Recent Publications

Revisions to Form W-2 Reporting of Group Health Plan Coverage

One of the many new challenges imposed on employers due to the passage of the Patient Protection and Affordable Care Act on March 23, 2010 (“Health Care Reform”) is the requirement to report the “aggregate cost of employer-sponsored coverage” on their employees’ Forms W-2.

This Health Care Reform reporting provision, now set forth within Internal Revenue Code section 6051(a)(14), became effective for taxable years beginning January 1, 2012 and the cost of employer provided health care coverage must be reported on Form W-2 issued in 2013.

Earlier this year, the IRS released its most recent guidance on this issue, Notice 2012-9, wherein the IRS added additional Q&As and clarified existing ones that were provided in Notice 2011-28. Please see our previous summary of Notice 2011-28.

We summarize the most recent changes below:

Notice 2012-9’s Revisions to Notice 2011-28

  • Transition Relief1 for Employers (Q/A-3):
    • Small Employers: An employer is not subject to the reporting requirement for any calendar year if the employer was required to file fewer than 250 Forms W-2 for the preceding calendar year. This exemption will continue until further guidance is issued. The determination on the number of filings is made without regard to the use of an agent under Code section 3504. For example, if the combined filings of an employer and its agent amount to 250 or more Forms W-2, the reporting obligations under Code section 6051(a)(14) must be met.
    • Indian Tribes: In addition to the current exemption of Employers that are Federally recognized Indian tribal governments, employers that are tribally chartered corporations wholly-owned by a Federally recognized Indian tribal government are exempt from reporting until further guidance is issued.
  • Employee of Multiple Employers (Q/A-7):
    • If an employee works for more than one employer, each employer providing employer-sponsored coverage must report the aggregate reportable cost of coverage it provides. However, special rules with regard to related employers within the meaning of Code section 3121(s) and common paymasters.
  • Health FSAs (Q/A-19):
    • If the amount of a health flexible spending account (“health FSA”) offered under a Code section 125 cafeteria plan is funded only by employee salary reduction contributions, no reporting on the health FSA is required. Moreover, if the salary reduction elected by the employee for the plan year for all qualified benefits equals or exceeds the amount of the health FSA for the plan year, the employer does not include the health FSA amount for that employee in the aggregate reportable cost. However, if the health FSA amount exceeds the salary reduction elected by the employee for the plan year, then the amount of the employee’s health FSA minus the employee’s salary reduction election for the health FSA must be included in the aggregate reportable cost.
  • Transition Relief1 for Dental / Vision Coverage (Q/A-20):
    • Notice 2012-9 clarifies that dental or vision coverage is exempted from the Form W-2 reporting requirements only if it meets the HIPAA excepted benefit requirements under Treas. Reg. section 54.9831-1(b)(3). Generally, to be excepted benefits, the dental or vision benefits must either:
      • be offered under separate policy, certificate or insurance contract; or
      • permit participants not to elect the benefits, and if they do elect them, the participants must pay an additional premium/ contribution for the coverage.
  • Section 105(h) Excess Reimbursements or 2% Shareholder-Employee of an S Corporation (Q/A-23):
    • If a plan is discriminatory under Code section 105(h), the applicable employer-sponsored coverage does not include excess reimbursements of highly compensated individuals that are included in gross income under 105(h).  Moreover, the applicable employer-sponsored coverage does not include the cost of coverage that is included in income of a 2% shareholder-employee of an S corporation.
  • Composite Rate for Calculating Cost of Coverage (Q/A-28)
    • This Q/A was clarified to provide that if an employer uses the composite rate for active employees, but not for determining the applicable COBRA premiums for qualifying beneficiaries, the employer may use either the composite rate or the applicable COBRA premium for determining the aggregate cost of coverage, as long as the same method is used consistently for all active employees and is used consistently for all qualifying beneficiaries who receive COBRA coverage.

