Reporting the Value of Health Coverage on Form W-2

The Affordable Care Act (ACA) requires employers to report the value of health insurance coverage on employees’ W-2 forms. This rule originally was to go into effect for the 2011 tax year but was subsequently made voluntary for 2011 and mandatory beginning with the 2012 tax year. Employers who issued 250 or more W2s for the year 2012 must issue the first W-2s reporting the value of health insurance coverage early in 2013. Employers with less than 250 W2s in 2011 are not required to comply with this reporting until 2014 for the year 2013.

General Reporting Rules

      • Form W-2 must be provided to employees no later than January 31st of the following year, or, if a written request is made by a terminated employee, within 30 days of the request.
      • The cost of coverage is reported in box 12 for Form W-2 using code “DD.”

For employees who terminate their employment during the year, the employer may choose whether to report coverage just for the months that the employee was an active employee or to include COBRA coverage as well.  Either method is acceptable as long as it is consistently applied to all terminated employees.

      • An employer is not required to report the cost of coverage for individuals who would not otherwise receive a Form W-2 (e.g., retirees, 1099 contractors, etc.).
      • Until further guidance is issued, the costs of coverage need not be reported for multi-employer plans, health reimbursement arrangements and self-insured plans that are not subject to any federal COBRA requirements (e.g., church plans, etc.).
IRS Notice 2012-9 gives additional guidance on what coverage is reportable and what is exempt.

Coverage Exempted From Reporting

Benefits that should not be included in reporting the value of health benefits on Form W-2:

      • Archer Medical Savings Account (MSA)
      • Health Savings Account (HSA)
      • Long-Term Care
      • Accident-Only or Disability Income Insurance
      • Liability Insurance
      • Workers’ Compensation
      • Automobile Medical Insurance
      • Credit-Only Insurance
      • Free Standing Nursing Home Care or Home Health Care or Community-Based Care
      • Medicare Supplemental Insurance
      • Stand-Alone Dental and Vision – Stand-alone dental and vision plans are not required to be included in the cost of coverage if employees have the right to not elect those benefits and if they must pay an additional premium or contribution for the coverage. If an employer’s dental or vision plan does not meet this test, the employer will have to report its cost on the employee’s Form W-2.
      • Health Flexible Spending Account (FSA) – The cost of a health FSA is only required to be reported if the amount of the health FSA for the plan year exceeds the salary reduction elected by the employee for the year. To the extent the amount of the health FSA includes optional employer flex credits in addition to the salary reduction amount, the value of those flex credits must be reported.
      • Employee Assistance Program (EAP), Wellness Program, Onsite Medical Clinic – If the employer does not charge a COBRA premium with regard to its EAP, wellness program or onsite medical clinic, then it is not required to report the cost of that coverage on the employee’s W-2.
      • Hospital Indemnity, Fixed Indemnity Insurance, Specific Disease Coverage – These are reportable if the employer makes a contribution to the cost of coverage or if the employee purchases the policy on a pre-tax basis under a Section 125 cafeteria plan. They are not reportable if the cost of coverage is included in the employee’s gross income. Therefore, to the extent that the employer merely provides the opportunity for employees to purchase an independent, non-coordinated fixed indemnity policy and the employee pays the full amount of the premium with after-tax dollars, the cost of coverage provided under that policy is not required to be reported on the employee’s Form W-2.

Optional Reporting

Employers may choose to report the cost of coverage that is otherwise not required to be reported, including the cost of coverage under a Health Reimbursement Account (HRA), a multi-employer plan, an EAP, wellness plan or onsite medical clinic.

Employers Exempt From Reporting

Until further guidance is issued, an employer that filed fewer than 250 W-2s in the prior year is not subject to the health insurance reporting requirements. The new guidance clarifies that the 250 threshold would include those W-2s filed by an agent, such as a payroll company, in the prior year. This relief will apply to future calendar years until the IRS publishes additional guidance. However, any guidance that expands the reporting requirements will apply only to calendar years that start at least six months after the guidance is issued.

Determining the Amount to Report

IRS Notice 2012-9 clarifies and gives new guidance on how to determine the amount to report.
      • Composite Rates – If the employer uses one composite rate or tiered rates (i.e., one rate for self-only and a second rate for family, regardless of the number of dependents) the employer may calculate and report the same reportable costs for all members of the coverage tier. If, under the health plan, a composite rate is used with respect to the premium charged for active participants but not for the premium charged under COBRA to a qualifying beneficiary, the employer may use either the composite rate or the applicable COBRA premium for determining the aggregate cost of coverage, provided that the same method is used consistently.
      • Election Changes After the End of the Calendar Year – The new guidance clarifies that the employer may calculate the reportable cost for a calendar year based on information available to it as of December 31st. Any election or notification that is made or provided in the subsequent calendar year is not required to be included in the calculation of the reportable cost for the calendar year, even if it has a retroactive effect on coverage.
      • Non-calendar Year Payroll Cycles – For employers whose payroll cycle year does not coincide with the calendar year, the new guidance gives three options: (1) treat the coverage as provided during the calendar year that includes December 31st; (2) treat the coverage as provided during the immediately subsequent calendar year; or (3) allocate the cost of coverage for the coverage period between the two calendar years under any reasonable allocation method, which should generally relate to the number of days in the period of coverage that fall within each of the two calendar years. Whichever method the employer uses must be applied consistently to all employees.
      • Employers must report the total cost of coverage paid by both the employer and the employee under all applicable employer-sponsored health plans which cover the employee.  It includes costs paid pre-tax and post-tax and also includes amounts imputed into an employee’s income.
      • The reported cost may be calculated using the same method to calculate COBRA premiums (less 2%), or the premium rate for insured plans of the composite rate for the relevant class of coverage for an employee.

      • For employees who change coverage during the year, the employer must take into account the change in coverage by reflecting the different reportable costs for the periods in question and use any reasonable method to smooth the calculated cost for the month of the change; for example, a change that occurs mid-month.
Glocal Insurance Services is not a law firm and no opinion, suggestion, or recommendation of the firm or its employees shall constitute legal advice. Clients are advised to consult with their own attorney for a determination of their legal rights, responsibilities and liabilities, including the interpretation of any statute or regulation, or its application to the clients’ business activities.