IRS Issues Additional/Revised Guidance on W-2 Reporting of Health Benefits
With the release of Notice 2012-9, the Internal Revenue Service (IRS) has given more advice about how employers, benefit plan administrators and others should go about applying the new Form W-2 health benefits cost reporting requirements that were mandated by PPACA. This latest guidance (23 pages) updates, expands and replaces prior IRS Notices 2010-69 and 2011-28. For webinar slides specific to this topic, including a handy single-page reference chart (page 3) click here.
Background: PPACA (the Patient Protection and Affordable Care Act of 2010) also referred to as the “Affordable Care Act” seeks to expand coverage for many more Americans than are currently covered. Part of that effort (Section 6051(a)(14)) requires that plan participants know and understand the true cost of their coverage—not just what comes out of their paycheck, but also how much their employers (and plan sponsors) contribute towards that coverage. You may have attended our webinar in November or the updated webinar in December or even read a previous article on this website discussing prior IRS Notices on this topic.
To kick-start the provision’s requirements, the IRS is asking for voluntary reports on group health expenditures on the 2011 W-2s and will be requiring certain employers (that issued 250 or more W-2s in 2011) to begin issuing W-2s containing this information by January 31, 2013 for 2012 earnings. See more on Timing below.
IRS has also made an effort to clarify where there might be a reporting requirement for a Health Care Flexible Spending Account (HCFSA). Generally, employers that only permit employees to make a pre-tax salary deferral will not include those amounts in the healthcare component of Box 12, code DD on the employee’s W-2.
IRS Offers 39 Questions and Answers
Where this new guidance departs from prior guidance is notable. For example, the Question/Answer to number 37 and 38 are noteworthy – that employers must include the cost of fixed indemnity coverage in the health benefits cost total reported on the W-2.
“An employer is required to include in the aggregate reportable cost reported on Form W-2 the cost of coverage provided under hospital indemnity or other fixed indemnity insurance, or the cost of coverage only for a specified disease or illness, if the employer makes any contribution to the cost of coverage that is excludable under IRC Section 106 (of the Internal Revenue Code) or if the employee purchases the policy on a pre-tax basis under an IRC Section 125 cafeteria plan,” officials say.
With Question/Answer # 38, they make the case for the converse of that: “[t]o the extent the employer merely provides the opportunity for employees to purchase an independent, noncoordinated 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 Form W-2,” officials say.
IRS Clarified Exemptions This Notice clarifies that the reporting requirement does not apply to certain types of coverage, including the following:
- Dental and vision plans meeting the conditions of an “excepted benefit” for certain HIPAA purposes (if your dental and vision plans are bundled with your medical/Rx plans then they are not excepted benefits).
- Coverage in an EAP (Employee Assistance Plan), wellness program or on-site medical clinic if COBRA enrollees aren’t charged a premium for that coverage.
- Health Care Flexible Spending Accounts (HCFSAs) funded solely by salary reduction contributions (if you offer credits to a HCFSA then it will be reportable).
- Certain independent, non-coordinated hospital or fixed indemnity insurance offered on an after-tax basis to employees (if you, the employer pay for these coverage, or permit your employees to pay for them on a pre-tax basis, then they’ll become reportable).
While the IRS did issue prior guidance (see links below) under Notices 2010-69 and 2011-28, there are a few areas where this latest guidance expands and replaces prior guidance.
You will want to note the following differences:
- Coverage costs may be based on your (the employer’s) available information as of December 31st. As such you won’t have to reissue and recalculate a W-2 merely because, for example, an employee informs you in January that he divorced his spouse in late November, and you’ve got to process her COBRA offering. You may rely upon the information that you had, in your possession as of December 31st and issue your W-2 with confidence.
- Alternative methods are available to calculate the reportable amounts for coverages that extend over payroll periods that might span past December 31st. You just need to remain consistent in how you calculate that for all employees.
- The prior guidance for employers that do not need to calculate and report these amounts on their W-2s is based upon the number of W-2s you issues in the prior calendar year.
Your immediate attention to this is appreciated, as many employers, should be tracking these elections now for reporting on the W-2s they’ll be issuing as soon as January 31, 2013.
Short example: You’ll track that Bob Smith had EE-only coverage for January 2012 in the PPO at a cost of $505. For February 2012, Bob will add his new wife and have EE-Spouse coverage in the PPO at a cost of $715. Then, in May 2012, Bob will add his newborn daughter to the plan and switch to the HMO (family coverage) at a cost of $1450, which he’ll maintain until December. Here’s the math: ($505 x1) + ($715 x3) + ($1,450 x8) = $14,250 added to Bob’s W-2 in Box 12, using code DD.
Peace of mind?
In section IV of this Notice, the IRS makes it clear that future guidance will be prospective. If future guidance is issued that requires employers to report additional amounts, such guidance will be prospective only and will not apply until January 1 of the calendar year beginning at least six months after the date the guidance is issued. Again, they want employers to rely upon this guidance and plan accordingly.
- 2013: Beginning with W-2s issued on 1/31/2013 for 2012 earnings, employers will provide this cost data in Box 12, using code DD (an information only box).
- 2014: Less than 250 employees? In 2012, your company is relieved from tracking & reporting the value of health care coverage on Forms W-2. You’ll start with your 1/31/2014 issued W-2s for calendar year 2013.
IRS Notices regarding W-2 reporting for employer-sponsored group health plan coverage:
- Notice 2010-69: the IRS altered the reporting requirement for W-2s.
- Notice 2011-28: the IRS offered transitional guidance as stated on the pages above.
- Notice 2012-9: the IRS clarified a few matters with regard to HCFSAs, different organizational types and the inclusion of EAP or other non-ERISA-excepted-benefits for which COBRA premiums are charged to Qualified Beneficiaries.
- IRS’ Chart based on Notice 2012-9 is available here.
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