Details of W2 reporting requirements for 2012

One of the new Health Care Reform requirements obligates employers to
report the aggregate cost of applicable employer-sponsored health care
coverage on an employee’s Form W-2.

Affected employers

Although
the Affordable Care Act imposed this requirement for all employers in
2011, the Internal Revenue Service (IRS) made it optional for all
employers for 2011 because necessary guidance was not available early
enough in 2011. Beginning with 2012, however, this reporting is no
longer optional for “large” employers (defined below). Reporting remains
optional for employers that are not large employers until the IRS
issues additional guidance.

For purposes of this requirement, a
“large” employer is an employer that was required to file at least 250
Forms W-2 for the preceding calendar year. For the initial reporting
required on 2012 Forms W-2, an employer that filed at least 250 Forms
W-2 for 2011 must report the cost of employer-sponsored health care
coverage on all employees’ Forms W-2 for 2012, even if the employer
files fewer than 250 Forms W-2 for 2012. An employer that files at least
250 Forms W-2 for 2012 will be required to report the cost of
employer-sponsored health care coverage on all employees’ Forms W-2 for
2013, regardless of the number of 2013 Forms W-2 the employer is
required to file.

It is important to note that “large employer”
status for this reporting requirement is based solely on the number of
Forms W-2 filed by the employer, not the number of employees or
full-time equivalents the employer had or has at any point during the
preceding or current calendar year. This 250 Form W-2 threshold is based
on the Internal Revenue Code requirement that an employer filing at
least 250 Forms W-2 for the current year must electronically file those
Forms W-2. Note also that an employer with a large number of seasonal or
temporary employees may end up subject to this reporting requirement
even though the employer never has 250 full-time employees during the
year. Similarly, an employer with high employee turnover may end up
subject to this reporting requirement even though the employer never has
250 employees at any one time during the preceding calendar year.

Health care coverage subject to Form W-2 reporting

In
general, “applicable employer-sponsored coverage” subject to the
reporting requirement is coverage under any group health plan offered
and sponsored by the employer that is not taxable to the employee. This
includes:

  • Group medical and prescription drug coverage (whether fully insured or self-insured by the employer)
  • Dental
    coverage or vision coverage if the coverage is an integral part of the
    medical coverage and cannot be elected or declined by the employee
    separately from the medical coverage
  • Employer contributions to a flexible spending account (FSA), but not including “flex credits” that an employee can elect to receive in cash or apply as contributions to a Code Section 401(k) plan
  • Employee
    Assistance Programs (EAPs), wellness programs, and on-site medical
    clinics, but only if the EAP, wellness program, or on-site clinic is a
    “group health plan” for HIPAA purposes and the employer charges
    a COBRA premium to continue the EAP, wellness program or on-site clinic
    coverage during the COBRA continuation coverage period
  • Specific
    disease or illness coverage (such as cancer insurance) or hospital
    indemnity or other fixed indemnity insurance if the employer pays for
    any part of the coverage on a non-taxable basis or the employee pays for
    coverage on pre-tax basis
  • Retiree health coverage, but only if the employer otherwise must issue a Form W-2 to the retiree

The following types of coverage are not subject to Form W-2 reporting:

  • Health reimbursement accounts (HRAs) (until further guidance is issued)
  • Employer or employee contributions to a health savings account (HSA)
  • Employer or employee contributions to a multiemployer group health plan (union-affiliated health and welfare plan)
  • Dental coverage or vision coverage that an employee can elect or decline separately from the medical coverage
  • Employee
    salary reduction contributions to a flexible spending account (FSA),
    including “flex credits” that an employee can elect to receive in cash
    or apply as contributions to a Code Section 401(k) plan
  • EAPs, wellness programs and on-site medical clinics that are not “group health plans” for HIPAA purposes or the
    employer does not charge a COBRA premium to continue the EAP, wellness
    program or on-site clinic coverage during the COBRA continuation
    coverage period
  • Specific disease or illness coverage (such as
    cancer insurance) or hospital indemnity or other fixed indemnity
    insurance if the employer includes any employer contribution in the
    employee’s taxable income or the employee pays for coverage on an
    after-tax basis
  • Coverage for accident or disability income insurance, including supplemental disability insurance
  • Liability insurance, including general liability and automobile insurance
  • Worker’s compensation or similar insurance
  • Credit-only insurance

Aggregate cost to be reported

The
aggregate cost of “applicable employer-sponsored coverage” to be
reported on employees’ Forms W-2 includes both amounts paid by the
employer and amounts paid by the employee, regardless of whether the
amounts are paid on a pre-tax or after-tax basis. This includes any
employee contributions made on a pre-tax basis through a Code Section
125 Cafeteria Plan.

