1. By By
Larry Grudzien Sheila Aiken
Attorney at Law Aiken & Aiken, LLC
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2.  Overview,
 Employers subject to reporting,
 What is “applicable employer-sponsored coverage”?,
 How to determine the “aggregate reportable cost”?,
 Methods for calculating the cost of coverage,
 Other issues,
 Transition relief,
 Employer action plan, and
 Questions.
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3.  Employers must report the “aggregate cost” of “applicable
employer-sponsored coverage” on an employee’s Form W-2.
 Although PPACA provided that the requirement would be
effective beginning with the 2011 tax year, the IRS
subsequently made compliance in 2011 optional.
 The Form W-2 reporting requirement is first required for the
2012 tax year–that is, the value must be reported on the Form
W-2 issued in January 2013 for the 2012 tax year.
 To comply with this requirement, employers must:
 Determine the applicable employer-sponsored coverage that is
provided to each employee;
 Calculate the aggregate cost of such coverage for each employee;
and
 Report that cost on each employee’s Form W-2. 3

4.  In the 2011 version of Form W-2 (Wage and Tax Statement) and
related Instructions, one notable change is the addition of new
codes for Box 12 reporting, including a new code DD to be used
for reporting the cost of employer-sponsored health coverage.
 In March 2011, the IRS issued Notice 2011-28, providing interim
guidance on the reporting requirement (including information
on how and what to report as well as certain transition relief),
and also posted FAQs that incorporate the guidance in the
notice.
 In January 2012, the IRS issued Notice 2012-9,restating and
amending its guidance and clarifying which employers are
exempt, when Health FSAs are not included, when EAPs are
included and other issues.
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5.  Even though the W-2 reporting requirement is
for informational purposes without triggering
any tax liability, it would appear that typical
information reporting penalties will apply to
employers for noncompliance.
 In addition, it is not clear whether penalties
would apply for a good faith mistake in
reporting the cost of coverage—guidance from
the IRS would be welcome.
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6.  The interim guidance clarifies that if the employer is not
otherwise required to issue a Form W-2 for an individual (such as a
retiree or other former employee receiving no compensation),
reporting is not required.
 When employees terminate employment during a calendar
year, an employer may apply any reasonable method of
reporting the cost of coverage provided under a group health
plan, provided that the method is used consistently for all
employees receiving coverage under that plan who terminate
employment during the plan year.
 But regardless of the method of reporting used by the
employer for other terminated employees, there is no
reporting requirement for an employee to receive a Form W-2
prior to the end of the calendar year, if the employee
terminated employment during the year. 6

7.  All employers that provide “applicable employer-sponsored
coverage” during a calendar year are subject to the reporting
requirement–including federal, state, and local government
entities (a few exceptions apply, such as federally recognized
Indian tribal governments).
 For 2012 Forms W-2, under transition relief and until the
issuance of further guidance, an employer is not subject to the
reporting requirement for any calendar year if the employer
was required to file fewer than 250 Forms W-2 for the
preceding calendar year.
 Therefore, if an employer files fewer than 250 Forms W-2 in 2011, the
employer would not be subject to the reporting requirement for the
2012 calendar year.
 This rule applies regardless of whether the employer uses an agent.
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8.  There are other exceptions to the reporting requirement, including
transition relief for:
 For employers that provide coverage under a self-insured health plan that is not
subject to any federal continuation coverage requirements (e.g., certain church
plans);
 For plans maintained by the government primarily for members of the military
and their families; and
 For related employers (within the meaning of Code § 3121(s)), in which case only
the common paymaster must report the cost of coverage provided to an
employee by all the employers for whom it serves as the common paymaster;
and
 If related employers employ the same employee, but do not use a common
paymaster, the employers may either:
1. report the total aggregate cost on a single W-2, or
2. allocate the cost between the employers and report the divided cost on separate Forms W-
2.
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9.  The guidance also addresses the reporting obligations of
predecessor and successor employers in the case of an
individual transferring to a new employer that qualifies as a
successor employer under Code § 3121(a)(1).
 These rules generally require that both entities report–unless
the successor employer undertakes to report for the
predecessor employer.
