W-2 Reporting Rules Clarified

The Internal Revenue Service has recently released guidelines which should answer many questions employers have been asking related to that health care reform law provision.  Employers were required to report the cost of health care coverage on their employees’ W-2 wage and income statements.

First of all, smaller employers—those that distribute less than 250 W-2s for 2011—are exempt until at least 2014 and perhaps longer.

Secondly, all other employers will have to report the health care cost information on 2012 W-2s, which are issued in 2013.

Other clarifications include:

“Employers will not have to include dental and vision care in computing employees’ health care costs if those plans are separate from group medical plans, as they typically are.

“Contributions employees make to flexible spending [FSAs] and health savings accounts [HSAs] are to be excluded from the health care cost figure.

“In situations where employees work part of the year and then terminate employment and receive COBRA coverage, employers can choose to report only the cost of coverage while the employee was working or to report that plus the COBRA cost.  In such situations, though the reporting choice must be applied consistently.

“Health care cost information does not have to be reported in situations where distribution of a W-2 is not required.  The most typical example of that would involve a retired employee who receives retiree health care coverage from his or her former employer but does not receive a salary.

“Employers do not have to report health care cost information in situations in which employees request a W-2 before the end of the year in which they terminate employment.

“The cost of coverage that is taxable to employees, such as for a domestic partner or a child over age 26, must be reported on the W-2.”

While not all situations have been explicitly addressed, “some experts interpret the guidance to mean that employers have a choice.”  But they emphatically add that the key thing is to be consistent.

While the cost of this requirement to employers is still unknown, companies now have some extra time to make the necessary changes in their administrative systems.  They should also explain to employees that the cost of the coverage will not affect their taxable income even though it is reported on their W-2.

From Business Insurance, April 4, 2011 issue, pp. 4 and 18.