Highlighting Health Insurance value on Forms W-2

By Ed Doherty, Cammack LaRhette Consulting Jul 13, 2011
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The Patient Protection and Affordable Care Act (PPACA) requires that employers report the cost of providing health insurance to an employee on the employee's Form W-2. This provision raises many questions: Which employers must report the cost of providing health insurance? What, precisely, must employers report and when? Most of these questions have been answered by the Internal Revenue Service (IRS) in Notice 2011-28, which provided a bit more time for some employers to comply.

It’s critical to note that health insurance benefits are not being taxed. Reporting the cost of health insurance on W-2s might seem like a path to taxation, but the reason for reporting is to convey to employees the value of their health insurance, because many employees do not realize how expensive it is. While the PPACA does include a provision to tax health insurance starting in 2018, this applies only to so-called "Cadillac" health insurance coverage that is more valuable than that provided by most employers. In short, health insurance coverage will not be taxed under current law unless it is very expensive.

When Must Employers Report?

Large employers must report the cost of health insurance coverage on 2012 Forms W-2. Small employers (those that filed 250 or fewer Forms W-2 for the 2011 tax year) must report this information on their 2013 Forms W-2. Remember, employers issue Forms W-2 in January following the tax year they cover, so this means the first required reporting starts in January 2013. IRS Notice 2010-68 and IRS Notice 2011-28 clarify that reporting the cost of health insurance coverage is optional for the years before it is mandatory.

Which Employers Must Report?

The reporting requirement applies to all employers, including churches and other religious organizations, all levels of government, and employers not subject to COBRA continuation coverage requirements.

The reporting requirement, however, does not apply to all types of coverage offered under plans. The cost of coverage under church plans—plans that are offered by religious organizations and are not subject to the Employee Retirement Income Security Act or COBRA continuation—does not have to be reported. So while the reporting requirement applies to religious organizations, if a religious organization offers only church plans, it has nothing to report.

Calculating and Reporting the Cost Coverage

Employers must report the "aggregate cost of applicable employer-sponsored coverage," which is the total cost of coverage under all the group health insurance provided to the employee. The IRS provides employers with a few different options for how to relay this. The key principle underlying the employer’s options for cost calculation is that once the employer chooses a method, the employer must apply that method uniformly to all employees receiving coverage under the same plan.

Essentially, employers must report the cost of medical coverage under their group health plan that is tax-free. There are several benefits and lines of coverage that do not count toward the reportable aggregate cost:

  • Stand-alone dental and vision plans.
  • Amounts contributed to Archer medical savings accounts, health savings accounts (HSAs) and health reimbursement arrangements (HRAs).
  • Amounts contributed by the employee to health flexible spending arrangements (FSAs), although amounts contributed by the employer to FSAs are included in reportable cost.
  • "Excepted benefits," including accident, death and disability (AD&D) insurance; liability insurance; and automobile health insurance.
  • Long-term-care insurance.
  • Any health-like insurance (for example, covering a specific condition) that is not excludable from taxable income.

The aggregate reportable cost includes the entire amount of the coverage, including employer and employee contributions. For fully insured plans, this is easy enough to calculate: Employers may report just the premium charged for the employee’s coverage. Employers with self-insured plans (and those with fully insured ones, if they wish) can use the COBRA premium rate to determine the aggregate cost of covering an employee. Alternatively, if the employer does not calculate precise COBRA premiums from year to year, it can use a good-faith estimate of the total COBRA premium, including employer subsidization.

Cost Changes During the Year

When the reportable cost changes in the middle of a tax year, employers must ensure that the reported cost accounts for the changes. Most employers probably will calculate the costs on a monthly basis, which makes adjusting for changes easier. Sometimes a change—such as the employee’s beginning, ending or changing coverage—occurs in the middle of a month. In that case, the employer may include, exclude or prorate the changes in costs for that month, as long as the employer uses the same method for all employees covered by that plan.

In addition, employers must incorporate in the calculation any method changes, such as when the employer recalculates the COBRA premium in the middle of the year. When calculated on a monthly basis, the reportable cost is simply the annual sum of the monthly costs.

Once the cost of coverage is determined, employers must report it in Box 12 on the Form W-2 using code DD. As usual, employers must distribute the Forms W-2 to employees in January following the applicable tax year and must file the forms with the Social Security Administration.

Edward Doherty is a compliance consultant for Cammack LaRhette’s health and welfare services practice. He provides support and service to clients and vendors regarding compliance issues like HIPAA, COBRA, ERISA, FMLA and health care reform.

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