How to Record Employer-Paid Health Insurance: W-2 and Ledger Entries

Recording employer-paid health insurance runs on two tracks. On each employee’s Form W-2, put the aggregate annual cost of their group health coverage in Box 12 with Code DD. In your general ledger, book the employer’s share as Health Insurance Expense when the coverage period runs, and route the employee’s payroll deductions through a withholding liability account that zeros out when you pay the insurance carrier. The Box 12 figure is informational only and doesn’t change taxable wages.¹

Calculating the Amount That Goes on the W-2

The Code DD figure is the total annual cost of the employee’s coverage: the employer-paid portion plus any employee contributions taken through payroll, whether pre-tax or after-tax. The IRS lets you use one of three methods to arrive at that figure.²

COBRA applicable premium method. Use the COBRA premium you would charge a qualified beneficiary for the same coverage, less the 2 percent COBRA administrative fee. Works for insured and self-insured plans.
Premium charged method. Use the actual premium the insurer bills for that employee’s coverage tier. Available only for insured plans.
Modified COBRA premium method. If you subsidize COBRA or base current-year COBRA on a prior year’s cost, use a good-faith reasonable estimate of the true COBRA premium, again less the 2 percent fee.

Self-insured employers using the COBRA method calculate their COBRA-equivalent cost on either a past-cost or actuarial basis. The IRS hasn’t issued detailed regulations for self-insured COBRA calculations, so document whichever reasonable method you use.²

What to Leave Out

Several health-related items stay out of the Code DD total:²

HSA contributions, both employer and employee. These have their own reporting code.
Standalone dental and vision plans. Dental or vision that is integrated into a single medical plan does get included.
Employee salary reductions into a health FSA. Employer FSA contributions above the employee’s salary reduction may need to be included.
Archer MSA contributions.

Where It Appears on the W-2

Report the aggregate cost in Box 12 using Code DD. The amount covers the full calendar year of coverage; for an employee who left mid-year, report only the cost through their last day of coverage.³

The figure is informational. It does not increase taxable wages and does not change any other box on the W-2. The IRS uses it to track the prevalence and cost of employer-sponsored insurance.¹

Small Employer Relief

If your business filed fewer than 250 W-2s for the preceding calendar year, Code DD reporting is optional under transitional relief the IRS first announced for 2012 and has extended indefinitely. That relief remains until the IRS publishes new guidance, and any expansion of the requirement won’t take effect until at least six months after guidance is issued.⁴ At 250 or more W-2s in the prior year, reporting is mandatory. Voluntary reporting below the threshold gives employees a clearer picture of total compensation.

Bookkeeping Entries in the General Ledger

Two entries drive the ledger side: one when payroll runs, one when you pay the carrier.

The Employer’s Share

When the monthly premium invoice arrives, debit Health Insurance Expense for the employer-paid portion and credit Cash if you’re paying now, or Accounts Payable if you’ll pay later. This puts the cost in the month the coverage was active rather than the month the check clears.

The Employee’s Share

During each payroll cycle, the employee’s portion of the premium comes out of the paycheck. Debit Salaries and Wages Payable, which reduces the net check, and credit a Health Insurance Withholding Liability account. That liability sits on the balance sheet until you remit the full premium to the insurer. When you pay the carrier, debit the liability account to clear it and credit Cash.

Keeping employee withholdings in their own liability account makes month-end reconciliation clean and confirms that what you’re deducting from paychecks matches what you send to the insurer.

S-Corporation Shareholder-Employees

Premiums paid for a shareholder who owns more than 2 percent of an S corporation follow a different path. The premiums are deductible by the S corporation, but they must be added to the shareholder-employee’s taxable wages in Box 1 of the W-2. They do not appear in Box 12 with Code DD the way rank-and-file coverage does.⁵

These premiums are exempt from Social Security and Medicare taxes if the coverage is offered under a plan covering a class of employees. Include the premium amount in Box 1, but leave it out of Boxes 3 and 5.⁵ The shareholder can then claim the self-employed health insurance deduction on their personal return, which offsets the income tax hit. The S corporation must actually pay the premiums (or reimburse the shareholder) and report the amount as W-2 compensation for the deduction to work.

Medical Loss Ratio Rebates

When an insurer issues an ACA Medical Loss Ratio rebate, the accounting treatment depends on how employees paid their share.⁶

If employees paid with after-tax dollars, treat the rebate as a purchase price adjustment. Reduce Health Insurance Expense for the employer’s portion, and pass the employee’s share back as a premium reduction. Neither piece is taxable to the employee.

If employees paid on a pre-tax basis through a Section 125 cafeteria plan, the employee portion becomes taxable however you distribute it. A future premium reduction lowers the employee’s salary reduction and raises taxable wages by the same amount. A cash payout is taxable income and subject to employment taxes. Either way, run the employee’s share through payroll so the correct taxes are withheld.⁶

Filing, Deadlines, and Penalties

W-2s go to the Social Security Administration, not the IRS. Most employers file through the SSA’s Business Services Online portal.⁷ Electronic filing is mandatory if you file a combined total of 10 or more information returns (W-2s, 1099s, and other forms) during the calendar year.⁸

The deadline for furnishing W-2s to employees and filing them with the SSA is January 31 following the close of the tax year.⁹ For tax year 2026, January 31, 2027 falls on a Sunday, pushing the deadline to Monday, February 1, 2027.

Per-form penalties for late or incorrect W-2s due in 2026:¹⁰

Corrected within 30 days: $60 per form.
Corrected after 30 days but by August 1: $130 per form.
Filed after August 1 or not filed: $340 per form.
Intentional disregard: $680 per form, with no annual cap.

Annual maximum caps apply to the first three tiers, and businesses averaging $5 million or less in gross receipts get lower caps.

How Long to Keep the Records

Retain employment tax records, including W-2 copies and the payroll data behind them, for at least four years after the tax is due or paid, whichever is later.¹¹ For the health coverage figures specifically, that means holding premium invoices, enrollment records, payroll registers, and your Code DD cost worksheets for at least four years after filing. If the health coverage numbers are ever audited, the insurer billing statements and cost worksheets are what back up the amount you reported.

1
Internal Revenue Service. Reporting Employer-Provided Health Coverage on Form W-2
2
Internal Revenue Service. IRS Notice 2012-9
3
Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3 – Reporting the Cost of Group Health Insurance Coverage
4
Internal Revenue Service. Form W-2 Reporting of Employer-Sponsored Health Coverage
5
Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues
6
Internal Revenue Service. Medical Loss Ratio (MLR) FAQs
7
Social Security Administration. Employer W-2 Filing Instructions and Information
8
Internal Revenue Service. Topic No. 801, Who Must File Information Returns Electronically
9
Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3
10
Internal Revenue Service. Information Return Penalties
11
Internal Revenue Service. Topic No. 305, Recordkeeping