(787) 900-9956 San Juan, PR • Atlanta, GA
The employer-shared responsibility requirements of the Affordable Care Act (“ACA”) do not apply in Puerto Rico. Basically, since Puerto Rico is not part of the U.S. for purposes of Code § 7701(a)(9), the taxes imposed by Code § 4980H do not apply to an employer’s Puerto Rico operations. For a host of business and employee relations reasons, however, the vast majority of large and mid-size employers doing business on the Island offer some sort of healthcare benefits to their local employees, particularly full-time employees.
Technically, the local ACA exemption also extends to the W-2 reporting requirements of ACA § 9002; Inclusion of Cost of Employer-Sponsored Health Coverage on W-2. To help local employees gain a better understanding of the value of their employee benefits, the Puerto Rico Department of the Treasury (commonly known by its Spanish name as “Hacienda”) has administratively adopted a local equivalent of such ACA rule. Specifically, employers with operations in Puerto Rico must report in box 5 of the local Form W-2 the aggregate cost of their healthcare benefits to Puerto Rico employees. A copy of the most recent version of the local Form W-2, which is officially known as Form 499R-2/W-2PR, may be found online at: https://hacienda.pr.gov/sites/default/files/documentos/comprobante_de_retencion_2023_rev._06.23_informativo.pdf
Calculating Reportable Amount
The healthcare costs reported in box 5 must be determined in accordance with IRS Notice 2012-9 (https://www.irs.gov/pub/irs-drop/n-12-09.pdf). Accordingly, such costs are generally equal to the premiums that would have been charged under COBRA for the same healthcare coverage that the employee received during the year. A few alternative methods for calculating the reportable amount are also available. The IRS has prepared a chart listing the specific healthcare items that must, cannot, and could be included in running these calculating, which is available online at: https://www.irs.gov/affordable-care-act/form-w-2-reporting-of-employer-sponsored-health-coverage .
The IRS chart can safely be used for calculating the amount reportable in the local Form W-2, with the caveat that, since 2018, local tax laws do not provide for, or grant favorable tax treatment on, health Flexible Spending Arrangements (FSAs). Health Reimbursement Accounts (HRAs) and Health Savings Accounts (HSAs) are locally allowed (PRIRC §§ 1032.08(b) and 1081.04, respectively, but not FSAs (PRIRC § 1032.06). Thus, Puerto Rico employees should not be allowed to participate in FSAs, as that could result in an income tax assessment for the underpayment of local income tax on wages. In fact, the local tax rules require that the employee share of healthcare premiums be paid with after-tax dollars.
Employer-Provided Healthcare is Tax-Free
Reporting healthcare costs within the local Form W-2 does not mean that such costs are taxable wages to the employee or subject to payroll tax withholding at source. On the contrary, the cost of employer-provided healthcare coverage and the value of medical benefits or services that an employee receives under the employer’s healthcare plan are tax-free to the employees and excluded from the wages for purposes of payroll tax withholdings (PRIRC § 1032.08 for local income tax and Code §§ 3121(a)(2) and 3306(b)(2) for FICA and FUTA, respectively). Therefore, this W-2 reporting is for informational purposes only and does not impact the tax liability of local employees.
W-2 Filing
By January 31 of the immediately following year, the employer must electronically file the local Form W-2 with Hacienda through Hacienda’s online portal, SURI (https://suri.hacienda.pr.gov/_/). W-2s cannot be filed on paper with Hacienda. By February 7 of the same year, the employer must provide a copy of the W-2 to the corresponding Puerto Rico employee (PRIRC § 1062.01(n)(2)). Failure to file or provide the W-2 by the relevant due date results in a $500 penalty per violation.
