W-2 Reporting Planning and Guidance

As part of the Affordable Care Act (ACA), many employers have Form W-2 reporting requirements. As we head into a new year, we want to give you a refresher on the three requirements that you need to know.

1. Reporting the value of group health coverage provided to employees

For the 2019 Form W-2, many employers are required to report the value of group health coverage provided to employees. This cost of coverage is reported in Box 12 using Code DD.

This reporting requirement does not apply to employers that filed fewer than 250 W-2 forms in 2018. This exception continues to apply as long as an employer files fewer than 250 W-2 forms in the prior calendar year and until the IRS issues other guidance.

Coverage that must be reported

Group health coverage that must be reported includes traditional medical plan coverage (whether insured or self-funded) and employer contributions to a health FSA in excess of an employee’s salary reduction election. It also includes employee assistance plans (EAP), wellness programs and on-site medical clinics, but only if the employer charges a premium to employees for those programs for purposes of COBRA continuation coverage. Limited (or “mini-med”) medical plan coverage must be reported only if an employer contributes to the cost of such coverage, or if employees pay premiums for such coverage on a pre-tax basis through salary reduction.

Coverage that is not reported

Benefits that DO NOT have to be reported are employee salary reduction contributions to:

  • Health FSA and HRA coverage
  • HSA contributions (both employer and employee)
  • Standalone dental and vision plans
  • Long-term care coverage
  • Coverage under a standalone plan for a specific illness or disease

Calculating the cost of coverage

For most employers, there are two methods to compute the aggregate reportable cost.

  1. Premium Charged: only available to fully insured plans, and is the premium charged by the carrier
  2. COBRA Premium: for a self-funded plan, use the COBRA premium, not including the 2% administrative fee

Regardless of the plan year, the cost is reported on a calendar year basis. Cost of coverage includes changes that an employee may have in coverage (e.g., moving from one coverage tier to another).

2. Imputed income reporting for employers who provide more than $50,000 of group life benefit to employees

The IRS requires that certain benefits provided to employees be reported as taxable compensation. One such benefit is group-term life insurance if the value of group-term life insurance coverage exceeds $50,000 and is either paid for by the employer or by the employee through pre-tax salary reductions. In either circumstance, the value of coverage is taxed through imputing income to the employee on Form W-2. The value of coverage that is imputed as taxable income is determined using the age bands in Table 2-2 found on page 13 of this publication (sometimes Table 2-2 is referred to as “Table 1” rates). The employee’s age as of December 31, 2019 is used to determine the applicable Table 1 rates for imputing income for 2019.

3. Additional Medicare tax for higher income earners

As a result of the ACA, individuals who earn $200,000 now pay an additional 0.9% Medicare tax. The increase only applies to the Medicare portion of FICA; employers do NOT match the increased tax amount.

Beginning in 2014, all employers were required to withhold an additional 0.9% Medicare tax on any employee who will be paid more than $200,000 in base wages and commissions and other non-cash fringe benefits in a calendar year. Employers must withhold it regardless of whether the individual ultimately has to pay the tax. Over withholding for an employee is reconciled on the employee’s personal tax return.

Because the tax applies only to wages paid in excess of $200,000, the actual withholding does not begin January 1. Rather, it begins with the pay period in which the employee’s pay actually exceeds $200,000. An employer does not need to notify the employee when the additional withholding kicks in.

The IRS has modified Forms 941 and 943 for this additional withholding. Please work with your payroll service to make sure this requirement is met.