Pepper Hamilton LLP: IRS Provides Additional Guidance on Form W-2 Informational Reporting Requirements

Pepper Hamilton LLP: IRS Provides Additional Guidance on Form W-2 Informational Reporting Requirements

By  Michael A. Kadlec and  Joseph F. Murphy

On January 3, 2012, the Internal Revenue Service issued Notice 2012-9 (available at http://www.irs.gov/pub/irs-drop/n-12-09.pdf), which restates and clarifies previously issued guidance on the requirement under the Patient Protection and Affordable Care Act of 2010 (the Affordable Care Act) to report the cost of employer-sponsored health coverage on employees' annual Forms W-2 (using box 12, code DD). Notice 2012-9 supersedes the prior guidance issued under Notice 2011-28 and clarifies various aspects of the reporting requirement.

Summary of Reporting Requirements

The Affordable Care Act added Section 6051(a)(14) to the Internal Revenue Code (the Code), and generally requires annual reporting to employees on Form W-2 of the aggregate cost of coverage under all applicable employer-sponsored group health plans that is excludable from the employees' income under Section 106 of the Code (or would be excludable if it were employer-provided coverage under Code Section 106). The reporting requirement is informational only and will not cause otherwise excludable employer-provided health coverage to become taxable. Applicable-employer sponsored coverage includes the following group health plans:

  • coverage under a medical plan (including combined medical-dental or medical-vision plans)
  • contributions by an employer to a health flexible spending arrangement (to the extent that the amount of the health flexible spending arrangement for the plan year exceeds the salary reduction elected by the employee for the plan year)
  • coverage under an executive medical plan
  • coverage under an employee assistance program (to the extent the coverage is provided under a group health plan and the employer charges a premium for COBRA continuation coverage), and
  • health benefits provided at an on-site medical clinic.

For this purpose, applicable-employer sponsored coverage does not include:

  • coverage only for accident or disability income insurance; coverage issued as a supplement to liability insurance; liability insurance; workers' compensation or similar insurance; automobile medical payment insurance; and credit-only insurance
  • coverage for long-term care
  • coverage under a separate policy, certificate, or insurance contract that provides dental or vision benefits, or
  • independent, non-coordinated coverage for a specified disease or illness, or hospital indemnity or other fixed indemnity insurance, where the payment for such coverage is not excludable from gross income and for which a deduction under Code Section 162(l) is not allowable.

The cost that must be reported is the total cost of coverage under all applicable employer-sponsored plans. Aggregate cost includes both amounts paid by the employer and the employee, regardless of whether these amounts are paid through pre-tax or post-tax contributions.

There are three methods by which an employer may calculate the cost of coverage for the required Form W-2 reporting. An employer may use (i) the COBRA applicable premium method, (ii) the premium charged method, or (iii) the modified COBRA premium method. Under the COBRA-applicable premium method, the reportable cost for a period equals the established COBRA-applicable premium for that coverage for that period, less the 2 percent administrative charge. The premium-charged method may be used to determine the reportable cost only for an employer's insured group health plan. The employer must use the premium charged by the insurer for that employee's coverage. The modified COBRA premium method may be used when the employer subsidizes the cost of COBRA or when the premiums charged by the employer in the current period equal the prior year's COBRA rates.

Finally, Notice 2012-9 confirms that employers that were required to file fewer than 250 Forms W-2 in the preceding calendar year are temporarily excluded from this reporting requirement.

Conclusion

This additional Form W-2 reporting is a requirement beginning with the 2012 taxable year (the 2012 Forms W-2 must be distributed by the end of January 2013). Thus, employers must determine which of their benefit plans would be classified as providing for applicable employer-sponsored coverage and monitor the cost of that coverage for 2012. Additionally, employers will need to determine which costs may permissibly be excluded from the calculation of the aggregate cost of coverage and determine whether their payroll systems will be effective in capturing the information needed for Form W-2.

For further information, please contact any member of our Employee Benefits Practice Group.

Michael A. Kadlec and Joseph F. Murphy

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

This article is republished with permission of Pepper Hamilton LLP. Further duplication without the permission of Pepper Hamilton LLP is prohibited. All rights reserved.

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