The Internal Revenue Service recently issued guidance on a provision of the Patient Protection and Affordable Care Act that requires employers to report the cost of health coverage on employees’ W-2 forms.
The requirement is informational only and does not affect an employee’s income determination or whether any particular coverage is excludable from gross income.
Notice 2011-28 answers questions for employers about how to calculate the cost of coverage, which benefits to include in the calculation, exceptions to the rule and the effective date of the requirement.
Howard Bye, of counsel at Stoel Rives in Seattle who practices in the employee benefits section of the Benefits, Tax and Wealth Management group, said the guidance is “pretty reasonable.”
The Act “certainly imposes a burden on employers, but this notice pushes off the requirement and gives people more time to get ready for it,” he said.
Bye also predicted the IRS will issue further guidance by January 2013, when the requirement kicks in.
“This is interim guidance to let people know the IRS’s initial thoughts,” he said, noting that the guidance is open to public comment for 90 days.
The IRS provided guidance on the following issues:
To report the cost of health care coverage, employers must include the amount paid by the employee, as well as the employer contribution. The cost also includes coverage for others covered under the plan, such as a spouse, domestic partner or child.
The IRS guidance provides three options for employers to calculate the cost of coverage, Bye said.
Under the COBRA applicable premium, employers can use the same method to calculate cost as they would to calculate a COBRA premium, minus the extra 2 percent employers are allowed, Bye noted. Under the modified COBRA premium method, employers that subsidize COBRA coverage can report the unsubsidized COBRA premium amount.
And for “employers that purchase insurance plans, it’s pretty straightforward: they report the premium allocated to that employee for health insurance,” Bye explained.
Under the IRS guidance, amounts contributed to a Health Savings Account, Archer MSA or Health Reimbursement Arrangement should not be included in the reported cost.
Contributions to a health Flexible Spending Account also should not be included unless an employer contributes money to the employee’s health FSA, which should be included in the report.
Vision and dental benefits should be included in the reported cost if they are “integrated” into the group health plan, but the guidance does not define “integrated,” Bye noted. Where employees have to elect vision or dental coverage separate from a health plan, the plans are likely not integrated, he said, although it is unclear how this requirement applies to self-funded plans with separate contributions for vision and dental coverage.
The guidance includes some exceptions to reporting, including multi-employer plans, retirees who do not receive a W-2 and church plans, Bye said.
In addition, employers that are required to file fewer than 250 W-2 forms in 2011 are exempt from the reporting requirement for 2012 W-2s and until the issuance of further guidance, according to the IRS.
The reporting requirement was waived for 2011, so employers must start reporting the cost of health coverage on W-2 forms issued for 2012 wages. Employers may voluntarily report earlier if desired. The information should be provided in Box 12, using code DD.