Employers Be Ready: Costs of Health Coverage Required on 2012 Form W-2

Update by Perkins Cole

11.29.2011

As part of the changes made by health care reform, Section 6051(a)(14) of the Internal Revenue Code requires employers to report on Form W-2 the aggregate cost of employer-sponsored health coverage provided to employees.  Though the reporting requirement doesn’t apply until employers furnish W-2s for calendar year 2012, employers need to make sure that they have procedures in place now so that they can capture the relevant information during 2012.  

  • Subject to limited exceptions, all employers providing employer-sponsored coverage under a group health plan are subject to the reporting requirement.
     
  • There is a temporary exception for employers that file fewer than 250 W-2s—these employers are not required to report the cost of health coverage until the IRS issues further guidance.
  • The new reporting requirement does not affect whether health benefits are taxable.

How is the reportable cost of coverage calculated?

  • The reportable cost of employee health coverage is generally determined by referring to the premium charged.  Alternatively, employers may determine the reportable cost by calculating the COBRA applicable premium.  An employer may use different methods for calculating the cost under different plans, but the method selected for a plan must apply for every employee covered under that plan.
  • The reportable cost of coverage includes both the portion paid by the employer and the portion paid by the employee, including the cost of coverage for any person who is eligible by relationship to an employee, even if the employee pays for that coverage with after-tax dollars.
  • The reportable cost of coverage does not include amounts contributed to an Archer MSA or health savings account or amounts that an employee contributes to a health flexible spending arrangement through salary reductions.  Employers are also not required to include the cost of limited scope dental or vision benefits that are offered to employees at additional cost.  

For what time period should reportable cost of coverage be calculated?

  • Reportable cost of coverage must be determined on a calendar year basis, even if the plan’s year is different. This requirement may present unexpected complications.  If, for example, a plan’s rates change during the calendar year, employers will still be required to report the total cost of coverage for the calendar year.
  • If an employee experiences an event that allows the employee to make a change in coverage mid-year, the employer must still report the total cost of coverage for the calendar year.
  • If an employee commences or terminates coverage or employment during the calendar year, the employer may use any reasonable method to determine the reportable cost of coverage, provided the selected method is used consistently for all employees that are similarly situated.

Less obvious pitfalls.

  • The new reporting requirements specifically require employers to report the cost of coverage for on-site medical clinics.  To date, there is no guidance on how to determine these costs, but employers should be aware that they might be required to capture this information.

 

Practical Tips

  • Where to report: The cost of employer-sponsored health coverage provided to an employee should be reported in Box 12 of the employee’s Form W-2 and should be identified with Code DD.
  • When to prepare: Employers should review their systems for tracking employee health coverage immediately to ensure that they will be able to capture any changes in cost that may occur during the 2012 calendar year as well as the total cost for each employee for the year.
  • Stay tuned: Some unanswered questions remain as to practical compliance with the new reporting requirement.  We hope that the IRS will give us additional guidance and we will try to keep you posted.

 

Additional information.

This Update is only intended to provide a general summary of Section 6051(a)(14) and Notice 2011-28.  You can read the full text of Notice 2011-28 here

You can find discussions of other recent cases, laws, regulations and rule proposals of interest to employers on our website.

© 2011 Perkins Coie LLP