A new IRS notice provides interim guidance to employers on the W-2 reporting rules for employer-sponsored health insurance coverage [IR 2011-31; Notice 2011-28, 2011-16 IRB].
Background. Code Sec. 6051(a)(14), which was added to the Internal Revenue Code by §9002 of the Patient Protection and Affordable Care Act (Health Care Act, P.L. 111-148), generally provides that the “aggregate cost” of employer-sponsored health insurance coverage must be reported on employee W-2s beginning with the 2011 tax year. For this purpose, “aggregate cost” is determined under rules similar to the rules in Code Sec. 4980B(f)(4) that refer to the definition of “applicable premium” with respect to COBRA continuation coverage. The information is to be reported in Box 12 of Form W-2, using code “DD.”
In October 2010, the IRS announced that it will not require employers to include the “aggregate cost” of employer-sponsored health insurance coverage on employee W-2s for the 2011 tax year (filed in 2012). Reporting this information on 2011 W-2 forms is optional [Notice 2010-69, 2010-44 IRB 576; IR 2010-103].
The New Guidance
Some of the key points in the new guidance are as follows:
New W-2 reporting requirement has no tax ramifications. The IRS is emphasizing that this new W-2 reporting requirement has no tax ramifications. The purpose of the reporting requirement is to provide useful and comparable consumer information to employees on the cost of their health care coverage. The new reporting requirement does not cause excludable employer-provided health care coverage to become taxable.
Additional relief for small employers. Small employers (those filing fewer than 250 W-2 forms in the prior year) are not required to report the cost of health coverage on any forms required to be furnished to employees prior to January 2014. For example, if an employer files fewer than 250 2011 W-2 forms, it will not be subject to the W-2 reporting requirements for 2012 W-2 forms furnished to employees in January 2013. This transition relief will continue to apply until the issuance of further IRS guidance.
Other than noted above, all employers that provide health insurance coverage are generally subject to the W-2 reporting requirements, including federal, state, and local governmental entities, as well as churches and other religious groups.
Questions and Answers (Q&As)
Notice 2011-28, 2011-16 IRB, includes 31 Q&As on the interim guidance that are divided into the following topics: (1) in general; (2) employers subject to the reporting requirement; (3) method of reporting on Form W-2; (4) aggregate cost of applicable employer-sponsored coverage; (5) cost of coverage required to be included in the aggregate reportable cost; (6) methods of calculating the cost of coverage; and (7) other issues relating to calculating the cost of coverage.
There are Q&As on terminated employees (Q&A 6), workers who are employees of multiple related employers (Q&A 7), and successor employers (Q&A 8). Q&A 9 notes that an employer is not required to issue a W-2 form that includes the aggregate reportable cost of health care coverage to an individual to whom the employer is not otherwise required to issue a W-2 form, such as a retiree or other former employee receiving no compensation that needs to be reported on Form W-2. Q&A 10 states that the total of the aggregate reportable health care costs attributable to an employer's employees is not required to be reported on Form W-3, Transmittal of Wage and Tax Statements.
Aggregate cost of applicable employer-sponsored coverage. Q&A 11 says that the “aggregate cost” of “applicable employer-sponsored coverage” is the total cost of coverage under all applicable employer-sponsored coverage. The “applicable employer-sponsored coverage” is defined in Q&A 12. It means, with respect to any employee, coverage under any group health plan made available to the employee by an employer that is excludable from the employee's gross income under Code Sec. 106, or would be so excludable if it were employer-provided coverage (within the meaning of Code Sec. 106), with certain exceptions. Q&A 14 notes that the aggregate reportable cost generally includes both 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 that cost through pre-tax or after-tax contributions. The aggregate reportable cost includes any portion of the cost that is includible in an employee's gross income (see Q&A 15). For example, it includes the cost of health coverage provided to an adult child who is age 28. The fair market value of this coverage is included in the income and the wages of the employee.
The cost of the following employer-sponsored health care coverage does not have to be reported on Form W-2: (a) coverage only for accident or disability income insurance; (b) coverage issued as a supplement to liability insurance; (c) worker's compensation insurance; (d) automobile medical payment insurance; (e) credit-only insurance; and (f) other similar insurance coverage.
The following amounts are not included in aggregate cost for W-2 reporting purposes: (a) amounts contributed to an Archer MSA; (b) amounts contributed to a health savings account; and (c) the amount of any salary reduction election to a flexible spending arrangement (Q&A 16). The cost of coverage under a health reimbursement arrangement does not have to be included in the aggregate reportable cost on Form W-2 (Q&A 18).
Methods of calculating the cost of coverage. An employer may calculate the reportable cost under a plan using the COBRA applicable premium method (see Q&A 25). Alternatively, an employer that is determining the cost of coverage for an employee covered by the employer's insured plan may calculate the reportable cost using the premium charged method (see Q&A 26), and an employer that subsidizes the cost of coverage or that determines the cost of coverage for a year by applying the cost of coverage in a prior year may calculate the reportable cost using the modified COBRA premium method (see Q&A 27). Employers that charge employees a composite rate (the same premium for different types of coverage under a plan, for example, a premium for self-only coverage versus family coverage) should see Q&A 28.
Effective date. The guidance generally is effective beginning with 2012 W-2 forms (filed in January 2013). Employers are not required to report the cost of health coverage on any forms required to be furnished to employees prior to January 2013. However, any employers that choose to report earlier (on the 2011 W-2 forms furnished to employees in January 2012) may use the new notice for guidance regarding that voluntary earlier reporting. If future IRS guidance applies the W-2 reporting requirements to: (i) additional employers or categories of employers; (ii) additional types of coverage; or (iii) otherwise expands the reporting requirements, the guidance will only apply prospectively and will not apply to any calendar year beginning within six months of the date that the guidance is issued.
Employer feedback. The IRS is accepting comments for 90 days on all aspects of the interim guidance and the reporting requirements in Code Sec. 6051(a)(14), including areas that should be addressed in proposed and final regulations or other future guidance. Comments are requested on how future guidance could further reduce the burden of compliance with the reporting requirements while still providing useful and comparable consumer information to employees on the cost of their health care coverage. In addition, the IRS is requesting comments on any challenges employers may face in implementing the reporting requirements for 2012 W-2 forms, and how further guidance could address those challenges, including through the issuance of additional transition relief.