IRS Issues Updated W-2 Reporting FAQs and Chart
On Feb. 15, 2012, the Internal Revenue Service (IRS) released updated frequently asked questions (FAQs) on reporting the cost of employer-provided health care coverage on employees' Form W-2s. The updated FAQs reflect the additional interim guidance set forth in Notice 2012-9 (see below).
In addition, the IRS released a new chart that details the type of coverage taken into account for Box 12 Code DD reporting, which is largely mandatory for 2012 and requires tracking employee's coverage throughout the year.
Systems should be reviewed for compliance to ensure accurate W-2 reporting.
-- SHRM Online staff
On Jan. 3, 2012, the U.S. Internal Revenue Service (IRS) issued Notice 2012-9, with interim guidance on meeting the requirement under the Patient Protection and Affordable Care Act (PPACA) to report on employees' W-2 forms the cost of their group health insurance coverage. This information must be furnished beginning with 2012 W-2 forms, which generally must be provided to employees by the end of January 2013. The aggregate cost of an employee's health care coverage is to be determined under rules similar to the rules for determining the applicable premium for COBRA continuation coverage.
Generally, all employers are required to meet the new W-2 reporting requirement, but the IRS provided some exemptions in transition relief, including one for small employers who filed fewer than 250 Forms W-2 in 2011. Such employers are not required to report the value of employer-provided health care for 2012.
PPACA defines applicable employer-sponsored coverage subject to the reporting requirement as coverage under any group health plan that is excludable from the employee's gross income, or that would be so excludable if it were employer-provided coverage under the Internal Revenue Code.
Observation: It is important to recognize that health coverage is treated as applicable employer-sponsored coverage without regard to whether the employer or the employee pays for the coverage and whether the value of the coverage is includible in the employee's income.
All employers providing applicable employer-sponsored coverage must report the cost on their employees' Forms W-2. This includes federal, state and local government entities, churches and other religious organizations and employers not subject to the COBRA continuation coverage requirements. But it does not include federally recognized Indian tribal governments. Notice 2012-9 adds that corporations owned by Indian tribal governments also are excluded. Transition relief is provided to certain of these employers under the notices, as described below.
The cost of the coverage is to be reported beginning with the Forms W-2 issued for 2012, in Box 12 with a Code DD.
Certain Coverage Not Included
Applicable employer-sponsored coverage does not include:
• Long-term care insurance.
• "Excepted benefits," which includes accident or disability income insurance; liability insurance; coverage issued as a supplement to liability insurance; workers' compensation or similar insurance; automobile medical payment insurance; credit-only insurance; and other similar insurance coverage under which benefits for medical care are secondary or incidental.
• Limited scope dental or vision care provided under a separate policy.
• Coverage only for a specific disease or illness, hospital indemnity or other fixed indemnity insurance.
In addition, the cost of coverage does not include contributions to health savings accounts (HSAs) of the employee or the employee's spouse, contributions to a health reimbursement arrangement (HRA), salary reduction contributions to health flexible spending arrangements (health FSAs) or contributions to Archer medical savings accounts (MSAs).
Also excluded are the costs of self-insured plans not subject to the COBRA requirements (such as a self-insured church plan), multiemployer plans to which the employer contributes, and plans provided by governmental employers to members of the military or their families.
Notice 2012-9 provides that an employer may elect to report the cost of coverage that is excluded under these rules as long as the coverage is applicable employer-sponsored coverage and the general rules for determining the cost of coverage are met. Where an employer has a plan that includes applicable employer-sponsored coverage and other benefits, such as a long-term disability plan that provides health benefits, Notice 2012-9 provides that any reasonable method for determining the reportable costs may be used.
Clarifications in Notice 2012-9 that are worth noting include:
• Health FSAs. A new example illustrating the exclusion for salary reduction contributions to a health FSA. Any employer contributions to the FSA in excess of the employee's salary reduction must be reported.
• Stand-alone vision and dental plans. The standard for determining whether the cost of coverage under a vision or dental plan is subject to the reporting requirement is the same as the standard for determining whether the plan is subject to HIPAA rules. Thus, if the coverage is offered under a separate plan or policy where participants may elect not to be covered, and those who elect coverage must pay an additional premium, the coverage need not be reported.
• EAPs, wellness programs and on-site clinics. The cost of coverage under an employee assistance program (EAP), a wellness program or an on-site medical clinic is not required to be reported if the employer does not charge a premium for the cost of this coverage to COBRA beneficiaries.
• Hospital indemnity/specific disease coverage. The exclusion from "applicable employer- sponsored coverage" for hospital indemnity plans, fixed indemnity insurance and coverage for a specific disease does not apply if the employer makes any contribution to the cost of coverage that is excludable from income, or if the employee purchases the policy on a pre-tax basis under a cafeteria plan; such contributions must be reported.
• Third-party sick pay. Third-party sick pay providers furnishing Forms W-2 are not required to report the cost of employer-provided health care, but any Form W-2 provided by the employer must include such costs whether or not a third-party payer is separately reporting sick pay.
• Excess reimbursement for highly compensated Individuals. The reporting requirement does not apply to the cost of coverage includible in income under tax code section 105(h) (discriminatory self-insured medical plans) or payments includible in gross income for a 2 percent shareholder employee of an S corporation that is required to include the premium payments in gross income.
Notice 2012-9 reiterates the statement included in prior guidance that this reporting is informational only; nothing in the statute or in the guidance issued or contemplated for the future causes or will cause otherwise excludable employer-provided health care coverage to become taxable.
