On October 12, the Internal Revenue Service (IRS) announced that employers will not be required to report the cost of employer-sponsored group health coverage on Forms W-2 issued for 2011. The IRS guidance provides welcome relief to employers facing the administrative burden of determining the aggregate cost of employer-sponsored health coverage and establishing procedures to track the coverage by the end of 2010.
The Patient Protection and Affordable Care Act of 2010 (PPACA) amended the Internal Revenue Code to require, beginning January 1, 2011, that employers report the aggregate cost of “applicable employer-sponsored coverage” on Forms W-2 issued to employees.
In Notice 2010-69, the IRS explained that the Form W-2 reporting requirement is not mandatory for Forms W-2 issued for 2011, and an employer will not be subject to penalties for failure to report the aggregate cost of employer-sponsored coverage on Forms W-2 issued for 2011.
The IRS explained that “[T]he Treasury Department and the IRS have determined that this relief is appropriate to provide employers with additional time to make any necessary changes to their payroll systems or procedures in preparation for compliance with the reporting requirement.” Also, the IRS continues to stress that the Form W-2 reporting requirement is intended for informational purposes only to provide employees with greater transparency into overall health care costs, and that the amounts reportable are not taxable.
Form W-2 Reporting Requirement in General
The Code, as modified by PPACA, requires an employer to report on an employee’s Form W-2 the aggregate cost of “applicable employer-sponsored coverage,” excluding: (1) the amount contributed to an Archer MSA of the employee or the employee’s spouse, (2) the amount contributed to a health savings account of the employee or the employee’s spouse, and (3) the amount of any salary reduction contributions to a flexible spending arrangement. Prior to the IRS’ issuance of interim relief, this requirement was scheduled to become effective for taxable years beginning after December 31, 2010.
“Applicable employer-sponsored coverage” is generally defined as coverage under any group health plan made available to an employee by an employer that is excludable from the employee’s gross income under the Code. Applicable employer-sponsored coverage includes the entire cost of the coverage, without regard to whether the employer or the employee pays for the coverage. The aggregate cost of coverage is determined under rules similar to those for determining premiums under the Consolidated Omnibus Budget Reconciliation Act (COBRA) – excluding the 2% administrative charge that may be applied to COBRA coverage.
Applicable employer-sponsored coverage excludes:
- coverage for long-term care;
- coverage only for accident, or disability income insurance, or any combination thereof;
- coverage issued as a supplement to liability insurance;
- liability insurance, including general liability insurance and automobile liability insurance;
- workers’ compensation insurance or similar insurance;
- automobile medical payment insurance;
- credit-only insurance;
- other similar insurance coverage, specified in regulations, under which benefits for medical care are secondary or incidental to other insurance benefits;
- coverage for a specified disease or illness, hospital indemnity, or other fixed indemnity insurance, if the coverage is offered as an independent, noncoordinated benefit the payment of which is not excludable from income, and no deduction is allowed; and
- coverage under a separate policy, certificate, or contract of insurance that provides dental or vision benefits.
Additional IRS Guidance Expected Soon
Notice 2010-69 also explains that the Treasury Department and the IRS anticipate issuing guidance further explaining the Form W-2 reporting requirement before the end of 2010.