As part of federal health care reform legislation enacted in 2010, employers generally will be required to report the aggregate cost of employee health plan coverage on Forms W-2 (W-2) issued for 2012 (i.e., W-2s furnished to employees in January 2013). This alert summarizes transition guidance the IRS recently issued for 2012. Please note these rules may change for future years.
What Is The Purpose of the New Health Plan Cost Reporting?
Ostensibly, the purpose of the new health plan cost reporting is to provide employees with comparable information regarding the cost of their health care coverage. However, many believe the reporting rules are really intended to make employees more aware of the value of their health plan benefits before health care reform's "Cadillac plan" excise taxes take effect in 2018. In any case, the new W-2 reporting requirement is for informational purposes only and does not impose taxation on any health plan coverage.
What Are The Requirements of The New Health Plan Cost Reporting?
For 2012, unless an exemption discussed below applies, employers are required to report the aggregate cost of all "applicable employer-sponsored" health plan coverage provided to (1) an employee, and (2) any person covered by the plan because of his or her relationship to the employee. Generally, applicable employer-sponsored health plan coverage includes any coverage under a group health plan that is made available to employees. The reporting requirements apply to W-2s furnished in January 2013 (for calendar year 2012) with the applicable health plan costs reported in Box 12 using code DD.
Reportable costs include both employer and employee contributions, even if the coverage is not taxable to the employee. Employers must use all available information as of December 31st of the calendar year, and any election or notification the employer receives in the subsequent calendar year is not to be reflected in the calculations even if it has a retroactive effect (e.g., a divorce notice or other change in family status). Health plan cost reporting does not trigger a W-2 reporting requirement for individuals who normally would not otherwise receive a W-2 (e.g., retirees or other former employees who receive no other compensation).
The IRS has specified that the following benefits generally are excluded from health plan cost reporting: long-term care, accident or disability income insurance or supplemental liability insurance; health reimbursement arrangement benefits; stand-alone dental and vision plan coverage; multiemployer plan coverage; and amounts contributed to a health savings account or medical savings account. Moreover, the cost of coverage for an employee assistance program, wellness program or on-site medical clinic need not be reported, provided the employer does not charge a premium for the coverage to a qualifying beneficiary under any applicable federal continuation coverage requirements. Finally, amounts related to a health care flexible spending account funded solely by employee salary reductions are not reportable. However, if an employer contributes to or provides flex credits that can be used towards the health care flexible spending account, then the employer must report any amounts that exceed the employee's salary reduction contributions for the plan year.
Given the breadth of what constitutes a reportable or non-reportable cost, the IRS created a helpful chart outlining these requirements that is available here.
How Are The Health Plan Costs Calculated?
The reportable cost for employees who receive health plan coverage is the sum of the reportable costs for each period (such as a month) during the year as determined under the methods used by their employers. To calculate the reportable health plan costs, employers can select from several methods as long as the method chosen is consistently applied to all employees in the plan. The IRS has outlined three permissible methods:
- COBRA Applicable Premium Method - Employers may use the applicable COBRA continuation premium, excluding any 2% COBRA administrative fee;
- Premium Charged Method - Employers with insured group health plans may use the premium charged by the insurer; and
- Modified COBRA Premium Method - Employers that subsidize COBRA coverage or determine COBRA premiums for the current year by using prior year COBRA premium information generally may use a reasonable good faith estimate of the COBRA applicable premium to report the cost on the W-2s.
Which Employers Are Currently Exempt?
The reporting rules generally apply to all employers that provide applicable employer-sponsored coverage. However, until further transition guidance is issued, the following employers are exempt:
- Federally recognized Indian tribal governments and employers that are tribally chartered corporations wholly owned by a Federally recognized Indian tribal government;
- employers that filed fewer than 250 W-2s for the previous calendar year (for example, employers that filed fewer than 250 W-2s for calendar year 2011 would not be required to report the cost of health plan coverage on W-2s for calendar year 2012); and
- employers that maintain self-insured plans that are not subject to COBRA continuation coverage.
Additionally, if an employee terminates employment during the year and requests an early W-2, the employer is not required to include the health plan cost on the requested W-2.
Other Miscellaneous Items
The recent IRS guidance provides additional clarification on certain miscellaneous items, including:
- Third party sick pay providers that furnish a W-2 to employees are not required to report health plan costs. However, employers are still required to report health plan costs even if the W-2 includes sick pay or if a third party sick pay provider is providing a separate W-2.
- An employer may include otherwise excluded amounts for current exemptions (e.g., health reimbursement arrangements, multiemployer plans, employee assistance programs, etc.), provided those amounts constitute employer-sponsored coverage and are calculated using a permissible method described above.
- If a plan provides benefits that constitute applicable employer-sponsored health care coverage and also provides benefits that do not constitute applicable employer-sponsored health care coverage (e.g., a long-term disability program that provides certain health care benefits), then an employer may use any reasonable allocation method to determine the reportable cost of the portion of the plan that provides applicable employer-sponsored health care coverage. However, where the portion of the plan that provides a reportable benefit is incidental compared to the portion of the plan that provides non-reportable benefits, an employer is not required to report either portion of the cost. On the flip side, the entire cost of the coverage may be reported if the non-reportable benefits are incidental compared to the reportable health care benefits.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.