W-2 COST OF COVERAGE REQUIREMENT – JUST GOT A LITTLE EASIER

1. HUMAN CAPITAL PRACTICE
ALERT:
HEALTH CARE REFORM BILL
February 2012 www.willis.com
W-2 COST OF COVERAGE
REQUIREMENT – JUST GOT
A LITTLE EASIER
CODE REQUIREMENTS AND REGULATORY
GUIDANCE
EFFECTIVE DATES
The Patient Protection and Affordable Care Act of 2010 (PPACA), § 9002 requires employers, for
the first time, to include on Form W-2 Wage and Tax Statements, the “cost of employer-
sponsored health coverage.” The amount will be reported in Box 12, code DD. There is no
corresponding requirement to report health care costs on the Form W-3 (Transmittal of Wage
and Tax Statements). The reporting requirement was to take effect for calendar year 2011 W-2
reporting, but, in Notice 2010-69, the Internal Revenue Service (IRS) confirmed that compliance
would be deferred until 2012.
Reporting is required for larger employers starting with the 2012 W-2, due out in January 2013.
A larger employer is one who files W-2 information electronically with the IRS – a rule that
generally applies to an employer who issues 250 or more W-2s (partnerships with more than 100
partners must also file returns electronically). An IRS representative has confirmed that the
calculation of 250 employees is per employer, not on a “controlled group” basis – so, for example,
where there are three companies, one parent and two wholly owned subsidiaries, and each has
100 employees, none of them would be required to report the cost of coverage in 2012 under the
small employer exception.
The W-2 reporting requirements will ultimately apply to almost every employer who provides
employer-sponsored health coverage, including state and local government entities, churches
and other religious organizations, and employers that are not currently subject to COBRA
coverage requirements, but excluding federally recognized Indian tribal governments or related
corporations that are wholly owned by tribal governments. Certain plans are not required to
report the cost of coverage in 2012, nor until further guidance is provided, including smaller
employers, plans maintained primarily for members of the military and their families, and plans
of employers that are not subject to COBRA (e.g., self-insured church plans, whether the church
plan voluntarily offers COBRA or not).
Caution: The employer is solely responsible for accurately reporting wages and withholding
taxes. Failure to comply with this informational reporting may trigger the same penalties that
apply to W-2 reporting in general – an amount ranging from $30 to $100 per W-2, depending on
the length of time the employer fails to comply (maximum penalty provisions apply to small
businesses). There is a second, separate penalty for failure to correct the W-2. Each penalty has
a maximum of $1,500,000 ($500,000 for small businesses).

2. LET YOUR PAYROLL SYSTEMS/PROCESSES BE YOUR COMPLIANCE GUIDE
As we noted in July 2011, the delay in enforcing the new reporting requirements gives employers, software
providers, payroll administrators, and third-party service providers adequate time for implementation. W-2
reporting of health coverage is for informational purposes only – employer and employee pre-tax contributions
continue to be excluded from gross income and wages for employment tax purposes.
As with all other elements reported on the W-2, plan sponsors will be heavily dependent on payroll administrators
who in turn will depend on software providers to accurately code the systems and elements of coverage used to
accumulate and generate W-2 data. Envisioned is a process, perhaps similar to that used to accumulate
contributions for a savings plan under Internal Revenue Code (IRC) § 401(k) – contributions which are also
reported on the W-2. Because the accumulation and reporting processes will generally be driven by payroll systems,
compliance and accuracy will largely be a function of the information reported by the employer. This summary is a
compliance starting point. However, the guidance includes many questions and answers that should be read
carefully by those responsible for Form W-2 preparation and those individuals the preparer must rely upon to
report and coordinate cost information. Additional information on the reporting requirements can be found in IRS
Notice 2011-28, as further adjusted by IRS Notice 2012-09.
