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W-2 Reporting of Group Health Plan Coverage Revised

Integra Insurance Services would like to ensure you are aware that the IRS issued revised guidance for form W-2 reporting of group health plan coverage so your business remains compliant.

Change to NoticesThe revised interim guidance (Notice 2012-9) was issued on January 4, 2012 in response to public comments made on the original guidance under Notice 2011-28. This new notice supersedes the former and is intended to ease reporting complexities, clarify several points and address additional issues that will enable employers to accurately report coverage value. The IRS stated that any future guidance will be prospective and will not be applicable earlier than January 1 of the calendar year beginning at least 6 months after any additional guidance is issued. Notice 2012-9 applies until any future guidance is issued. A number of additional Q&As have been included so please review the notice in its entirety if your particular issue has not been addressed by this briefing.  
Effective Dates & Initial Action Steps for EmployersW-2 reporting requirements are applicable beginning this tax year. In other words, the value must be reported on the Form W-2 issued in January 2013 for the 2012 tax year. In order to comply with the W-2 reporting requirements, employers will want to:
  • Determine the applicable employer-sponsored coverage that is provided to each employee;
  • Calculate the aggregate cost of such coverage for each employee; and
  • Report that cost on each employee's Form W-2.
Employers will also want to track the information needed to report the cost of employer-sponsored health coverage throughout 2012, and work with their payroll provider to ensure accurate and timely reporting. It is important to note that Form W-2 reporting is for informational purposes only to provide useful and comparable consumer information to employees regarding the cost of the health care coverage and not to tax employees on the value of coverage.  

Employers Exempt from Reporting

Most employers that provide applicable employer-sponsored coverage during a calendar year are subject to the reporting requirement, including federal, state and local government entities with the exception of employers filing fewer than 250 Forms W-2 for the preceding calendar year. The revised guidance also clarifies that tribally chartered corporations that are wholly owned by a federally recognized Indian tribal government are exempt from the reporting requirement.

Dental & Vision Arrangement Reporting

The Notice clarifies that the cost of coverage under a dental or vision plan is not included in the aggregate reportable cost if the plan is an excepted benefit under HIPAA (Q&A-20).

Reporting Requirements when Multiple Employers/Related Employers are Involved

The Notice clarifies the application for Form W-2 reporting when an individual is an employee of multiple employers within a calendar year. Each employer providing employer-sponsored coverage must report the aggregate reportable cost of coverage it provides.

The Notice also provides that if employers concurrently employ an employee and are related employers, with a common paymaster, the common paymaster must include the aggregate reportable cost of the coverage provided to that employee by all the employers for whom it services as the common paymaster.

If the employers do not share a common paymaster, then the employers may:

  • Report the entire aggregate reportable cost on one of the Forms W-2 issued to the employee; or
  • Allocate the aggregate reportable cost among the employers using any reasonable allocation method (Q&A-7).
Reporting Requirements for Health FSA'sThe reporting requirement does not apply to health FSA coverage funded solely through employee salary reduction elections. An example has been added to clarify this point (Q&A-19).

Example: Employer's cafeteria plan offers permitted taxable benefits (including cash), and qualified nontaxable benefits including a health FSA. The plan permits contributions only through employee salary reduction elections, and does not offer any employer flex credits. Employee makes a $2,000 salary reduction election for several qualified benefits under the plan, including a health FSA for $1,500. For purposes of Form W-2 reporting, the health FSA amount is not included when determining the aggregate reportable cost.

However, when the health FSA is offered through a cafeteria plan under which optional employer flex credits can be applied to the health FSA or an employer contributes to the Health FSA, special rules must be applied to determine whether or not any amount must be included in the aggregate reportable cost. If the amount of the employee's salary reduction for all qualified benefits equals or exceeds the amount of the health FSA for a plan year, then the amount of the health FSA is not included in the aggregate reportable cost.

Example: Employer's cafeteria plan offers permitted taxable benefits (including cash) and qualified nontaxable benefits, including a health FSA. The plan offers an employer flex credit of $1,000. Employee makes a $2,000 salary reduction election for several qualified benefits under the plan, including a health FSA for $1,500. The cost of the qualified benefits for Employee under the plan for the year is $3,000. The amount of the Employee's salary reduction election ($2,000) for the plan year equals or exceeds the amount of the health FSA ($1,500) for the plan year. Thus, for purposes of Form W-2 reporting, none of the health FSA amount is permitted to be included for purposes of determining the aggregate reportable cost.

If the amount of the employee's health FSA for a plan year exceeds the employee's salary reduction for that plan year, then the amount of the employee's health FSA minus the employee's salary reduction election for the health FSA must be included in the aggregate reportable cost.

Example: Employer's cafeteria plan offers permitted taxable benefits (including cash) and qualified nontaxable benefits (including a health FSA). The plan offers a flex credit in the form of a match of each employee's salary reduction contribution. Employer makes a $700 contribution to the health FSA to match Employee's salary reduction election. The amount of the health FSA for Employee for the plan year is $1,400. The amount of the Employee's health FSA ($1,400) for the plan year exceeds the salary reduction election ($700) for the plan year. The employer must include $700 ($1,400 health FSA amount minus $700 salary reduction) in determining the aggregate reportable cost.

 

Calculating the Reportable Cost when Straddling Two Tax Years

Calculating the Reportable Cost when Straddling Two Tax Years When the final payroll period of a calendar year includes December 31, but continues into the subsequent calendar year, an employer may report that coverage period in one of the following ways:

  • Treat the coverage as provided during the calendar year that includes December 31;
  • Treat the coverage as provided during the calendar year immediately subsequent to the calendar year that includes December 31;
  • Allocate the cost of coverage for the coverage period between each of the two calendar years using any reasonable allocation method, and apply the method consistently to all employees (Q&A-36).