W-2 Reporting of Health Coverage: Additional IRS Guidance

IRS on January 3 issued new guidance to employers on the requirement to report the cost of health coverage on employees’ 2012 Forms W-2. In general the guidance gives employers greater flexibility.

 

Background: The Patient Protection and Affordable Care Act, the 2010 healthcare reform law, requires employers to report the value of employer-sponsored health coverage on employee W-2s for information purposes. There are no tax consequences associated with this mandate.

 

See the Ceridian Human Resources Legislation Blog for November 1, 2011 for details about the earlier IRS guidance (Notice 2011-28) on this requirement.

 

In particular, the 2011 guidance specifies (1) that employers must report both employer costs and employee costs, e.g., the employee share of monthly health insurance premiums; (2) that all health costs that are “non-taxable to the employee” must be reported, e.g., the costs of major medical insurance; and (3) that the reporting requirement applies only to individuals who would otherwise receive a Form W-2, i.e., it does not apply to retirees unless they receive a W-2 for other purposes, such as to report payouts under a deferred compensation plan.

 

The new guidance (Notice 2012-9) clarifies that employers need not report on Forms W-2 the costs of employee assistance plans (EAP), on-site medical clinics or wellness programs, as long as employers do not include these costs in the calculation of COBRA premiums. In some ways the question of possibly having to impute and calculate per-employee costs of EAP and wellness programs for W-2 reporting purposes was one of the biggest concerns of employers with the new reporting requirement.

 

Also excluded from the reporting requirements are vision and dental plans that are excepted benefits under HIPAA (generally with policies, elections and/or premiums that are separate from those of major medical coverage).  Previous guidance used a somewhat different standard for excluding these benefits:  whether the plan was “integrated into” a major medical plan.  

 

For group health plan coverage periods that extend beyond December 31, Notice 2012-9 clarifies that employers may treat all coverage as occurring before Dec 31; treat all coverage as provided in the calendar year after Dec 31; or use “any reasonable allocation method” to allocate costs between the two calendar years. In any event, the coverage method must be applied consistently to all employees.

 

It seems clear from the new guidance and the earlier Notice 2011-28 that employers are not required to report the cost of health coverage on employee Forms W-2 before January 2013—even if an employee terminates during calendar year 2012.

 

Finally, it’s worth reiterating a suggestion made in the November 1 Blog: consider a special communication to employees explaining the number they can expect to see on their 2012 Form W-2 in Box 12 Code DD. Not only is it important for employees to know the full value of their employer-sponsored health coverage; they should also know that the new number has no effect on their tax withholding—at least for now.