Box 12 code ii represents "Medicaid waiver payments excluded from gross income". So the payments that you received do not have to be included in your taxable income. However, you can choose to include these amounts as earned income in order to qualify for the earned income credit and the additional child tax credit.
When filling out your tax return enter your W2 exactly as you received it. Then, copy the number from box 12 into box 1. That will allow you to treat the amount from box 12 as earned income.
Here is the IRS article on payments like yours.
This is the part that covers your issue-
Q9. I received payments described in Notice 2014-7 that are treated as difficulty of care payments under Section 131. May I choose to include these payments in earned income for purposes of the Earned Income Credit (EIC) or the additional Child Tax Credit (ACTC)? (added May 8, 2020)
A9. Yes, for open tax years, you may choose to include all, but not part, of these payments in earned income for determining the EIC or the ACTC, if these payments are otherwise earned income (wages or income from self-employment).
@Kurly27
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