Reporting value of health benefits on employee’s W-2 in 2012. IRS issues guidance under Notice 2011-28

Shortly after the enactment of health care reform legislation the rumors were flying that the law required reporting the value of health insurance on the employees W-2 thus creating additional taxable income. This was never true. However, now the IRS has issued interim guidance to clarify the entire issue for 2012. IRS Notice 2011-28 contains a series of questions and answers that clarify what is covered under the law, the methodology to be used when calculating the amount reported on the W-2 as well as unusual situations that may apply to terminated employees, HSAs, etc.

Following are some excerpts from the ruling.  NOTE question 19 regarding flexible spending accounts FSAs. Click here to link to Notice 2011-28

This reporting to employees is for their information only, to inform them of the cost of their health care coverage, and does not cause excludable employer-provided health care coverage to become taxable. Nothing in § 6051(a)(14), this notice, or the additional guidance that is contemplated under § 6051(a)(14), causes or will cause otherwise excludable employer-provided health care coverage to become taxable.

The types of coverage described in § 9832(c)(1) (providing that certain “excepted benefits” are not subject to the requirements of chapter 100 of the Code) that are not subject to this reporting requirement are as follows:

• Coverage only for accident, or disability income insurance, or any combination thereof;

• Coverage issued as a supplement to liability insurance;

• Liability insurance, including general liability insurance and automobile liability insurance;

• Workers’ compensation or similar insurance;

• Automobile medical payment insurance;

• Credit-only insurance;

• Other similar insurance coverage, specified in regulations, under which benefits for medical care are secondary or incidental to other insurance benefits.

Q-20: Is the cost of coverage under a dental plan or a vision plan included in the aggregate reportable cost, if that plan is not integrated into a group health plan providing other types of health coverage subject to the reporting requirements of § 6051(a)(14)?

A-20: No. An employer is not required to include the cost of coverage under a dental plan or a vision plan if such plan is not integrated into a group health plan providing additional health care coverage subject to the reporting requirements of § 6051(a)(14). An employer must include the cost of coverage under a dental plan or a vision plan if such plan is integrated into a group health plan providing such additional health care coverage.

Q-24: How may an employer calculate the reportable cost under a plan?

A-24: An employer may calculate the reportable cost under a plan using the COBRA applicable premium method (Q&A-25). Alternatively, (1) an employer that is determining the cost of coverage for an employee covered by the employer’s insured plan may calculate the reportable cost using the premium charged method (Q&A-26); and (2) an employer that subsidizes the cost of coverage or that determines the cost of coverage for a year by applying the cost of coverage in a prior year may calculate the reportable cost using the modified COBRA premium method. For employers that charge employees a composite rate (the same premium for different types of coverage under a plan, for example, a premium for self-only coverage versus family coverage).

The reportable cost for an employee receiving coverage under the plan is the sum of the reportable costs for each period (such as a month) during the year as determined under the method used by the employer. An employer is not required to use the same method for every plan, but must use the same method with respect to a plan for every employee receiving coverage under that plan.

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