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IRS clarifies W-2 reporting rules

Health care cost guidance considers smaller employers

IRS clarifies W-2 reporting rules

WASHINGTON—Newly released Internal Revenue Service guidance answers many questions employers have raised about a health care reform law provision that will require them to report the cost of health care coverage on employees' W-2 wage and income statements.

The guidance also exempts smaller employers—those that distribute less than 250 W-2s in 2011—from the requirement until at least 2014 and possibly longer.

For other employers, the health care cost information will have to be reported on 2012 W-2s, which are issued in 2013.

As employers were preparing to meet that reporting obligation, they raised numerous compliance-related questions, which the IRS guidance largely addresses.

“A lot of open questions have been resolved,” said Rich Stover, a principal with Buck Consultants L.L.C. in Secaucus, N.J.

Issues addressed by the IRS guidance include:

c 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.

c Contributions employees make to flexible spending and health savings accounts are to be excluded from the health care cost figure.

c 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.

c 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.

c 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.

c 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.

Still, not all questions were resolved.

For example, the guidance is not explicitly clear on what to do in situations in which an employee works several months in a year, retires and then receives coverage under an employer's retiree health care plan.

Not exactly spelled out is whether just the cost of active employee coverage or the cost of the active coverage and retiree health care coverage has to be reported on the W-2.

Some experts, though, say they interpret the guidance to mean that employers have a choice.

“The employer may choose to report both the active coverage and the retiree coverage. Alternatively, the employer may choose to report only the active coverage, as long as this choice is applied consistently to all terminated employees,” Pricewaterhouse-Coopers L.L.P. said in a newsletter.

“The key thing is to be consistent,” said Sharon Cohen, an attorney with Towers Watson & Co. in Arlington, Va.

The new reporting requirement will add to employers' costs, though how much isn't known. At the very least, employers will have “some lead time to make the necessary changes in their administrative systems,” said J.D. Piro, a principal with Aon Hewitt Inc. in Norwalk, Conn.

Employers also may have to explain to employees that the cost of the coverage will not affect their taxable income even though it is reported on their W-2.

“Employers may want to educate employees that health care coverage still is a tax-favored benefit,” said Michael Thompson, a PwC principal in New York.

Smaller employers, though, will have more time to comply. Under Notice 2011-28, employers that issue fewer than 250 W-2s in 2011 “will not be required to report the cost of health coverage...prior to January 2014. This transition relief will continue until the issuance of further guidance,” the IRS said.