“APPLICABLE EMPLOYER-SPONSORED COVERAGE” DEFINED
Applicable Employer-Sponsored Coverage (ESC) includes employer and employee organization health coverage
(insured and self-insured) provided to employees, former employees, the employer and others associated or
formerly associated with the employer in a business relationship, and their families. ESC is defined using the same
definition of coverage as used under COBRA – so that it generally includes all coverage from all plans, regardless of
whether it is excludable from income. But some types of health coverage are exempted from the reporting
requirement. In Notice 2011-28 and Notice 2012-09, the IRS interpreted these exemptions, and they
provided some additional exemptions. They promised further guidance which will be applied
prospectively with at least six months advance notice. So, unless the IRS guidance specifically excludes a
coverage item, employers should include the cost for that item in the 2012 W-2, box 12, code DD.
Accordingly, employers should be aware of the possibility that the items exempted for 2012 may be subject to the
reporting requirement in future years.
Excluded from ESC: Under IRS Notice 2011-28, confirmed by Notice 2012-09, the following items are not included
in ESC for 2012:
1. Contributions to an Archer Medical Savings Account
2. Contributions to a Health Savings Account (HSA)
3. Employee pre-tax contributions to a health Flexible Spending Account (FSA) (however, where the health FSA
coverage exceeds the employee’s pre-tax contributions, such as where there are employer contributions to a
FSA, that difference must be included in ESC*)
4. Coverage only for a specified disease or illness (e.g., cancer) and hospital indemnity or other fixed indemnity
coverage offered on an independent, non-coordinated basis, and funded solely with after-tax employee
contributions
5. Dental or vision coverage that is “not integrated” into a group health plan that provides reportable coverage
(Note: This is the same standard that applies under the Health Insurance Portability and Accountability Act of
1996 (HIPAA), excluding dental and/or vision coverage where it is offered under a separate policy, certificate or
insurance contract; or, participants elect such coverage separately and where elected, they pay an additional
premium or contribution for such dental or vision coverage)
6. Long-term care coverage
7. Coverage only for accidents or disability income coverage or a combination of both
8. Liability coverage or coverage issued to supplement liability coverage
9. Workers’ compensation or similar insurance
10. Coverage under a multi-employer plan
11. Automobile medical payment insurance
12. Credit-only insurance
* The IRS has provided specific guidance for full flex/cafeteria plans.
2 Willis North America • 02/12

3. The exclusion for HIPAA excepted benefits (accident or disability “applicable premium” under COBRA (minus
income, liability, workers’ compensation or similar insurance, auto the 2% COBRA administrative fee, if charged).
med pay, credit only, and other similar coverage where medical care The entire cost of ESC provided to an
benefits are secondary or incidental) does not extend to the cost of employee must be reported, without regard to
medical care provided by on-site medical clinics, nor care provided who is covered and regardless of who paid the
through an Employee Assistance Program (EAP), wellness program cost – the employer or the employee. While an
or similar program. Such costs must be included in the reportable employer may use a different method for
cost. However, in Notice 2012-09, the Internal Revenue Service has different plans (options), they must use the
confirmed that employers can exclude the cost of such coverage from same method for every employee who
W-2 reporting in 2012 where a covered COBRA beneficiary would receives coverage under a specific plan
not be charged any premium. (option). Besides using the COBRA applicable
premium method, the Notice provides two
As a result, the cost of medical coverage to be reported as part of the additional methods to calculate the cost of
cost of ESC includes: coverage:
1. Major medical 1. PREMIUM CHARGED METHOD This
2. “Mini-med” plans method is for insured plans only and uses
3. On-site medical clinics providing more than first aid services the premium charged by the insurer for
4. Medicare Supplemental options each appropriate period.
5. Medicare Advantage options
6. Employee assistance plans that provide medical services (more 2. MODIFIED COBRA PREMIUM
than referral services) METHOD This method can be used only
7. Wellness programs that provide medical services when one of the following occurs:
8. Executive physicals
The employer subsidizes the cost of
The IRS has provided a guidelist on coverage items to include or COBRA (in which case the Form W-2
exclude at: http://www.irs.gov/newsroom/article/ reportable cost is based upon a
0,,id=254321,00.html reasonable good-faith estimate of the
COBRA “applicable premium”)
Special rules apply where coverage is also treated as wages (and The actual premium charged by the
reported in Box 1 of the W-2). Where the cost of coverage is imputed employer for each period in the
as wages for a 2% shareholder-employee of an S-Corporation or current year is equal to the COBRA
where the cost of coverage is imputed as income to highly “applicable premium” for each period
compensated employees because the self-insured medical plan in the prior year (in which case the
discriminates in favor of highly compensated employees, those Form W-2 reportable cost is based on
amounts should not be reported in Box 12, Code DD. However, the COBRA applicable premium in
taxable coverage provided to a same-gender spouse would be the prior year)
included both in Box 1, as wages and in Box 12, Code DD.
The Notice also describes how to calculate the
REPORTABLE COST OF ESC reportable cost for a period when the
Guidance anticipates a cumulative process in determining the employer charges employees a composite rate
amount to be reported. The reportable cost is the sum of the (i.e., if there is a single coverage class or if
reportable costs for each coverage period during the year as employees are charged the same premium for
determined under the method used by the employer. Coverage costs each type of coverage under the plan).
can be accumulated on a monthly or more frequent basis. Generally
speaking, until additional guidance is provided, employers can If the cost of coverage for a period changes
calculate the reportable cost based on methods to estimate during the year, the reportable cost must
3 Willis North America • 02/12

4. reflect the change in cost. Further, with respect to an employee who commences, changes or
terminates coverage during the year, the reportable cost must consider the change in coverage.
For example, if coverage begins mid-month where costs are determined on a monthly basis, the
employer can use any reasonable method to determine the cost (such as using the cost of
coverage in effect on the first day of the month, the last day of the month, or by prorating the
reportable costs) so long as the method is used consistently for all employees with coverage
under the plan.
Example: An employee elects single coverage for 2012 during annual enrollment. The cost of
coverage is $300 per person, per month. She marries in February 2012 and adds the spouse in
March 2012. The cost of coverage increases June 1 to $400 per person, per month. She waives
coverage in July 2012 and enrolls in the spouse’s employer’s plan. She re-enrolls in coverage
November 16, 2012, selecting the full family “tier” coincident with the birth of a baby. As a result,
the reportable cost on the 2012 W-2, issued in January 2013, could be reported as:
CALCULATING REPORTABLE COST – EXAMPLE
MONTH AMOUNT
January $ 300
February 300
March 600
April 600
May 600
June 800
July 0
August 0
September 0
October 0
November* 600
December 1,200
TOTAL $ 5,000
*Prorated method selected by employer. Regulations also allow employers to use a 1st day
rule ($0) or a last day rule ($1,200), so long as consistently applied to all employees.
The cost of any ESC needs to be reported for any year in which an employee receives a W-2. Two
special rules allow the employer to ignore certain items:
1. The employer can ignore the cost of coverage in the calendar year of separation, but only for
the periods after separation in that year
2. The employer can ignore retroactive changes in coverage that are made after December 31 of
the calendar year
Here are examples:
1. For an employee who separates on June 30, 2012, the employer may, but need not, include
the cost of ESC for the period July 1, 2012 through December 31, 2012 (COBRA, retiree
medical, etc.). However, if coverage continues into 2013 and if the individual receives a 2013
W-2 (due to payments for severance pay, unused vacation, deferred compensation, etc.), the
2013 W-2 must include the cost of coverage.
2. For an employee whose spouse has a baby on December 16, 2012, but who fails to report the
event until January, where coverage changes are retroactive to the date of birth, the
employer need not adjust the amount reported on the 2012 W-2. The employer is permitted
to use information as of December 31.