 An employer that contributes to a multiemployer plan is not
required to include the cost of coverage provided to an
employee under that multiemployer plan in determining the
aggregate reportable cost.
 If the only applicable employer-sponsored coverage provided
to an employee is provided under a multiemployer plan, no
reporting is required on the Form W-2. 9

10.  The IRS has indicated that the aggregate
reportable cost is not required to be reported on a
Form W-2 furnished by a third-party sick pay
provider.
 However, a Form W-2 furnished by the employer to
an employee must include the aggregate
reportable cost regardless of whether that Form
W-2 includes sick pay, or whether a third-party sick
pay provider is furnishing a separate Form W-2
reporting the sick pay.
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11.  The Form W-2 reporting requirement applies only to
“applicable employer-sponsored coverage,” a term that
generally includes any employer-provided group health plan
coverage under an insured or self-insured health plan that is
excludable from the employee's gross income under Code §
106, or that would be excludable if it were paid for by the
employer.
 It is subject to numerous exceptions , such as:
 Coverage for long-term care;
 Coverage (whether through insurance or otherwise) described in
Code § 9832(c)(1) (but no exception applies for coverage for on-site
medical clinics);
 Certain stand-alone vision or dental coverage; and
 Coverage described in Code § 9832(c)(3) (under certain
circumstances).
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12.  For purposes of determining whether a specific
arrangement is a group health plan, employers
may rely upon a good faith application of a
reasonable interpretation of the statutory
provisions and applicable guidance, including the
definition under the IRS COBRA regulations.
 Thus, any coverage subject to the COBRA
regulations' definition of group health plan
would, in the absence of an exception or
transition rule, be subject to the W-2 reporting
requirement.
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13.  Certain Benefit Types Under Code § 9832(c)(1) Are Not Includible:
 The following benefits are not subject to the Form W-2 reporting
requirement:
 Coverage only for accidents (including accidental death and dismemberment
coverage);
 Disability income coverage;
 Liability insurance, including general liability and auto liability insurance;
 Workers' compensation or similar coverage;
 Automobile medical payment insurance;
 Credit-only insurance; and
 Other similar coverage, specified in the regulations, under which benefits for
medical care are secondary or incidental to other insurance benefits (but no
such coverage is mentioned in the regulations).
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14.  Dental and Vision Coverage Is Not Includible Under
Certain Circumstances (Transition Relief):
 Applicable employer-sponsored coverage subject to the
reporting requirement does not include stand-alone
dental, or vision coverage that are “HIPAA-excepted
benefits.”
 Generally, to be an excepted benefit, dental or vision
benefits must either be offered under a separate policy,
certificate or contract of insurance; or participants must
have the right not to elect the benefits and if they do
elect the benefits, they must pay an additional
premium or contribution for that coverage.
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15.  Certain Independent, Noncoordinated Benefits
Under Code § 9832(c)(3) Are Not Included Under
Certain Circumstances:
 Under this category, coverage only for a specified
disease or illness and hospital indemnity or other fixed
indemnity insurance is not subject to W-2 reporting,
provided that the coverage is offered as independent,
noncoordinated benefits.
▪ However, to be excepted, such coverage must be funded by the
employee on an after-tax basis for which a deduction under Code
§ 162(l) is not allowable.
 This exception would include most hospital indemnity
(e.g., $100 per day) and cancer insurance plans. 15

16.  Coverage Under Health Savings Accounts (HSA) or Archer
MSAs Contributions Is Not Includible:
 Strictly speaking, HSA and Archer MSA contributions are included in the
definition of applicable employer-sponsored coverage, but they are
explicitly excluded from the W-2 reporting obligation.
 The IRS confirmed this treatment for HSA and Archer MSA contributions.
 Coverage Under Health Reimbursement Arrangements (HRA)
Is Not Includible (Transition Relief):
 Under transition relief provided in IRS Notice 2011-28, an employer is not
required to include the cost of coverage under an HRA in determining the
aggregate reportable cost.
 If the only applicable employer-sponsored coverage provided to an
employee is an HRA, no reporting is required on the Form W-2.
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17.  Salary Reduction Elections to Health FSAs Are Not
Includible:
 Health FSA contributions are included in the definition of
applicable employer-sponsored coverage.
