Published June 22, 2011

In this edition:

IRS Notice 2011-28 provides guidance regarding Form W-2 reporting requirements
Revenue Procedure 2011-32 provides the 2012 amounts for Health Savings Accounts and High Deductible Health Plans

Reporting the Cost of Health Care Coverage to Employees

Internal Revenue Service Notice 2011-28 provides interim guidance regarding the requirement to report to employees, on their annual Form W-2, the cost of their employer-sponsored group health plan coverage. This reporting requirement is required under Section 6051(a)(14) of the Internal Revenue Code which was added to the Code by the Patient Protection and Affordable Care Act of 2010.

This Compliance Update is limited to coverage of the guidance as it applies to health reimbursement arrangements (HRAs) and flexible spending accounts (FSAs). However, the Notice also provides guidance on many other topics, such as which types of coverage must be included in the reported amounts, how to calculate cost of this coverage, and the method for reporting cost of coverage.

General Information

This reporting requirement was established to provide useful information to consumers regarding the cost of their health care coverage. This requirement does not cause otherwise excludable employer-provided health care coverage to become taxable.

The reporting requirement generally applies beginning with 2012 Forms W-2 (i.e., forms for calendar year 2012 that are provided to employees in January 2013). However, certain employers, including small employers that are required to file fewer than 250 Forms W-2 for calendar year 2011, are eligible for transition relief that delays the effective date of these requirements.

Cost of Coverage for HRAs

Under the Notice, employers are not required to include the cost to provide coverage under an HRA when calculating the aggregate reportable cost of coverage. Further, if coverage under an HRA is the only applicable employer-sponsored coverage provided to an employee, the employer is not required to report any amount under Section 6051(a)(14) on the Form W-2 for that employee.

Cost of Coverage for FSAs

For the purposes of this Notice, the amount of a health FSA is the amount of the employee's salary reduction (i.e., the amount the employee elects to contribute to their FSA) combined with any optional employer contributions to the employee's FSA.

For health FSAs funded solely through employee salary reduction, the amount of the FSA is not reported on the Form W-2 and is excluded from the reported cost of coverage.

If the health FSA is funded by both employee salary reduction and employer contributions and is equal to or less than the employee's aggregate salary reduction amount, the amount is excluded from the reported cost of coverage (see example 1 below).

Example 1: An employer's cafeteria plan offers an employer contribution of $1,000. An employee makes a $2,000 salary reduction election, which is split between her health FSA ($1,500) and other qualified benefits (such as medical, dental, and vision coverage). The amount of the employee's salary reduction election ($2,000) for the plan year equals or exceeds the amount of the health FSA ($1,500) for the plan year. For W-2 reporting purposes, the amount of the health FSA is not included in the reported aggregate cost of coverage.

If the amount of an employee's health FSA is greater than the aggregate salary reduction amount (for all qualified benefits) due to employer contributions, then the amount of the health FSA that is in excess of the employee's salary reduction amount must be included in the aggregate cost of coverage reported on Form W-2 (see example 2 below).

Example 2: An employer's cafeteria plan offers a contribution in the form of an equal match of each employee's salary reduction contribution. The employee makes an annual health FSA salary reduction election of $700. The employer contributes an additional $700 to match the employee's election so the total amount of the health FSA for the plan year is $1,400. The amount of the employee's health FSA ($1,400) exceeds the employee's annual salary reduction election ($700) for the plan year, so the employer must include $700 in determining the aggregate reportable cost.

Additional Information

The full text of this guidance is available online at http://www.irs.gov/pub/irs-drop/n-11-28.pdf. Employers should carefully review this information to ensure they comply with all applicable rules and requirements.

2012 Health Savings Account Amounts

Health Savings Accounts (HSA) are designed to help individuals save for future qualified medical and retiree health expenses on a tax-free basis. Among other requirements, individuals who wish to own and contribute to an HSA must have coverage under a high deductible health plan (HDHP). An HDHP is a consumer-driven health plan that typically offers lower premiums in exchange for higher annual deductibles compared to traditional health plans.

HSAs and HDHPs are subject to certain limitations and requirements regarding contributions, deductibles, and out-of-pocket expenses. Under Section 223 of the Internal Revenue Code, these limitations and requirements may be adjusted for inflation on an annual basis. IRS Revenue Procedure 2011-32 provides the adjusted amounts for calendar year 2012, as outlined below.

HSA Contribution Limits

For calendar year 2012, the annual HSA contribution limit for individuals with self-only HDHP coverage is $3,100. The limit for individuals with family HDHP coverage is $6,250.

HDHP Minimum Required Deductibles

The minimum required deductibles have not changed from the 2011 amounts of $1,200 for self-only coverage and $2,400 for family coverage.

HDHP Out-of-Pocket Maximum

The 2012 maximum annual limit on out-of-pocket expenses (including items such as deductibles, co-payments, and co-insurance, but not premiums) for self-only coverage is $6,050 and $12,100 for family coverage.

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