Readers brought up some good comments about my Thursday column on the provision in the Affordable Care Act that requires most employers to begin reporting the cost of employer-provided health care on their W-2 forms, starting with W-2 forms issued for 2012.
The cost, reported in Box 12 with the code DD, includes both the employer and employee share of health insurance premiums for the year. It might or might not include dental and vision care premiums depending on how the employer packages benefits.
Some employers were exempt from the requirement for 2012 W-2s including those who filed fewer than 250 W-2s in 2011.
The reporting does not create any new tax liability; it’s for informational purposes only (although many think Congress might attempt to tax at least some of it). The reporting requirement is supposed to help employees appreciate and understand the value of their health benefits.
In my column, I said the employee pays no income tax on the amount reported in Box 12 and that employees pay their share of premiums with pretax dollars.
While that’s true in most cases, there are exceptions.
If employees cover a domestic partner or same-sex spouse, the value of the partner/spouse’s coverage (less any after-tax payments made by the employee) is generally added to their income and they pay federal tax on it. The cost of the spouse/partner’s coverage is included in the DD amount, but the reporting does not create any additional tax. (Taxation of partner/same-sex spouse benefits at the state level varies.)
And while many employees get to pay their share of health insurance premiums with pretax dollars, many don’t.
Section 125 plans
If an employer sets up a 125 plan, employees can pay for health care premiums with pretax dollars. This plan, also called a cafeteria plan, is named after the section of the tax code that lets employees pay for a variety of benefits with pre-tax dollars if their employer sets one up. Employers can set up a premium-only 125 plan that shelters just health care premiums.
If the employer does not set up a 125 plan, employees pay their premiums with post-tax dollars.
The vast majority of employees working at large companies (100 workers and up) get to pay for health care with pretax dollars, according to a 2008 report by Mathematica Policy Research.
These plans are much less common at smaller companies, even though 125 premium-only plans are simple to implement, have minimal filing obligations and lower the cost of health insurance for employees, the report says.
“Employees do not enroll in a 125 plan,” says Carol Malenka, a principal with consulting firm Mercer. “They typically receive open enrollment information before the start of a plan year asking them to select their benefit options. Those materials generally state that the payment for the employee’s share of the premium for coverage will be deducted from the employee’s paycheck on a pretax basis.”
Employee paychecks typically indicate whether amounts deducted for health insurance and other benefits are pretax. If you’re not sure, ask your employer.
And if your employer doesn’t offer a 125 plan, suggest it.
Exemptions
Some employers are exempt from the new reporting requirement, such as the military and Indian tribes. Another group of plans and employers covered by “transition relief” did not have to provide this information on W-2 forms for 2012, and won’t until the IRS provides additional guidance. This includes employers that issued fewer than 250 W-2 forms in 2011, multi-employer plans, Health Reimbursement Arrangements and a few others.
For more information, see the IRS QA at http://tinyurl.com/bbn9kej.
Kathleen Pender is a San Francisco Chronicle columnist. Net Worth runs Tuesdays, Thursdays and Sundays. E-mail: kpender@sfchronicle.com Blog: http://blog.sfgate.com/pender Twitter: @kathpender
Article source: http://www.sfgate.com/business/networth/article/Health-care-premiums-sometimes-taxed-4245604.php