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Cost of health care coverage W-2 reporting requirements remain the same as last year. Employers who previously filed fewer than 250 Forms W-2 should be aware of the significance of the number 250. Were you required to file 250 or more Forms W-2 for tax year 2013, and did you offer or provide group health coverage to your workers in 2014? If so, an Affordable Care Act/IRS requirement to report health care coverage costs on Forms W-2 for 2014 applies. What follows is important information so that you can comply with the regulations.

Highlights:

  • Report the aggregate cost of applicable employer-sponsored health care coverage on the employee’s Form W-2 (Bw-2 ox 12, code DD).
  • Report is informational only; there are NO tax consequences.
  • Exceptions: Certain small employers or employers that contribute to a multi-employer plan.
  • The IRS provides detailed instructions to assist employers and payroll administrators in meeting this reporting requirement. The instructions first applied for 2012 and there are no changes for tax years 2013 or 2014.

Details:

Affected Employers

The Affordable Care Act (ACA) requires all employers to report the aggregate cost of applicable employer-sponsored health care coverage on the employee’s Form W-2, which is reported in Box 12 using code DD. The amount is informational only and has NO tax consequences. Penalties may be imposed on employers that fail to meet this enforced IRS reporting requirement.

Exceptions: The following employers are exempt from the 2014 reporting requirement:

  • Small employers: Employers that filed fewer than 250 Forms W-2 for tax year 2013.
  • Multi-employer plans: Employers that contribute to a multi-employer plan.

Applicable Coverage

For purposes of the W-2 reporting requirement, “applicable employer-sponsored coverage” means all group health coverage, whether paid by the employer or employee, pretax or after-tax, and whether the plan is self-funded or insured, grandfathered or non-grandfathered.

In general, any group health coverage that is subject to the Consolidated Omnibus Budget Reconciliation Act (COBRA) is considered applicable employer-sponsored coverage, although some exceptions apply.

Exceptions: The following costs are not required to be reported:

  • Stand-alone dental and/or vision plans (i.e., insured dental or vision benefits provided under a separate policy from medical benefits, or self-funded dental or vision benefits for which the employee makes a separate election and contribution from medical benefits).
  • Wellness programs, employee assistance plans (EAPs), onsite health clinics, etc. provided that the plan or program is not subject to federal COBRA.
  • Health reimbursement arrangements (HRAs), even if subject to COBRA.
  • Programs that are not considered group health coverage, such as long-term care plans, and voluntary specific disease or critical illness policies that are funded by employee after-tax premiums.
  • Health savings accounts (HSAs), Archer medical savings accounts (MSAs) or employee salary-reduction contributions to flexible spending accounts (FSAs). (Special rules may apply to FSAs that include employer contributions or credits.)
  • Health costs or reimbursements that are “includible income” for tax purposes, such as cases affecting a 2-percent shareholder-employee of a Subchapter S corporation or highly-compensated employees in a discriminatory plan.

Applicable Employees

The requirement to report the aggregate health coverage cost pertains to 2014 Forms W-2 issued to all employees.

Exceptions: Employers are not required to complete W-2 reporting of health coverage costs in the following cases:

  • Midyear forms. A worker that terminates employment during 2014 may request a Form W-2 before the usual distribution date (typically January 2015). However, employers are not required to report health coverage costs on an “early” Form W-2 and do not need to provide another form in January.
  • Former workers, COBRA beneficiaries, and retirees, if Form W-2 is not required for any other reason.

Some workers may receive W-2s both from the employer and from a disability carrier (or third-party sick pay provider). An example is an employee that works part of the year, is off work due to disability part of the year, and has health coverage in both time periods. In this case, all health coverage costs must be reported by the employer. The disability carrier or third-party sick pay provider is not responsible for reporting health coverage costs.

Cost Calculation

The standard method to determine the reportable aggregate health coverage cost for Form W-2 is to use 2014 COBRA rates (minus administrative fee). The cost must be reported on a calendar year basis (January 1 through December 31, 2014), regardless of the group plan year or renewal date.

For each employee, the reportable cost will be the health coverage costs attributable to the employee throughout the year. For instance, if John’s only health coverage was an insured medical plan and his coverage level was single for January through June and family level for the remainder of year, the reportable cost for John’s Form W-2 will be the sum of the monthly single premium rate times six plus the monthly family premium rate times six.

Some plans use composite rates for active employees and tiered rates for COBRA beneficiaries. In this case, the IRS guidance allows the employer to use either the composite or tiered rates, or to use composite for one group and tiered for the other, as long as the employer’s method is consistent for each group.

Employers are expected to report 2014 health coverage costs using information available to them as of December 31, 2014. Although coverage changes may be processed after year-end (such as a December status change reported to the carrier in January), the employer is not required to issue corrected forms.

Note that the last health plan “coverage period” of the year may extend into the next year. For instance, the last week of December includes days in December and January. In this case, the employer may choose to apply one of the following methods, as long as the same method is applied consistently to all employees:

  • Treat the entire period as provided for in the first year,
  • Treat the entire period as the second year, or
  • Allocate the period between the two years.

IRS Guidance:

To assist employers and payroll administrators in complying with the reporting requirement, the IRS provides the following guidance: