IRS Further Clarifies Rules on Reporting Health Plan Costs on 2012 W-2 Forms

In its latest guidance on W-2 reporting of health benefits (Notice 2012-9, issued Jan. 5) the IRS has clarified that employers need not include the cost of coverage under an employee assistance program (EAP), health reimbursement accounts (HRA), wellness program or on site-medical clinic in the reportable amount if the employer does not charge a premium for that type of coverage. (But if those programs are incorporated in the company’s health plan, they should be included. That’s not the case with most programs of this kind.)

But employers may include such costs – EAPs, HRAs, wellness programs and on-site medical clinics – if they are in fact employer-sponsored, Notice 2012-9 says.

The new guidance also describes when employers have to report hospital indemnity or other fixed indemnity insurance in the W-2.

If the coverage is not coordinated with the company’s sponsored health plan and the employee pays for it on an after-tax basis, it need not be reported. But if the company contributes any amount to the insurance or if the employee buys the policy on a pre-tax basis through a cafeteria plan, then those kinds of coverage must be reported, Notice 2012-9 says.

Starting for calendar year 2012, employers must report on Forms W-2 (which employers will give employees in January 2013) the aggregate cost of health coverage received by an employee under the employer’s health plan, as required under health reform.

(Even though the government persistently repeats it has no intention of taxing health benefits, it may not be enough to allay all employer suspicions that this is the first step to eliminating the tax-exempt status of health benefits. Employers are also concerned about the administrative burden of the reporting.)

The latest guidance builds on, adds to and supersedes some of the guidance on W-2 reporting in IRS Notice 2011-28, which had a comment period. Under 2011-28, most FSAs, HRAs and HSAs were excluded from the cost analysis. Also in that notice, IRS determined that smaller employers would not be subject to the reporting requirements if they are required to file fewer than 250 Forms W-2.

Reportable costs include amounts for applicable employer-sponsored coverage: (1) paid by the employer; and (2) by the employee, regardless of whether paid through pre-tax or after-tax contributions.

All employers that provide applicable employer-sponsored coverage, including federal, state and local government entities, churches and other religious organizations, and employers not subject to the COBRA continuation coverage must report such costs (but not federally recognized Indian tribal governments), that notice said.

Concerns over Cost

Employers remain concerned about costs associated with this requirement: the effort that will go into calculating a per-beneficiary amount for health coverage for each employee is definitely going to cost something.

Further, employers initially thought this was the beginning of taxing the benefit, so every time IRS discusses this, it reiterates that reporting is for employees’ information only and does not cause otherwise excludable health coverage to become taxable.

Notice 2012-09 also creates safe harbors for companies from having to report costs for certain employees terminated before the end of the year, multi-employer plans, some HRAs, dental and vision plans and some self-insured plans not subject to COBRA continuation coverage rules.

Here’s what the Groom Law Group has to say about the new guidance.