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Healthcare Reform and W-2 Reporting: IRS Provides Details

November 1, 2011

Just as residents in the path of giant storms try to learn as much as they can about temperature, winds and severity, HR and Payroll professionals are trying to learn as much as they can about the compliance hurricane known as healthcare reform.

We know that the Patient Protection & Affordable Care Act (PPACA) imposes a number of blockbuster mandates, including the employer requirement to provide affordable health coverage (2014), the so-called “individual mandate” to buy health insurance (2014) and a raft of insurance mandates such as extending coverage to adult children and ending annual and lifetime coverage limits.

But there are lesser known mandates as well, including one that was the subject of a great IRS Webinar on Oct 31—the healthcare reform law’s new W-2 reporting requirement.

Effective for 2012 W-2s issued to employees beginning in January 2013, this new mandate promises to be an employer compliance challenge for years to come.

First some helpful websites that explain the requirement in greater detail, including IRS Notice 2011-28 that provides interim guidance to employers on the reporting requirement.

Another helpful link is to the IRS Webinar itself, though that won’t be available for a couple of weeks.

IRS provides some Frequently Asked Questions and Answers concerning the W-2 reporting requirement that employers will also find useful in learning about the new requirement.

In brief, PPACA requires employers to report the cost of coverage under an employer-sponsored group health plan. More specifically according to IRS, employers must report the total cost of all “applicable employer-sponsored coverage” provided to an employee. Applicable employer-sponsored coverage, says IRS, “is coverage under a group health plan that the employer makes available to the employee that is non-taxable to the employee.”

In other words, employers must report on an employee’s Form W-2 for the year 2012 , in Box 12, Code DD, the cost of major medical insurance, mini-med plans, on-site clinics, wellness programs and executive reimbursement plans.

Excluded from the new reporting requirement are contributions to HSAs, employee contributions to FSAs and the costs for items like Long Term Care insurance and stand-alone dental and vision coverages.

The IRS emphasizes that what must be reported includes both employer and employee contributions, including for example, employer and employee portions of major medical insurance premiums.

To be sure, PPACA mandated W-2 reporting is for information purposes only. As IRS puts it, “nothing about the reporting requirement causes or will cause excludable employer-provided health coverage to become taxable.” The idea is to inform employees about the true cost of their health coverage.

Clearly employers have much to do to prepare for this new reporting requirement. They might also consider a special communication to employees explaining the new number that will appear on their Form W-2 for the year 2012 and emphasizing that this is mandated by the healthcare reform law for information purposes only and does not affect their tax withholding in any way.

W-2 reporting of the cost of health coverage is just one more example of the cascade of compliance obligations healthcare reform imposes on employers. So far, at least, employers seem to be handling the mandates that became effective for plan years beginning in 2011.

In 2012 the W-2 reporting mandate will kick in; other perhaps more onerous requirements will take effect in 2013, 2014 and beyond.

There’s no question that healthcare reform represents a compliance hurricane for employers. But by learning as much as we can about these requirements and keeping the lines of communication open to employees, senior management and trusted partners, we can come through the storm unscathed—and compliant.

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2 Comments leave one →
  1. December 31, 2012 2:23 am

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  2. January 4, 2013 6:22 pm

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