How To Calculate the Cost of Benefits

Contact your payroll vendor first to determine if the vendor already has a system in place to provide the calculations and reporting the cost of employer-sponsored health coverage on Forms W-­2. If you are providing the cost to the payroll vendor, the following information will assist in calculating the cost to report.

The aggregate cost of coverage includes the portion of the cost paid by the employer and the portion of the cost paid by the employee (on either a pre­-tax or after­-tax basis). The cost of coverage is generally determined under the rules for determining COBRA premiums, and the same amount should be reported for employees electing each tier of coverage (for example, the same amount would be reported for all employees electing family coverage). The IRS requires employers to determine cost taking into account the actual period of coverage and any changes in coverage tier during the year.

The regulations describe four methods that can be used for the calculation. The most common method for insured plans is the "Premium Charged Method," which is the premium charged by the insurer for the employee's coverage. This includes the employer and employee portions of the premium. The other methods are the "COBRA Applicable Premium Method," which is COBRA rate for the benefit; "Modified COBRA Premium Method," which can only be used by employers that subsidize the cost; and, the "Composite Rate," which can only be used by employers that charge the same rate to all employees regardless of number of individuals covered by the plan.

Neither American Fidelity Assurance Company nor American Fidelity Administrative Services provides tax or legal advice and, given the complexity of these laws, we always recommend working with your legal counsel on how the laws impact your specific situation.