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IRS clarifies W-2 reporting of group health plan coverage costs to employees

March 12, 2012

Under the Patient Protection and Affordable Care Act passed in 2010, many employers will soon be required to report to employees the cost of their group health plan coverage. As the deadline gets closer, many employers are having trouble figuring out how they are supposed to calculate the reportable cost.

The IRS has recently provided some guidance, but first, here is some background information.

As part of the sweeping healthcare law, reporting of the aggregate cost of employer-sponsored healthcare benefits is to be made on annual Form W-2s. It was originally supposed to start with the 2011 calendar year but reporting for last year was made optional after the IRS provided relief (IRS Notice 2010).

The IRS recently issued guidance (IRS Notice 2012-9) to help employers with the mandatory reporting that is scheduled to begin with 2012 W-2 forms. Employers are generally required to give 2012 W-2 forms to employees by January 31, 2013, and then file them with the Social Security Administration.

Important: The reporting requirement is informational only. It does not affect whether coverage is excludable from gross income under the tax code and does not affect the amount includable in income or the amount reported in any other box on Form W-2. It also does not cause otherwise excludable employer-provided healthcare coverage to become taxable.  

“The purpose of the reporting is to provide useful and comparable consumer information to employees” on the cost of their coverage, according to the IRS. 
Fortunately, there is relief from the reporting requirements for some employers. Here are some highlights of the latest IRS guidance:

If an employer issues W-2 forms for less than 250 employees in the preceding year, it is exempt from the W-2 reporting requirement.

Tribally chartered corporations, which are wholly owned by federally recognized Indian tribal governments, are also exempt.

The aggregate reportable cost generally includes the portion of the cost paid by the employer and the portion of the cost paid by the employee, regardless of whether the employee paid for it through pre-tax or after-tax contributions.

Employers who are subject to the reporting requirements include federal, state and local government entities, churches and other religious organizations, as well as employers that are not subject to the COBRA continuation coverage requirements under the tax code, to the extent such employers provide applicable employer-sponsored coverage under a group health plan.

The aggregate reportable cost will be reported on Form W-2 in box 12, using code DD.

What are the requirements if a staff member terminates employment during the year? An employer may “apply any reasonable method of reporting the cost of coverage provided under a group health plan” for the employee, provided that the method is used consistently for all employees receiving coverage under that plan who leave their jobs during the plan year and continue or otherwise receive coverage after the termination of employment. However, an employer is not required to report any amount in box 12 using Code DD for a departing employee who has requested to receive a Form W-2 before the end of the calendar year.

An employer also does not have  to issue a W-2 reporting the healthcare cost to retirees, who are not otherwise required to receive a W-2.

An employer is not required to include the cost of coverage under a dental or vision plan if it satisfies the requirements for being excepted benefits under the Health Insurance Portability and Accountability Act (HIPAA). (Generally, to be excepted benefits for this purpose, the dental or vision benefits must either:

1. Be offered under a separate policy, certificate, or contract of insurance (that is, not offered under the same policy, certificate, or contract of insurance under which major medical or other health benefits are offered).
2. Participants must have the right not to elect the dental or vision benefits and if they do elect the dental or vision benefits they must pay an additional premium or contribution for that coverage.

The amount of money placed in a healthcare flexible spending account is not required to be included in the reportable costs as long as the amount comes solely through employee contributions from salary. Reporting requirements also do not apply to amounts contributed to an Archer Medical Savings Account or to any health savings account of an employee or an employee’s spouse.

Coverage of employee assistance programs (EAPs) is not required to be reported if no premium is charged. This also applies to wellness programs and onsite medical clinics for COBRA participants. If a premium is charged, then an employer must include the cost in W-2 reporting.

Other types of coverage not subject to the reporting requirement include: coverage only for accident, or disability income insurance, or any combination thereof; coverage issued as a supplement to liability insurance; liability insurance, including general liability insurance and automobile liability insurance; Workers’ Compensation or similar insurance; automobile medical payment insurance; credit-only insurance; and other similar insurance coverage, specified in regulations, under which benefits for medical care are secondary or incidental to other insurance benefits.

These are only some of the rules associated with the new healthcare reporting requirements. 

Photo by http://www.flickr.com/photos/74903303@N06/

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