The Affordable Care Act requires all employers who filed at least 250 Form W-2s in tax year 2012 to report the total cost of applicable employer-sponsored health coverage on employees’ Form W-2s (provided to employees in January of 2013). For now, reporting is optional for smaller employers. Form W-2 reporting is purely informational and designed to show employees the value of their health care benefits. The amount reported is not taxable income.
Step 1: Identify the Reportable Health Coverage Provided to Each Employee
Employers must report the value of “applicable employer-sponsored coverage,” which is defined as any coverage that is or would be excludable from the employee’s gross income under Internal Revenue Code (Code) section 106. Applicable employer-sponsored coverage includes the value of major medical coverage under a standard group health plan. However, an employer does not need to report the value of:
- Long term care;
- Excepted benefits set forth in Internal Revenue Code § 9832(c)(1) (such as accident/disability, auto liability, and workers’ comp.);
- Stand-alone dental or vision coverage that qualifies as excepted under HIPAA;
- Coverage only for a specified disease or illness (such as a cancer-only policy);
- Hospital indemnity or other fixed indemnity insurance;
- Contributions to an HSA or Archer MSA, which are separately reported on Form W-2;
- The cost of coverage under a Health Reimbursement Arrangement (HRA);
- Salary reduction elections to health FSAs (note: complex requirements apply to health FSAs offered through cafeteria plans that include optional employer flex credits);
- Coverage provided through an EAP, wellness program, or on-site medical clinic that is not provided under a group health plan. Employers must report the EAP, wellness program, or on-site medical clinic coverage if they would charge a continuation coverage premium under COBRA or the PHSA.
More information on the types of coverage which must be reported is available in IRS Notice 2012-9, available at http://www.irs.gov/pub/irs-drop/n-12-09.pdf.
Step 2: Evaluate Whether Employer Sponsored Cafeteria Flex Credits Are Reportable
Special rules apply to employers that offer a cafeteria plan including a health Flexible Spending Account (under Internal Revenue Code section 125) with optional employer flex credits. If the employer does not offer employer flex credits, then the health FSA does not need to be reported. However, if the employer offers flex credits, any employer contributions to the FSA in excess of the employee’s salary reduction must be reported.
Step 3: Calculate the Total Value of the Employer-Sponsored Health Coverage
Employers may opt to use any of the following methods, but must use the same method for every employee receiving coverage under a plan:
A. COBRA applicable premium – based on the established method of calculating COBRA, less the employer’s 2% administrative charge.
Example: County has calculated the COBRA applicable premium under Internal Revenue Code §4980B(f)(4) as $500 per month, plus a 2% administration fee. County should report $6,000 ($500/month multiplied by 12 months), but should not include the 2% administrative charge.
B. Premium charged (fully insured plans only) – based on the actual premiums charged by the insurer.
Example: City is fully insured and pays $495.00 per month for Employee A’s group health plan coverage. Employee A pays $165.00 per month, and works for City for 12 months. Under the premium charged method, City would report $7,920.00 (City contribution + employee contribution multiplied by 12 months) on Employee A’s Form W-2.
C. Modified COBRA premium – used where the employer subsidizes the cost of COBRA coverage. Reportable cost is calculated based on a reasonable good faith estimate of the COBRA applicable premium, or is based on the prior year’s cost if the employer charges COBRA beneficiaries the prior year’s premium.
Example: Utility Agency subsidizes half the COBRA applicable premiums for a calendar year. A reasonable good faith estimate of the COBRA applicable premium for self-only coverage for each month is $200 per month, and individuals eligible to elect continuation coverage pay only $100 per month. Utility Agency must report $2,400, the reasonable good faith estimate of the yearly COBRA applicable premium, on Form W-2.
D. Composite rate – used where there is a single coverage class or employees are charged the same premium for each type of coverage under the plan.
Example: School District’s employees pay a composite rate for all active employees of $50 per month per employee regardless of whether an employee elects self-only, family or employee plus spouse coverage. School District contributes $50 per employee per month. School District’s yearly reportable cost on Form W-2 is $1,200 ($100/month multiplied by 12 months.)
Step 4: Report the Total Value on Form W-2
Employers report the value of employer-sponsored health coverage in Box 12 of an employee’s Form W-2 Wage and Tax Statement, using Code DD. Employers must report both the employer-paid portion and any portion paid by the employee on a calendar year basis regardless of whether the employee’s contribution was made pre-tax or after-tax. Employers must also report the cost to cover any spouse, child or other eligible dependent covered by the plan because of that person’s relationship to the employee. The employer does not reduce the reportable cost for income imputed to the employee for the coverage (such as coverage for domestic partners or adult children over 27). When an employer terminates an employee, the employer should report the prorated cost of coverage and may also (but is not required to) include any COBRA payment amounts paid by the employee after termination.
The IRS chart specifying the reporting requirements for Box 12, Code DD is available at: http://www.irs.gov/uac/Form-W-2-Reporting-of-Employer-Sponsored-Health-Coverage.