4 Willis North America • 02/12

5. Finally, reportable cost is a calendar year calculation, regardless of
the plan year used for the health plan and regardless of the 12-month
SPECIAL SITUATIONS
period for determining the COBRA applicable premium. Employer-
There is guidance for special situations.
sponsored coverage costs must be reported on a calendar year basis,
so the W-2 reportable cost under the plan for an employee for the
SEPARATION
year must reflect the reportable cost, with any increases or decreases
An employer may apply any reasonable
that occur during the calendar year.
method of reporting the cost of coverage for
an employee who terminates employment
before the end of the calendar year. The
Clarifications from New Guidance Issued in January 2012
employer has the flexibility to report only the
cost of coverage received prior to termination
Internal Revenue Service Notice 2012-9 also confirmed with respect
or to include the cost of post-employment
to reporting the 2012 cost of Employer Sponsored Coverage (ESC):
COBRA coverage (or retiree medical
coverage, etc.) so long as the same method is
Elements that are not required to be reported, such as the cost of
used for all who terminate. In 2012, if the W-2
a Health Reimbursement Arrangement, can be included in the
is requested prior to the end of the calendar
cost reported on the W-2, so long as the coverage is ESC and the
year, no cost of coverage amount need be
cost is calculated using one of the required methods.
reported in Box 12. However, if the employer
Where ESC is provided incidental to a non-reportable benefit
regularly issues W-2s mid-year after
(e.g., where an insurer provides coverage for a day in an overseas
separation, it must include the cost of
emergency room as part of an Employee Assistance Program
coverage on that W-2.
(EAP) that otherwise provides only referral services), the
employer need not calculate and report the value of the potential
emergency room benefit as part of ESC. INDIVIDUALS WITH MULTIPLE
Where ESC is combined with a non-reportable benefit (e.g., RELATED EMPLOYERS
where the insurer commingles medical and disability coverage), Special rules apply for individuals who
the employer can use any reasonable method, applied in a perform services for multiple related
reasonable manner, to allocate costs between the ESC and the employers within the meaning of IRC
non-reportable benefit. §3121(s), where one of the employers is a
Except for W-2s issued by third-party sick pay providers, any “common paymaster.” There, the common
other W-2, whether issued by the employer or the employer’s paymaster must include aggregate reportable
agent, must include the cost of ESC – even if the agent issues the costs for coverage provided by all employers it
W-2 with income information and the employer issues a separate serves. The individual employers do not
W-2 with only the cost of coverage information. report the cost of coverage that they provided.
In any year after separation, if a W-2 is issued, it must also
include cost of coverage information.
5 Willis North America • 02/12

6. EMPLOYEE TRANSFERS TO SUCCESSOR EMPLOYER
If an employee transfers to a successor employer, both the predecessor and
the successor must report the aggregate reportable cost of coverage that each
provided unless the successor employer chooses to issue one W-2 reflecting
wages paid and the aggregate reportable cost of ESC provided to the employee
during the calendar year by both the predecessor and successor employers.
Last July we issued an
RETIREES, COBRA PARTICIPANTS
Alert on the same subject
An employer is not required to report the cost of coverage to an individual for
whom the employer is not otherwise required to issue a W-2.
based on guidance issued by
Treasury/Internal Revenue
Service (IRS) with respect
CONCLUSION to reporting the cost of
Most employers will be able to rely on their payroll administrators to achieve health coverage on the
compliance with the new W-2 reporting requirements. We anticipate, 2012 Form W-2. This
however, that payroll administrators will require employers to provide them February 2012 Alert
with the health coverage costs to accumulate and include on the W-2. updates and restates the
July 2011 Alert based on
Beyond the operational compliance issues, employers will want to consider the most recent Treasury/
how such information will be communicated to workers. Will the new IRS guidance issued
mandated disclosure on the 2012 Form W-2 be adequate? Are additional
earlier in 2012.
communications needed to place the new informational item in context?
For comparison, most employees who participate in tax preferred benefits (a
401(k), cafeteria plan, etc.) are generally unable to explain the difference
between their federal wages (Box 1), FICA wages (Box 5), state wages (Box 16)
and local wages (Box 19). Employees may not even notice the new health cost
number on their W-2 – or at the other extreme, it may surprise them or
confuse them because few employees understand the cost of health coverage.
