section 6051 (a)(15) you can review the reporting requirements. You can use the new tax-tracking type if one of the following situations apply to you:
- As an employer, you are self-administering your QSEHRA plan. This means you are issuing employee reimbursements through payroll, using a standard payroll reimbursement pay item. In this scenario, you will continue issuing reimbursement payments in the same manner, while adding the new QSEHRA tax-tracking type to report payments on the employees' Form W-2.
- You have a Third Party Administrator (TPA) managing your QSEHRA plan. In this scenario, the TPA administers claims and issues payments directly to employees. The QSEHRA tax-tracking type will track the amounts paid by the TPA for reporting on your employees' Form W-2.
Follow these steps to setup the new Qual. Small ER HRA tax tracking type payroll item
- From the Employees menu, choose Manage Payroll Items > New Payroll Item.
- Select Custom Setup and click Next.
- Select Company Contribution and click Next.
- Enter a unique name for this new payroll item, which will appear on employee pay vouchers, pay stubs, and on payroll reports (for example, "Reportable Qual. Small ER HRA" ). Click Next.
- Leave the agency information blank. This is a tracking and reporting item only, not a true liability item.
- Click the arrow next to the Liability account box, and select <Add New>.
- In the Add New Account window, choose Other Expense as the Account Type and enter a new Account Name (for example, "Reportable Qual. Small ER HRA"). Click Save & Close.
- Click the drop-down next to the Expense account box and select the account you just created. Click Next.Note: If you are creating more than one payroll item for tracking QSEHRA payments, continue to use this account for both the liability and expense accounts. Setting both the liability and expense accounts the same creates a "wash" item that shows a zero amount on your Profit & Loss statements. This allows you to track QSEHRA payments for W-2 reporting purposes without these numbers affecting your financial reports.
- Click Yes to ignore the warning that you have set your liability account and expense account to the same account.
- Click the arrow for the tax tracking type, and select the new tax-tracking type Qual. Small ER HRA. Click Next.
- Click Next to accept the default tax settings.
- Click Next to accept the default settings on the Calculate based on quantity page.
- Click Finish to accept the default settings on the Default rate and limit page.
Any amounts tracked with the new tax-tracking type will be reported as required on Box 12 of Form W-2 code FF, beginning with tax year 2017.
To make the necessary liability adjustments to your new QSEHRA payroll item, follow these steps.
- From the Employees menu, choose Payroll Taxes and Liabilities > Adjust Payroll Liabilities.
- Enter an appropriate date and enter the same date as the Effective Date.
- Select Adjustment is for Employee, click the drop-down arrow, and select the employee whose costs you need to adjust.
- Click the drop-down arrow under the Item Name column, and select the Qual. Small ER HRA tax tracking type
- Enter the amount of the adjustment. To increase the costs reported, enter the amount as a positive number; to decrease the costs reported, enter the amount as a negative number.
- Leave the Wage Base and Income Subject to Tax columns blank.
- Describe the liability adjustment in the Memo column.
- If you need to make a liability adjustment for another employee, click Next Adjustment, and repeat steps 3 through 6.
- When you have made all the necessary liability adjustments, click OK