Question of the Month: November 2020

Question: What are the requirements for W-2 cost of coverage reporting?

Answer:

The Affordable Care Act (ACA) requires employers to report the aggregate cost of “applicable employer-sponsored coverage” on an employee’s Form W-2 for the purpose of providing “useful and comparable consumer information to employees on the cost of their health care coverage.” For this purpose, an employer must:

  1. Determine the applicable employer-sponsored coverage that is provided to each employee;
  2. Calculate the aggregate cost of such coverage for each employee; and
  3. Report that cost on each employee’s Form W-2.

There are many aspects to the cost-of-coverage reporting requirement, so here we will break things down into a series of short Q/As. For additional details on W-2 reporting requirements, please see our issue brief here.  

Q/A-1: Who is subject to the cost-of-coverage reporting requirement?

Answer: In general, this reporting requirement applies to any employer that sponsors “applicable employer-sponsored coverage.” This generally includes private-sector employers, government entities, and churches/religious organizations.

Under transition relief still in effect, employers that filed fewer than 250 Form W-2s in the previous calendar year are not required to provide this information.

This transition relief also applies to employers providing coverage under self-insured plans not subject to any federal continuation coverage requirements (e.g., some church plans) and to employers contributing to multiemployer plans.

Other exceptions to the reporting requirement include:

  1. Federally recognized Indian tribal governments and tribally chartered corporations wholly owned by a federally recognized Indian tribal government
  2. Plans maintained by the government primarily for members of the military and their families; and
  3. Related employers (within the meaning of Code § 3121(s)), in which case only the common paymaster must report.

Q/A-2: How do I know if I meet the threshold for the filing exemption?

Answer: As noted above, transition relief applies to employers who filed fewer than 250 Forms W-2 for the previous calendar year. Therefore, employers who filed fewer than 250 Forms W-2 in 2019 would not be subject to the reporting requirement for 2020 Forms W-2. For this purpose, the employer’s size is determined without application of controlled group rules in Code § 414. Therefore, related employers who may be considered under common control for other ACA purposes can be considered separately for purposes of this reporting requirement.

Q/A-3: What coverage must be reported?

Answer: “Applicable employer-sponsored coverage” generally includes coverage under a group health plan that is made available on a tax-favored basis, but there are certain exceptions, including HRAs, HSA contributions, health FSAs funded solely by employee contributions, and stand-alone dental or vision coverage that are excepted benefits. For group health plans subject to reporting, the cost of COBRA continuation coverage should be included for an active employee receiving COBRA continuation coverage (e.g. due to a reduction of hours). A full list of plans that are in and out of scope may be found here.

Q/A-4: What is the cost of coverage?

The “applicable cost” of coverage is the entire plan cost, including both the employer and employee contributions, regardless of whether the employee paid for that cost through pre-tax or after-tax contributions (but note that there is a special rule for health FSA contributions, discussed below). The cost of coverage is not reduced by any imputed income included in the employee’s gross income (e.g., coverage for child dependents over the age of 27 or domestic partners).

Q/A-5: Is there a special rule that applies to health FSAs?

Employee salary reduction elections for health FSAs are excluded from the cost of coverage. Therefore, if health FSA contributions occur only through employee salary reduction elections, the amount does not need to be reported. But when an employer makes a contribution to the health FSA (e.g., via optional employer flex credits), then this amount may need to be included if the amount of the employee’s health FSA for the plan year exceeds the employee’s salary reductions for that plan year.

Q/A-6: How does the cost of coverage need to be reported on the W-2?

Employers must report the cost of coverage in Box 12 of the W-2 using Code DD.

Q/A-7: Do we need to report HSA Contributions anywhere?

Yes. Although HSA contribution amounts are not included in the cost of coverage reporting, it is still necessary for employers (of all sizes) to report these in Box 12 of Form W-2, using code W. For this purpose, employer contributions include all contributions made through a cafeteria plan—even pre-tax salary reductions. And any employer HSA contributions that aren’t excludable from the employee’s income must be reported in Boxes 1, 3 and 5. 

Q/A-8: Is there a penalty for noncompliance?

According to the IRS, reporting of the cost of coverage is informational in nature only and will not trigger any additional tax liability. We are not aware of penalties specifically tied to Box 12 reporting, but it is likely that the standard penalties that apply to Form W-2s for failing to report or for reporting incorrect information would apply.

An employer that fails to include the required information on the Form W-2 or who reports incorrect information should submit an amended return (Form W-2c) with the required/corrected information.