Cost of coverage

The Patient Protection and Affordable Care Act of 2010 requires employers to report the total cost of coverage of employer-sponsored health plans on employee W-2 forms effective as of 2013 (i.e., W-2 forms due in January 2013 pertaining to the 2012 calendar year). The amount reported does not affect tax liability and is for informational purposes only.

Any employer who provides applicable employer-sponsored coverage is subject to the reporting requirement*. This includes all government and church employers except federally recognized Indian governments. Employers must report the total cost of all applicable employer-sponsored group health care coverage which is exempt from an employees’ gross income. The cost of coverage for the employee, as well as any covered dependents, is reported. The amount reported should include both the portion paid by the employer and the portion paid by the employee. For further guidance, please refer to IRS Notice 2012-9.

*For the 2013 requirement (calendar year 2012 W-2), employers who report fewer than 250 W-2s are exempt (these employers are also exempt in future years unless additional guidance is issued).

Exceptions

The items below need not be reported or used in calculating the cost of coverage:

  • Coverage for long-term care;
  • Separate dental and vision coverage;
  • Separate endorsements which employees purchase on an after-tax basis;
  • Costs of any employee assistance program, wellness program or on-site medical clinics if those costs are not included in the plan premium;
  • Cost of coverage under a multi-employer plan;
  • Cost of coverage under a Health Reimbursement Agreement;
  • Amounts contributed to a Health Savings Accounts, an Archer MSA, or under a flexible spending agreement;
  • Cost of coverage provided under a self-insured group health plan that is not subject to COBRA; and
  • After-tax employee purchases of hospital indemnity, other indemnity, and/or specific disease or illness coverage.

Methods for calculating cost of coverage

The aggregate reportable cost generally includes both the portion of the cost paid by the employer and the portion of the cost paid by the employee, regardless of whether the employee paid for that cost through pre-tax or after-tax contributions. The IRS has identified the methods below as acceptable for calculating the reportable cost of coverage:

  • COBRA applicable premium method – the reportable cost for a period (e.g., a month) equals the COBRA applicable premium for that coverage for that period.
  • Premium charged method – the employer MUST use the premium charged by the insurer for that employee’s coverage for each period as the reportable cost for that period.
  • Modified COBRA premium method – the employer may determine the reportable cost for a period based upon a reasonable good faith estimate of the COBRA applicable premium for that period (this may only be used when the cost of COBRA is subsidized so that the premium charged to COBRA qualified beneficiaries is less than the COBRA applicable premium).

Examples

Example No. 1

Employer determines that the monthly reportable cost under a group health plan for self-only coverage for the calendar year 2012 is $500. Employee is employed by employer for the entire calendar year 2012 with self-only coverage. For purposes of reporting for the 2012 calendar year, Employer must treat the 2012 reportable cost under the plan for Employee as $6,000 ($500 x 12).

Example No. 2

Employer determines that the monthly reportable cost for self-only coverage for the period Oct. 1, 2011, through Sept. 30, 2012, is $500, and that the monthly reportable cost for self-only coverage for the period Oct. 1, 2012, through Sept. 30, 2013, is $520. Employee is employed by employer for the entire calendar year 2012 with self-only coverage. For purposes of reporting for the 2012 calendar year, Employer must treat the 2012 reportable cost under the plan for Employee as $6,060 [($500 x 9) + ($520 x 3)].

Example No. 3

Employer determines that the monthly reportable cost for self-only coverage for the calendar year 2012 is $500, and that the monthly reportable cost under the same group health plan for self-plus-spouse coverage for the calendar year 2012 is $1,000. Employee is employed by Employer for the entire calendar year 2012. Employee had self-only coverage from Jan. 1, 2012, through June 30, 2012, and then had self-plus-spouse coverage from July 1, 2012, through Dec. 31, 2012. For purposes of reporting for the 2012 calendar year, Employer must treat the 2012 reportable cost under the plan for Employee as $9,000 [($500 x 6) + ($1,000 x 6)].

Example No. 4

Employer determines that the monthly reportable cost for self-only coverage for the calendar year 2012 is $500. Employee commences employment and self-only coverage under the group health plan on March 14, 2012, and continues employment and self-only coverage through the remainder of the calendar year. For purposes of reporting for the 2012 calendar year, Employer treats the cost of coverage under the plan for Employee for March 2012 as $250 ($500 x ½). Because Employer’s method of calculating the reportable cost of under the plan for March 2012 by prorating the reportable cost for March 2012 to reflect Employee’s date of commencement of coverage is reasonable, Employer must treat the 2012 reportable cost under the plan for Employee as $4,750 [($500 x ½) + ($500 x 9)].