Form W-2 Reporting Requirements

LINKS AND RESOURCES

• In April 2011, the IRS issued Notice 2011-28 to provide interim guidance on the Form W-2 reporting requirement.

• The IRS then revised and clarified its interim guidance in Notice 2012-9, issued on Jan. 3, 2012, which provides technical reporting information for employers that include health coverage cost information on Forms W-2 for 2012 and later years.

• Additional Q&As on this requirement are available on IRS.gov.

EMPLOYERS SUBJECT TO THE REPORTING REQUIREMENT

In general, all employers that provide “applicable employer-sponsored coverage” must comply with the Form W-2 reporting requirement. This includes government entities, churches and religious organizations, but does not include Indian tribal governments or tribally chartered corporations wholly owned by an Indian tribal government.

The Form W-2 reporting requirement is currently optional for small employers (those that had to file fewer than 250 Forms W-2 for the prior calendar year). Thus, if an employer is required to file fewer than 250 Forms W-2 for 2014, the employer would not be subject to the reporting requirement for 2015. Small employers will continue to be exempt from the reporting requirement, unless and until the IRS issues further guidance. The IRS confirmed that this transition relief for small employers applies for the 2015 tax year and will continue to apply to future calendar years until the IRS publishes additional guidance. Large employers (those that file 250 or more Forms W-2) were required to comply with the reporting requirement starting in 2012.

The Internal Revenue Code’s aggregation rules do not apply in determining whether an employer filed fewer than 250 Forms W-2 for the prior year. Also, if an employer files fewer than 250 Forms W-2 only because it uses an agent to file them, the employer does not qualify for the small employer exemption.

COVERAGE THAT MUST BE REPORTED

Under the Form W-2 reporting requirement, the information that must be reported relates to “applicable employer-sponsored coverage.” Applicable employer-sponsored coverage is, with respect to any employee, coverage under any group health plan made available to the employee by the employer which is excludable from the employee’s gross income under Code Section 106.

For purposes of this reporting requirement, it does not matter whether the employer or the employee pays for the coverage—it is the aggregate cost of the coverage that must be reported. The aggregate cost of the coverage is determined using rules similar to those used for determining the applicable premiums for COBRA continuation coverage. It must be determined on a calendar year basis.

The ACA reporting obligation also does not apply to amounts contributed to an Archer medical savings account (Archer MSA) or to an HSA. Those amounts are already required to be separately accounted for on the Form W-2. Thus, even small employers must report all employer contributions (including an employee’s contributions through a cafeteria plan) to an HSA on Form W-2.

Similarly, salary reduction contributions to a health flexible spending arrangement (health FSA) under a cafeteria plan are not required to be reported. However, if the amount of the health FSA for the plan year (including optional employer flex credits) exceeds the salary reduction elected by the employee for the plan year, the amount of the health FSA minus the salary reduction election must be reported.

Example: ABC Company maintains a cafeteria plan that offers permitted taxable benefits (including cash) and qualified nontaxable benefits (including a health FSA). The plan offers a flex credit in the form of a match of each employee’s salary reduction contribution. Sandy makes a $700 salary reduction election for a health FSA. ABC Company provides an additional $700 to the health FSA to match Sandy’s salary reduction election. The amount of the health FSA for Sandy for the plan year is $1,400. The amount of Sandy’s health FSA ($1,400) for the plan year exceeds the salary reduction election ($700) for the plan year. ABC Company must include $700 ($1,400 health FSA amount minus $700 salary reduction) in determining the aggregate reportable cost.

In addition, employers may include in the Form W-2 reportable amount the cost of coverage that is not required to be included in the aggregate reportable cost, such as HRA coverage, provided the coverage is applicable employer-sponsored coverage and is calculated under a permissible method.

METHODS OF REPORTING

Coverage Provided after Termination of Employment

If an employer provides coverage (such as continuation coverage) to an employee who terminates employment during the year, the employer may apply any reasonable method of reporting the cost of coverage for that year, as long as that method is used consistently for all employees. Regardless of the method used, an employer does not have to report any amount for an employee who requests a Form W-2 before the end of the calendar year in which the employee terminated employment.

Example: Bob is an employee of XYZ Company from January 1 through April 25. Bob had individual coverage under XYZ Company’s group health plan through April 30, with a cost of coverage of $350 per month. Bob elected continuation coverage for the six months following termination of
employment, covering the period May 1 through Oct. 31, for which he paid $350 per month. XYZ Company will have applied a reasonable method of reporting Bob’s cost of coverage if it uses either of the following methods consistently for all employees who terminate coverage during the year:

• Reports $1,400 as the reportable cost under the plan for the year, covering the four months during which Bob performed services and had coverage as an active employee; or
• Reports $3,500 as the reportable cost under the plan for the year, covering both the monthly periods during which Bob performed services and had coverage as an active employee, and the monthly periods during which Bob had continuation coverage under the plan.

PENALTIES

Violations of the ACA’s W-2 reporting requirements are subject to existing rules on filing Forms W-2.

The amount of the penalty is based on when the employer files the correct Form W-2. In 2015, the Trade Preferences Extension Act of 2015 increased the base penalties for failure to file correct information returns or provide individual statements under Code Sections 6721 or 6722. These penalty amounts are indexed to increase with inflation.

The increased penalty amounts are as follows:

*The penalty for failures due to intentional disregard will be equal to the greater of either the listed penalty amount or 10 percent of the aggregate amount of the items required to be reported correctly.

Exceptions

An inconsequential error or omission is not considered a violation. An inconsequential error or omission does not prevent or hinder the IRS from processing the Form W-2, from correlating the information required to be shown on the form with the information shown on the payee’s tax return or from otherwise putting the form to its intended use. Errors and omissions that are never inconsequential are those relating to a TIN, a payee’s surname, a significant item in a payee’s address, any money or dollar amounts and whether the appropriate form was used.

A penalty will not apply if the employer can show that the failure was due to reasonable cause and not to willful neglect. In general, the employer must be able to show that:

• The failure was due to an event beyond the employer’s control or due to significant mitigating
  factors; and
• The employer acted in a responsible manner and took steps to avoid the failure.

Even if an employer cannot show reasonable cause, under the de minimis rule for corrections, the penalty will not apply to a certain number of returns if the employer:

• Filed those Forms W-2 on or before the required filing date;
• Either failed to include all of the information required on the form or included incorrect information; and
• Filed corrections of these forms by Aug. 1.

If an employer meets all of the de minimis rule conditions, the penalty for filing incorrect Forms W-2 will not apply to the greater of 10 Forms W-2 or one-half of 1 percent of the total number of Forms W-2 that the employer is required to file for the calendar year.

COMPLIANCE STEPS FOR EMPLOYERS

Employers that file 250 or more Forms W-2 should ensure that they are in compliance with the W-2 reporting requirement. They should make sure that they can identify the applicable employer-sponsored coverage that is provided to each employee and calculate the aggregate cost of that coverage.

Employers may also have to address questions from employees regarding whether their health benefits are taxable under this reporting requirement. They can assure employees that this reporting is for informational purposes only, to show employees the value of their health care benefits so they can be more informed consumers. The amount reported does not affect tax liability, as the value of the employer contribution to health coverage continues to be excludible from an employee’s income, and is not taxable.