2013: W-2s Must Now Include Value of Employer-Sponsored Benefit Plans

By: Matthew Fox

January 2013 marked the beginning of new challenges for employers that issue more than 250 W-2s.[1]  Under the Patient Protection and Affordable Care Act (the “Act”), these employers will be required to report to employees the total cost of their coverage under an employer-sponsored group health insurance plan.[2]  Employees often forego cash compensation in favor for employer benefits, including health insurance plans.  Beginning this year, employees will know just how much their health insurance benefit costs.  Although health benefits are still tax free,[3] labor unions and employer groups think these benefits could easily be taxed in the future now that this value must be reported to the government.[4]

Box 12, Code DD on this year’s W-2 will show the cost of both employee and employer health care costs.[5]   This number is supposed to reflect both the cost paid by the employer as well as the part that is paid by the employee.[6]  The IRS states “[t]his reporting is for informational purposes only and will provide employees useful and comparable consumer information on the cost of their health care coverage.”[7]  Often, employees have no idea how much their employer pays for health insurance.  Employees think this benefit is free, and are unaware of its high costs to the employer.  The Kaiser Family Foundation’s 2012 annual survey illustrated just how costly health insurance benefits are to the employer.[8]  Premiums for employer-sponsored health insurance averaged $5,615 a year for single coverage and $15,745 for family coverage.[9]  These costs have increased 25 percent and 30 percent respectively over the last five years.[10]  The tax-free treatment of employer-sponsored group health insurance plans is the largest in the tax code.[11]  The government foregoes approximately $180 billion per year by providing this tax subsidy.[12]

Peter R. Orszag, director of the Congressional Budget Office when the Act was passed, told lawmakers, “[t]he economic evidence is overwhelming, the theory is overwhelming, that when your firm pays for your health insurance, you actually pay through reduced take-home pay. The firm is not giving that to you for free.”[13]

If an employer fails to comply with the new W-2 reporting requirements, they may be subject to penalties of $200 per W-2 form, up to a maximum of $3 million.[14]

One potential problem with disclosure is the requirement only illustrates the cost of health insurance to the employer, not the value.[15]  This may penalize an employer that has negotiated low premiums for a high value plan.  An employee may look to work for an employer that has the highest health insurance costs, believing it will translate to a higher value plan, with better coverage.  As incentives drive the economy and the world, the unintended effect of this new requirement may lead to wasteful spending on healthcare plans.  Employers may begin to feel the need to spend copiously on health care insurance in order to attract the best talent.[16]

[1] W-2 Reporting, UnitedHealthcare, http://www.uhc.com/united_for_reform_resource_center/health_reform_provisions/w_2_reporting.htm (last visited Feb. 21, 2013).

[2] Form W-2 Reporting of Employer-Sponsored Health Coverage, IRS (Aug. 4, 2012), http://www.irs.gov/uac/Form-W-2-Reporting-of-Employer-Sponsored-Health-Coverage.

[3] Id.

[4] Robert Pear, To Open Eyes, W-2s List Cost of Providing a Health Plan, N.Y. Times, Jan. 30, 2013, at A12.

[5] Form W-2 Reporting of Employer-Sponsored Health Coverage, supra note 2.

[6] Pear, supra note 4.

[7] Form W-2 Reporting of Employer-Sponsored Health Coverage, supra note 2.

[8] The Kaiser Family Foundation, Employer Health Benefits: 2012 Annual Survey, 2012, at 1.

[9] Id.

[10] Id.

[11] Pear, supra note 4.

[12] Id.

[13] Id.

[14] Id.

[16] Id.

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