IRS releases additional W-2 reporting guidelines

January 3, 2012

What the new standards mean for employers

On Tuesday, January 3, 2012 the Internal Revenue Service (IRS) issued additional guidance for employers and benefits professionals regarding the W-2 health benefits cost reporting requirements that begin in 2012.

Clarification on voluntary benefits

Previous to this IRS announcement, benefits advisors and administrators voiced questions about how hospital indemnity insurance, critical illness insurance, FSAs and health benefits other than major medical coverage might fit into the new reporting system.

Q & A number 37 in IRS Notice 2012-9 explains that:

• Only when employers make some contribution to the cost of coverage, or employees purchase coverage on a pre-tax basis under a Section 125 cafeteria plan, will employers have to include the value of supplemental health benefits, such as hospital indemnity, critical illness, cancer or other specified disease insurance, in their W-2 reporting.
• Employers do not have to include the cost of supplemental health benefits that the employees pay for entirely with after-tax dollars, according to the notice.

When benefits are reportable, the W-2 total should include the aggregate cost — the total of the portion paid by the employer and the portion paid by the employee. Employers are responsible for this reporting even when their disability providers also issue W-2s for paid disability benefits.

The purpose of W-2 reporting

The federal government will use the data collected from the W-2 cost reporting requirement to gain a better understanding of the aggregate value of health insurance and other coverage and services that are being provided through employers.

At present, this W-2 reporting is the only way the government has set up to collect this information. It is the same information the government will need in 2018 to determine whether an employer’s plan meets the threshold for the 40% “Cadillac” excise tax. The government has not yet said whether it will use the W-2 reporting as the means to gather that information or whether it will implement a new method for assessing the tax.

According to the legislation and IRS guidance, employers must report costs for:

• Medical plans
• Medicare supplemental policies
• Prescription drug plans
• Dental or vision plans that are “integrated” into a group health plan so that they are part of the same insurance policy, contract or certificate of insurance. Dental or vision coverage in a self-funded medical plan is included unless employees make a separate election and/or contribution for the dental or vision coverage.
• Hospital indemnity, critical illness, cancer or other specified disease insurance only if the employer makes at least some contribution to the cost of coverage or the employee purchases the policy on a pre-tax basis under a Section 125 cafeteria plan. For more information see Q&A- 37 in the IRS Notice.
• Employee assistance programs that qualify as group health plans which are subject to COBRA (paid with employer dollars, unless no COBRA premium is charged for this coverage when it is elected by qualified beneficiaries. This rule also applies to wellness program and clinic costs. This “no COBRA premium” exception could be subject to change in future IRS guidance).
• The aggregate cost of COBRA continuation coverage (or similar federal continuation coverage) for any of this reportable coverage

Employers do not need to report costs of:

• Coverage for certain “HIPAA excepted benefits,” such as accident insurance and disability insurance
• Hospital indemnity, critical illness, cancer or other fixed indemnity or specified disease insurance that is 100% paid for only with employee after tax dollars (not through a cafeteria plan)
• Long term care coverage
• Liability insurance
• Life insurance
• Archer MSA contributions
• Health reimbursement arrangements
• Health savings account contributions
• Flexible Spending Accounts (FSAs) as long as contributions occur only through employee salary reduction elections. Note one exception: employer flex credits contributions are reportable.
• Workers’ compensation
• Automobile medical payment insurance

The notice also includes additional guidance on other health insurance reporting considerations.

Impact on employers:

• Employers will report benefit costs on W-2s in Box 12 under Code DD.
• The new guidelines may make it easier for employers to understand how to complete this somewhat complex task required by the health care reform law.
• In general, the W-2 reporting requirements mean employers will need to explain the benefits reporting employees see on their W-2s so employees understand that they are not being taxed on their benefits coverage.

Impact on employees/individuals:

• Individuals are not required to do anything with this information and the benefits reported on their W-2s will not increase their taxable income.