Closer look: Affordable Care Act adds W-2 requirements for large employers
February 25, 2013
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The Affordable Care Act requires reporting of the aggregate cost of applicable employer-sponsored coverage on an employee's W-2 Wage and Tax Statement. According to Internal Revenue Service Notice 2010-69, reporting was optional for all employers in 2011 and for employers issuing less than 250 W-2 forms in 2012.
However, reporting will be required on the W-2 form that was issued in January 2013 for large employers: those filing more than 250 W-2 forms. This reporting requirement will likely extend to small employers within the next couple of years. The purpose of this requirement is to provide employees with useful and comparable information regarding the cost of their health care coverage.
Large employers are required to report on the W-2 form the cost of group health plan coverage provided to the employee. The information is reported in Box 12, using code DD to identify the amount. Although the information is provided on the W-2 form, this does not make health coverage taxable as income to the employee. Also of note, the new rules do not require an employer to issue a W-2 form to report the information where otherwise it would not be issued (e.g. for retirees).
The “aggregate cost” is the total cost of coverage under all applicable employer-sponsored coverages provided to the employee and any family members receiving coverage:
- An employer may calculate the reportable cost by using the COBRA applicable premium method.
- An employer may calculate the reportable cost for a current employee by using the premium charged method.
- An employer that subsidizes the cost of coverage or determines the cost of coverage for a year by using the cost of coverage in a prior year can use the modified COBRA premium method. IRS Notice 2011-28 provides more detailed information on methods of calculation.
- The employer may use different calculation methods for different plans, but cannot use different methods for participants in the same plan. A special rule for self-insured plans allows the aggregate cost to be calculated by either the actuarial method or past cost method. Generally, the amount reported includes the amounts paid by the employer and amounts paid by the employee.
There are several exceptions to coverage that would otherwise be reportable, including accounts earning tax deductible interest for medical expenses (Archer Medical Savings Account), health savings accounts, and most employee salary reduction contributions to flexible spending accounts. Also excluded are dental and vision plans. Additionally, there is no reporting requirement for Health Reimbursement Accounts, although this might change in the future. Onsite clinics, employee assistance programs and wellness programs must be reported only if the program is subject to COBRA and the employer charges a COBRA premium for continuation of coverage.
The reporting must be based on a calendar year (January 1 to December 31), even if the health plan is not based on a calendar year (e.g. policy runs from May 1 to April 30). The actual cost must be reported, which means the employer must incorporate into the calculation any mid-year addition or deletion of dependents and other rate changes. For example, if the health care rates increased for a plan that runs from May 1 to April 30, the employer will have to calculate one rate for January 1 through April 30 and another rate for May 1 to December 31, also factoring in any changes in employee dependents covered under the plan.
If an employee commences or terminates coverage during the year, the employer can use any reasonable method to calculate cost, as long as it is the same method used for all similarly situated employees. For example, an employer can include in the aggregate only premiums paid during the employee's employment or include those premiums plus COBRA premiums paid following employment as long it uses a consistent method. However, reporting is not required if a terminating employee requests to receive a W-2 form prior to the end of the calendar year.
More information can be found in IRC § 6051 and informational pages on the IRS website.