IRS revises guidance on W-2 reporting of group health insurance costs
A provision of the 2010 health care reform law will generally require employers to report the cost of employer-sponsored group health coverage on the W-2 forms they furnish to employees. Last year, the IRS issued Notice 2011-28 to provide interim guidance on this requirement. On Jan. 4, 2012, the IRS issued Notice 2012-9, which modifies and expands the interim guidance.
All employers should familiarize themselves with the latest guidance to ensure they understand their obligations and have systems in place for tracking and calculating reportable costs. For many employers, the reporting requirement is effective for the 2012 tax year — that is, it will apply to W-2s furnished in January 2013. Qualifying small employers — those required to file fewer than 250 W-2s for 2011 — may not have to comply at all, or, at the earliest, starting with 2013 W-2s furnished in January 2014.
The Patient Protection and Affordable Care Act of 2010 added Section 6051(a)(14) to the Internal Revenue Code (IRC). That section generally requires all employers to report on Form W-2 the aggregate cost of employer-sponsored group health coverage (without regard to whether the cost is paid by the employer or employee).
Originally, the reporting requirement was effective for the 2011 tax year. But in October 2010, the IRS issued Notice 2010-69, making reporting optional for 2011 and not required until 2012 (for W-2s furnished in January 2013).
Several types of benefits are excluded from the definition of “employer-sponsored coverage,” including:
- Long-term care,
- Separately insured dental or vision coverage,
- HIPAA-excepted benefits — such as accident or disability income insurance, supplemental liability insurance, or worker’s comp — except for on-site medical clinics, Coverage under a hospital indemnity or fixed indemnity plan — or for a specific illness or disease — if offered as an independent, noncoordinated benefit, and
- Government-sponsored plans that provide coverage primarily for members of the military and their families.
In addition, contributions to a Health Savings Account (HSA) or salary reduction contributions to a Flexible Spending Account (FSA) shouldn’t be included when calculating an employee’s total cost of coverage.
As explained in Notice 2011-28, the new requirement calls for informational reporting only — it doesn’t cause excludable benefits to become taxable or change the tax treatment in any way. The purpose of the requirement is “to provide useful and comparable consumer information to employees on the cost of their health care coverage.”
Notice 2011-28 provided detailed guidance, in a Q&A format, regarding the employers subject to the reporting requirement, types of coverage included, methods for calculating and reporting the cost, and other issues.
To facilitate compliance, the notice provided “transition relief,” indefinitely delaying the effective date for small employers (as described above) as well as for certain types of coverage, including:
- Multiemployer plans,
Reimbursement Arrangements (HRAs),
Stand-alone dental and vision plans (that is, plans that aren’t integrated into a group health plan), and
- Self-insured plans not subject to COBRA or other federal coverage continuation requirements, such as church plans.
This transition relief applies at least until W-2s for 2012 are furnished in January 2013. After that, it will stay in effect unless and until further guidance is issued (with at least six months’ notice). For example, if the IRS decides to apply the reporting requirement to small employers, the earliest W-2s the requirement can apply to are the 2013 W-2s that will be furnished in January 2014 — and only if the IRS issues guidance before June 30, 2013.
Based on comments it received, the IRS issued Notice 2012-9 to modify and expand its earlier guidance. Notable changes include:
- Clarifying that the transition relief for small employers is limited to those required to file fewer than 250 W-2s in 2011, regardless of whether they file the forms themselves or use an agent.
- Outlining reporting methods for individuals employed by related employers that don’t use a common paymaster.
- Clarifying that an employer should include the cost of a health FSA in reportable costs only to the extent the cost exceeds the employee’s salary reduction election (by virtue of an employer matching contribution, for example).
- Modifying the transition relief for stand-alone dental and vision plans to provide that they’re excludable from reportable costs if they qualify as HIPAA-excepted benefits — that means that either 1) the benefits are offered under a separate policy, certificate or insurance contract, or 2) participants have the right to opt out of dental or vision coverage and must pay an additional premium if they accept it.
- Providing that the cost of coverage does not include excess reimbursements of highly compensated individuals that are included in gross income (Notice 2011-28 said they were included) or premium payments or reimbursements included in the income of a greater than 2% shareholder-employee of an S corporation.
Notice 2012-9 also added new guidance on several issues. Highlights include:
- Providing that employers need not include the cost of coverage under employee assistance programs, wellness programs or on-site medical clinics, so long as they don’t charge COBRA premiums for these benefits.
- Clarifying that, in calculating reportable costs, employers may include the costs of health reimbursement plans, multiemployer plans or other benefits that aren’t required to be included, so long as they otherwise meet the requirements of the guidance.
- Outlining cost allocation methods for programs that include both health and nonhealth benefits, such as long-term disability.
- Clarifying that reportable costs need not be adjusted for post–year-end elections or notifications (of a divorce during the tax year, for example) that affect the cost of coverage for the tax year.
cost allocation methods for coverage periods that straddle two
Providing that third-party sick pay providers that furnish W-2s aren’t required to report aggregate health coverage costs.
- Clarifying that the cost of coverage under a hospital indemnity or fixed indemnity plan — or for a specific illness or disease — need not be reported to the extent an employer merely provides the opportunity for employees to purchase an independent, noncoordinated policy and the employee pays the full amount of the premium with after-tax dollars. If the employer makes a contribution or employees pay with pretax dollars, the cost must be reported.
Review your program
If your organization provides health benefits to employees, we’d be happy to help you review your benefits program and evaluate your W-2 reporting obligations. Although compliance won’t be required for a year or more, it’s a good idea to start planning soon. It will take time to ensure that your payroll systems are equipped to handle the new reporting requirements and to choose and implement appropriate methods for calculating and reporting your costs.
To comply with the requirements of IRS Circular 230, we must inform you that the information discussed above is not intended or written to be used, and cannot be used by the recipient or any other taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or to promote, market or recommend to another party any transaction, entity, investment plan, arrangement or other matter.