 While the amount of any salary reduction election to a health
FSA is excluded from the aggregate reportable cost and is not
reported on Form W-2, separate rules apply for health FSAs
offered through cafeteria plans under which optional employer
flex credits can be applied.
 If an employer provides a flex credit, the cost of the FSA should
not be reported unless the flex credit causes the employee’s
health FSA to exceed his or her salary reduction election.
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18.  Coverage Under On-Site Medical Clinics, Wellness Programs and Employee
Assistance Programs:
 The cost of employee assistance programs (EAPs), onsite clinics, and other
wellness initiatives which qualify as group health plans (as defined in Internal
Revenue Code § 5000(b)(1)) may have to be reported on Form W-2.
▪ It will depend on how the employer administers COBRA continuation coverage for
such benefits.
▪ If the employer does not charge a COBRA premium for continued coverage under the EAP,
on-site clinic, or wellness programs, the employer is not required to report the value of such
coverage on the employee’s W2.
▪ However, if the employer does charge a COBRA premium, it must report the value of the
coverage.
 Employers will need to carefully review their EAP and wellness programs to
determine whether they qualify as “group health plans.”
 Failure to properly administer such benefits as group health plans could have
potentially far-reaching impact, including COBRA penalties, ERISA penalties,
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and now W-2 reporting penalties.

19.  An employer may include in the aggregate reportable cost the cost of
coverage that is not otherwise required to be included under
applicable interim relief, such as the cost of coverage under an HRA, a
multi-employer plan, an EAP, wellness program, or on-site medical
clinic, provided that the calculation of the cost of coverage otherwise
meets the requirements and provided that such coverage constitutes
applicable employer-sponsored coverage.
 In addition, there is guidance on reporting for programs that include
benefits that constitute applicable employer-sponsored coverage and
other benefits that do not constitute applicable employer-sponsored
coverage, such as a long-term disability program that also provides
certain health benefits.
 In this instance, an employer may use any reasonable allocation
method to determine the cost of the portion of the program
providing applicable employer-sponsored coverage
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20.  If the portion of the program providing a benefit that is
applicable employer-sponsored coverage is only incidental
in comparison to the portion of the program providing
other benefits, the employer is not required to include
either portion of the cost in the aggregate reportable cost.
 Similarly, if the portion of the program providing a benefit
that is not applicable employer-sponsored coverage is
only incidental to the portion of the program providing a
benefit that is applicable employer-sponsored coverage,
the employer may, at its option, include the benefit that is
not applicable employer-sponsored coverage in
determining the reportable cost, notwithstanding the
general prohibition on reporting coverage that is not
applicable employer-sponsored coverage.
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21.  The aggregate cost of applicable employer-
sponsored coverage provided to an employee is
referred to as the “aggregate reportable cost.”
 Because the amount that must be reported
relates to the cost of coverage provided, it
would appear that in cases where coverage is
extended retroactively, W-2 reporting must still
be made—it would be helpful if the IRS
confirmed this and provided guidance on how
to retroactively report for this purpose.
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22.  Both Employer and Employee Portions of the Cost are Included
(and No Adjustment for Imputed Income Amounts)
 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.
 It also includes the cost of coverage of the employee and any person
covered by the plan because of a relationship to the employee, including
any portion of the cost that is includible in the employee's gross income–
thus, aggregate reportable cost is not reduced by any imputed income
included in the employee's gross income.
▪ This might include coverage for certain adult children over age 27 as well as non-
dependent domestic partners for whom income is imputed to the employee as a
result of the coverage.
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23.  No Adjustment for Excess Reimbursements Under a
Self-Insured Discriminatory Plan
 In determining aggregate reportable cost, the cost of
applicable employer-sponsored coverage does not include
excess reimbursements of highly compensated individuals
that are included in gross income under Code § 105(h).
 An excess reimbursement that is included in income is
subtracted from the cost of coverage.
 Similarly, the cost of applicable employer-sponsored
coverage does not include the cost of coverage taken into
income as the result of an employee being a 2% shareholder-
employee of an employer that is an S corporation.
