By Maureen M. Maly, Faegre & Benson LLP
Health care reform requires employers to calculate and report the aggregate cost of applicable employer-sponsored health insurance coverage on employees' Form W-2s. Although the new rule applies for employees' tax years beginning after Dec. 31, 2010, payroll systems need to be updated for this change by January 2011. This deadline is imposed because employees are entitled to request their Form W-2s early if they terminate employment during the year.
Note: Grandfathered plans are not exempt from this reporting requirement.
[Update: The IRS announced that it it will defer the new requirement for employers to report the cost of coverage under an employer-sponsored group health plan, making that reporting by employers optional in 2011. See Draft Form Issued for Reporting Health Care Costs on W-2s; Requirement Made Optional for 2011.]
Plans for which coverage costs must be reported under the new requirement include:
• Medical plans.
• Prescription drug plans.
• Executive physicals.
• On-site clinics if they provide more than de minimus care.
• Medicare supplemental policies.
• Employee assistance programs.
Coverage under dental and vision plans is included unless they are "stand-alone" plans. However, the cost of coverage under health flexible spending accounts, health savings accounts and specific disease or hospital/fixed indemnity plans is excluded from the reporting requirement.
How to Value Plans
The aggregate cost of coverage under the plans (including the employee and employer portions of cost) is determined under rules similar to COBRA—minus the 2 percent administrative charge permitted under COBRA. Government regulations regarding how to value plans for COBRA purposes were, as of this writing, expected shortly. Presumably, any regulations issued would apply to COBRA and to the new Form W-2 reporting requirements. One challenge for employers might be that some of the plans covered by the new reporting requirement, such as on-site medical clinics, are not plans that they have previously valued for COBRA purposes. Now, employers will need to come up with reportable values for coverage provided under these programs.
The new reporting requirement appears to require a monthly calculation of coverage. However, some employees might have less than a month's coverage if their coverage starts or stops during the month. Future regulations might clarify how to report coverage of less than a full month.
Reporting is required for employees but also seems to apply to former employees who are provided with health coverage, including early retirees, retirees, terminated employees on COBRA and surviving spouses. Many of these individuals would not typically receive a Form W-2 from the employer, at least not for taxable years following their termination of employment. Accordingly, if this interpretation is correct, an employer's overall W-2 reporting requirements may increase dramatically. Employers should begin working with their payroll departments immediately to ensure compliance with these new requirements.
Maureen M. Maly is a partner with Faegre & Benson in the law firm's Minneapolis office. Her practice focuses on employee benefits with a particular expertise in welfare benefits issues.
© 2010 Faegre & Benson LLP. All Rights Reserved.
This article should not be construed as legal advice.
Start Planning for New W-2 Reporting Requirement Now, Miller Johnson, September 2010
Draft Form Issued for Reporting Health Care Costs on W-2s; Requirement Made Optional for 2011, SHRM Online Benefits Discipline, October 2010
Employer Reporting, Notifications: Prepare Now, HR News, April 2010
Coordinate Compliance Among Health Care Reform and Other Laws, SHRM Online Legal Issues, April 2010
SHRM Online Benefits DisciplineSHRM Online Health Care Reform web page