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William Byrnes (Texas A&M) tax & compliance articles

Must a taxpayer report the value of his/her employer-sponsored health insurance coverage included on the W2?

Posted by William Byrnes on April 10, 2014


In its Health Care Tax Tip 2014-09, the IRS answered the question:  Must a taxpayer report on the income tax return (form 1040) the value of his/her employer-sponsored health insurance coverage?  The employer has included the cost of the employer-sponsored health insurance coverage on an employee’s W-2, Wage and Tax Statement.  What must a taxpayer do with this information?

The Affordable Care Act requires employers to report the cost of coverage under an employer-sponsored group health plan. Reporting the cost of health care coverage on the Form W-2 does not mean that the coverage is taxable. The value of the employer’s excludable contribution to health coverage continues to be excludable from an employee’s income, and it is not taxable. This reporting is for informational purposes only and will provide employees useful and comparable consumer information on the cost of their health care coverage.

Employers that provide “applicable employer-sponsored coverage” under a group health plan are subject to the reporting requirement. This includes businesses, tax-exempt organizations, and federal, state and local government entities (except with respect to plans maintained primarily for members of the military and their families). However, federally recognized Indian tribal governments are not subject to this requirement.  See Form-W-2-Reporting-of-Employer-Sponsored-Health-Coverage

Here is what the IRS stated about the amount shown on the W-2 “employer-sponsored health insurance coverage”.

  • The health care law requires certain employers to report the cost of coverage under an employer-sponsored group health plan.
  • The amount of employer-sponsored health insurance coverage appears in Box 12 of the W-2, and has the code letters “DD” next to it.
  • Reporting the cost of health care coverage on the Form W-2 does not mean that the coverage is taxable or that it needs to be reported on the tax return.
  • The amount in Box 12 is only for government information collection only, and shows the payments made by the taxpayer and the employer and is not included in the amount shown in Box 1, which is the amount of taxable earnings.

Reporting on the Form W-2

The value of the health care coverage will be reported in Box 12 of the Form W-2, with Code DD to identify the amount. There is no reporting on the Form W-3 of the total of these amounts for all the employer’s employees.

In general, the amount reported should include both the portion paid by the employer and the portion paid by the employee. See the chart, below, and the questions and answers for more information.

An employer is not required to issue a Form W-2 solely to report the value of the health care coverage for retirees or other employees or former employees to whom the employer would not otherwise provide a Form W-2.

Form W-2 Reporting of Employer-Sponsored Health Coverage

Coverage Type

Form W-2, Box 12, Code DD

Report

Do Not Report

Optional

Major medical

X

Dental or vision plan not integrated into another medical or health plan

X

Dental or vision plan which gives the choice of declining or electing and paying an additional premium

X

Health Flexible Spending Arrangement (FSA) funded solely by salary-reduction amounts

X

Health FSA value for the plan year in excess of employee’s cafeteria plan salary reductions for all qualified benefits

X

Health Reimbursement Arrangement (HRA) contributions

X

Health Savings Arrangement (HSA) contributions (employer or employee)

X

Archer Medical Savings Account (Archer MSA) contributions (employer or employee)

X

Hospital indemnity or specified illness (insured or self-funded), paid on after-tax basis

X

Hospital indemnity or specified illness (insured or self-funded), paid through salary reduction (pre-tax) or by employer

X

Employee Assistance Plan (EAP) providing applicable employer-sponsored healthcare coverage

Required if employer charges a COBRA premium

Optional if employer does not charge a COBRA premium

On-site medical clinics providing applicable employer-sponsored healthcare coverage

Required if employer charges a COBRA premium

Optional if employer does not charge a COBRA premium

Wellness programs providing applicable employer-sponsored healthcare coverage

Required if employer charges a COBRA premium

Optional if employer does not charge a COBRA premium

Multi-employer plans

X

Domestic partner coverage included in gross income

X

Governmental plans providing coverage primarily for members of the military and their families

X

Federally recognized Indian tribal government plans and plans of tribally charted corporations wholly owned by a federally recognized Indian tribal government

X

Self-funded plans not subject to Federal COBRA

X

Accident or disability income

X

Long-term care

X

Liability insurance

X

Supplemental liability insurance

X

Workers’ compensation

X

Automobile medical payment insurance

X

Credit-only insurance

X

Excess reimbursement to highly compensated individual, included in gross income

X

Payment/reimbursement of health insurance premiums for 2% shareholder-employee, included in gross income

X

Other Situations

Report

Do Not Report

Optional

Employers required to file fewer than 250 Forms W-2 for the preceding calendar year (determined without application of any entity aggregation rules for related employers)

X

Forms W-2 furnished to employees who terminate before the end of a calendar year and request, in writing, a Form W-2 before the end of that year

X

Forms W-2 provided by third-party sick-pay provider to employees of other employers

X

The chart was created at the suggestion of and in collaboration with the IRS’ Information Reporting Program Advisory Committee (IRPAC). IRPAC’s members are representatives of industries responsible for providing information returns, such as Form W-2, to the IRS. IRPAC works with IRS to improve the information reporting process.

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