The new W-2 reporting requirements offer employers a choice between
simple compliance and incorporating the new reporting requirement into a
larger strategy designed to confirm the value of the health coverage offered.
Your Willis Client Advocate® can provide assistance with your
communications surrounding this new mandated disclosure.
6 Willis North America • 02/12

7. KEY CONTACTS
U.S. HUMAN CAPITAL PRACTICE OFFICE LOCATIONS
NEW ENGLAND Wilmington, DE Jacksonville, FL
302 397 0171 904 355 4600
Auburn, ME
207 783 2211 ATLANTIC Marietta, GA
770 425 6700
Bangor, ME Baltimore, MD
207 942 4671 410 584 7528 Miami, FL
305 421 6208
Boston, MA Bethesda, MD
617 437 6900 301 581 4261 Mobile, AL
251 544 0212
Burlington, VT Knoxville, TN
802 264 9536 865 588 8101 Orlando, FL
407 562 2493
Hartford, CT Memphis, TN
860 756 7365 901 248 3103 Raleigh, NC
704 344 4856
Manchester, NH Nashville, TN
603 627 9583 615 872 3716 Savannah, GA
912 239 9047
Portland, ME Norfolk, VA
207 553 2131 757 628 2303 Tallahassee, FL
850 385 3636
Shelton, CT Reston, VA
203 924 2994 703 435 7078 Tampa, FL
813 490 6808
NORTHEAST Richmond, VA 813 289 7996
804 527 2343
Buffalo, NY Vero Beach, FL
716 856 1100 Rockville, MD 772 469 2842
301 692 3025
Cranford, NJ MIDWEST
908 931 3005 SOUTHEAST
Appleton, WI
Florham Park, NJ Atlanta, GA 800 236 3311
973 410 4622 404 224 5000
Chicago, IL
Morristown, NJ Birmingham, AL 312 288 7700
973 829 6374 205 871 3300 312 621 4843
973 829 6465 312 348 7678
Charlotte, NC
New York, NY 704 344 4856 Cleveland, OH
212 915 8802 216 861 9100
Gainesville, FL
Norwalk, CT 352 378 2511 Columbus, OH
203 523 0501 614 326 4722
Greenville, SC
Radnor, PA 704 344 4856 East Lansing, MI
610 254 7289 517 349 3226
7 Willis North America • 02/12

8. Grand Rapids, MI San Antonio, TX
248 735 7249 210 979 7470
Milwaukee, WI Wichita, KS
414 203 5248 316 263 3211
414 259 8837
WESTERN
Minneapolis, MN
763 302 7131 Fresno, CA
763 302 7209 559 256 6212
Moline, IL Irvine, CA
309 764 9666 949 885 1200
Pittsburgh, PA Las Vegas, NV
412 645 8506 602 787 6235
602 787 6078
Schaumburg, IL
847 517 3469 Los Angeles, CA
213 607 6300
SOUTH CENTRAL
Novato, CA
Amarillo, TX 415 493 5210
806 376 4761
Phoenix, AZ
Austin, TX 602 787 6235
512 651 1660 602 787 6078
Dallas, TX Portland, OR
972 715 2194 503 274 6224
972 715 6272
Rancho/Irvine, CA
Denver, CO 562 435 2259
303 765 1564
303 773 1373 San Diego, CA
858 678 2000
Houston, TX 858 678 2132
713 625 1017
713 625 1082 San Francisco, CA
415 291 1567
McAllen, TX
956 682 9423 San Jose, CA
408 436 7000
Mills, WY
307 266 6568 Seattle, WA
800 456 1415
New Orleans, LA
504 581 6151
The information contained in this publication
Oklahoma City, OK is not intended to represent legal or tax advice
and has been prepared solely for educational
405 232 0651 purposes. You may wish to consult your attor-
ney or tax adviser regarding issues raised in this
Overland Park, KS publication.
913 339 0800
8 Willis North America • 02/12