Important Payroll Update: Health Costs Reported on 2011 W-2s

Payroll Update: Health Costs Reported on 2011 W-2s

The other day, I received an email with some propaganda-like information about the impending tax hikes coming in 2011 as a result of the tax cuts that are set to expire this December 31st.  At the end of the email was a rant about how you will be taxed on your health insurance costs next year because of the new W-2 reporting requirement.  I’m not sure how prevalent this belief is, but this is not true! The employee will not be taxed on the employer’s cost of health insurance, and the employee’s tax liability will not change.  As of right now, the only tax on health insurance will be on the high cost “Cadillac plans” starting in 2018.

As a background, part of the PPACA healthcare reform laws is a new requirement for employers beginning in 2011.  Employers will need to calculate the total cost of providing health insurance for each individual employee, and report this number on the employee’s W-2.  Just because this number is reported on the W-2, it does not mean the employee will be taxed on this money.  The W-2 form contains boxes used for informational purposes.  The IRS has yet to issue specific guidance on where exactly this number needs to be reported, but we suspect it will either be Box 12 or 14, or perhaps the W-2 will be redesigned to accommodate this new number.  Regardless, this new reporting requirement will not increase taxes to the employee or employer.

The IRS says the main purpose of this reporting requirement is to show employees the true cost of their health insurance costs, so they may be more informed consumers.  Other purposes are said to be served as well, including the government getting a better idea of exactly how many people are covered by employer-provided healthcare coverage, the loss of tax revenue as a result of this tax sheltered money, and the values of the high cost Cadillac plans that will begin to be taxed in 2018.

Two Things To Start Preparing Now:

  1. Prepare Your Payroll System:  Check with your payroll service provider or internal IT staff to confirm that the health insurance cost can be tracked in your payroll software for W-2 reporting purposes.  In our case, we use “Company Contributions” that show informational numbers such as 401(k) match and the employer share of benefits.  Make sure that wherever the amount is stored in your payroll system that it does not affect the employee’s gross pay.  Also, make sure that your payroll system gives you the capability to report such non taxable money in a specific box on the W-2 Form.  If the IRS ends up using Box 12 or 14, you will also need the ability to apply a label or code (whichever is applicable).
  2. How To Calculate:  A total annual amount of both the employee plus employer costs needs to be calculated for each individual employee.  You can use the COBRA premium amount, minus the 2% administration fee, as the monthly base amount.  This amount will then need to be annualized for the number of months they were covered under the health plan.  Note that if the employee had a coverage change some time during the year, whether it was changing the number of people covered in the family, or changing plan choices, this will need to be taken into account.  Every single employee could have a different number, based on their activity.  So fire up your spreadsheets now!  Here are the types of group health plans that need to be included in the aggregate number:
    •   Medical plans
    •   Prescription Drug Plans
    •   Executive Physicals
    •   Onsite clinics providing more than “de minimus” care
    •   Medical Supplemental Policies
    •   Employee Assistance Programs

If your dental or vision coverage is part of your group medical plan, these costs must be included too.  If they are stand-alone plans, meaning your employees can individually elect or decline coverage independent of their medical coverage, these do not need to be included.  Contributions to FSA’s, HSA’s, long term care, disability, and voluntary supplemental policies are also not included.

Even though technically these health insurance costs don’t have to be reported until January of 2012, when W-2’s are issued for the year 2011, there may be a situation where you need to issue a W-2 to a terminating employee who leaves before the end of 2011.  Therefore, your company must be ready by February 1, 2011 to report these costs.  Now is the time to plan how your company will meet this requirement.

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