01.16.12

IRS Clarifies Guidelines for W-2 Reporting of Health Coverage Costs

The IRS has issued Notice 2012-9, modifying previous interim guidance on the W-2 reporting requirement for employer-sponsored health coverage.  Like the previous guidance, the Notice provides direction on the details of the information reporting rule for employers who will be subject to it and those employers that choose to voluntarily comply with it.

Background.  For tax years beginning on or after January 1, 2011, the aggregate cost of the applicable employer-sponsored health insurance coverage must be reported on Form W-2.  For this purpose, the aggregate cost is to be determined under rules similar to the rules used to determine the “applicable premium” for purposes of COBRA continuation coverage.  The W-2 reporting does not, however, apply to reporting the amount contributed to an Archer MSA or the health savings account (HSA) of an employee or the employee's spouse, any salary reduction contributions to a flexible spending arrangement (FSA), or certain “exempted benefits” such as worker's compensation and disability income insurance.

In Notice 2010-69, the IRS made this new reporting requirement optional for all employers for the 2011 Forms W-2 (which would generally be given to employees in January 2012).  In Notice 2011-28, the IRS provided further relief for small employers (i.e., those filing fewer than 250 2011 Forms W-2) by making the W-2 reporting optional for health coverage provided through at least 2012, or until further guidance is issued by IRS.  Thus, these employers wouldn't have to report the cost of health care coverage on any forms required to be furnished to employees before January 2014, at the earliest.

New interim guidance.  In Notice 2012-9, the IRS modifies, adds to and replaces Notice 2011-28 with additional guidance, in question and answer (Q&A) format, for employers who are subject to the information reporting requirement for the 2012 Forms W-2 and employers that choose to voluntarily comply with it for either 2011 or 2012.  The Q&As, like those in Notice 2011-28, cover:

• general requirements;
• methods for reporting the cost of coverage on Form W-2;
• definitions of terms relating to the cost of coverage required to be reported;
• the types of coverage for which the cost is required to included on Form W-2;
• calculation methods used to determine the cost of coverage;
• issues that an employer may have to address in determining the cost of coverage.

The IRS emphasizes that this reporting to employees is for their information only.  The reporting is intended to inform them of the cost of their health care coverage, and doesn't cause excludable employer-provided health care coverage to become taxable.

Provisions clarified in the Notice include:

• Exemption for Small Employers.  Employers filing fewer than 250 Forms W-2 for the preceding calendar year are not required to report the aggregate cost of coverage.
• Stand-Alone Dental and Vision Plan Reporting.  The Notice clarifies that the standard for determining whether the cost of coverage under a dental plan or vision plan is included in the aggregate cost is the same standard for determining whether such coverage is an excepted benefit under HIPAA.  Thus, certain stand-alone dental and vision plans may be exempt from the reporting requirement.
• Excess Reimbursement for Highly Compensated Individuals.  The reporting requirement does not apply to the cost of coverage includible in income under certain medical reimbursement plans for highly compensated employees or for payments or reimbursements of health insurance premiums for a 2 percent shareholder-employee of an S corporation that is required to include the premium payments in gross income.
• Coverage under Employee Assistance Program or Similar Program.  An employer that does not charge a premium for an EAP, wellness program or on-site medical clinic to COBRA-qualifying beneficiaries is not required to include the cost of such coverage in the aggregate reportable cost. 
• Optional Reporting of Exempted Benefits.  Employers may, for convenience, include in the aggregate reportable cost the cost of coverage that is not required to be included (e.g., cost of coverage under a Health Reimbursement Account (HRA)), provided that certain conditions are satisfied.
• Reporting Non-Applicable Employer-Sponsored Coverage.  Employers may use any reasonable method to determine the relative allocation of cost for benefit programs that make available both applicable employer-sponsored coverage (e.g., group health plans) and other coverage (e.g., long-term disability programs).
• Employee Election Changes after Year-End.  The aggregate reportable cost for a calendar year reported on a Form W-2 may be based on the information available to the employer as of December 31 of the calendar year, without regard to any election or notification made or provided in a subsequent calendar year that has a retroactive effect on a previous year’s coverage.
• Payroll Periods Crossing Two Taxable Years.  The Notice provides employers with various options for reporting the aggregate reportable cost for a payroll period that spans two taxable years.
• Hospital Indemnity/Specified Disease Insurance.  Employers are required to include the cost of coverage in the aggregate reportable cost on Form W-2 if the employer makes any contribution to the cost of coverage that is excluded from the employee’s income or if the employee purchases a policy on a pre–tax basis under a cafeteria plan.  However, if the employer provides the opportunity for employees to purchase an independent, non-coordinated fixed indemnity policy and the employee pays the full amount of the premium with after-tax dollars, the cost of coverage provided under that policy is not required to be reported on Form W-2.
• Third-Party Sick Pay.  The aggregate reportable cost is not required to be reported on a Form W-2 furnished by a third-party sick pay provider.  However, a Form W-2 furnished by the employer to an employee must include the aggregate reportable cost, regardless of whether that Form W-2 includes sick pay or whether a third-party sick pay provider is furnishing a separate Form W-2 to report sick pay.

Effective date.   Notice 2012-9's interim guidance is generally applicable beginning with 2012 Forms W-2 (that is, the forms required for the calendar year 2012 that employers are generally required to give employees by the end of January 2013 and then file with the Social Security Administration).  Employers may rely on the guidance provided in Notice 2012-9 if they voluntarily choose to report the cost of coverage on 2011 Forms W-2, even though this reporting isn't required for 2011.  This interim guidance is applicable until further guidance is issued.  To the extent that future guidance applies the reporting requirement to additional employers or categories of employers or additional types of coverage, that guidance will apply prospectively only and will not apply to any calendar year beginning within six months of the date the guidance is issued.

For more information about this guidance, please contact Kevin Jones at kjones@argy.com.

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