The Affordable Care Act (ACA) requires virtually all employers that provide group health insurance coverage to report information about the value of these benefits to employees via their W2. Since the requirement took effect in 2014, the IRS has exempted some businesses. Still, for those that have to report, the deadline of January 31, 2021 is coming up fast. Please see below for our comprehensive FAQ we prepared for our employer groups.
What companies need to complete the W2 reporting requirements?
While the ACA says all employers that offer health insurance coverage to employees must report information about their benefits to employees via the Form W2, in 2011, the Internal Revenue Service (IRS) issued Notice 2011-28 which made the reporting optional for smaller employers that file fewer than 250 Forms W-2 for the prior calendar year, and that notice is still in effect.
If a business files less than 250 W2s, but they are part of a controlled group or wholly owned by another entity that issues more than 250 Forms W2, do they need to report health information on their employees’ W2 Statements?
The 250 Form W2 filing threshold applies per entity without application of any aggregation rules for related employers. The IRS’s controlled group rules do not apply to the W2 reporting requirements like they do with the employer mandate. Each employer entity with a separate tax ID stands on its own when determining if it filed fewer than 250 Forms W2 for the prior year.
Where on the Form W2 does the health cost information go? Are any reporting codes required?
Employers subject to the requirement must report the aggregate cost of all applicable health coverage in Box 12 of the Form W2 using code “DD.” In general, the amount reported should include the portion of coverage costs paid by the employer and the employee’s part. In the case of a health FSA, the amount reported should not contain any salary reduction contributions.
Does an employer report just the company’s total cost for coverage? Or does the employer report what an employee pays in for coverage too?
Box 12 cost data should represent the aggregate cost of all applicable employer-sponsored coverage. The value reported should include both employer and employee premium contributions, regardless of whether any employee portion of the premium is paid on a pre-or post-tax basis.
How does an employer know what “applicable” health plan costs are to aggregate a total cost?
For entities required to provide health coverage cost information in Box 12 of the Form W2, there are rules about what cost data to include in their cost tabulations. In general, the employer must tally the cost of all major medical coverage and other benefits included in the COBRA premium to get the aggregate amount. To determine the precise value of benefits, you must follow the rules outlined in IRS guidance. The IRS has published a chart outlining what applicable employer-sponsored coverage employers must include the aggregate total of health insurance benefits for W2 reporting purposes.
Does the reporting requirement apply to employer contributions to account-based plans?
Since health reimbursement arrangements are considered group coverage by the IRS, employers offering HRAs, including Individual coverage Health Reimbursements (ICHRAs), and Qualified Small Employer Health Reimbursement Accounts (QSEHRAs) need to record information about their contributions to those accounts on employee Forms W2. For Health FSAs, if there are any employer contributions to an FSA that exceed the employee’s total salary reduction elections for all benefits, including insurance, then the employer should report those contributions on the W2 as well. Any employer or employee health savings account (HSA) contributions do not qualify because HSAs are employee-owned accounts, not group benefit plans.
Do you count other ancillary benefit costs when you aggregate? Do you include group dental? Group life? An Employee Assistance Program (EAP)?
The requirement applies to medical benefits, and the rule of thumb is including anything you would include in the COBRA premium. Many excepted benefits are excluded, but any hospital indemnity or specified illness coverage paid through either salary reduction (pre-tax) or by an employer counts. If an employer includes the cost of an EAP, on-site medical clinic, or a wellness program in its COBRA premium, the employer must also include those costs in the aggregate total reported in Box 12. The IRS has published a chart outlining what applicable employer-sponsored coverage must be included in the aggregate sum of health insurance benefits for W2 reporting purposes.
Are there specific health benefit costs that definitely should NOT go in an employer’s aggregate cost reported in Box 12 of the W2?
Employers do not have to include the cost of the following benefits in their aggregate total:
• Long-term care coverage
• Dental insurance
• Vision insurance
• Amounts contributed to an Archer Medical Savings Account
• Amounts contributed to a Health Savings Account (HSA)
• Salary reduction elections to a Section 125 Flexible Spending Account
What do employers do if they offer a non-calendar year plan?
Employers subject to the W-2 requirement must determine the aggregate coverage cost each year on a calendar year basis, even if they offer a non-calendar year plan.
What if a business has a retiree-only plan or has retirees on their health plan? Do they need to get a W2 for reporting?
An employer is not required to issue a Form W2 to report the healthcare coverage value for retirees or other employees or former employees to whom the employer would not otherwise provide a Form W2.
Is there a chance that the rules will change and businesses that issue less than 250 W2s will have to report?
According to the IRS, the voluntary status of reporting for businesses that fall under the 250-form threshold will be in effect indefinitely. If this status changes, it will be with ample notice.
Why is the reporting threshold 250 Forms W2? Why doesn’t the IRS use a different number?
When a business issues 250 or more Forms W2, then the IRS requires the business to submit their Forms W2 to the IRS electronically; this is why they chose 250 forms or more as the interim mandatory reporting threshold.
Do employers who file less than 250 Forms W2 in a calendar year have to worry about this at all?
No. However, the IRS makes it clear that employers who file less than 250 Forms W2 in a calendar year (those not subject to the electronic filing requirements) may report an employee’s health coverage cost information in Box 12 voluntarily.
Why do employers have to do W2 reporting?
The reporting requirement intends to provide employees with useful and comparable information about their healthcare coverage costs.
Does the reporting have a tax impact on employers or employees?
No. It’s informational only. The reporting in no way impacts excluding the value of employer-sponsored health insurance coverage from an employee’s taxable income.
What are the penalties if an employer subject to requirements does not report the information, or if they make a mistake?
If an employer who needs to complete the W2 reporting of health coverage costs fails to include it on an employee’s statement or makes an intentional mistake, the same kind of penalties that if the business failed to complete other parts of the W2 or made a deliberate error will apply. The penalties stem from Internal Revenue Code sections 6721(e)(2) and I6722(e)(2), describe the potential penalties, which vary based on the business’s size and the scope of the omissions and errors, but overall are very significant.