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IRS issues W-2 health benefit reporting guidance

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in Employee Benefits Program,Firing

The health care reform law requires you to report the value of employees’ health benefits on their W-2 forms (Box 12, with Code DD). The IRS waived mandatory reporting for 2011, pending future guidance.

The guidance, which has now been released, requires employers filing 250 or more W-2s to report beginning with 2012 W-2s that are filed in 2013.

Reporting on Form W-3, however, isn’t required.

The guidance provides valuation methods and new transition relief for certain employers and benefits. You may use this guidance if you choose to report employees’ health benefits on their 2011 W-2s. (Notice 2011-28, IRB 2011-16)

What’s out

The law excludes from reporting health reimbursement accounts, health savings ­accounts, dental or vision care that’s not integrated into a group plan, long-term care insurance, workers’ compensation and specific disease or hospital/fixed indemnity plans.

In addition, prior to 2014, and until further guidance is issued, the transition relief extends this reporting exclusion to employers filing fewer than 250 W-2s for the preceding calendar year and to these situations:

  • Terminating employees request early W-2s
  • No W-2s are required (e.g., retirees receive health benefits but no other reportable compensation or taxes)
  • The plan is self-insured and not subject to ­COBRA
  • The plan is a multiemployer plan.

What’s reportable

The aggregate value (i.e., the employer and employee shares) of any group health insurance that’s excludable from employees’ income under tax code Section 106 must be reported. Heads up: The aggregate value includes the portion of health benefits that’s taxable to employees because coverage is provided to their domestic partners or others who don’t qualify as tax dependents. The aggregate value includes the value on-site medical clinics, but the guidance does not provide a method for valuing this coverage.

The method of determining the aggregate value is the same as that used to value COBRA benefits, minus the 2% surcharge. Alternatively, insured plans may use the premium-charged method. You aren’t required to use the same valuation method for every plan, but you must use the same method for every employee receiving coverage under the same plan.

WHO REPORTS: For businesses that use the common paymaster method, the common paymaster reports the combined amount. Likewise, successor employers that assume their predecessors’ reporting responsibilities report the combined amount.

Special reporting rules for health FSAs

Employees’ pretax contributions into cafeteria plan health flexible spending accounts (FSAs) aren’t reportable. Employers’ contributions may or may not be reportable, depending on the value of employees’ health FSAs.

  • Employers’ contributions are reportable if the value of employees’ health FSAs exceeds their pretax contributions. So, for example, if Barbara makes a $700 pretax contribution into her health FSA, which is matched dollar-for-dollar for a total of $1,400, her employer reports the $700 match on her W-2.
  • Employers’ contributions aren’t reportable if employees’ pretax contributions for all qualified cafeteria plan benefits equal or exceed the amount of their health FSAs. If, say, Jack makes a $2,000 pretax contribution into the cafeteria plan, $1,500 of which is designated for his health FSA, and he receives a $1,000 employer match, W-2 reporting isn’t necessary because his total pretax cafeteria plan contribution equals or exceeds the value of his health FSA.

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