Under the Patient Protection and Affordable Care Act of 2010, employers were supposed to begin reporting the value of health care coverage for employees on W-2 forms for 2011 (which are provided to employees in January 2012). The IRS granted relief to all employers by delaying mandatory reporting until 2012. Now the IRS has issued some guidance to help with this reporting requirement.
Here are some highlights on the who, what, where, when, and why of this W-2 reporting rule.
Who and when
W-2 forms for 2012 (which are furnished to employees in January 2013) must include the value of health care coverage.
However, for small employers (those issuing fewer than 250 W-2 forms), reporting on 2012 forms is optional. Small employers will probably have to begin including health coverage on W-2 forms issued for 2013 (which are furnished to employees in 2014), but optional treatment could be extended; the IRS has said that this interim relief will continue to apply until the issuance of further guidance.
What
What type of health coverage must be included for employers who voluntarily report it for 2011 or 2012? New guidance in question-and-answer format, fill in some details. The guidance that has been provided is only interim; the IRS has requested comments from the public and could make changes to reporting rules in the future.
The law requires that the “aggregate cost” of coverage be reported. Coverage for this purpose is based on the premium paid for employer-sponsored coverage, whether such coverage is paid by the employer, employee, or a combination of both. The cost is not determined by the employee’s usage or claims under the health coverage.
Type of health coverage to be reported:
- Employer-sponsored group-health plan coverage (other than the types of coverage which are excluded) for medical treatment and prescription drugs
Types of health coverage that are not reported:
- Long-term care insurance
- Vision care
- Dental care
- Contributions to health savings accounts (HSAs) or Archer medical savings accounts (MSAs)
- Contributions to flexible spending accounts (FSAs)
- Coverage under health reimbursement arrangements (HRAs)
Where
W-2 forms for 2012 will be revised to permit the reporting of health coverage. The aggregate reportable cost of health coverage will be reported on Form W-2 in box 12, using code DD.
If an employee leaves the job during the year but continues to have employer-provided health coverage (e.g., through COBRA), the employer may use any reasonable method to report the cost of the coverage, provided that the method is used consistently for all employees receiving coverage under that plan who terminate employment during the plan year. This means including or not including the COBRA coverage; the coverage enjoyed prior to termination must be included on the W-2 form. However, if an employee who leaves the job during the year requests a W-2 form, as is his or her prerogative, then the COBRA coverage does not have to be reported on the W-2 form.
Why
Why does the Pension Protection Act require this reporting? The purpose is never stated. Presumably it is to help the government determine what employers are spending on health coverage for their staff as well as to educate employees on the extent of the coverage they enjoy. The reporting also helps employers determine the extent to which they will be taxed when the excise tax on “Cadillac” health plans takes effect in 2018.
The reporting does not affect the taxation of employer-paid health coverage. For now it remains fully tax-free to employees, regardless of the type of coverage provided.