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24.  Special Rules for Health FSA Contributions:
 Health FSA contributions are included in the definition of applicable employer-
sponsored coverage, but special rules apply with respect to the W-2 reporting
obligation.
 The amount of any salary reduction election to a health FSA is excluded from the
aggregate reportable cost and is not reported on Form W-2.
 Where the health FSA is offered through a cafeteria plan under which optional
employer flex credits (expressed as a fixed amount, or as a formula such as matching
salary reduction) can be applied to the health FSA, special rules must be applied to
determine whether any amount must be included in the aggregate reportable cost as
follows:
▪ If the amount of the employee's salary reduction (for all qualified benefits) equals or exceeds
the amount of the health FSA for a plan year, then the amount of the employee's health FSA is
not included in the aggregate reportable cost.
▪ If the amount of the employee's health FSA for a plan year exceeds the employee's salary
reduction for that plan year, then the amount of the employee's health FSA minus the
employee's salary reduction election for the health FSA must be included in the aggregate
reportable cost. 24

25.  Coverage that Straddles Two Reporting Years:
 Where a coverage period (e.g. final payroll period)
extends beyond December 31 of a reporting year,
employers may use a reasonable allocation method
to divide the cost between the two years, or treat
the coverage period as occurring either entirely
before December 31 or entirely after December 31.
 The option selected by the employer should be
applied consistently to all employees.
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26.  Aggregate cost is determined under “rules similar to” the COBRA
rules for applicable employer-sponsored coverage (including
employee and employer contributions), including the special
rules governing self-insured plans.
 Employers are permitted to calculate reportable cost (i.e., the
cost of coverage under a group health plan) using one of three
methods:
 The COBRA applicable premium method;
 The premium charged method (for insured plans); or
 The modified COBRA premium method (for an employer that
subsidizes the cost of coverage or determines the cost of coverage for a
year by applying the cost of coverage in a prior year).
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27.  COBRA Applicable Premium Method:
 Under this method, the reportable cost equals the COBRA
applicable premium for that coverage for that period.
 The employer must calculate the COBRA applicable
premium in a manner that satisfies the requirements
under Code § 4980B(f)(4).
 Under current guidance, this means that the employer
must make such calculation in good faith compliance with
a reasonable interpretation of the statutory requirements
under Code § 4980B.
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28.  Premium Charged Method:
 The premium charged method may be used to
determine the reportable cost only for an employee
covered by an employer's insured group health plan.
 In such a case, the employer must use the premium
charged by the insurer for that employee's coverage
(i.e., for single-only coverage or for family coverage,
as applicable to the employee) for each period as the
reportable cost for that period.
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29.  Modified COBRA Premium Method:
 This method is available to an employer only where it subsidizes the cost of COBRA
(so that the premium charged to COBRA qualified beneficiaries is less than the
COBRA applicable premium) or where the actual premium charged by the employer
to COBRA qualified beneficiaries for each period in the current year is equal to the
COBRA applicable premium for each period in a prior year.
 If the employer subsidizes the COBRA cost, it may determine the reportable cost for
a period based upon a reasonable good faith estimate of the COBRA applicable
premium for that period, if such reasonable good faith estimate is used as the basis
for determining the subsidized COBRA premium.
 If the actual premium charged by the employer to COBRA qualified beneficiaries for
each period in the current year is equal to the COBRA applicable premium for each
period in a prior year, the employer may use the COBRA applicable premium for
each period in the prior year as the reportable cost for each period in the current
year.
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30.  Reportable Cost Must Be Determined on a
Calendar-Year Basis:
 Although an employer may use a 12-month
determination period that is not the calendar year for
purposes of applying the COBRA applicable premium
under a plan, that same 12-month period may not be
used for purposes of calculating the reportable cost
for the year under the plan.
 Instead, the reportable cost under a plan must be
determined on a calendar-year basis.
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31.  Employer Must Reflect Any Changes in
Reportable Cost During the Year:
 If the cost for a period changes during the year (e.g.,
under the COBRA applicable premium method
because the 12-month period for determining the
COBRA applicable premium is not the calendar year),
the reportable cost under the plan for an employee
for the year must reflect the increase or decrease.
