The Internal Revenue Service has issued long-awaited guidance on a new requirement that employers report the cost of employee health coverage on Forms W-2. The goal of this Patient Protection and Affordable Care Act requirement is to provide useful and comparable consumer information to employees.
The IRS guidance sets forth specific rules for reporting health coverage costs and provides significant relief for certain employers. Highlights include the following:
- Form W-2 reporting is not required until the 2012 Forms W-2 are due in January 2013. There is no reporting requirement for 2011 Forms W-2, although employers may voluntarily choose to include information about health coverage costs. (Click here to read an earlier, related legal alert.)
- Subject to various exceptions, employers will be required to report the aggregate cost of all health coverage in box 12 of Form W-2, using code DD. The cost of health coverage will generally include both employer and employee contributions, whether or not excluded from income for federal tax purposes. It will typically be determined in accordance with COBRA rules. In certain situations, alternative calculation methods will be available. The reports are for information purposes only and will not affect tax or withholding obligations.
- Employers will not be required to report this information with respect to individuals who would not otherwise be provided a Form W-2 for a year, such as retirees and other former employees who receive no W-2 compensation.
- Certain employers are exempt from the new reporting requirement, including employers that provide coverage through self-funded church plans (or other group health plans that are not subject to COBRA or any other federal continuation coverage requirement) and federal, state, and local governments.
- Employers that are required to file fewer than 250 Forms W-2 in one year will not be required to report health coverage costs in the next year. Thus, an employer that files fewer than 250 Forms W-2 in 2011(due in January 2012) will not need to report the costs in their 2012 Forms W-2 (due in January 2013).
- Certain forms of health coverage are exempt from the Form W-2 reporting requirement, including health savings account (HSA) and Archer medical savings account contributions, employee pretax salary reduction contributions to health flexible spending accounts (Health FSAs), coverage under health reimbursement accounts (HRAs), long-term care coverage, and coverage under stand-alone dental or vision benefit plans. In addition, an employer that makes contributions to a multiemployer health plan (a jointly trusteed plan subject to collective bargaining) is not required to report the cost of that coverage on a Form W-2.
The guidance suggests that at least some of the exemptions provided under the new guidance may be transitional. However, any changes that the IRS makes to these exemptions will apply prospectively only.