Guidance on W-2 Reporting for Employer-sponsored Health Coverage

Practical Law Legal Update 1-517-0954 (Approx. 4 pages)

Guidance on W-2 Reporting for Employer-sponsored Health Coverage

by PLC Employee Benefits & Executive Compensation

Published on 05 Jan 2012 • USA (National/Federal)

The Internal Revenue Service (IRS) issued Notice 2012-9 restating and amending Notice 2011-28, and providing interim guidance on the reporting to employees of the cost of employer-sponsored group health plan coverage added under the Affordable Care Act (ACA).

On January 3, 2012, the IRS issued Notice 2012-9 (Notice), which restates and amends the prior guidance in Notice 2011-28 and provides interim guidance on the requirement under the Affordable Care Act (ACA) that employers report the cost of employer-sponsored health coverage to employees on IRS Form W-2. The purpose of the reporting requirement is to provide employees with comparable consumer information on the cost of their health care coverage. However, the reporting requirement does not mean that the amounts reported are taxable.

Employers must report the aggregate cost of "applicable employer-sponsored coverage," which, subject to several exceptions, consists of employer-sponsored coverage under a group health plan (insured or self-funded) that is excludable from the employee's gross income. The reportable cost generally includes:

The portion of the cost paid by the employer.
The amount paid by the employee, regardless of whether paid through pre-tax or after-tax contributions.

The Notice supersedes and makes changes to the prior guidance in Notice 2011-28, including clarifying:

The application of interim relief from the reporting requirement for employers filing fewer than 250 Forms W-2 for the prior calendar year.
The reporting requirements for certain related employers that do not use a common paymaster (these employers can either provide the full reportable cost to an employee on a single Form W-2, or allocate the cost and reporting among the employers).
The reporting requirements do not apply to coverage under a health flexible spending arrangement if contributions occur only through employee salary reduction elections, by providing a new example.
That the standard for determining whether coverage under a dental plan or vision plan is subject to the reporting requirement is based on the same standard for determining whether coverage is subject to the rules in the regulations under the Health Insurance Portability and Accountability Act of 1996. Generally, for dental or vision:
- benefits must be offered under a separate policy, certificate or contract or insurance; or
- participants must have the right not to elect the dental or vision benefits and if they do they must pay an additional premium or contribution.
The reporting requirement does not apply to the cost of coverage includible in income under IRC Section 105(h) (an excess reimbursement that is included in income is subtracted from the cost of coverage in determining the reportable cost).
The reporting requirements for employers charging a composite rate (generally, one rate for all members of the group) for active participants, but not the premium charged under COBRA to a qualifying beneficiary.

The Notice also provides for new Q&A's not contained in Notice 2011-28, including guidance that employers:

Are not required to include the cost of coverage under an employee assistance program, wellness program or on site-medical clinic in the reportable amount if the employer does not charge a premium for that type of coverage provided under COBRA to a qualifying beneficiary.
May include the cost of coverage under programs that are not required to be included, such as the cost of coverage under a health reimbursement account (HRA), a multiemployer plan, an EAP, wellness program or on-site medical clinic (as long as the calculation meets the requirements of the Notice and the coverage is employer-sponsored coverage).
May use a reasonable allocation method to determine the cost of the portion of a program providing applicable employer-sponsored coverage, for programs under which employees receive benefits that constitute both employer-sponsored coverage and other benefits that do not constitute employer-sponsored coverage. There is also guidance if the portion of the program providing coverage is only incidental in comparison to the portion of the program providing other benefits.
Are not required to adjust the amount reported on Form W-2 for any elections or notifications in the subsequent year that may have an effect on the cost of coverage in the earlier year (for example, if the employer receives a notice of a divorce).
May choose one of three alternatives for calculating the reportable amount if coverage extends over a payroll period including December 31 (an employer must apply this method consistently to all employees).
Are required to report the cost of coverage provided under hospital indemnity or other fixed indemnity insurance on an excludible or pre-tax basis if:
- the employer makes any contribution to the cost of coverage that is excludable under IRC Section 106 (generally excluding from an employee's income employer provided coverage under a health plan); or
- the employee purchases the policy on a pre-tax basis under a cafeteria plan.
Are not required to report the cost of coverage provided under a hospital indemnity or other fixed indemnity insurance includable in the employee's gross income if:
- offered as independent, noncoordinated benefits; and
- the payment is made on an after-tax basis.
If an employer merely provides the opportunity for employees to purchase an independent, noncoordinated fixed indemnity policy whereby the employee pays the full amount of the premium with after-tax dollars, this amount is not required to be reported.

Applicability Date

The Notice provides that:

The guidance is applicable beginning with the 2012 Forms W-2 (the forms required for the calendar year 2012 that employers are generally required to give employees by the end of January 2013).
Employers may rely on the guidance in the Notice if they voluntarily choose to report the cost of coverage on 2011 Forms W-2 (even though reporting is not required for 2011).

As Notice 2011-28 provided, further guidance may be issued, including future regulations. However, any guidance will apply prospectively only and will not apply to any calendar year beginning within six months of the date any new guidance is issued.

The Notice generally contains the same transition relief for certain employers for certain types of employer-sponsored coverage that was in Notice 2011-28. However, there is additional transition relief for certain employers for coverage under an employee assistance program, on-site medical clinic or wellness program.

Practical Implications

The Notice provides helpful guidance and clarifications for many questions that were not answered in prior guidance. Since the Notice indicates that the reporting exception for employers required to file fewer than 250 Forms W-2 for the prior calendar year will continue "unless and until further guidance is issued," one question that remains is whether this exception will continue.

Employers required to comply with reporting requirements for the 2012 Forms W-2 (required to be furnished to employees by the end of 2013) should begin to work with their providers to understand the system changes and processes needed to be able to accurately capture required data beginning in 2012.

For more information on these requirements, see Practice Note, W-2 Reporting for Employer-sponsored Health Coverage, which will be updated to reflect the Notice.

Guidance on W-2 Reporting for Employer-sponsored Health Coverage | Practical Law