The Affordable Care Act introduced a new Form W-2 reporting obligation for the cost of employer sponsored group health plan coverage. The amount is not taxable to the employee; it is information reporting only.  Originally, the reporting was mandatory for 2011 which would have affected the January 2012 W-2 forms.  Now, the IRS has made 2011 reporting optional and 2012 reporting mandatory.  Interim guidance with 31 Q&A's was issued by the IRS, with highlights summarized below. 

Why worry today if the January 2013 W-2's are the first with the new required reporting?  Collecting the information for 2012 from a number of sources may need to be coordinated in ways not currently done and should be considered before open enrollment this fall.  Also, the method(s) for determining COBRA amounts for self-funded plans should be examined since these premiums will be reported.  This detailed work cannot wait until the last minute.  Your payroll provider may not have all the information or answers. 

What is required to be reported on the W-2? 

The "aggregate cost" of employer-sponsored health coverage for each employee must be reported.  The new law provided that cost would be determined under rules "similar" to the rules for determining COBRA premiums, rules which have never been very clear in a number of circumstances. 

The amount is reported on Form W-2, Box 12 with Code DD.  Nothing is reported on W-3, the transmittal form.  While reportable, the amount is not taxable income to the employee. 

Who must report this cost information on W-2's? 

All employers that provide "employer-sponsored coverage" must report, even if the health coverage is not subject to COBRA.  There are some exceptions.  

Small employers who are required to report fewer than 250 W-2's in a calendar year are not required to report for 2012 and until further guidance is issued.  This is derived from the exemption from electronic filing of tax returns. 

Also, Federal, state and local governments, churches and religious organizations may be subject to reporting unless they provide a self-funded plan that is not subject to COBRA or any other federal continuation coverage.  Federally recognized Indian tribal governments are excluded.  Coverage primarily for military members and their families provided by federal, state or local governments or agencies or instrumentalities is also excluded. 

What if there is no W-2 or a mid-year change for an employee? 

For a mid-year termination of employment, the cost of employer-sponsored coverage is not required to be reported if the employee requests a W-2 before the end of the year.  Otherwise, the W-2 reports the cost for the calendar year when W-2’s are issued in January. 

In general, each employer reports the cost for the portion of the year its health coverage was in effect.  Employers reporting under a common paymaster may aggregate the costs for a year.  Employers in acquisitions and divestitures report for their own periods of coverage unless the successor employer has agreed to issue one form W-2 for the wages for each employer under IRS rules that permit this. 

If the employer is not required to issue a W-2 to an individual, no cost of health coverage is required to be reported.  In most instances, retirees, terminated employees and other former employees will not receive W-2's and will not have the cost of any health coverage reported.  

Note that nonqualified deferred compensation that is reported on a W-2 may trigger reporting of any cost of health coverage provided during the calendar year as well. 

What is "employer-sponsored coverage"? 

Coverage is any group health plan made available to employees that is excludable from employee gross income or would be if it were employer provided, with some exclusions. 

First step is to identify which plans and benefits are subject to reporting:

How much employer-sponsored coverage is reported? 

For each plan that must be included in determining the aggregate cost of coverage, the amount –

• includes both employer and employee contributions. 
• is for the level of coverage provided – employee-only, employee + spouse and/or dependents, etc. 
• includes amounts reported as imputed income to the employee for domestic partner coverage or other coverage.

The "COBRA" premium cost is the basis for the cost of coverage.  The guidance allows employers to determine this on a plan by plan basis by:

1. The applicable COBRA premium method – using the actual COBRA premium determined in a good faith manner under the COBRA rules.  For self-funded plans, this method will be an attractive way to avoid multiple premium calculations.
2. The modified COBRA premium method – this is available only if the employer subsidizes the COBRA premium or where the current COBRA premium uses the applicable COBRA premium charged in the prior year.  If the employer subsidizes COBRA, the modified COBRA premium can be a reasonable good faith estimate of the applicable COBRA premium.
3. The premium charged method – available only for insured plans, the premium charged by the insurer for that employee's coverage.  This method allows employers who are charged, in effect, individual rates to report those rates on the W-2.

Caveat:  The W-2 reporting requires that the cost be determined on a calendar year basis, even if the employer uses any other 12-month period for determining and adjusting the COBRA rate.  Thus, if the COBRA premium or cost changes mid-way during the calendar year, the cost reported must reflect the cost for each period during one calendar year. 

What should employers do now? 

During 2011, employers should (1) identify the group health plans for which the cost of coverage will be reported and (2) the source of information for that cost, including which information payroll providers have or can obtain.  Then, for 2012, employers should (3) review their COBRA premium determinations to ensure that the COBRA costs to be reported will conform to the IRS guidance. 

Employers with self-funded group health plans should review their COBRA rates for 2012 in light of reporting these rates on the W-2s in January 2013.  This is a good time to determine if the COBRA rates would meet the good faith standard under COBRA and the new guidance on COBRA rates.  Before reporting begins is the time to adjust COBRA rates to better reflect the actual cost of coverage. 

The IRS guidance allows employers the option to report voluntarily on W-2's for 2011.  Instead of voluntarily reporting, employers may want to collect the information on a "practice" basis for a pilot group to determine if the information collection will come together for 2012 reporting and to anticipate problems ahead of time.  

In addition, some employers may want to collect the cost of health coverage information and provide it to employees to begin to educate the workforce on the cost of their healthcare.  Employers who provide a full compensation and benefits statement to employees will want to compare the W-2 cost information to the information already reported.  By the end of 2012, employers will want to consider some explanation of the health coverage cost reporting to accompany the W-2 and to explain, in particular, that the amount reported is not taxable income to the employee.