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Tax Implications of Employer-Sponsored Health Benefits Reported on W-2
August 2, 2010
One of the main myths circulating in response to the new healthcare reform legislation is the idea that employer-sponsored healthcare benefits provided to employees will become taxable to the individual. Starting in the 2011 tax year, Sec. 9002 of the Patient Protection and Affordable Care Act requires employers to report the "aggregate cost" of applicable employer-sponsored group health insurance coverage provided on each employee's annual Form W-2. Generally, this is defined as major medical coverage and certain exclusions apply. The myth is that once these benefits are included on the W-2 they will become taxable as an increase to the employee's taxable income. However, this is NOT true! The new requirement is for reporting purposes only and the value of the health coverage continues to be excludible from an employee's gross income.
The question then becomes: Why require an employer to report the value of the health benefits on an employee's W-2 if they are not taxable to the employee? Keep in mind the key component of the overall bill is mandatory health insurance coverage. First, the reporting requirement is intended to eventually assist the IRS in verifying that taxpayers have health coverage, since it appears that the mandate for coverage will be regulated through the tax system. Beginning after 2013, individuals will be required to obtain coverage or risk being fined. While certain exceptions may apply, exact details of these provisions are still in the works. Secondly, the reporting will help the IRS identify high-dollar insurance plans, where a so-called "Cadillac Tax" may be imposed on the insurer, not the insured, beginning in 2018.
Employers should act proactively to ensure compliance with the new requirements as the administrative burden will fall upon the employer providing the coverage. Employers who outsource their payroll responsibilities to a payroll service company should consult with the representative to ensure their respective company is taking the proper actions to ensure compliance for the 2011 tax year. Employers who handle their payroll in-house will need to implement the following procedures for the 2011 tax year:
- Determine what "applicable employer-sponsored coverage" was provided to each employee
- Calculate the "aggregate cost" of that coverage for each employee
- Record the "aggregate cost" on each employee's W-2
Unfortunately, the IRS has not finalized an exact formula, and the process for determining these amounts will certainly create confusion among businesses.
While the basic structure of the new healthcare reform has been presented, many of the procedural details are still a work in progress. For updated information on the new healthcare reform legislation or to discuss your specific tax situation and/or reporting requirements contact your 415 Group adviser.
by: Chad R. Isler, MT
