Starting in 2013, employers will be required to report the amount of employer paid health care insurance on the annual Form W-2 filed for each employee. The new requirement (as part of The Patient Protection and Affordable Care Act of 2010) is intended to bring more transparency to employees with regard to the cost of their health care coverage. The IRS has issued Notice 2012-9 as guidance to assist in understanding the new reporting requirements, including exceptions and limitations to the reporting, as well as approved methods for calculating the costs required to be reported. It is important to understand the general requirements and what the effect of the new reporting requirement will have on your business.
Employers are required to issue a Form W-2 to each employee no later than January 31 reporting the income and withholdings from the employee for the prior year. Starting in 2013, the W-2's issued to employees for 2012 are required to include the employer paid health care insurance costs for each employee. There are very few exceptions to this requirement; however, those employers who are filing fewer the 250 Form W-2s are exempt from filing. In addition, s corporations are not required to report the amount of employer paid health care coverage to shareholders when the cost is included in taxable wages. Most other employers will be required to report the employer paid health care insurance costs in box 12 of Form W-2 using code DD.
Health care coverage can encompass a wide variety of employer sponsored insurance; so much that the IRS guidance outlines the limitations of the reporting by listing what costs are not to be included. For instance, the reporting requirement does not include employer paid costs for stand-alone dental or vision insurance. It also does not include disability, accident, or liability insurance.
In addition to understanding the exceptions and limitations, employers must understand how to calculate the health care coverage costs to report them correctly on Form W-2. There are several methods allowed by the IRS to calculate the cost of health care coverage including the following:
- Premium Charged method - The premium charged by the insurer for each employee's coverage
- COBRA method - The COBRA application premium for the coverage for the reporting period
- Modified COBRA Premium method - An estimate of the COBRA applicable premium
The new reporting requirement is for reporting purposes only. It is intended to inform employees of the cost of their health care coverage and not to cause employer provided health care insurance costs that are otherwise non-taxable to become taxable. As there are potential penalties for each incorrectly filed W-2, proper planning should take place in order to prevent any compliance challenges.