The reportable aggregate cost also includes
amounts paid by the employer and employee for coverage for the
employee’s spouse, dependent, and (if offered) domestic partner. The
cost for domestic partner coverage must be reported on the employee’s
Form W-2 even though coverage for the employee’s domestic partner who is
not a dependent is taxable to the employee.

Calculation of aggregate cost to be reported

Employers may calculate the aggregate cost to be reported on Form W-2 using one of the following methods:

  • The COBRA applicable premium method

Under
this method, the reportable aggregate cost is equal to the applicable
COBRA premium for the period (not including the permissible COBRA
administrative fee). An employer may use this method whether the group
health care plan is fully insured or self-insured.

  • Premium charged method (for insured programs only)

This
method is available only for employers that provide group health care
benefits through a fully insured program. The reportable aggregate cost
is the premium charged by the insurer for the level of coverage elected
by the employee (for example, single or family coverage, as applicable).

  • Modified COBRA premium method

This
method is available only to employers that either subsidize COBRA
premiums or base the current year’s COBRA premium on the prior year’s
COBRA applicable premium. If the employer subsidizes the COBRA premium,
such that the COBRA qualified beneficiary’s premium is less than the
actual premium cost, the employer may determine the reportable aggregate
cost using a reasonable good faith estimate of the COBRA premium. If
the employer uses the prior year’s COBRA applicable premium as the COBRA
premium for the current year, the employer may use prior year’s COBRA
applicable premium for reporting purposes.

An
employer may use different methods for different plans but must use the
same method for all employees receiving coverage under a plan.
Additional options are also available for employers that determine
employee contributions based on composite rates.

The aggregate
cost reported on an employee’s Form W-2 must reflect any increase or
decrease in cost during the year. The reported aggregate cost must also
reflect any changes in coverage an employee may make during the year,
for example, enrolling in coverage, dropping coverage or switching from
single coverage to family coverage.

The aggregate cost reported
must be based on a calendar year, even if the employer is using a
12-month period that is not the calendar year for purposes of
determining COBRA applicable premiums.

Reporting for former employees

If
an employee terminates during the year and the employer continues to
provide coverage after termination of employment, through COBRA or
otherwise, the employer may use any reasonable method to report the
aggregate cost of coverage as long as it does so consistently for all
terminated employees receiving post-termination coverage. If the
terminated employee requests a Form W-2 before the end of the calendar
year in which the employee terminated, the employer is not
required to report the aggregate cost of applicable employer-sponsored
coverage on the Form W-2 issued at the employee’s request, and the
employer is not required to issue another Form W-2 at the end of the calendar year to report that cost.

If
an employer is not required to issue a Form W-2 to an individual who is
receiving employer-sponsored coverage, such as a retiree or other
former employee who did not receive any reportable compensation during
the calendar year, the employer is not required to provide a Form W-2
solely to report the aggregate cost of the employer-sponsored coverage.

Actual reporting on Form W-2

The aggregate cost of applicable employer-sponsored coverage is reported in Box 12 using Code DD.

Planning considerations

The
IRS has stressed that the reporting of this cost is informational only
and has no impact on whether the reported amounts are or would be
taxable. The stated purpose of this mandated reporting is to provide
useful and comparable consumer information to employees on the total
cost of their health care coverage.

This new reporting obligation
offers employers an opportunity to highlight the cost of the benefits
they are providing to their employees. Many, if not most, employees have
no idea of the true total cost of the health care coverage they receive
through their employer-sponsored group health care plan. They usually
only see the employee contribution they are required to pay, but do not
appreciate the additional amount paid by the employer to provide this
benefit.

Employers should consider generating an employee
relations benefit from this new reporting obligation and its attendant
administrative burdens. An employee education program timed for delivery
near the end of January 2013, to coincide with delivery of the 2012
Forms W-2, that specifically focuses on the health care coverage offered
by the employer can illustrate to employees this important tax-free
benefit the employer provides.

For assistance or further information, please contact:

Antoinette M. Pilzner
248.220.1341
apilzner@mcdonaldhopkins.com