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Do I have to report the pre-tax AFLAC accident insurance premiums amount in Box 12 with Code W?

I purchased AFLAC accident insurance through my employer last year. In order to be able to deduct the premiums on a pre-tax basis, my employer set it up as a Cafeteria Section 125 plan. The amount of premiums I paid is listed in Box 12 with code W.  However, TurboTax is calling it an HSA and saying that I will be liable for 6% tax if I don't withdraw the money. But it's a premium - there is no money to withdraw. TT is also asking about an HDHP (which I don't have). My employer verified with Quickbooks (our payroll service) that how this is set up on the employer's end is correct. What do I do? Do I have to report the amount of the premiums in Box 12?


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6 Replies

Do I have to report the pre-tax AFLAC accident insurance premiums amount in Box 12 with Code W?

Your payroll service is incorrect.

The code W is used ONLY for contributions by your employer plus by you through payroll deduction to an HSA, which requires a High Deductible Health Plan (HDHP).

TurboTax thinks it is an HSA because that is the only purpose code W is used for. Have your employer look at the W-2 instructions (note that these are the instructions to the employer on how to complete the form):

"Code W—Employer contributions to a health savings account (HSA). Show any employer contributions (including amounts the employee elected to contribute using a section 125 (cafeteria) plan) to an HSA[emphasis mine]. See Health savings account (HSA)." See page 20 at https://www.irs.gov/pub/irs-pdf/iw2w3.pdf

Yes, HSAs are sometimes funded by a Sec 125 plan, but this AFLAC policy is NOT an HDHP and therefore the premiums should not be listed this way (with the code of W).

My guess is that this would normally appear in box 14 on the W-2.

Do I have to report the pre-tax AFLAC accident insurance premiums amount in Box 12 with Code W?

I have the same exact situation as the original poster: Aflac accident policy through employer, premiums paid via pretax contribution through my employer, reported on my W2 in box 12 with code W. I understand that the W2 isn't correct but what am I supposed to do for this year's filing? Will I have to enter this as an HSA and pay the 6% tax liability even though I don't have an HSA and then try to convince my employer they did it wrong and they need to amend my W2 so I can file an amended return? Thank you in advance for any help
abaptista
Returning Member

Do I have to report the pre-tax AFLAC accident insurance premiums amount in Box 12 with Code W?

What did you end up doing?  I have this same problem this year!

BillM223
Expert Alumni

Do I have to report the pre-tax AFLAC accident insurance premiums amount in Box 12 with Code W?

@abaptista

 

I suggest that you make another pass at your payroll people to explain to them that the use of code W in this case is wrong. 

 

A Health Savings Account is a unique financial instrument that is well defined in IRS Pub 969 on page 2: "A Health Savings Account (HSA) is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must be an eligible individual to qualify for an HSA."

 

Did you employer help you set up such an account? If so, ask them where it is, and then note that the account belongs to YOU, not your employer, and that they have no control over it outside of possibly making some contributions to it.

 

The instructions for the W-2, W-3 (quoted in the thread above) clearly state that code W is only for use for contributions to an HSA.

 

The fact that contributions to an HSA can be part of a Section 125 plan does not justify using code W.

 

If your employer refuses to correct your W-2, then I suggest you take the following steps:

 

1. When you enter your W-2 into TurboTax, don't enter the code W or its corresponding dollar amount at all.

2. This will make your return correct in the sense that you will not have a form 8889 attached, since you don't have an HSA.

3. Keep detailed copies of these comments with your W-2 in your tax files in case the IRS asks, as they may when they see that your copy of the W-2 does not match the copy that the company sent them.

 

It is not common for me to suggest that you alter your W-2, but if you don't, your return will be materially wrong, so I view this as the lesser of two evils.

 

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abaptista
Returning Member

Do I have to report the pre-tax AFLAC accident insurance premiums amount in Box 12 with Code W?

Thanks Bill!  I checked in with my employer who then consulted ADP who reported that most companies follow this same method.  The amount is minimal, but I want to don't want to unnecessarily have my submission not tie to what my employer submitted simply because TurboTax cannot accommodate for this cafeteria plan and automatically generates additional forms that I can't seem to delete (and even after trying to delete they reappear).

 

I spoke to multiple agents on the TurboTax support lines for over two hours now and no resolution.  I may just need to give in and either remove that amount or hire an accountant.

Do I have to report the pre-tax AFLAC accident insurance premiums amount in Box 12 with Code W?

@abaptista 

 

Although tax season has come and gone, I wanted to reiterate that your payroll department is mistaken in showing premiums paid to an Aflac policy in Box 12 of your W-2 with a code of W.

