Press Room: Tax Release

April 03, 2012

Cost of Employer-Sponsored Health Coverage Must Be Reported on Forms W-2

Beginning with 2012, the aggregate cost of employer-sponsored health coverage must be reported on Form W-2 issued to an employee (on the Forms W-2 issued in January 2013). The aggregate reportable cost is reported on Form W-2 in Box 12, using code DD. Reporting is generally required by all employers including federal, state and local government entities, churches and other religious organizations. However, there is an exception for small employers. If an employer was required to file fewer than 250 Forms W-2 for the previous calendar year, then it would not be required to report the aggregate cost of employer-sponsored health coverage for the current year. This exception applies until further guidance is issued by Internal Revenue Service. In addition, the taxable amount reported on a Form W-2 for a 2% shareholder in an S corporation does not have to be separately reported in Box 12.

In Notice 2012-9, IRS has restated, expanded and clarified its previous guidance on information reporting to employees of the cost of employer-sponsored group health plan coverage.

In general, the employer must report the aggregate reportable cost of coverage for all employees for a calendar year. However, if an employer is not required to issue a Form W-2 to an individual for a calendar year, the employer is not required to issue a Form W-2 solely to report the aggregate reportable cost of coverage that the individual may have received during the calendar year (i.e., retiree or other former employee not receiving the payment of compensation). For employees who terminate employment during a calendar year, any reasonable method for reporting the aggregate cost of health coverage can be used as long as it is used consistently throughout the year for all employees who terminated employment during the year.

Applicable employer-sponsored health coverage means coverage under a group health plan for employees, except coverage does not include: (1) long-term care coverage; (2) dental and vision coverage; and (3) use of on-site medical clinics and employee assistance programs.

The aggregate cost includes both the portion of the cost paid by the employer and the portion of the cost paid by the employee (whether pre-tax or after-tax contributions). In general, aggregate cost does not include amounts contributed to any Archer MSA, health savings account, salary reduction contributions to flexible spending accounts and coverage under a health reimbursement account.

An employer may calculate the reportable cost by using the COBRA applicable premium method. Under this method, the reportable cost for a period equals the COBRA applicable premium for that coverage for that period. An employer may calculate the reportable cost using the premium charged under an insured health plan. If the employer uses the premium charged method, the employer must use the premium the insurer charged for the employee’s coverage for each period as the reportable cost for that period. If an employer subsidizes the cost of coverage or determines the cost of coverage for a year by applying the cost of coverage from a prior year, it may calculate the reportable cost using the modified COBRA premium method. If the employer subsidizes the COBRA premium, then it may determine the reportable cost for a period based upon a reasonable good faith estimate of the COBRA applicable premium for that period. On the other hand, if the employer’s COBRA premium charged is based on a prior period, the employer may use such prior period COBRA cost as the reportable cost.

The aggregate cost is determined on a calendar year basis. An employer does not have to use the same methodology for all of its group health plans. However, it must use the same methodology for determining the reportable cost under a single group health plan.

Failure to include the aggregate cost on the employees’ Forms W-2 could result in a penalty of $100 for each Form W-2 which fails to disclose the aggregate cost, with a maximum penalty of $1.5 million (a reduced penalty for small employers). The penalties are reduced if the failure is corrected prior to August 1 of the calendar year of the filing requirement.