Employer Funded Health FSA W2 Reporting Guidance – HRA and HSA Excluded

Health FSA W2 Reporting

Health FSA funds are generally not subject to W2 or 1099 reporting requirements for employee salary reduction amounts when used to pay eligible expenses for groups that file less than 250 W2s. There are some ACA/ObamaCare caveats, however, so we felt it necessary and prudent to provide this guidance on Health FSA W2 Reporting.

For groups with more than 250 W2s to file,  the amount of a employer funded health FSA contributions must be included in the aggregate reportable cost on the Form W-2.  So only employer funded Health FSA contributions (not employee salary reductions) are reported on W2, and only for employers who file more than 250 W2s are required to report.

See: https://www.irs.gov/irb/2012-04_IRB/ar10.html#d0e1798

Reminder IRS Notice 2012-9 W2 Reporting for Health FSA Employer Contributions for Groups with more than 250 W2s

The Internal Revenue Service (IRS) released Notice 2012-9 that restates and amends IRS guidance related to W-2 requirements for reporting employer-sponsored group health plan coverage. Notice 2012-9 replaces Notice 2011-28 that was issued in June 2011 (see our Compliance Update published on June 22, 2011 for more information).

Notice 2012-9 includes a thorough explanation of numerous W-2 reporting requirements related to coverage costs; however, this Compliance Update is limited to coverage of the guidance as it applies to health reimbursement arrangements (HRAs) and flexible spending accounts (FSAs).

Background

The 2012 W-2 reporting requirement under Section 605(a)(14) of the Internal Revenue Code was added to the Code by the Patient Protection and Affordable Care Act of 2010. It is for informational purposes only. The intention is to provide details related to the aggregate cost of applicable employer-sponsored coverage and does not make such coverage taxable.

Excluded Plans

Plans that are not subject to the W-2 reporting rules include (but are not limited to):

Coverage provided by the government under a plan that is maintained primarily for members of the military and their families
Dental and vision plans that are considered excepted benefits under HIPAA portability rules
HRA plans: 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 employee’s Form W-2
Health savings accounts (HSAs) and Archer medical savings accounts (MSAs)

Cost of Coverage for Health FSAs

The amount of a health FSA must be included in the aggregate reportable cost on the Form W-2, but only if the amount of the health FSA is more than the salary reduction elected by the employee for the plan year (i.e., the amount an employee contributes to their FSA during the plan year) as noted in example 1 below.

Example 1: An employer’s cafeteria plan offers permitted taxable benefits (including cash) and qualified nontaxable benefits, including a health FSA. The plan permits contributions only through employee salary reduction elections, and does not offer any employer contributions. An employee makes a $2,000 salary reduction election for several qualified benefits under the plan, including a health FSA for $1,500. For purposes of reporting on Form W-2, the amount of the health FSA is not included for purposes of determining the aggregate reportable cost.

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 2).

Example 2: 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 election ($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.

However, if the employee’s health FSA amount is greater than the aggregate salary reduction amount (for all qualified benefits), 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 the Form W-2 (see example 3).

Example 3: 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, which makes the total amount of the health FSA $1,400 for the plan year. The amount of the employee’s health FSA ($1,400) exceeds the employee’s annual salary reduction election ($700) for the plan year. In this instance, the employer must include $700 in determining the aggregate reportable cost.

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

Application

Notice 2012-9 guidance generally applies to 2012 Forms W-2 (i.e., forms for calendar year 2012 that are given to employees in January 2013), and this notice is applicable until further guidance is issued. Employers that decide to comply voluntarily with reporting coverage costs on 2011 Forms W-2 can use this guidance.

All employers providing applicable employer-sponsored coverage during the 2012 calendar year must report coverage costs. This includes federal, state, and local government entities; churches and other religious organizations; and employers that are not subject to the COBRA continuation coverage requirements under Code Section 4980B, to the extent such employers provide applicable employer-sponsored coverage under a group health plan.

However, Notice 2012-9 provides transition relief to certain employers that provide specific types of employer-sponsored coverage. For example, employers that file fewer than 250 Forms W-2 for the 2011 calendar year will not be subject to the reporting requirements for 2012 Forms W-2.

In addition, Notice 2012-9 clarifies that tribally chartered corporations that are wholly-owned by a federally recognized Indian tribal government are exempt from the reporting requirements.

For employees who terminate within the calendar year, employers can use a reasonable reporting method for reporting coverage costs. The reporting method must be consistent for all terminated employees, but employers are not required to provide Forms W-2 before the end of the calendar year during which the employees were terminated.

If the IRS decides to make changes to the Form W-2 reporting requirements in the future, such guidance will apply only to calendar years beginning at least six months after the changes are issued.

Additional Information

Notice 2012-9 includes an extensive list of questions and answers related to reporting requirements and calculating costs, and the full text is available on the IRS website.

Employers should carefully review the updated details to ensure compliance with all applicable rules and requirements.

From:  Coenexis