Under PPACA, employers are required to report the aggregate cost of applicable employer-sponsored group health plan coverage on each employee’s Form W-2. The employer must report the cost of coverage on a calendar-year basis, regardless of the plan year used for the health plan. The reporting is intended for informational purposes for the employee (to provide employees with the cost of their health care coverage). Importantly, the W-2 reporting requirement does not cause the cost of such coverage to be included in the employee’s income or otherwise become subject to federal taxation.
Employers Subject to the Requirement
Generally speaking, all employers, including private companies, governmental entities, church organizations and tax-exempt organizations, are required to provide informational reporting of the value of health benefits provided to employees. There is a small employer exception for employers who filed fewer than 250 Forms W-2 for 2011. Unless changed by future guidance, those employers who file fewer than 250 Forms W-2 for one calendar year will be exempted for the next calendar year. It is not entirely clear whether the controlled group rules apply in determining whether an employer meets the small employer exception. Cautious employers should assume that those rules do not apply. Finally, federally recognized Indian tribal governments are exempt.
According to Internal Revenue Service (IRS) guidance, employers are not required to include the cost of coverage on any Form W-2 required to be issued before January 2013. Thus, the reporting requirement will first apply with respect to coverage provided in 2012. This means that most employers must begin reporting the costs of employees’ health coverage for 2012 and report that value on the Form W-2, which generally will be provided to employees in January 2013. However, employers that file fewer than 250 Forms W-2 for one calendar year, self-insured plans that are not subject to COBRA (including church plans) and multiemployer plans will be exempted for 2012.
Reportable Plan Information
Employers must report on Form W-2 (in Box 12 using the code “DD”) the cost of “applicable employer-sponsored coverage,” which is generally defined as any group health plan coverage provided by the employer to an employee that is excludable from the employee’s income (usually under Internal Revenue Code Section 106). Applicable employer-sponsored coverage includes major medical coverage (both self- and fully insured), executive medical plan coverage, dental and vision coverage that is combined with major medical coverage, employer contributions to a health FSA, on-site medical clinics and employee assistance programs – if a COBRA premium is charged for continued coverage for either – and prescription drug coverage. In addition, an employer is required to report the aggregate cost of applicable employer-sponsored coverage, including amounts paid by the employer and the employee, regardless of whether the employee’s contributions are made on a pre- or post-tax basis. This would also include all contributions for covered individuals, including the employee’s spouse and dependents, and all amounts reported as income as a result of coverage (including the cost of coverage for an adult dependent over age 26 or for a domestic partner).
Applicable employer-sponsored coverage does not include employee FSA contributions through salary reductions, health reimbursement arrangement (HRA) coverage, health savings account and Archer Medical Savings Account contributions, non-coordinated coverage for specific illness or disease (i.e., cancer coverage), long-term care, self-insured group health plans that are not subject to COBRA, and coverage provided under a governmental plan that provides coverage primarily for members of the military and their families. Importantly, coverage under an HRA, employee assistance program, wellness program or on-site medical clinic, multi-employer plan, and self-insured group health plans not subject to COBRA is subject to transitional rules under Notice 2012-9, meaning that the IRS may limit the applicability of those provisions in future guidance. That said, any change will be prospective only and will not apply earlier than Jan. 1 of the calendar year beginning at least six months after the date of issuance of any change.
How to Calculate the Reportable Cost
Notice 2012-9 provides three methods that an employer can use to determine the reportable cost:
- COBRA Applicable Coverage Method: Under this method, the cost equals the COBRA applicable premium for the period. A good-faith estimate of the COBRA premium may be used.
- Premium Charged Method: The employer reports the cost of coverage by using the premium charged by the insurer for the employee’s coverage (and any dependents). Only employers with fully insured plans may use this method.
- Modified COBRA Premium Method: If the employer subsidizes the COBRA cost, then the employer may report a reasonable good-faith estimate of the full cost. This approach recognizes situations in which an employer with a self-insured plan subsidizes the cost of COBRA by underestimating the actual cost of health benefits.
Regardless of the method used to calculate the aggregate reportable cost, all plans must be reported on a calendar-year basis, irrespective of the employer’s plan year. In addition, if an employee begins, changes or terminates coverage during the year, the reported costs must reflect the actual periods of coverage. Notice 2012-9 clarifies that, for a program in which an employee receives benefits that constitute applicable employer-sponsored coverage, as well as benefits that do not constitute applicable employer-sponsored coverage (such as long-term disability), an employer may use any reasonable method to determine the cost of the portion of the program providing applicable employer-sponsored coverage. Employers should track actual coverage for each employee over the course of the entire calendar year and report accordingly, using one of the above methods and in accordance with the above rules.
Employer Action Required
Employers should begin preparation to comply with the W-2 reporting requirements, since employers must do so for 2012 reporting, which will take place in January 2013. Employers should review IRS Notice 2012-9 and the sample completed Forms W-2 to more fully understand the requirement. Employers should also review their plan offerings and determine which coverages will constitute “applicable employer-sponsored coverages” that are subject to the reporting requirements. Finally, the employer should implement payroll and reporting processes to comply with the requirement, including reviewing the issue with any third-party administrators that the employer is using.
Penalties for Noncompliance
Failure to properly report the cost of employer-sponsored health coverage on Forms W-2 may result in penalties. Depending on whether the failure is timely corrected, the penalties can range from $30 to $100 per Form W-2, up to maximums ranging from $250,000 to $1.5 million.