On March 29, 2011, the Internal Revenue Service (IRS) issued Notice 2011-28 which provides interim guidance on informational reporting to employees on the cost of employer-sponsored group health coverage.
According to the Patient Protection and Affordable Care Act (PPA CA), employers must report the "aggregate cost" of "applicable employer-sponsored coverage" on an employee's W-2. Although the PPA CA provided that this informational reporting would be effective with the 2011 tax year, the IRS made this requirement optional for all employers for 2011.
With the issuance of Notice 2011-28, the IRS confirms that the W-2 reporting requirement is generally required for the 2012 tax year meaning that the cost of applicable employer-sponsored group health coverage must be reported on the W-2 issued in January 2013 for the 2012 tax year. The IRS has emphasized that the purpose of the new reporting requirement is to inform employees' of the cost of their group health coverage. It is not intended to cause otherwise excludable employerprovided health coverage to become taxable.
As a general matter, almost every employer that provides employersponsored group health coverage is subject to the information reporting requirement. Notice 2011-28, however, does provide a few exceptions, most notably, the exception for employers that were required to file fewer than 250 W-2s in 2011 (i.e., small employers). In these instances, the employer is not subject to the reporting requirements for the 2012 calendar year or any later year until further guidance is issued.
In order to satisfy the new W-2 reporting requirement, an employer must:
- determine the applicable employersponsored group health coverage that is provided to an employee;
- calculate the aggregate cost of the employee's applicable coverage; and
- report the cost in box 12 of the W-2.
WHAT IS APPLICABLE EMPLOYERSPONSORED COVERAGE?
Applicable employer-sponsored group health coverage is defined as coverage under any group health plan made available to an employee by an employer that is excludable from the employee's gross income or would be excludable if it were provided by the employer. Employer-sponsored group health coverage does not include:
- long-term care;
- coverage for on-site-medical clinics;
- coverage for treatment of the mouth (dental) or eye (vision); and,
- any coverage which is not excluded from gross income under Internal Revenue Code Section 162(l).
WHAT IS THE AGGREGATE REPORTABLE COST?
The aggregate cost of applicable employer-sponsored group health coverage will generally include:
- the portion of the cost paid by the employer and
- the portion paid by the employee, regardless of whether the employee paid for that cost through pre-tax or after-tax contributions.
The cost of coverage under all applicable employer-sponsored group health coverage must be included in the aggregate reportable cost. Health savings account contributions, Archer MSA contributions, and salary reduction contributions to health flexible spending accounts are explicitly excluded from aggregate reportable costs.
HOW IS THE COST OF COVERAGE CALCULATED?
The cost of coverage for an employee must be reported on a calendar year basis using one of three methods:
- the actual premium charged for coverage under an insured plan,
- the COBRA applicable premium method, or
- a modified COBRA premium method (where the cost of COBRA is subsidized).
Additional guidance is provided for employers using a composite rate structure. The guidance provides that employers may use different methods for different plans but the same method must be used for each covered employee within the same plan.
The IRS is offering a 90-day public comment period on this interim guidance. It is hoped that this comment period leads to the IRS providing more details on certain issues, such as, calculating the cost of coverage. For employers wishing to voluntarily report the cost of employer-sponsored cost of coverage with the 2011 W-2 (i.e., in January 2012), Notice 2011-28 may be relied upon.
The Bottom Line
W-2s issued in January 2013 for the 2012 tax year will need to reflect the cost of employer-sponsored group health coverage. Employers should begin to identify which group health coverages will need to be reported, and which cost method should be used for reporting purposes. Employers should also begin revamping their payroll systems to accommodate the new reporting requirements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.