NOTE:  The W-2 reporting requirement for health care coverage costs is now optional for 2011.  

In our previous blog posting… New W-2 Health Care Reporting Requirements:  The When & What… we discussed when the new W-2 health care coverage reporting needs to begin and what types of plans need to be reported on.  In this posting, we discuss what benefits are exempt from these new W-2 reporting requirements and how to determine a value for the plans you’ll need to provide a cost of coverage calculation for.

Benefits Exempt from W-2 Reporting Requirements
The following employer provided benefits are not required to be reported on Form W-2 under the new health care reform law:

  • Long-term care, accident or disability income benefits
  • Specific disease or illness policies (such as cancer policies) and hospital (or other) indemnity insurance policies where the full premium is paid by the employee on an after-tax basis
  • Archer MSA or HSA contributions of the employee or the employee’s spouse
  • Salary reduction contributions to a Health Flexible Spending Account (FSA)

How to Determine a Value for Health Care Plans
The most challenging part of this new reporting requirement will be determining the aggregate cost of coverage or value of employer-sponsored health plans for each employee.  To determine the value of health care coverage, the employer will calculate the applicable premiums for the taxable year under the rules for COBRA continuation coverage.

The value that the employer is required to report is the aggregate premium calculated under the COBRA rules… not just the portion of the premium that the employee has to pay.  The cost of coverage calculation should include both the employee and employer portions of the premium regardless of how that cost is split.  If the employer’s plan provides for the same COBRA continuation coverage premium for both individual coverage and family coverage, the employer plan would be required to calculate separate individual and family premiums.  The employer would report the value of the coverage the employee received. 

For example, if one employee received family coverage, the employer would report the premium amount for family coverage for that employee. For another employee that receives individual coverage, the employer would report the premium amount for individual coverage.

A particular challenge for employers might be that some of the plans covered by the new W-2 reporting requirement, such as on-site medical clinics, are not plans that they have previously valued for COBRA purposes. With the new requirements, employers will need to come up with reportable values for coverage provided under these programs.  We understand that the IRS is currently working on this guidance.

As of this blog posting, the IRS has not yet finalized the details on this reporting requirement. We will update you on the specifics as additional information becomes available.