Important New W-2 Reporting Requirements for Employers

Under the Affordable Care Act, employers are now required to include the cost of employer-provided group health plan coverage on an employee’s Form W-2. In general, this consists of employer-sponsored coverage under a group health plan that is excludable from the employee’s gross income. This provision is optional for 2011 (reported on the January 2012 W-2), but is mandatory for 2012 (the first W-2 it will truly affect is the January 2013 W-2). The purpose of the reporting requirement is to provide employees with comparable consumer information on the cost of their health care coverage; the guidance clarifies once again that the amounts reported are not taxable.

The IRS previously issued interim guidance in 2011 that provided information on the nuts and bolts of the reporting, as well as transitional relief for small employers. The IRS has now released additional interim guidance which amends and restates the prior interim guidance. Much of the original guidance remains intact, but this new guidance supersedes the earlier guidance and provides additional clarification, as well as a number of changes. The highlights of the guidance are set forth below.

Exception for Small Employers and New Exception for Tribally Chartered Corporations

The guidance clarifies that the transition relief for small employers, which allows employers who file fewer than 250 Forms W-2 in the preceding calendar year to be exempt from the reporting requirement, will continue unless and until further guidance is issued. It also adds to the transition relief an exception from the reporting requirement for employers that are tribally chartered corporations wholly-owned by a federally recognized Indian tribal government.

Health FSA, Dental and Vision Plans Not Reportable

The guidance clarifies that a health FSA funded only by employee salary reduction elections is not subject to the W-2 reporting requirement, unless the amount in the health FSA for the plan year exceeds the employee’s salary reduction election for the plan year (which typically happens when employers provide flex credits through a cafeteria plan that are used to seed the health FSA).

The prior interim guidance provided that an employer did not have to report dental and vision coverage if the coverage is not “integrated” into the group health plan, but did not define the term “integrated.” The new guidance explains that an employer does not have to report coverage under a dental and/or vision plan if those benefits are excepted benefits under HIPAA. To be excepted benefits, they must either be offered under a separate policy, certificate or contract of insurance, or the participant must have the right not to elect the dental or vision benefits and, if they do, they must pay additional premium or contribution for that coverage.

EAPs, Wellness Programs and Onsite Medical Clinics

Coverage provided under these types of programs would only be required to be included in the W-2 reporting if the coverage is considered a group health plan. EAPs are a little tricky because they can include a variety of benefits from marital assistance to concierge services. If the EAP provides medical benefits, such as counseling by a trained professional, it would be subject to the W-2 reporting requirement. The guidance creates an exception from the reporting when an employer does not charge a COBRA premium for these types of coverage to COBRA qualified beneficiaries. If the employer does charge a COBRA premium, it must include the cost of the programs in the W-2 reporting.

Coverage Containing both Reportable and Non-Reportable Benefits

The guidance provides that, for a program that provides both benefits that constitute applicable employer-sponsored coverage and other benefits that do not, employers may useany reasonable allocation method to determine the cost of theportion of the program providing applicable employer-sponsored coverage.

For example, a long-term disability program that provides for certain health care benefits would contain both reportable and non-reportable benefits. If the portion of the program that is applicable employer-sponsored coverage is only incidental in comparison to the portion of the program providing other benefits, the employer would not have to include either portion of the cost in the aggregate reportable cost.

If, on the other hand, the portion of the program providing a benefit that is not applicable employer-sponsored coverage is only incidentalto the portion of the program providing a benefit that isapplicable employer-sponsored coverage, the employer has theoption of including the benefit that is not applicable employer sponsored coverage in determining the reportable cost.

Reporting for Non-Reportable Coverage

The new guidance clarifies that employers may include the costs of coverage under programs not required to be included,such as the cost of coverage of an HRA, as long as thecalculation of the coverage otherwise meets the requirements and the coverage is applicable employer-sponsored coverage.

Hospital Indemnity/Other Fixed Indemnity/SpecifiedDisease/Illness Coverage

Prior guidance stated that the cost of coverage provided under these types of policies is not required to be reported on the Form W-2 to the extent the employer merely provides the opportunity for employees to purchase an independent, noncoordinated fixed indemnity policy (or other fixed indemnity insurance or specified disease or illness coverage) and the employee pays the full amount of the premium with after-taxdollars.

The new guidance clarifies that an employer would have to report on the cost of coverage if the employer makes any contribution toward the cost of the coverage or if the employee purchases the coverage on a pre-tax basis under a cafeteria plan.

Retroactive Plan Changes

The guidance provides that the aggregate reportable cost for a calendar year may be based on information available to the employer as of December 31 of that year. Any election or notification made after such date that retroactively affects coverage is not required in the calculation of the aggregate reportable cost for the calendar year. For example, if an employee makes an election or provides notification of a status change (e.g., a divorce) in January 2013 which affects the cost of coverage in 2012, the changes in the cost of coverage need not be reflected in the aggregate reportable cost for 2012.The guidance also provides that a W-2 is not required to be furnished if a W-2 has already been provided for a calendar year, before the election or notification.Coverage Period Spanning Two Taxable Years.

If a coverage period includes December 31 but continues into the subsequent year, the employer may (1) treat the coverage as provided during the calendar year that includes December31; (2) treat the coverage as provided during the following calendar year; or (3) allocate the cost of coverage between each of the two years under any reasonable allocation method,which generally should relate to the number of days in theperiod of coverage that fall within each of the two calendar years. The method the employer uses should be applied consistently to all employees.

This additional interim guidance provides helpful information and clarifications for many questions that were not answeredin prior guidance. The new guidance will apply until further guidance is issued. Employers should continue to work with their payroll vendors to ensure compliance with the reporting requirement. 

This information is provided to highlight various employee benefit matters of general interest to our readers. It is not intended to interpret laws or regulations, or to address specific situations. You should not act or rely on any information contained herein without seeking the advice of an attorney or tax professional.