Health Care Reform Includes Changes to W-2 Form
As 2012 approaches, employers will begin to focus on what needs to be reported on the 2011 W-2s as it pertains to health insurance.
On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act (PPACA) and on March 30, 2010 a bill amending the PPACA was signed into law. Together, these two laws are often referred to as the Affordable Care Act.
The Affordable Care Act changes the way that health insurance is reported on the W-2. The Affordable Care Act originally required employers to report the total cost of employee health insurance on the W-2 starting with the 2010 W-2s, but later in 2010 the IRS announced it was postponing the reporting requirement, making the reporting optional for at least one year. This health insurance reporting is only used to inform the employees about the cost of their coverage and is not taxable to the employee.
In March 2011 the IRS issued Notice 2011-28 which provided interim guidance on informational health insurance reporting on the W-2s.
The amount that is reported is the aggregate cost of the employer sponsored group health plan coverage. The aggregate reportable cost generally includes both the portion of the cost paid by the employer and the cost paid by the employee, regardless of whether the employee paid for that cost through pre-tax or after-tax contributions.
The reportable cost for an employee receiving coverage under the plan is the sum of the reportable costs for each period (such as a month) during the year as determined under the method used by the employer. An employer is not required to use the same method for every plan, but must use the same method with respect to a plan for every employee receiving coverage under that plan.
The reportable cost under a plan may be calculated using the following acceptable methods:
COBRA applicable premium method – under this method the reportable cost equals the COBRA applicable premium for coverage for a specified period of time. If this method is applied, the employer must calculate the applicable COBRA premium that is in compliance with Code Section 4980B(f)(4) requirements. The calculation would meet these requirements if the employer’s calculation was made in good faith with a reasonable interpretation of these statutory requirements.
Modified COBRA premium method – this method may be used only (a) where the employer subsidizes the cost of COBRA so that the premium charged to the individual is less than the COBRA applicable premium; or (b) where the actual premium charged to the individual is equal to the COBRA applicable premium for each period in a prior year. The reportable cost under this method must be made based upon a reasonable good faith estimate.
Premium charged method – this method can be used only for an employee covered by an employer’s insured group health plan. This method uses the premium charged by the insurer for that employee’s coverage (single or family) as the reportable cost for that period.
Refer to IRS Notice 2011-28 for a complete explanation on the calculation methods.
The amount reported does not include any contributions to Archer MSAs, Health Savings Accounts (HSAs), salary reduction contributions to Flexible Spending Arrangements (FSAs), or the cost of coverage under Health Reimbursement Plans (HRAs).
Other types of coverage that are not subject to the reporting requirements are:
- Long Term Care
- Dental (if not integrated into a group health plan)
- Vision (if not integrated into a group health plan)
- Accident and disability
- Liability and Workers’ Compensation or similar insurance
The cost of the health coverage is reported on the W-2 in box 12 with a code of DD. The aggregate cost for health insurance is not reported on the W-3, Transmittal of Wage and Tax Statements.
The reporting is optional for the 2011 W-2s, which are due to employees by January 31, 2012. Beginning with the 2012 W-2s, issued in January 2013, reporting will be required; however, there will be an exception for small employers. Employers that have fewer than 250 employees are considered small employers and will not be required to report the aggregate cost of health insurance on the W-2s until further notice.
State and federal authorities, in their search for additional funds, are more actively assessing penalties for non-compliance and this is a big concern for small business owners. To ensure that everything is being done correctly, some are hiring professional firms to do the bookkeeping. In some cases, local outsourcing can be a cost-effective alternative for small businesses.