Reporting Employer-Sponsored Health Coverage on Form W-2: Interim Guidance from the IRS

April 7 2011

It was announced March 30, 2011 that the IRS issued Notice 2011-28 giving interim guidance on reporting employer-sponsored health coverage on Form W-2.  On March 23, 2010, the Patient Protection & Affordable Care Act of 2010 was enacted that will require employers to report the aggregate cost of health plans.  This was to be effective for the calendar year 2011 reported in 2012, but was delayed.  Employers were still given the option to begin reporting the coverage at this time, although it was not required, however it will be required beginning calendar year 2012 reported in 2013.

The Form W-2 added a new box code DD for box 12 for reporting the employer-sponsored healthcare costs.  This coverage amount is not taxable to the employee but is only reported on Form W-2 for information to the employee.  The IRS has provided valuable information in a question and answer format. View the Employer-Provided Health Coverage Informational Reporting Requirements: Frequently Asked Questions on the IRS website.

To determine what must be reported on the form W-2, we need to understand the definitions of the coverage to be considered, what is to be included and how to calculate the amounts.

First, let’s determine what coverage is to be reported in box 12.  The coverage is for group health coverage that is offered by an employer to its employees.  The coverage will include both the employee and employer contributions.  This may be either pre-tax or after tax. 

What Should NOT be Included as Health Coverage

The following are not considered health coverage and should not be included:

  • Employee flex spending account (FSA) contributions
  • Amounts contributed to an Archer or HSA account
  • Accident or Disability Insurance
  • Supplemental liability insurance
  • General liability or automobile liability insurance
  • Workers compensation or similar insurance coverage
  • Automobile medical payment insurance
  • Credit only insurance
  • Long term care coverage
  • Government provided coverage
  • Dental or vision that is not part of a group health plan

What Should be Included as Health Coverage

The following itmes should be considered in reporting employer-sponsored group health coverage:

  • FSA or HSA match from the employer
  • FSA amounts that are greater than the federal limit for the plan year

Who’s Excluded From Reporting on the Form W-2?

Those groups or individuals that would be excluded from reporting the health coverage on the Form W-2 include:

  • Employers who filed less than 250 Form W-2’s the prior year
  • Self insured employers that are not subject to the COBRA continuation
  • On W-2 for employees that terminate before the end of the calendar year and request their W-2 early
  • Related companies that fall under a common paymaster.  The common Paymaster would be required to report this information
  • Those who do not normally receive a W-2
    For example:  Retirees

The next item to be considered is how to calculate the amount to be reported on the Form W-2 in box 12 with code DD.  Self insured employers can use either the actuarial method or the past cost method for the 12 month calendar year, as long as the calculation used is consistent for all employees and uses a calculation that shows reasonability.

The coverage to be reported should include both the employee and employer premium amounts for the full calendar year.  This is not the health premium year of the employer-sponsored plan.

Methods of Payment

There are several methods of payment:

Premium charge method
This would be the full premium amount charged by the insurer for the full 12 month period for each employee.  If an employee is only with the company a portion of the year, it would be for that number of months.

Modified COBRA Premium method

  1. The employer subsidized COBRA cost only report the insured’s cost
  2. The amount cannot exceed the actual coverage amount per month
    For example if an employee has self coverage for $350 per month and the employer charges the additional 2% ($350 * 102% = $357) the employee amount to be reported would be $350
  3. When determining the amount to report remember it is a good faith estimate that would calculated the same for each employee
    For example self coverage is $500 per month and the employee is only charged $350, the full $500 must be reported

Composite Rate Calculation

  1. If all employees are charged the same premium regardless of the number of dependents covered, the amount reported can be one rate for all employees
  2. If the health plan has different types of coverage for the same amount, charge the same amount per coverage type
    For example, self coverage is $350, family is $500, then charge $350 for all self coverage and $500 for all family coverage

Other considerations to be aware of include increases or decreases in the premium amounts within a year.  For example:

If the first 6 months is $350 and the last 6 months is $400, then the reported amount would be $350 * 6 + $400 * 6 = $4,500

Also, if an employee changes from single to family coverage, the reportable amount would be the single rate for the number of months at that rate plus the family rate for the remaining months in the year, or the old rate could be used for the entire year or the new rate for the entire year, just be consistent.

The bottom line is to always treat each individual the same and make a good faith effort to be reasonable with the way the amounts are calculated for reporting.