Employer Reporting of Health Care Costs on Form W-2
by Rachel B. Arnedt
The Patient Protection and Affordable Care Act, enacted in March of 2010, requires most employers to report the total cost of employer-sponsored group health insurance coverage on Form W-2. It is important to note that this reporting requirement is for informational purposes only – it does not affect the taxability of the benefit.
The following summary is intended to help employers become familiar with this new reporting requirement.
Who Must Report?
All employers, including tax-exempt entities, federal, state and local governmental employers, as well as churches and other religious organizations (but excluding federally recognized Indian tribes), are required to report the cost of employer-sponsored group health coverage.
When Must Reporting Begin?
For most employers, reporting must begin with the 2012 W-2s, due in January, 2013. Reporting is voluntary for 2011; employers may choose, however, to report costs for 2011 in order to test their payroll systems and may rely on the guidance issued in IRS Notice 2011-28 to do so.
Small employers who are required to file fewer than 250 W-2s for the prior year will have the option of reporting for the 2012 year, but reporting will not be required until the 2013 tax year (for W-2s furnished in January, 2014).
Despite what may seem like a long lead time, employers should begin working now to make any necessary changes to their payroll systems and procedures in preparation for compliance with the new reporting requirement, as data collection may need to begin as early as January 1, 2012.
What Coverage and Costs Get Reported?
Employers must report the total cost of coverage under all "applicable employer-sponsored coverage." This includes the entire cost of employee, spouse and dependent coverage under a group health plan, regardless of the extent to which the cost is paid for by the employee, whether the coverage is insured or self-insured or whether the employee is taxed on some portion of the coverage. The reporting requirement applies to both grandfathered and non-grandfathered plans.
Certain coverage is not considered part of the applicable employer-sponsored coverage that must be reported. Contributions to or for the following are excluded:
- health savings accounts (HSAs);
- health reimbursement arrangements (HRAs);
- Archer Medical Savings Accounts (MSAs);
- salary reduction contributions to a health flexible spending account (FSA) - but note that employer contributions to the FSA (including employer flex credits an employee chooses to allocate to the FSA) are reportable;
- stand-alone dental or vision coverage that is not integrated into a group health plan;
- coverage for specific diseases;
- long-term care plans;
- disability or accident plans;
- workers’ compensation;
- liability insurance; and
- multiemployer health plans.
Most other coverage, including benefits such as on-site medical clinics, executive physicals and prescription drug coverage is included in the definition of applicable employer-sponsored coverage.
How to Determine the Reportable Cost?
IRS Notice 2011-28 provides employers some flexibility in determining the amount to be reported on the employee's Form W-2. The default method of calculating cost is to use the applicable COBRA premium (without the 2% COBRA administrative fee). In the alternative, insured plans can use the total premium charged. Other methods are permitted if the employer determines the cost of coverage based on the prior year's cost, or charges a composite premium (for example, the same cost for self-only and family coverage).
The cost must be determined on a calendar year basis, even if the plan's coverage period is something other than a calendar year, and must take into account any changes in the cost of coverage that occur during the calendar year.
For employees who terminate employment during the calendar year, the employer can limit the total cost of coverage reported on the W-2 to coverage received while the employee was actively employed. At their option, employers may also include the cost of COBRA continuation coverage, as long as the employer chooses one method and applies it consistently. Employers are not required to report the cost of employer-sponsored coverage for any former employee (or surviving spouse or other beneficiary) with respect to whom the employer is not otherwise obligated to issue a Form W-2 for the year.
How to Report Applicable Costs?
The total cost of applicable employer-sponsored coverage should be reported in Box 12 of Form W-2, using code DD. The cost of coverage is not reported on Form W-3.
About the author: Rachel B. Arnedt, with Wiggin and Dana LLP’s Employee Benefits Practice Group in New Haven, practices in qualified and non-qualified deferred compensation, executive compensation, health, welfare, and flexible benefits plans. Her clients include both taxable and tax-exempt employers. Ms. Arnedt rejoined Wiggin and Dana after nearly five years as in-house ERISA counsel for a Fortune 50 company. Read more.
Ms. Arnedt is a frequent presenter on numerous issues in her practice areas, including health care reform and retirement plans. She will be presenting the Health Care Legislative Update at the November employment law seminar in Bridgeport.