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Navigating health reform
Large Employers Must Disclose Health Coverage Costs for 2012
Beginning with the 2012 tax year, large employers (those that issued 250 or more W-2s for 2011) are required by the Patient Protection and Affordable Care Act of 2010 (PPACA) to report the value of employer-provided health coverage on W-2s issued in January 2013.
“Small employers will have at least another year before they must comply,” notes Virginia Harn, a partner in the CliftonLarsonAllen manufacturing and distribution group. “But employers who must deal with this for 2012 W-2s face a complex task to determine the reportable amount. Failure to comply may subject employers to substantial penalties.”
This reporting requirement encompasses employer-sponsored health benefits, including medical insurance plans and self-insured arrangements. However, reporting is not required for employee salary-reduction contributions to flexible spending accounts (FSAs) or for employer-paid contributions to Archer medical savings accounts (MSAs) or health savings accounts (HSAs).
The requirement has no impact on the employee’s taxable income. It is provided for informational purposes only and does not cause employer-provided health care coverage to become taxable. For example, if an employer pays $7,300 in health insurance costs annually for an employee as a tax-free fringe benefit, the $7,300 would be included on the W-2 in Box 12, Code DD, for informational purposes only. The employee is not taxed on the $7,300, nor is it subject to payroll taxes.
New IRS guidance on the health insurance reporting requirement
In Notice 2012-9, the IRS provides guidance regarding the reporting of employer-sponsored group health plan coverage costs. This guidance addresses the following issues:
- Employers subject to the reporting requirement: All employers that provide health coverage are subject to the reporting requirement, including government entities, churches, and exempt organizations, including employers not subject to COBRA continuation coverage requirements. However, federally-recognized Indian tribal governments are not subject to reporting.
- Terminated employees: Reporting is not required for terminated employees who request a W‑2 before the end of the calendar year. For terminated employees who elect COBRA continuation coverage, the employer may report only employer-paid coverage for the year or may include employee-paid continuation coverage, provided the employer uses that method consistently for all employees.
Example: An employee receives $1,400 of employer-provided group health coverage prior to termination in June 2012. The employee elects six months of COBRA coverage and pays $2,100 during 2012. At a minimum, the employer must report $1,400 as the employer-provided health benefits on the W-2 for 2012. Alternatively, the employer may report $3,500 as the health benefits on the W-2 ($1,400 of employer-provided benefit plus $2,100 of employee-paid COBRA), provided the employer uses this method consistently for all terminated employees.
- Retired employees: If an employer is not required to issue a W-2 to a retired employee receiving no compensation, the employer is not required to issue a W-2 reporting any health benefits to that employee.
- Employer-sponsored health coverage: The amount reportable on the W-2 includes the cost of coverage of a group health plan and any self-insured plan other than any coverage for long-term care, on-site medical clinics, separate policies for dental or vision care, and independent, non-coordinated benefits (i.e., coverage for a specified disease or fixed indemnity insurance).
- The aggregate cost to be reported on Form W-2 is both the employer and employee portion, regardless of whether the employee paid through pre-tax or after-tax contributions (but see the special exclusion below regarding contributions to a health FSA).
- The reportable cost includes coverage for the employee, spouse, and dependents, including any portions taxable to the employee such as coverage of a child age 27 and older.
The following are several examples of costs that do not need to be reported on W-2s:
- Amounts contributed to any Archer MSA or health savings accounts (HSA). Those amounts must be reported elsewhere on Form W-2.
- The amount of any salary reduction election to a health FSA, unless the employer offers the health FSA through a cafeteria plan. In that case, the employer is required to report the health FSA amount on the employee’s W-2 only if the amount of the health FSA exceeds the salary reduction elected by the employee due to an employer’s matching payment.
- The cost of coverage provided under a self-insured group health plan that is not subject to federal continuation coverage under COBRA (e.g., a church plan).
- The cost of coverage provided by the U.S. government or other governmental entities for members of the military and their families.
Calculating the cost
Employers have four alternatives for calculating the reportable cost to the employees:
- The employer may use the COBRA continuation premium.
- If the employer offers an insured group health plan, the premium charged by the insurer is the Form W-2 reportable cost.
- For an employer that subsidizes the cost of coverage or determines the cost of coverage by reference to a prior year, the reportable cost is the modified COBRA premium (i.e., the subsidized COBRA cost).
- For an employer that charges a composite rate (i.e., the same premium for different types of coverage such as single or family), the reportable cost may be the same amount for all coverage in the particular group, and is to be calculated under one of the three prior methods.
W-2 statements are information returns that must be provided to the IRS and to the employee. Incomplete forms subject the employer to a maximum penalty of $100 per return ($200 per W-2 for the IRS and employee statements). For example, a large employer with 250 employees who fails to comply could potentially be subject to a $200 penalty per return, or $50,000 in total.
Larger employers will need to carefully examine the details of IRS Notice 2012-9. Harn observes that “the more varied the employer’s health care offerings, the more difficult it is to determine the reportable amount of the health benefits.” While perfection may not be possible, it is important that employers attempt to make a good faith effort at compliance in order to avoid possible IRS penalties.