Inclusion of Cost of Employer-Sponsored Health Coverage on W-2

The following article was contributed by Jake Lincoln, CPA, located in San Diego, California. You may contact him at Original published date January 8, 2013.
Under the Patient Protection and Affordable Care Act of 2010, employers are required to disclose the aggregate cost of employer-sponsored health insurance coverage provided to their employees on each employee's annual Form W-2. Contributions to Health Savings Accounts and Medical Savings Accounts are not included. This requirement began last year, for all 2011 Form W-2's. This is the second year of this new reporting legislation.

For purposes of this new reporting requirement, "applicable employer-sponsored coverage" means, 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 the Internal Revenue Code Sec. 106. Coverage is treated as applicable regardless of whether the employer or employee pays for the coverage. This does not include coverage for long-term care, accidents, or disability income insurance. Nor does it include coverage that applies to a specific disease or illness. It does include coverage under any group health plan established and maintained by the US Government, the government of any state, or applicable agency.
In the case of qualifying self-employed individuals, coverage under any group health plan providing health insurance coverage will be treated as applicable employer-sponsored coverage if the deduction for the coverage is allowable under IRC Sec. 162(l).

This provision only requires disclosure of the aggregate cost of employer-sponsored health coverage by the employer. It does not require a specific breakdown of the various types of medical coverage. Thus, if an employee enrolls in employer-sponsored health insurance coverage under a medical plan, a dental plan, and a vision plan, the employer must report the total cost of all of these health policies. As stated earlier, this disclosure began with 2011 W-2 reporting.

A person who is a 2% or greater shareholder of an S Corporation is treated as a partner of a partnership for fringe benefit reporting. The IRS has ruled that unless specifically provided otherwise, a partner is not entitled to the exclusion of fringe benefit from income. The value of benefit is included in the income of the partner and may be deductible to the partnership as a business expense.

When an S corporation pays the health insurance premiums for a 2% shareholder who is also an employee of the S corporation, the following rules apply. The S corporation is allowed a deduction under IRC Sec. 162(a) provided the expenses would otherwise be deductible. However, no deduction is allowed for any month in which the taxpayer is eligible to participate in any subsidized health plan maintained by the employer of either the taxpayer or the taxpayers spouse.

The health insurance premium is included in each shareholder-employee's W-2 wages; however, the employee is allowed an offsetting deduction. For the shareholder-employee to claim the deduction, the S corporation must have established a plan providing medical care coverage.

The S corporation is considered as having such a plan if either (1) the S corporation makes the premium payments for a place covering the 2% shareholder-employee, or (2) the shareholder-employee makes the premium payments and is reimbursed by the S corporation. If the shareholder-employee is reimbursed, proof of premium payment must be provided to the S corporation.

Although amounts paid by and S corporation for accident and health insurance covering a 2% shareholder must be included income (Form W-2), in most cases these payments are excluded from wages for FICA purposes.
Please Note: information in this email is for informational purposes only. Pink Payroll is not responsible for decisions made using this information. Please contact your tax professional or Pink Payroll for information that applies to your specific situation.

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