Author: Cindy Niesen, Associate Director | Research & Compliance, Hays Companies
The January 31st W-2 deadline will be here before you know it, and there’s a lot your team needs to prepare between now and then. As we approach 2019 year-end, employers should keep in mind certain health and welfare benefits-related information that must be reported on the W-2 Earnings Statements they provide to employees. The IRS has issued 2019 General Instructions for Forms W-2 and W-3.
Below are the top six reporting issues that employers generally encounter:
1.) Employee Health Coverage
The ACA requires that employers who issue at least 250 W-2s reflect the value of health coverage on Box 12 of Form W-2. Reporting of health care costs is optional for employers issuing fewer than 250 W-2s, but is encouraged by the IRS. The 250 W-2 threshold is based on the reporting employer’s Federal Employer ID Number (FEIN), regardless of the aggregate size of a controlled group. This information does not increase the employees’ taxable income (Box 1 wages).
- For fully-insured plans, the total premium rate (employer and employee contributions) is reported.
- For self-insured plans, the COBRA rate (exclusive of the 2% COBRA administration fee) may be used, per the IRS.
- Employee elective contributions to a health FSA are not required to be reported; however, if the employer makes contributions to the employee’s health FSA over and above the employee’s election, that amount should be included in the Box 12 calculation.
- Stand-alone dental and vision benefits may be excluded from the calculation (their inclusion is optional).
New in 2019:
Small employers (with fewer than 50 full-time and full-time equivalent employees) who do not offer a group health plan may provide a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) beginning in 2019. Employers may make available for reimbursement up to a maximum of $5,150 for an individual plan, or $10,450 for a plan that also covers spouses and dependents. If an employer provides a QSEHRA, they should enter the amount they have budgeted (the maximum available benefit for the year, not the actual reimbursement paid to the employee), in Box 12.
2.) Employer-provided group term life insurance (See IRS Publication 15-B)
- After excluding the first $50,000 in benefit, the “premium” value (based on Table I rates) for non-discriminatory plans that provide either the same flat dollar death benefit or multiple of earnings benefit for all eligible employees is included in employees’ taxable earnings (Boxes 1, 3 and 5).
- For discriminatory (class-specific) benefits that differentiate by class, the entire value is taxable for key employees (the income exclusion for the first $50,000 in death benefit does not apply). For non-key employees, the exclusion is still applicable.
- Voluntary term life insurance policies that “straddle” the Table I rates (i.e., at least one employee pays more than Table I and at least one employee pays less) are employer-provided group term life insurance and must be imputed. However, the employer can deduct the employee’s actual cost of the coverage from the imputed amount.
3.) Health Care Benefits for Domestic Partners and Other Non-Dependents
Internal Revenue Code Section 105(b) permits certain qualified benefits provided to employees or former employees, their spouses and dependents to be excluded from taxable income. Employers offering domestic partners health care (medical, dental and vision) coverage must include the fair market value of the coverage provided (employer and employee contributions) for domestic partners (unless the partner is considered the employee’s tax dependent) and other non-dependents in W-2 earnings, Boxes 1, 3 and 5, for income tax purposes.
4.) Dependent Care Assistance Plans (DCAPs)
Employee salary reduction elections are excluded from taxable earnings. Report the fair market value of dependent care benefits paid by the employer (including amounts paid directly to a daycare facility, reimbursed to an employee, or provided in kind by the employer), as well as employee elections under a dependent care FSA in Box 10.
5.) Health Savings Accounts (HSAs)
Employer contributions (including employee contributions through the employer’s cafeteria plan) should be reported in Box 12. Employer HSA contributions that are not excluded from employees’ income (i.e., they are outside the employer’s cafeteria plan) are also taxable income and are reportable in boxes 1, 3 and 5.
6.) Third Party Sick Pay Reporting for Disability Benefits
Disability benefits are subject to payroll tax (FICA and FUTA) for the first six months of benefit, when the coverage is employer-paid. Generally, the employer is responsible for the employer match, and must report the value of the benefit as third-party sick pay. However, some exceptions may apply (for example, if the insurer is making the employer and employee FICA matching contribution and providing the employee with a W-2 on behalf of the employer). (Refer to IRS Publication 15-B for more details)
The applicable codes to be used are described in the General Instructions (see the link in the first paragraph, above).
This document is provided for general information purposes only and should not be considered legal or tax advice or legal or tax opinion on any specific facts or circumstances. Readers are urged to consult their legal counsel and tax advisor concerning any legal or tax questions that may arise.
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