In a previous update we described the new employer obligation, added by the health care reform law, to report on Form W-2 the cost of health coverage provided to employees.  In that update we noted some gray areas and unanswered questions.  The IRS recently issued Notice 2012-9, which provides clarifications and additional guidance.

On-Site Medical Clinics, Employee Assistance Programs and Wellness Programs

Our first update noted the lack of guidance on how employers were to determine the cost of coverage for on-site medical clinics.  The new notice provides that an employer is only required to report the cost of health coverage provided through an on-site medical clinic, employee assistance program or wellness program if the program is subject to COBRA and the employer charges a continuation premium for the program.  However, an employer may report the cost of coverage that is not required to be included, as long as the employer calculates and includes the cost of such coverage consistently for all employees that are similarly situated.

Programs That Include Both Health Coverage and Other Benefits

In the case of programs providing both benefits that constitute health coverage and other benefits that do not, such as disability insurance that covers medical expenses as well as providing salary replacement, employers may use any reasonable allocation method to determine the cost of the coverage that must be included.  If the health coverage is “only incidental” relative to the other benefits provided, the employer is not required to report any cost for the program.  Conversely, if the non-health benefits are incidental compared to the health benefits, the employer may opt to report the entire cost of the program.

Early W-2 Requests and Late Notice of Changes

Employers are not required to report the cost of employer-sponsored coverage for terminated employees who request a Form W-2 prior to the end of the calendar year.

If an employee provides notice after December 31 of changes that have a retroactive effect on the prior year’s coverage, employers are not required to modify their calculations of the cost of coverage, so long as the cost reported on the W-2s is based on the information that was available to the employer as of December 31.

The Cost of Coverage Under Indemnity Policies

Employers must include the cost of hospital indemnity insurance or other fixed indemnity insurance (e.g., policies that pay a set amount for each day of hospitalization or that cover certain expenses for a specified disease) as part of the cost of coverage on a Form W-2 in certain instances. If the employer makes contributions to the cost of coverage that are excludable from the employee’s gross income or if employees purchase the insurance using pre-tax salary reductions through a cafeteria plan, the cost of such coverage must be included.  However, if an employer merely offers employees the opportunity to purchase an indemnity policy that is not coordinated with other health coverage offered by the employer, at the employee's own cost and with after-tax dollars, the employer is not required to include the cost of coverage under such policies on W-2s. 

Small Employer Exemption

The temporary exemption for employers that filed fewer than 250 W-2s for the preceding calendar year is still in place, until further notice.

© 2012 Perkins Coie LLP