To Report, or Not to Report, That is the Question: Understanding PPACA’s W-2 Reporting Requirements

By Kristi R. Gauthier, Esq.
Clark Hill PLC

December 2012 – The Patient Protection and Affordable Care Act (PPACA) requires that certain employers report the cost of employer-sponsored health care costs on an employee’s W-2 beginning with W-2s issued for the 2012 calendar year. This does not mean that the cost of employer-sponsored health care is taxable to employees, but rather the reporting of such costs is a means by which employees, and the government, are notified of the cost of health care coverage.  

Which Employers Are Subject to This Reporting Requirement?

With very limited exceptions, all employers sponsoring a group health plan and filing more than 250 W-2s in the previous calendar year must comply with PPACA’s W-2 reporting requirement. This includes governmental employers and churches.  

The IRS has provided that the “small employer exception” (e.g., less than 250 W-2s in the previous calendar year) will apply to all future calendar years until the IRS issues additional guidance providing otherwise. It is important to note that the small employer exception is determined based on the individual employer and not on a controlled group basis.  

How are the Reportable Costs Calculated?

Employers must report “aggregate reportable cost” of all the coverage it provides. Aggregate reportable cost is defined as the total cost of all applicable employer-sponsored coverage which includes both the employee and employer portion of the benefit costs, regardless of whether it is paid on a pre-tax basis. (See below for information on which group health plans to include in these calculations.) For insured plans, costs are usually based on the premiums charged. For self-funded plans, employers can use the costs calculated for purposes of COBRA premium calculations, minus the 2% administration fee.

Which Group Health Plans Are Exempt From Cost Reporting?

Not all employer-sponsored group health plans are subject to the W-2 reporting requirements.  For example, employers do not need to include the cost of the following group health plans in its calculation of aggregate reportable costs:

•    HIPAA excepted benefits (e.g., standalone dental, standalone vision, certain health flexible spending account plans)
•    Health Savings Account (HSA) contributions
•    Health Reimbursement Arrangements (HRAs)
•    Self-funded plans that are not subject to COBRA or other similar continuation coverage
•    Long-term care coverage
•    Accident or disability income
•    Multi-employer plans

For a complete list of plan reporting requirements, see the useful chart issued by the IRS at http://www.irs.gov/uac/Form-W-2-Reporting-of-Employer-Sponsored-Health-Coverage.

What Are the Reporting Requirements For Former Employees?

The IRS has issued guidance which provides flexibility for employers with regard to reporting aggregate reporting costs for employees who terminate employment during the calendar year. In general, as long as the employer is consistent in reporting the cost of coverage under a particular health plan for all employees who terminate employment during the year, any reasonable method may be used.

For example, an employer may report only the costs for the portion of the year during which employees were active employees covered by the plan, and ignore any costs for post-employment coverage, such as COBRA continuation coverage. Alternatively, the employer may choose to report the cost of both pre-and post-employment coverage on the employee’s W-2 for the year of termination, as long as this is the treatment for all covered employees who terminated during the year.
The IRS also provided that employers are not required to report the cost of coverage on a W-2 furnished to a former employee who requests their W-2 before the end of the calendar year in which the employee terminated employment.

With respect to retirees, or other former employees who received no compensation during the calendar year, the employer is not otherwise required to issue a W-2 in order to report the cost of any employer-provided coverage to such former employees.

Immediate Employer Action Required

Employers must comply with these new W-2 reporting requirements for 2012 reporting, which will take place in January 2013. Therefore, if they have not already done so, employers should review their employer-sponsored health plans to determine which plans will be subject to the W-2 reporting requirements. Employers also need to implement payroll and reporting processes to comply with the requirement, including working with any applicable third-party administrators that assist the employer with its payroll processing.

*This article is not intended to give legal advice. It is comprised of general information.  Employers facing specific issues should seek the assistance of legal counsel.

Kristi R. Gauthier is a senior attorney in Clark Hill’s Birmingham office and concentrates her practice in Employee Benefits Law. Kristi has represented clients in a wide variety of employee benefits issues involving health and welfare benefits, as well as retirement plans. Kristi is admitted to practice in the State of Michigan, the U.S. District Court for the Eastern District of Michigan, and the U.S. Sixth Circuit Court of Appeals. She also is active in the legal community with memberships in the American Bar Association, the State Bar of Michigan, and the Oakland County Bar Association where she is a member of the Employee Benefits Committee. Kristi also serves as a member of the Clark Hill Diversity and Inclusion Committee. Kristi has lectured on various employee benefits issues, including ERISA compliance, healthcare reform, COBRA, section 125 plans, 403(b) plans and IRS plan correction programs. Kristi is also a co-author of the ABA publication ERISA Survey of Federal Circuits. Kristi was named a “Rising Star” by Michigan Super Lawyers in 2011.