 

You said, " ADP ... reported that most companies follow this same method." Based on my experience in answering thousands of HSA questions here on the TurboTax support forum, very few companies report premiums for Aflac policies with a code of W in Box 12 - and the ones that do are mistaken.

 

Please read the following where I add more links that demonstrate my conclusion.

 

The issue is whether premiums paid by or through the employer for a fixed indemnity health plan can be considered contributions to an HSA (health savings account), and therefore be reported on the employee’s W-2 in box 12 with a code of W.

 

What is a fixed indemnity health plan? It is – in the words of Aflac, one of the best-known suppliers of fixed indemnity health plans – “[s]upplemental insurance [which] is additional coverage that you can use to help with the out-of-pocket expenses that may not be covered by your major medical insurance. Have you ever had expenses not covered by your major medical plan? That’s where Aflac comes in.” See https://www.aflac.com/what-we-do/default.aspx

 

In other words, a fixed indemnity health plan pays the policyholder a “fixed” amount for each covered event, without regard to the expense incurred by the policyholder. “Normal” health insurance reimburses the policyholder based on the expense incurred by the policyholder.

 

On the other hand, an HSA is “a trust created or organized in the United States as a health savings account exclusively for the purpose of paying the qualified medical expenses of the account beneficiary, but only if the written governing instrument creating the trust meets the following requirements…” (See Section 223(d)(1) of the US Tax Code at https://www.law.cornell.edu/uscode/text/26/223).

 

A trust is created under the laws of the state in which the taxpayer resides. In the case of an HSA, the trust is generally created (depending on the laws of the state) when the HSA is initially funded.

 

Clearly, a fixed indemnity health plan like Aflac is NOT a trust organized under the laws of the state in which the taxpayer resides, but is – in Aflac’s own words - “insurance”.

 

How are contributions to an HSA made by or through an employer reported?

 

“You must report all employer contributions (including an employee's contributions through a cafeteria plan) to an HSA in box 12 of Form W-2 with code W.” See page 11 of 2020 General Instructions for forms W-2 and W-3 - https://www.irs.gov/pub/irs-pdf/iw2w3.pdf.

 

Code W—Employer contributions to a health savings account (HSA).

Show any employer contributions (including amounts the employee elected to contribute using a section 125 (cafeteria) plan) to an HSA.” See page 20 of 2020 General Instructions for forms W-2 and W-3 - https://www.irs.gov/pub/irs-pdf/iw2w3.pdf.

 

How are premiums for health plans paid by or through an employer reported?

 

Aflac itself states that premiums paid by or through the employer for certain Aflac policies should be reported in box 12 using code DD on the W-2. See https://www.aflac.com/health-care-reform/key-issues/w2-reporting-of-employer-sponsored-health-care.a.... This is consistent with the IRS instructions found in 2020 General Instructions for forms W-2 and W-3 - https://www.irs.gov/pub/irs-pdf/iw2w3.pdf  on page 21:

“Code DD—Cost of employer-sponsored health coverage. Use this code to report the cost of employer-sponsored health coverage.”

 

This appears to refer to Aflac policies that are part of the employee compensation package.

 

However, many employers also offer optional benefits under the umbrella of Section 125 in the U.S. Tax Code. In this case, the Aflac coverage is optional, because the employee is free to select which benefit that he/she wants of which an Aflac fixed indemnity policy may be one.

 

Section 125 benefits are either not reported on the W-2 or are optionally reported in Box 14 on the W-2 with a category for the benefit (generally, something like “SEC125”). There is no required description for categories in Box 14. If a category appears in Box 14 of the employee’s W-2 that the employee does not understand, he/she should ask the employer what the category refers to.

 

Note the language above: “Show any employer contributions (including amounts the employee elected to contribute using a section 125 (cafeteria) plan) to an HSA.” Some employers are apparently confused by the language in this paragraph. They read this as saying that ALL Section 125 premium payments are reported in Box 12 with a code of W. But, clearly, the language of the IRS instructions refers ONLY to contributions to an HSA being reported in Box 12 with a code of W.

 

In summary, fixed indemnity health policies such as from Aflac are not HSAs (Health Savings Accounts) under the terms of Section 223 of the U.S. Tax Code; therefore, premiums paid for such health policies must not be reported on the employee’s W-2 in box 12 with a code of W. Instead, such premiums should be reported either in Box 12 with a code of DD or reported in Box 14 with a category such as “SEC125” or not reported at all, depending on the policy.

 

Employers who mistakenly enter the premiums for fixed indemnity health policies in Box 12 with a code of W will cause problems for employees if they are audited, and in many cases, will cause the employee’s tax return to be incorrectly generated in most tax software.

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