New Guidance within Notice 2012-9

  • Transition Relief1 for EAPs, Wellness Programs and On-Site Medical Clinics (Q/A-32):
    • No Form W-2 reporting is required for cost of coverage under employee assistance programs (EAPs), wellness programs or on-site medical clinics for certain employers where the employer does not charge a COBRA premium with respect to that benefit. If former employees are allowed to continue such benefits and are not charged a COBRA premium, the employer does not need to include the cost of coverage in the W-2 of any employee. Employers not subject to COBRA (or continuation coverage requirements under the Federal employees Health Benefits Program) also do not need to report for these benefits. Otherwise, the cost of coverage is required to be reported for these programs only if they are deemed group health plans for purposes of Code section 5000(b)(1).
  • Permissive Inclusion of Cost of Coverage on Form W-2 (Q/A-33)
    • Employers may include on Form W-2 the cost of coverage that is not required to be included under the transition relief (such as HRA, EAP, wellness, or on-site medical clinics) as long as the calculation meets the requirements of Notice 2012-9 and that coverage constitutes applicable employer-sponsored coverage.
  • Cost of Coverage for Combined Benefits (Q/A-34)
    • If benefit programs provide applicable employer-sponsored coverage (which must be reported) with benefits that are not deemed applicable employer sponsored coverage, then an employer may use reasonable allocation methods to determine the cost of the applicable employer sponsored coverage portion. However, if the portion providing applicable employer sponsored coverage is incidental compared to the rest of the program which is not reportable, the employer is not required to report any of the coverage. On the other hand, if the otherwise non-reportable benefit is incidental when compared to the portion providing applicable employer sponsored coverage, then the employer may choose to include that coverage that is not applicable employer-sponsored coverage when calculating the cost of the program.
  • Notification After Year-End of Changes Affecting Coverage During Reportable Year (Q/A-35)
    • The aggregate reportable cost for a calendar year may be based on information the employer had available as of December 31st of that year. If an employee provides notice of a status change after December 31st that would retroactively change coverage (such as a divorce), the changes in the cost of coverage do not need to be reported in the W-2, nor is a Form W-2c required to be provided if the Form W-2 was already provided prior to the employee notification of coverage change.
  • Coverage Spanning Over Two Taxable Years (Q/A-36)
    • If the coverage period spans over two taxable years, the Notice sets forth different options to use as long as the method selected is applied consistently for all employees.
  • Hospital Indemnity or Other Fixed Indemnity Insurance
    • The cost of coverage provided under hospital indemnity or other fixed indemnity insurance must be reported in the applicable reportable cost on Form W-2 if the employer makes any contribution toward such coverage that is excluded from the employee’s income or if the employee purchases the policy on a pre-tax basis under a cafeteria plan. (Q/A-37)
    • However, if the hospital indemnity or other fixed indemnity insurance is offered as independent, noncoordinated benefits and if employee purchases the policy on an after-tax basis or if the benefit is includible in gross income (or, in the case of a self-employed individual, the payment is one for which a deduction under Code section 162(l) is allowable), the employer is not required to report the cost of coverage on Form W-2.  (Q/A-38)
  • Third-Party Sick Pay Provider (Q/A-39)
    • Third-party sick pay providers are not required to report the aggregate reportable cost of coverage on Forms W-2; that is the employer’s responsibility, regardless of whether the third-party sick pay provider furnishes a separate Form W-2 reporting sick pay.

For more information on this guidance or as to how other aspects of health care reform affect your employee benefits, please contact Elizabeth H. Latchana.

1Transition relief may be affected by future guidance; however, such guidance will be prospective only and will not be applicable earlier than January 1 of the calendar year beginning at least six months after the date of the issuance of the guidance (and in no event will affect the transition relief for 2012 Form W-2s).

IRS Circular 230 Disclosure

Unless expressly stated otherwise, this document is not intended or written to function as a covered opinion under Department of Treasury regulations. Any federal tax advice within this document is not intended or written to be used, and cannot be used, for the purpose of: (1) avoiding penalties that may be imposed, or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein.