Code DD in box 12 of the Form W-2 is used to record the employer-sponsored health coverage. The purpose of this report is to inform the employees about their health coverage plans provided by the employer.
Failure to comply with this requirement may incur a penalty from the IRS as well.
Let us discuss what is employer-sponsored health coverage and what is code DD in box 12 on the Form W-2.
What is Code DD in Box 12?
Form W-2 is used by employers to report the wages and tax reports to the IRS. Employers report salaries paid to the employees and taxes withheld from them on form W-2.
Box-12 on Form W-2 is a sub-section that has several columns to show different types of information marked by various codes like the Code DD.
The code DD is used to report the employer-sponsored health coverage provided by the employer to its employees.
The Code DD is just an indicator of the relevant column and the sub-section of the form so that employers report it in the correct place.
What is Eligible Employer-Sponsored Health Coverage?
The employer-sponsored health coverage must be reported in compliance with the Affordable Cares Act (ACA) by all businesses.
Small businesses with fewer than 50 employees can also claim tax savings on offering health coverage to their employees. This tax saving is not available for large businesses though.
The Internal Revenue Service (IRS) provides detailed information on the eligibility for employer-sponsored health coverage reporting.
- Group health coverage for employees under a plan offered in a small or large market group.
- A coverage plan offered by a government entity.
- A grandfathered plan is offered in a group market.
- Retiree or COBRA coverage plans
- Self-insurance plans
The Consolidated Omnibus Budget Reconciliation Act (COBRA) defines group health coverage as an insurance plan that covers the health insurance of two or more employees.
Reporting Employer-Sponsored Health Coverage
All types of businesses including not-for-profit entities and public entities must provide group health coverage to their employees.
These entities must report the amount of health coverage to the IRS on form 1095-C and also report the same on Form W-2 of each employee individually.
The amount reported on W-2 is not taxable. It is reported for the information purpose of the employee only.
Employers should identify the amount in box 12 with code DD to highlight the coverage amount. The reported amount should include the portion of the insurance plan covered by the employer and the employee.
Employers are exempted from reporting the health coverage provided to former employees and retirees. Also, they do not need to compile the total amount on Form W-3.
If a business has highly paid individuals with self-insured plans, these amounts should not be reported on W-2 directly.
These amounts should be reported with the employee’s gross income and only the value of the employee’s coverage should be reported in the form w-2.
Some businesses are exempt from reporting employer-sponsored health coverage. For instance, military employees and their family members are reported differently.
Similarly, the IRS offers a transition relief to businesses for reporting health coverage for previous years.
The transition relief was first offered to employers reporting under W-2 of 2012 in the year 2013. The transition relief is also offered to employers for reporting purposes for the years 2014 and 2015.
However, the transition relief is allowed for certain businesses, types of coverage, and situations. (Details below)
Compliance and Penalties
The IRS will levy a penalty on the employer who fails to report the employer’s health coverage as well as on an entity failing to provide health coverage to its employees.
The IRS compliance requirements for employer-sponsored health coverage plans and reporting compliance can be listed below.
Failure to Furnish Penalty
This penalty is levied upon employers who do not comply with IRC 6722 requirements and fail to provide a statement of coverage to their employees.
The penalty for a failure to furnish this record is $280 per employee.
Failure to Report Penalty
The IRC 6721 applies to employers who fail to report their health coverage plans to the IRS. The failure to report penalty per employee is also $280 per employee for the tax year 2022.
4980 H(a) Penalty
An employer will be subject to a penalty of $229.17 monthly 0r $2,750 annually per employee if:
- It does not offer the minimum essential coverage (MEC) to at least 95% of its employees.
- At least one employee received premium tax credit coverage for purchasing coverage through the marketplace.
4980 H(b) Penalty
The 4980 H(b) penalty is for failing to comply with the minimum value (MV) and failure to offer coverage with affordability or both.
The penalty per employee is $343.33 monthly or $4,120 annually.
An employer can receive only one of the 4980 H(a) or 4980 H(b) penalties at one time.
Employer-Sponsored Coverage Types for Reporting on Form W-2
Here are a few commonly used employer-sponsored coverage types that an employer should report, not report, and have the option to report.
|Major Medical Coverage||Report|
|Dental or Vision Plan||Optional|
|Optional Dental or Vision Plans||Optional|
|Health FSA plans are funded by salary deductions||Do Not Report|
|Hospital Indemnity or Specific illness plans||Report|
|Domestic Partner coverage||Report|
|Self-funded plans not subject to COBRA||Optional|
|Accident or Disability income, liability insurance, long-term care, Worker’s compensation, credit-only insurance.||Do Not Report|
|Employers are required to file fewer than 250 Forms W-2 for the preceding calendar year.||Optional|
|Terminated Employees receiving W2s before the end of the tax year||Optional|
These requirements must be fulfilled on Form W-2 box 12 and indicated by Code DD only and do not need to be reported in any other section.
FAQs on Employer-Sponsored Coverage and Code DD of Form W-2
Here are a few frequently asked questions about employer-sponsored health coverage reporting requirements.
Q: Does the Cost of Health Coverage include in the Employee’s taxable income?
No, the reported amount of health coverage is solely for the information of the employees. It does not cost the employee additional taxes.
Q: Which Amount an employer should report?
An employer should report both health coverage amounts. The one paid by the employer and the portion contributed by the employee on W2.
Q: Where should the employer report this amount on Form W-2?
The amount of health coverage insurance plan should be recorded on W-2 box 12 and highlighted by the Code DD.
Q: Should the employer report the health coverage plans for Terminated Employees?
If the employee is terminated during the tax year and is handed over a form W-2, the employer has the option to report it.
However, an employer does not need to report the health coverage for retired employees.
Q: Are there Any Penalties for Failure to Report or Failure to Disclose health coverage for the Employer?
Yes, the IRS imposes a penalty on the employer. The amount is $280 per employee for failure to report to the IRS and also the same penalty for failure to disclose the amount to the employee.
References for Research Work: