W-2 reporting requirements under the Affordable Care Act
April 11, 2014
What is included as “applicable employer-sponsored coverage”?
For purposes of this reporting requirement, “applicable employer-sponsored coverage” includes coverage under any group health plan made available to an employee by the employer, regardless of whether the employer or the employee paid the cost. Applicable employer-sponsored coverage also includes coverage under any group health plan established and maintained by the U.S. government, the government of any state or its political subdivision, or by any agency or instrumentality of such government (except for plans maintained primarily for members of the military and their families), churches and other religious organizations. Federally recognized Indian tribal governments are exempt from this reporting requirement.
What is not included as “applicable employer-sponsored coverage”?
The IRS has stated that applicable employer-sponsored coverage does not include:
- Stand-alone dental or vision coverage (if it qualifies as a "HIPAA-excepted" benefit)*;
- Contributions to an Archer medical savings account (MSA), health savings account (HSA) and salary reductions into a medical FSA (employer flex credits to a medical FSA are reportable);
- Health reimbursement arrangement (HRA)*;
- Coverage under an employee assistance program (EAP), wellness program or on-site medical clinic, provided that the employer does not charge a premium with respect to that type of coverage provided under COBRA;
- Coverage only for a specified disease (if it qualifies as a “HIPAA-excepted” benefit and is paid for on an after-tax basis by the employee);
- Coverage for long-term care;
- Coverage only for accident insurance;
- Hospital indemnity or other fixed indemnity insurance (if it qualifies as a “HIPAA-excepted” benefit, if the employer makes no contribution to the cost of coverage that is excludable from an employee's gross income, and if the premium is paid for on an after-tax basis by the employee); or
- Contributions made on behalf of an employee to a multiemployer plan* .
*See the following question and answer regarding transitional relief provided in the IRS Notices.
What transitional relief is provided in the IRS Notices?
IRS Notices 2011-28 and 2012-9 provide transitional relief from the reporting requirements for the following:
- Small employers (e.g., employers filing fewer than 250 Forms W-2 for the previous calendar year);
- Tribally chartered corporations wholly owned by a federally recognized Indian tribal government;
- Self-insured plans of employers not subject to COBRA continuation coverage or similar requirements;
- Multiemployer plans;
- Stand-alone dental and vision plans;
- Employers furnishing W-2s to employees who terminate before the end of a calendar year and request a W-2 before the end of that calendar year; and
- EAPs, wellness programs and on-site medical clinics (provided that the employer does not charge a premium with respect to that type of coverage provided under COBRA.
In the above situations, the new Form W-2 reporting requirement will not apply until the IRS publishes guidance giving at least six months advance notice of any change to the transition relief.
Note: An employer is permitted to include on Form W-2 the cost of coverage that is not required to be included in the aggregate reportable cost, including coverage under an HRA, a multi-employer plan, an EAP, wellness program or on-site medical clinic, provided such coverage constitutes applicable employer-sponsored coverage and is calculated using a permissible method under the notices.
Does the W-2 reporting requirement apply to all employers who provide health coverage, regardless of the employer’s size?
Yes. The W-2 reporting requirement applies to any employer that provides health coverage for its employees if the employer is required to deduct and withhold employment or income taxes from an employee’s wages under Sections 3401 or 3402 of the Code. However, employers filing fewer than 250 Forms W-2 for the previous calendar year are currently exempt from this new reporting requirement.
When is this new requirement effective?
The new Form W-2 requirement is effective for taxable years beginning after 2012 (i.e., the 2012 W-2 due in January 2013).
How is the aggregate cost of employer-sponsored coverage determined?
For a self-funded plan, the aggregate cost of coverage is determined under rules similar to those for determining COBRA premiums (as set forth in Section 4980(B)(f)(4) of the Internal Revenue Code). Therefore, the aggregate cost of employer-sponsored coverage that must be reported on an employee’s W-2 is equal to the COBRA rate for the coverage option in which the employee is enrolled (taking into account any employer subsidy and pre-tax or post-tax contributions by the employee), less the 2 percent administrative charge that may be applied to COBRA coverage. Coverage that may be imputed to an employee as additional wages for purposes of federal tax law (such as coverage for nondependent domestic partners and same-sex spouses and their children) is also subject to reporting.
If the employer-sponsored coverage is fully insured, the aggregate cost of coverage may be based on the premium charged by the employer for the coverage. If an employer subsidizes COBRA coverage, the employer may determine the reportable cost based upon a good faith estimate of the COBRA applicable premium for that period. Likewise, if the actual premium charged by the employer for COBRA in the current year is equal to the COBRA premium from last year, the employer may use the COBRA premium from the prior year as the basis for reportable costs in the current year.
If an employer charges employees a composite rate, the employer may choose to calculate and use the same reportable cost for a period for (1) the single class of coverage under the plan, or (2) all the different types of coverage under the plan for which the same premiums is charged to employees, provided the same method is applied to all types of coverage provided under the plan. An employer is considered to charge employees a composite rate if (1) there is a single coverage class under the plan (i.e., if an employee elects coverage, all individuals eligible for coverage because of their relationship to the employee are included in the elections and no greater amount is charged to the employee regardless of whether the coverage will include only the employee or the employee plus other individuals) , or (2) there are different types of coverage under the plan (e.g., self only and family, or self-plus-one and family) and employees are charged the same premium for each type of coverage.
If the cost for a period changes during the year, the reportable cost for an employee for the year must reflect the increase or decrease in cost for the periods to which the increase or decrease applies. For example, if an employee changes coverage during the year (e.g., adds or drops a covered family member or changes coverage options), the reportable cost must reflect the different reportable costs for the different coverages elected by the employee during the year. However, if an employee has a COBRA event and elects COBRA coverage, the employer may choose whether or not to include the cost associated with any continuation coverage for the calendar year at issue, provided that the same methodology is applied to all plan participants for the calendar year at issue.
If an employee works for multiple employers, but the employers do not share a common paymaster, 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.
Who will get the Form W-2?
Under current rules, employers file Form W-2 with the IRS and furnish a copy to each employee for wages subject to federal income and employment tax withholding. The PPACA indicates reporting also will be required for former employees, retirees and surviving spouses if the individual would otherwise receive a Form W-2.
Is this requirement a carrier requirement as well?
No. The requirement to report the aggregate cost of employer-sponsored coverage on an employee's W-2 is an employer reporting requirement, not a carrier reporting requirement.
Does this reporting requirement change the tax treatment of the benefit to the employee?
No. With respect to the W-2 reporting, this is solely a reporting exercise and does not change the tax treatment of the benefit to the employee under the current law.
In what box on the W-2 is the aggregate cost of employer-sponsored coverage reported?
The aggregate cost of employer-sponsored coverage will be reported in Box 12, using Code DD.