Recent IRS guidance that provides relief with respect to a Form W-2 reporting requirement. Health care reform required reporting the value of employer health care provided in 2011 (reported on the 2011 Form W-2 issued in January 2012). Notice 2010-69 makes the reporting optional rather than mandatory for 2011. A separate issue that remains is proper reporting of employer provided health care for state tax law purposes.
Reporting Employer Provided Health Care on Form W-2
The Patient Protection and Affordable Care Act (PPACA) and Health Care and Education Reconciliation Act (HCERA) (collectively, “health care reform”) made changes to reporting requirements on Form W 2. Section 9002 of PPACA revised section 6051(a) of the Internal Revenue Code to require employers to report the value of employer provided health care on Form W-2. Eventually, this information will be used to determine whether the “Cadillac plan” tax applies.
The IRS has now provided relief from this requirement. Notice 2010-69 provides that the reporting is optional for employer provided health care in 2011 (which will be reported on the 2011 Form W-2 issued in January 2012) and indicated that the IRS will issue additional guidance on what needs to be reported. Note that the draft 2011 Form W-2 indicates that Code DD for Box 12 will be used to report the value of employer provided health care. Although employers will still need to work with their payroll departments and payroll providers to implement this change, the relief on this reporting requirement is welcome.
Reporting Employer Provided Health Care for State Income Tax Purposes
Health care reform also has raised a separate issue with respect to Form W-2 based on the new differences between federal and state income tax laws. States that have an income tax often follow the federal income tax law. When federal income tax law changes, states usually need to revise their state income tax law to follow (or conform) to the new federal income tax law. Section 1004(d) of HCERA amended section 105(b) of the Code to exempt health care benefits provided to adult children up to age 26 from federal income tax. HCERA was enacted on March 30, 2010 and most state legislatures did not adopt legislation before adjourning to revise state income tax law conform to the HCERA changes. If federal and state income tax laws differ, then generally an employer must report the cost of coverage provided to an employee’s child who is not eligible for favorable tax treatment under state income tax law (for example, a 23 year old child not in school may not be a dependent for state income tax purposes but would be eligible for favorable tax treatment under federal income tax law). This raises a concern for employers, especially employers who in 2010 extended coverage under their health plans to adult children up to age 26, that state income tax withholding and reporting requirements for health care will be different than the federal requirements.
If an employer extended coverage to adult children up to age 26 in 2010 and the state income tax law was not amended to conform to the changes made by HCERA, then:
- In general, the employer should be withholding taxes on the value of the coverage for the adult child who is not otherwise eligible for favorable tax treatment and sending it to the state.
- The employer will need to report different amounts of income for federal and state income tax purposes on the 2010 Form W-2 (which will be issued in January 2011).
Almost always, state legislatures act to conform their state tax laws to federal tax law and apply this change retroactively to the date federal income tax law changed. It is hoped this will be the case on the expansion of coverage to adult children up to age 26, but employers may wish to check with their counsel on the status of the tax law for the states in which they have employees.
For example, Minnesota’s state legislature passed a law conforming Minnesota’s state income tax law to the federal income tax law as amended through March 18, 2010. See Minn. Stat. § 289A.02, subd. 7 (2010) (amended by 2010 Minn. Sess Law Chap 216, section 7). Minnesota’s change, however, did not revise Minnesota state income tax law to conform it to the changes made by PPACA or HCERA, which were enacted after March 18. Minnesota’s state legislature is not scheduled to reconvene until January 4, 2011, so it is unlikely the legislature will act to conform Minnesota’s state income tax law before employers are required to issue the 2010 Form W-2 to employees in January 2011. Minnesota’s Department of Revenue has provided some relief to employers by stating it will not require employers to withhold state income taxes on federally exempt employer provided health care benefits. The Department of Revenue, however, noted that employers had an obligation to properly report such amounts on the employee’s Form W-2. The Department of Revenue’s statement is available here.
Note: In addition to health care, health care reform also revised the federal income tax rules with respect to the adoption credit and state income tax laws have also not been revised to conform to this change.
The relief from the IRS reporting requirement is welcome. Once the IRS issues guidance on what is to be reported, employers should work with their payroll departments and payroll providers to prepare for the reporting requirements on 2011 Form W-2. If you wish to discuss the employer provided health care reporting or the state income tax conformity issue, please contact the attorney in the Benefits and Compensation practice group with whom you work.