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IRS Provides Guidance on W-2 Reporting of Employer-Sponsored Group Health Plan Coverage

On March 29, 2011, the Internal Revenue Service (“IRS”) issued Notice 2011-28, providing employers with much-needed guidance regarding Form W-2 reporting of the cost of employer-sponsored group health plan coverage.

 Required Under Health Care Reform Law. 

Under the Patient Protection and Affordable Care Act, employers must report the “aggregate reportable cost” of certain health plan coverage on an employee’s Form W-2. This requirement was supposed to have started with 2011 Form W-2s (which are usually issued in January 2012). However, the IRS had previously made the 2011 Form W-2 reporting requirement optional.  Thus, the requirement will generally apply beginning for 2012 W-2s (which are usually issued in January 2013). The new guidance clarifies how these rules will apply at that time.

 What is the “Aggregate Reportable Cost”? 

The aggregate reportable cost generally is the value of the health plan coverage provided to an employee. It generally includes both the employer’s share of the cost and the employee’s share of the cost. For example, an employer may offer family health plan coverage that costs $1,000 per month. The employer may pay for $800, while the employee pays $200. The “aggregate reportable cost” generally would be $1,000. (This number could increase if the employer also offers other health benefits, such as a health flexible spending account with an employer match or certain "integrated" dental or vision coverage – both of which usually must be reported on Form W-2.)

 Exceptions When Calculating “Aggregate Reportable Cost.”  

Under the new IRS guidance, there are several nuances and exceptions which must be considered in calculating the aggregate reportable cost. For example, the aggregate reportable cost includes the cost paid by the employee, whether pre-tax (i.e., through a cafeteria plan) or after-tax. It also includes the cost of coverage that is includible in the employee’s gross income (e.g., coverage for non-dependent domestic partners or children age 27 or older). 

 The aggregate reportable cost generally does not include: 

  • Amounts contributed to health savings accounts (HSAs) and/or Archer MSAs;
  • Salary reduction contributions under flexible spending arrangements (but it does include the amount of employer contributions under certain circumstances);
  • Coverage under a multiemployer plan;
  • Retiree coverage (unless the retiree is otherwise receiving a Form W-2 for the year);
  • Health reimbursement arrangement (HRA) contributions;
  • Long-term care benefits;
  • Many excepted benefits (such as "stand-alone" dental and vision plans);
  • Certain hospital indemnity or other fixed indemnity insurance; and
  • Coverage provided to an employee who terminates employment mid-year and requests a W-2 prior to the end of the calendar year.

 Note that this list is not exhaustive. Also note that these exceptions can be important. For example, suppose an employer: (1) offers an HRA to its employees; (2) provides major medical plan coverage through a multiemployer plan; and (3) offers stand-alone dental and vision benefits. This employer would not have any “aggregate reportable cost” to report on an employee’s Form W-2.

 Exceptions for Certain Entities.  

Certain entities do not need to report the cost of coverage on Form W-2, even if they provide health plan coverage. The new guidance provides the following exceptions: 

  • Small employers (those that filed fewer than 250 W-2s in the prior year) are exempt until at least 2013 and possibly 2014;
  • Governmental entities providing coverage under a plan maintained primarily for members of the military and their families (but other governmental entities generally must report the cost of coverage);
  • Self-funded group health plans that are not subject to any federal continuation coverage requirements (e.g., certain self-funded church plans); and
  • Federally recognized Indian tribal governments. 

Methods to Calculate the Aggregate Reportable Cost.  

The new IRS guidance offers three methods to calculate the aggregate reportable cost.  An employer is not required to use the same method for every plan. However, an employer must use the same method with respect to a plan for every employee receiving coverage under that plan. 

1. The "COBRA applicable premium" method – under this method, the reportable cost equals the COBRA applicable premium calculated under the relevant COBRA rules. 

2. For employers with insured plans, the "premium charged" method – under this method, the employer uses the premium charged by the insurer for an employee’s coverage (for example, for single-only coverage or for family coverage). 

3. For employers that subsidize the cost of COBRA coverage, or determine the cost of COBRA coverage for a year by applying the COBRA applicable premium from a prior year, the "modified COBRA premium" method – under this method, employers subsidizing COBRA coverage use a reasonable good faith estimate of the COBRA applicable premium. Alternatively, if the current year's COBRA premium equals the prior year's COBRA premium, the employer would use the prior year's COBRA premium. 

Special rules apply for employers that use a composite rate (i.e., the same premium for different types of coverage under a plan, such as self-only versus family coverage). 

Completing the Form W-2. 

The aggregate reportable cost of employer-sponsored group health plan coverage will be reported on Form W-2 in Box 12, using code DD.

 Further Guidance. 

The new IRS notice (Notice 2011-28) can be found here.

©2023 MICHAEL BEST & FRIEDRICH LLPNational Law Review, Volume I, Number 97

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