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Small Business Employee Benefits and HR Blog

How Health Care Reform Affects Annual W-2 Reporting

April 2, 2010
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Under the new health bill, a tiny section (Section 9002, below) makes a huge change to every company's annual reporting responsibilities.

SECTION 9002. INCLUSION OF COST OF EMPLOYER-SPONSORED HEALTH COVERAGE ON W-2.

(a) In General- Section 6051(a) of the Internal Revenue Code of 1986 (relating to receipts for employees) is amended by striking `and' at the end of paragraph (12), by striking the period at the end of paragraph (13) and inserting `, and', and by adding after paragraph (13) the following new paragraph:

    (14) the aggregate cost (determined under rules similar to the rules of section 4980B(f)(4)) of applicable employer-sponsored coverage (as defined in section 4980I(d)(1)), except that this paragraph shall not apply to--

            (A) coverage to which paragraphs (11) and (12) apply, or
            (B) the amount of any salary reduction contributions to a flexible spending arrangement (within the meaning of section 125).'.

(b) Effective Date- The amendments made by this section shall apply to taxable years beginning after December 31, 2010.

Translation:
healthcare reform w2 reporting

Beginning in the 2011 tax year, employers will be required to report the "aggregate cost" of "applicable employer-sponsored coverage" on an employee's W-2. 

What does this mean? 

It means that at the end of each tax-year a company will need to: 

1) Determine what "applicable employer-sponsored coverage" was provided to each employee; 

2) Calculate the "aggregate cost" of that coverage for each employee; and 

3) Record the "aggregate cost" on each employee's W-2.

Here's how this works...

First: Determine what "applicable employer-sponsored coverage" was provided to each employee.

Applicable employer-sponsored coverage (i.e. "applicable coverage") means coverage under any group health plan made available to the employee by the employer regardless of whether the employer or the employee paid the cost, including coverage provided under Health Flexible Spending Accounts (FSAs), Health Savings Accounts (HSAs) and Health Reimbursement Arrangements (HRAs).

Applicable coverage does not include the following:
    • Coverage only for a specified disease
    • Coverage for long term care
    • Coverage only for accident insurance
    • Hospital indemnity or other fixed indemnity insurance

Second: Calculate the "aggregate cost" of that coverage for each employee

In calculating the aggregate cost of a company's applicable coverage, the employer does not include the following applicable coverage in the calculation:
    • Contributions to HSAs or Archer MSAs
    • Employee contributions through salary reductions to FSAs
Unfortunately, the exact formula for determining the "aggregate cost" of applicable coverage has not been finalized.  For group health plans, the formula will be pretty simple (i.e. the amount of premiums paid to the insurance provider).  For self-insured plans like HRAs, the calculation will be more complicated.
 
Third: Record the "aggregate cost" on each employee's W-2

Once the aggregate cost is determined for each employee, the employer will need to report the applicable amount on each employee's W-2.

Note on 04-05-2010: The aggregate cost of an employee's health benefits will not be included in the employee's taxable income.  Rather, the reporting will be a way to verify medical coverage for the mandates.  Also, the W-2 will be a way to track coverage values for the excise tax (starting in 2018) on medical coverage above the thresholds.
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