Observation: PPACA will impose a 40 percent tax on the value of excess health coverage beginning in 2018. Form W-2 reporting of the value of employee health coverage will likely provide valuable information to the IRS in assessing this high-cost-plan tax in the future.
Notice 2012-9 includes the helpful guidance from the earlier notice concerning the reporting requirement with respect to employees who terminate employment during the year. As long as the employer is consistent in reporting the cost of coverage under a particular health plan for all employees who terminate employment during the year, any reasonable method may be used. For example:
• The employer may report only the costs for the portion of the year during which employees were active employees covered by the plan, and ignore any costs for post-employment coverage, such as COBRA continuation coverage.
• Alternatively, the employer may choose to report the cost of both pre-and post-employment coverage on the employee's Form W-2 for the year of termination, as long as this is the treatment for all covered employees who terminated during the year.
• Employers are not required to report the cost of coverage on a Form W-2 furnished to a former employee who requests their Form W-2 before the end of the year in which the employee terminated employment.
• No reporting is required for an individual to whom the employer is not otherwise required to issue a Form W-2, such as a retiree or other former employee who received no compensation.
Observation: Employers may use any reasonable method to report the cost of coverage to terminated employees as long as they use the same method consistently for all terminated employees. Thus, for the first year in which an individual retires, an employer may choose to report the cost of coverage for the entire year, including both the active coverage and the retiree coverage, on the Form W-2 that reports the employee's final compensation from the employer. Alternatively, the employer may choose to report only the value of the active coverage.
For future years, when no Form W-2 is required to be provided to the retiree, there is no requirement to report the cost of health coverage.
Calculating the Cost of Coverage
The total cost of coverage provided to the employee is to be reported, whether paid by the employer or by the employee. PPACA provides that the reportable cost is to be determined under rules similar to those for determining the applicable COBRA premium under the Internal Revenue Code. The employer may use the COBRA applicable premium method, the premium charged method or the modified COBRA premium method under the COBRA regulations. The additional 2 percent allowed to be added to the applicable premium charged to COBRA beneficiaries is not included in the reportable cost.
Observation: Current regulations under COBRA do not address the calculation of the COBRA premium specifically but provide that this determination must be made in good faith compliance with a reasonable interpretation of the statutory requirements.
The premium charged method may be used to determine the reportable cost only for an employee covered by an insured plan. The employer must report the premium charged by the insurer for that employee's coverage for the period.
The modified COBRA premium method may be used where the employer subsidizes the cost of COBRA coverage. Under this method, the reportable cost is to be determined based on a reasonable good faith estimate of the COBRA applicable premium for the period (if that is the method used to determine the subsidized premium), or where the employer charges COBRA beneficiaries the prior year's premium, in which case the reportable cost may be based on the prior year's cost.
Notice 2012-9 provides that an employer who uses a composite rate for active employees but not for COBRA beneficiaries may use either rate for determining the applicable cost to be reported, provided it is used consistently.
The reportable cost for a year must take into account any changes in coverage for the employee during the year, and it must be determined on a calendar year basis for all employees regardless of the plan year. Notice 2012-9 includes new guidance for determining applicable costs where a pay period spans Dec. 31 in any year, and where an employee notifies the employer of changes in his or her coverage for a prior calendar year after Dec. 31 of that year.
Under PPACA, the W-2 reporting provision was to become effective with respect to 2011 Forms W-2, but in Notice 2010-69, issued in October 2010, the IRS made the requirement optional for 2011. In addition, IRS Notice 2011-28, issued in March 2011, provided that employers were not required to report the cost of health coverage on the Form W-2 for 2012 and later years if they filed fewer than 250 Forms W-2 in the prior year (these employers also are exempt from the requirement to file returns electronically.) This exemption will apply until further notice but at least through 2012.
Notice 2012-9 clarifies this exception with respect to employers using an agent to file Forms W-2 so that the determination is made without regard to the use of the agent. If the employer would have been required to provide at least 250 Forms W-2 in the prior year had the employer not used the agent, the reporting requirement will apply for the current year.
The exception for small employers, as well as the exceptions from the reporting requirements for coverage under a self-insured plan that is not subject to any federal continuation coverage requirements, the exception for plans maintained primarily for members of the military and their families, and the exceptions with respect to Forms W-2 provided to terminated employees before the end of the year, multiemployer plans, HRAs and stand-alone dental and vision plans are all effective unless limited by future guidance.
Any such future guidance likely will be applicable not earlier than the calendar year beginning at least six months after publication of the guidance.
Birgit Anne Waidmann is director of PricewaterhouseCoopers human resource services, based in Washington, D.C.
Related External Article:
W-2 Reporting of Health Care Coverage Costs, TRI-AD NewsLink, May 2012
Related SHRM Articles:
IRS Issues Interim Guidance on Form W-2 Reporting of Cost of Health Coverage, SHRM Online Legal Issues, June 2011
Draft Form Issued for Reporting Health Care Costs on W-2s for 2011, SHRM Online Benefits Discipline, October 2010
Start Planning Now for New W-2 Reporting Requirement, SHRM Online Benefits Discipline, October 2010
IRS Delays Form W-2 Reporting Requirement Under PPACA, SHRM Online Legal Issues, October 2010
Taxes: What are the new reporting requirements for W-2s under PPACA?, SHRM HR Q&As, July 2010
Health Care Reform Includes Form W-2 Reporting Requirement, SHRM Online Benefits Discipline, May 2010
SHRM Online Benefits Discipline
SHRM Online Health Care Reform web page