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32.  Employer Must Account for Any Changes in Employee's Coverage During the
Year:
 If an employee changes coverage during the year, the reportable cost must take
into account the change in coverage by reflecting the different reportable costs for
the coverage elected by the employee for different periods.
 If the change in coverage occurs during a period (for example, in the middle of a
month where costs are determined on a monthly basis), an employer may use any
reasonable method to determine the reportable cost for such period, such as using
the reportable cost at the beginning of the period or at the end of the period, or
averaging or prorating the reportable costs, provided that the same method is used
for all employees with coverage under that plan.
 Similarly, if an employee commences or terminates coverage during a period, an
employer may use any reasonable method to calculate the reportable cost for that
period, provided that the same method is used for all employees with coverage
under the plan.
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33.  Using a Composite Rate:
 An employer is considered to charge employees a composite rate:
▪ If there is a single coverage class under the plan (that is, if an employee elects coverage, all
individuals eligible for coverage under the plan because of their relationship to the employee
are included in the elections and no greater amount is charged to the employee regardless of
whether the coverage will include only the employee or the employee plus other such
individuals); or
▪ If there are different types of coverage under a plan (for example, self-only coverage and family
coverage, or self-plus-one coverage and family coverage) and employees are charged the same
premium for each type of coverage.
 In such a case, the employer using a composite rate may calculate and use the
same reportable cost for a period for:
▪ The single class of coverage under the plan; or
▪ All the different types of coverage under the plan for which the same premium is charged to
employees, provided this method is applied to all types of coverage provided under the plan. 33

34.  The IRS has indicated that future guidance may prospectively limit the
availability of some or all of this transition relief–but it will not apply
earlier than January 1 of the calendar year beginning at least six months
after it is issued and will not limit the availability of the transition relief
for the 2012 Forms W-2.
 Transition relief is available for the following:
 Employers filing fewer than 250 Forms W-2;
 Certain Forms W-2 furnished to terminated employees before the end of
the year;
 Relief with respect to multiemployer plans;
 HRAs;
 Certain dental and vision plans; and
 Self-insured plans of employers not subject to COBRA continuation
coverage or similar requirements.
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35.  The notice clarifies that the reporting requirement
does not apply to certain types of coverage,
including the following:
 Dental and vision plans meeting the conditions of an
“excepted benefit” for certain HIPAA purposes;
 Coverage in an employee assistance program, wellness
program or on-site medical clinic if COBRA enrollees aren’t
charged a premium for that coverage;
 Health flexible spending arrangements funded solely by
salary reduction contributions; and
 Certain independent, non-coordinated hospital or fixed
indemnity insurance offered on an after-tax basis to
employees. 35

36.  New and revised information in the notice includes these
details:
 Coverage cost may be based on the employer’s available
information as of Dec. 31. Therefore, subsequent notifications
or elections (e.g., divorce) needn’t be considered.
 Alternative methods may be used to calculate the reportable
amount if coverage extends over a payroll period that includes
a Dec. 31, provided the method is used for all employees.
 Coverage reporting relief for employers filing fewer than 250
Forms W-2 is based on the prior calendar year and is
determined without taking into account the use of certain
agents.
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37.  Employers should add the following new items to their Form W-2
action plan:
 Determine whether stand-alone dental and vision benefits meet the HIPAA
definition of “excepted benefits.”
 Evaluate whether EAP, wellness programs, and onsite clinics are “group health
plans” for purposes of COBRA, and if so, how the reportable cost will be
determined.
 Choose a consistent method for allocating the cost of coverage when a benefit
program includes both medical and nonmedical benefits, and for allocating the
cost of coverage for reporting periods that straddle two reporting years.
 As always, coordinate with payroll staff and vendors to ensure proper reporting
on the Form W-2.
 Communicate with employees regarding the new information they’ll see
reported on their Form W-2.
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39.  Larry Grudzien
 Phone: 708-717-9638
 Email: larry@larrygrudzien.com
 Website: www.larrygrudzien.com
 Sheila Aiken, Aiken & Aiken, LLC
 Phone: 847-245-2336
 Email: saiken@aikenandaiken.com
 Website www.aikenandaiken.com
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