The Internal Revenue Service has issued Notice 2012-9 ("Notice") (http://www.irs.gov/pub/irs-drop/n-12-09.pdf), which provides additional interim guidance on reporting the cost of employer provided health coverage on Form W-2. The Notice also modifies and reaffirms previously issued guidance under Notice 2011-28. The guidance in the Notices generally applies beginning with 2012 Forms W-2 (provided to employees in January 2013). Employers are not required to report the cost of health coverage before that time.

The Notice includes specific rules for reporting health coverage, including the following:

  • Due Date for Reporting. While employers may voluntarily include information about the cost of health coverage for 2011 (the original compliance dates), no action is required until 2012.
  • Exempt Employers.
    • Non-COBRA Plans. Employers with self-funded group health plans that are not subject to any federal continuation coverage requirements are exempt from the Form W-2 reporting requirements.
    • Military Plans. Any federal, state, and local government employers which maintain health plans primarily for members of the military (and their families) are exempt.
    • Small Employers. Employers that are required to file fewer than 250 Forms W-2 for the preceding plan year are exempt from the reporting requirement for 2012 Forms W-2. These employers are also exempt from reporting for later years until further guidance is issued. The 250 limit includes Forms W-2 filed by an employer's agent under Code section 3504.
    • Indian Tribes. Federally recognized Indian tribal governments are exempt. Employers that are tribally chartered corporations wholly owned by a federally recognized Indian tribal government are exempt pending further guidance.
    Reporting Procedures. The aggregate reportable cost of coverage will be reported on Form W-2 in box 12, using code DD. Employers must use a reasonable and consistent method for determining the aggregate cost for employees who terminate employment during the year.
  • Common Paymasters. Subject to an exception for a common paymaster and related employers, all employers of an employee are responsible for reporting the cost of coverage for such employee during the applicable plan year. If the employee works for multiple related employers but the employers do not share a common paymaster, then the employers may: (1) report the entire aggregate reportable cost on one of the Forms W-2 issued to the employee; or (2) allocate the aggregate reportable cost among the employers using any reasonable allocation method.
  • Aggregate Reportable Cost.
    • The aggregate reportable cost of coverage includes both the cost paid by the employer and the cost paid by the employee, including any amounts that are includable in the employee's gross income (for example, amounts paid to cover a non-dependent domestic partner) for health coverage. The cost of coverage is generally determined using the COBRA premium rates calculation method.
    • For benefit programs that provide reportable benefits in conjunction with non-reportable benefits (such as certain long-term disability programs), an employer may use any reasonable allocation method to determine the cost of the portion of the program providing the reportable benefits. If the portion of the reportable benefits is incidental compared to the portion of the non-reportable benefits, however, the employer is not required to include the cost of reportable benefit. Similarly, if the portion of the program providing the non-reportable benefits is incidental, then the entire cost of the program may be reported.
    • For employers that charge a composite rate for active employees but do not use a composite rate for determining applicable COBRA premiums for qualifying beneficiaries, the employer may use the composite rate or the applicable COBRA premium to determine the aggregate cost of coverage reported on the Form W-2, provided the same method is used consistently for all active employees and for all qualifying beneficiaries.
  • Excludable Costs.
    • The aggregate reportable cost of coverage does not include amounts contributed to the following: health savings accounts (HSA); Archer medical savings accounts; health flexible spending accounts (Health FSAs) (applies to employee pre-tax salary contributions only); health reimbursement accounts (HRAs), long-term care coverage; coverage under stand-alone dental or vision benefit plans; and Employee Assistance Programs, wellness programs and on-site medical clinics that are provided to employees at no cost. While employers are not require to include these costs in their reporting they may do so voluntarily so long as they calculate the cost using a permissible method under the Notice.
    • An employer that makes contributions to a multiemployer health plan is not required to report the cost of that coverage on a Form W-2.
    • Excess reimbursements of highly compensated individuals that are included in income because a self-funded plan violates the nondiscrimination rules in Code section 105(h) are not included in aggregate reportable cost. A similar rule applies to coverage provided to 2% shareholder-employees of S corporations.
  • Third Party Sick Pay Provider Relief. Third party sick pay providers who furnish Forms W-2 to employees are not required to report the aggregate reportable cost of employer-sponsored group health plan coverage. However, a Form W-2 furnished by an employer must include the aggregate reportable cost even if that Form W-2 includes sick pay or if a third party provider is furnishing a separate Form W-2 reporting the sick pay.
  • Post-Year End Status Changes. The aggregate reportable cost for a calendar year may be based on information available to the employer as of December 31 of that year, regardless of whether any election or notification made after such date retroactively affects coverage. An employer is not required to furnish a Form W-2C if a Form W-2 has already been provided for a calendar year before this type of election or notification.
  • Coverage Periods Including Two Taxable Years. If a coverage period includes December 31 but continues into the subsequent year, the employer may: (1) treat the coverage as provided under the calendar year that includes December 31; (2) treat the coverage as provided during the following calendar year; or (3) allocate the cost of coverage between each of the two years, using any reasonable allocation method. The method selected must be applied consistently between all employees.
  • Hospital Indemnity/Specified Disease or Illness Insurance.
    • Pre-tax coverage. The cost of hospital indemnity or other fixed indemnity insurance, or coverage only for a specified disease or illness must be included in the aggregate reportable cost on Form W-2 if the employer makes any contribution to the cost of coverage that is excluded from the employee's income or if the employee purchases the policy on a pre-tax basis under a cafeteria plan.
    • After-tax coverage. The cost of hospital indemnity, other fixed indemnity insurance, or coverage only for a specified disease or illness is not required to be included in the aggregate reportable cost if the benefit is offered as an independent, non-coordinated benefit and is paid for with after-tax dollars, or is includible in gross income (or, in the case of a self-employed individual, is a payment for which a deduction under Code section 162(l) is allowable).

Comment: Employers should act now to ensure that their payroll systems are properly updated in time to calculate and report the appropriate health care costs for 2012. Employers who do not comply with reporting rules face substantial penalties of $200 per W-2, capped at $3 million per employer.

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