On January 3, 2012, the IRS issued Notice 2012-9 (the “Notice”) which provides interim guidance regarding the requirement that employers report the aggregate cost of employer-sponsored health coverage to employees on Form W-2. The Notice restates and supersedes prior guidance issued under Notice 2011-28. In general, the reporting requirement will capture the cost of employer-sponsored health coverage provided to an employee under a group health plan (insured or uninsured) that is excludable from the employee’s gross income. This includes both (i) the portion of the cost paid by the employer and (ii) the amount paid by the employee, regardless of whether paid through pre-tax or after-tax contributions. The reported amounts are for information purposes only and will not cause excludable health coverage to become taxable or affect the amount reported in any other box on Form W-2.
Three methods for calculating the cost of employer-sponsored health coverage were previously set forth in Notice 2011-28 and continue unchanged:
- For insured coverage, an employer can report the premium charged by the insurer for the employee's coverage for each period (for example, single-only coverage) as the reportable cost for that period.
- For self-funded plans, an employer can report the premium costs calculated in the same way as COBRA rates, using a good faith interpretation of the COBRA requirements.
- For employers that subsidize the cost of COBRA coverage so that the premium charged to COBRA qualified beneficiaries is less than the COBRA applicable premium, the reportable cost for a period can be based on a reasonable good faith estimate of the COBRA applicable premium for that period.
The cost of the coverage reported on Form W-2 for an employee must reflect any changes in coverage during the year. This might occur, for example, if an employee begins coverage mid-year, or changes the level of coverage during the year. Employers are not required to use the same method for all plans, but must use the same method for every employee receiving coverage under the same plan.
The Notice clarifies certain other provisions previously discussed in Notice 2011-28 and provides new guidance through additional Q&A’s:
- Reporting relief for small employers. The Notice gives interim relief from the reporting requirements for employers who filed fewer than 250 Form W-2s in the preceding year. The IRS has indicated that the rule will be in place for the 2012 reporting period (and for later years unless and until further guidance is issued), meaning that the earliest that a small employer would need to report the cost of coverage on a Form W-2 would be on the 2013 Form W-2 (to be issued in January of 2014).
- Reporting for related employers. If related employers concurrently employ an employee and one of the employers is a common paymaster, the common paymaster must include the reportable cost of coverage provided to an employee by all of the related employers. However, related employers who do not use a common paymaster can either report the full reportable cost to an employee on a single Form W-2, or allocate the cost among the related employers.
- Flexible spending arrangements (FSAs). The reporting requirements do not apply to coverage under an FSA if contributions occur only through employee salary reductions. The amount of an FSA is required to be included in the aggregate reportable cost only to the extent it exceeds the employee’s salary reduction contributions.
- Dental and vision coverage. Employers are not required to report the cost of dental and vision coverage that is an “excepted benefit” under HIPAA. Therefore, the employer does not have to report the cost of dental and vision benefits if either (1) the dental or vision benefits are not integrated with the medical plan, or (2) employees can elect not to receive the dental and vision benefits, and if they elect to receive them, they must pay an additional premium or contribution.
- EAPs, wellness programs and on-site medical clinics. Employers do not have to include the cost of coverage under an EAP, wellness program, or on-site medical clinic if the employer does not charge a premium for that coverage under COBRA.
- Inclusion of coverage costs not otherwise required to report. Employers may include the cost of coverage under programs that are not otherwise required to be reported, such as a health reimbursement account, EAP, wellness program, on-site medical clinic, or multi-employer plan, provided that such programs constitute employer-sponsored coverage.
- Reporting of costs under a program which provides benefits, only some of which constitute employer-sponsored coverage. Employers may use a reasonable allocation method to determine the cost of the portion of a program providing applicable employer-sponsored coverage. If the portion of the program that constitutes employer-sponsored coverage is only incidental in comparison to the portion of the program providing other benefits, the employer is not required to report any cost of the program. Conversely, if the portion of the program that constitutes the other benefits is only incidental in comparison to the portion of the program providing the employer-sponsored coverage, the employer may, at its option, include the cost of benefits that are not employer-sponsored coverage in determining the reportable cost.
- Reporting of coverage that spans two years. If the payroll period includes December 31 and continues into the following year, the employer can (i) report all costs on the Form W-2 for the year that includes the December 31, (ii) report all costs on the Form W-2 for the following year, or (iii) allocate the costs on a reasonable basis between the two years. The method selected must be consistently applied.
- Voluntary indemnity policies. The employer must report the cost of coverage provided under hospital indemnity or other fixed indemnity insurance if the employer makes any contribution to the cost of coverage that is excludible from the employee’s income, or the employee makes pre-tax contributions under a cafeteria plan. Reporting is not required where the employee purchases the policy on an after-tax basis.
- Coverage costs are not reportable by a third-party sick pay or disability insurance provider. A third-party sick pay or disability insurance provider is not required to report the cost of employer-sponsored health coverage on a Form W-2 it provides to the employee. A Form W-2 furnished by the employer to an employee must include the aggregate reportable health care costs, regardless of whether that Form W-2 includes any sick or disability pay, or whether the third-party provider is furnishing a separate Form W-2 to the employee.
- 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.
The following chart highlights various coverage types and whether they are required to be reported on Form W-2.
Click here to view chart