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IRS issues more guidance on health benefit W-2 reporting

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in Office Management,Payroll Management

Beginning with 2012 W-2 forms, you must report the value of employees’ health benefits (Box 12, with Code DD). Reporting on Form W-3 isn’t ­necessary.

Last year, the IRS provided transition relief that excused employers filing fewer than 250 W-2s during the preceding year from reporting. That relief, however, didn’t address a variety of other sticky reporting situations.

Good news: Under new guidance, W-2 reporting is excused in more instances. (Notice 2012-9, IRB 2012-4)

What’s new

Under the 2011 transition relief, no W-2 reporting is necessary for terminating em­­ployees who request early W-2s, retirees who receive health benefits but no other reportable compensation or taxes, self-insured plans that aren’t subject to COBRA and multi-employer plans.

Until further guidance is issued, the IRS is expanding this no-reporting rule to the following:

  • For discriminatory self-insured plans, the cost of excess reimbursements that are included in highly compensated employees’ gross income (i.e., the excess reimbursement is subtracted from the reportable amount).
  • Payments or reimbursements of health insurance premiums that are taken into income by 2% S corporation shareholder-employees.
  • W-2s provided by third-party payers of sick pay.
  • Dental and vision benefits need not be reported if they are excepted benefits under the Health Insurance Portability and Accountability Act (HIPAA). Under HIPAA, the benefits must be offered under a separate policy or employees must be able to decline the benefits.
  • Coverage provided under employee assistance programs, wellness programs or on-site medical clinics if employers don’t charge premiums for COBRA coverage. Watch this: Plans not subject to COBRA need not report these items, even if employees pay premiums.

Special reporting rules clarified

The IRS has clarified that the W-2 reportable cost is the cost available as of Dec. 31 of a calendar year. Upshot: You don’t have to recalculate the cost if employees provide elections or notifications that retroactively affect the cost of the previous year’s coverage (e.g., employees’ ex-spouses make COBRA elections upon divorce).

You also don’t have to provide W-2c forms if em­­ployees have already received their W-2s before these types of elections or notifications are provided to you (e.g., employees receive their W-2s on Jan. 15 and the election or notification is provided on Jan. 20).

For health benefit coverage periods that include Dec. 31 and continue into the next year (e.g., some biweekly pay periods end on the first Friday in January), the IRS provides you with three reporting options:

  • You can cut off the coverage as of Dec. 31.
  • You can carry over the coverage into the next year.
  • You can allocate the cost of coverage between the two years using any reasonable method. What’s reasonable? According to the IRS, a reasonable allocation method splits the coverage period into the number of days that fall within each month. Warning: Your allocation method must be applied consistently to all employees.

The cost of specific disease or hospital/fixed-­indemnity plans is excluded from reporting. However, the IRS now makes clear that W-2 reporting is necessary if you contribute any amount to the cost of coverage and that coverage is considered an employer-provided health plan, or if employees buy policies on a pretax basis through cafeteria plans.

Flip side: W-2 reporting isn’t necessary if em­­ployees pay for their benefits with after-tax dollars and the benefits are offered as independent, noncoordinated benefits—that is, you give employees the opportunity to buy independent, noncoordinated policies and simply withhold and forward the premiums.

If your health plan provides employees with reportable and nonreportable benefits, you may use any reasonable allocation method to determine the reportable cost. Small break: W-2 reporting isn’t required if the value of employees’ reportable coverage is incidental to the nonreportable coverage. Critical: The IRS doesn’t define incidental coverage.

The IRS has also clarified that you may voluntarily report any benefits that are excluded from reporting.

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