Form W-2 Reporting Requirement Extended for Employer-Sponsored Group Health Plans

Editor: Michael Dell, CPA

Procedure & Administration

In Notice 2010-69, the IRS announced that employers will not be required to report the cost of employer-sponsored coverage on Forms W-2, Wage and Tax Statement, issued for 2011, due to the difficulty in preparing payroll systems for the requirement. However, employers have the option to report such costs in 2011. In the draft 2011 Form W-2, also just released, the IRS has designated code DD for reporting the health coverage cost information in box 12. Notice 2010-69 states that the IRS will issue regulations explaining the reporting requirement later this year.

Background

The Patient Protection and Affordable Care Act, P.L. 111-148 (PPACA), signed into law by President Barack Obama on March 23, 2010, requires employers to report on Form W-2 the value of the health insurance they sponsor for their employees, effective for tax years beginning on or after January 1, 2011. If employees enroll in employer-sponsored health insurance coverage under multiple plans, employers are required to report the aggregate value of all health coverage (excluding the value of a health flexible spending arrangement). For example, if an employee enrolls in employer-sponsored health insurance coverage under a major medical plan, a dental plan, and a vision plan, the employer reports the total value of the employee’s coverage under all the plans.

Notice 2010-69

Notice 2010-69 delays the effective date for the requirement to report the cost of employer-sponsored group health plans on Forms W-2. Forms W-2 issued for 2011 are not required to include the health coverage information. Accordingly, employers will not be subject to any penalties for failing to meet the requirements of Sec. 6051 for not including the aggregate cost of employer-sponsored coverage on the 2011 Form W-2.

Implications

The delay in enforcing the new reporting requirements gives employers, software providers, and third-party service providers adequate time to plan and implement this new Form W-2 reporting requirement, particularly in light of the fact that essential IRS guidance was not available until late 2010.

Beyond the system problems, many questions have arisen as to what values should be specified on the W-2 and how employers should handle situations in which the information they have is the amount they contribute to a plan, such as a multiemployer health plan, but not the value of the benefit. The delay gives the IRS and Treasury time to issue proposed regulations and to receive and consider comments on these difficult issues. The PPACA ties the determination of the aggregate cost of employer-sponsored coverage to the rules for calculating the applicable premiums for an employee for COBRA continuation coverage, including the special rule for self-insured plans. However, even before the PPACA was passed, Treasury recognized that existing guidance on calculating the cost of COBRA coverage was inadequate, and it was working on a regulation to provide more detail. That regulation will no doubt serve as the basis for the W-2 reporting.

W-2 reporting at this point is strictly informational. The reporting requirement was included in the PPACA so employees could begin to understand the tax-free value of their health plans. It has no tax application and will not until 2018, when the tax on “Cadillac” plans comes into effect. That provision will impose an excise tax on insurers if the aggregate value of employer-sponsored health insurance coverage for an employee exceeds a threshold amount.

EditorNotes

Michael Dell is a partner at Ernst & Young LLP in Washington, DC.

For additional information about these items, contact Mr. Dell at 202-327-8788 or michael.dell@ey.com.