EMPLOYER W2 HEALTH INSURANCE REPORTING REQUIREMENTS – Employer-Provided Health Coverage
Beginning in tax year 2011, the Affordable Care Act (PPACA) requires employers to report the value of the health insurance coverage provided to employees on each employee’s annual Form W-2. This reporting is for informational purposes only, to show employees the value of their health care benefits. The amount reported does not affect tax liability, as the value of the employer contribution to health coverage continues to be excludible from an employee’s income and it is not taxable.
For taxable years beginning after December 31, 2010, employers will be required to calculate and report the aggregate cost of applicable employer-sponsored health insurance coverage on employees’ Form W2s. 1 This new reporting requirement applies for employees’ tax years beginning after December 31, 2010. Because employees are entitled to request their Form W2 early if they terminate employment during the year, payroll systems need to be updated for this change by January 2011.
While most W2s for tax year 2011 will be issued in January 2012, W2s reflecting the new health insurance information must be available no later than February 1, 2011 for any terminating employee. It is important to note that the aggregate cost of an employee’s health benefits will not be included in the employee’s taxable income. The W2 reporting will be a way to track coverage values for the 40% excise tax (starting in 2018) on “high cost” employer based medical coverage above certain thresholds (the so called “Cadillac plan tax”) The coverage costs (whether under an insured or self insured plan) that must be reported under the new requirement include:
• Medical plans
• Prescription drug plans
• Dental and vision plans, unless they are “stand alone” plans (i.e., an employee may elect only dental or only vision and is not required to also enroll in medical coverage)
• Executive physicals
• Onsite clinics if they provide more than de minimis care (The term de minimis means (as provided by IRC Sec. 132(e)(1)) any property or service, the value of which is (after taking into account the frequency with which similar fringe benefits are provided by the employer to the employer’s employees) so small as to make accounting for it unreasonable or administratively impracticable. In other instances where the IRS was interpreting whether a medical clinic provided de minimis benefits, an on-site nurse who provided emergency services was considered a de minimis benefit, while a clinic at a hospital that provided full scale medical treatment was not considered de minimis).
• Medicare supplemental policies
• Employee assistance programs
If an employee enrolls in employer sponsored health insurance coverage under multiple plans, the aggregate value of all such health coverage (except certain benefits, discussed in section below) must be disclosed. For example, if an employee enrolls in employer-sponsored health insurance coverage under a major medical plan, a dental plan and a vision plan, the employer is required to report the total value of the combination of all of these health related insurance policies. For this purpose, employers generally use the same value for all similarly situated employees receiving the same category of coverage (such as single or family health insurance coverage).
Employers will not be required to provide a specific breakdown of the various types of coverage, but must only report an aggregate cost. For example, if an employee enrolls in medical, dental and prescription drug coverage, the employer only has to report the total value of all coverage, not a value for each individual benefit.
Benefits Exempt from Form W2 Reporting Requirements
The following employer provided benefits are not required to be reported on Form W2 under the new health care law:
• Long term care, accident or disability income benefits
• Specific disease or illness policies (such as cancer policies), and hospital (or other) indemnity insurance
policies where the full premium is paid by the employee on an after tax basis
• Archer MSA or HSA contributions of the employee or the employee’s spouse
• Salary reduction contributions to a Health FSA
To determine the value of health insurance coverage, the employer will calculate the applicable premiums for the taxable year for such health coverage for the employee under the rules for COBRA continuation coverage under IRC Sec. 4980B(f)(4) (and accompanying Treasury regulations). The value that the employer is required to report is the aggregate premium calculated under the COBRA rules, not the portion of the premium that the employee has to pay. If the employer’s plan provides for the same COBRA continuation coverage premium for both individual coverage and family coverage, the employer plan would be required to calculate separate individual and family premiums and the employer would report the value of the coverage the employee received. For example, if one employee received family coverage, the employer would report the premium amount for family coverage for that employee. For another employee that receives individual coverage, the employer would report the premium amount for individual coverage.
This information is for educational purposes only. Please refer to your tax advisor for additional infirmormation or guidance.