On March 29, 2011, the Internal Revenue Service (IRS) issued additional guidance on how the value of group health plan coverage should be reported on Forms W-2. This guidance generally applies to the filing of the 2012 Forms W-2 (required to be furnished to employees in January 2013) but can be relied on by employers who voluntarily include the cost of coverage on the 2011 Forms. Amid rumor and speculation that this new reporting requirement will somehow render such coverage taxable, the IRS is clear that the purpose of this reporting requirement is merely to assist employees in comparing the cost of health care coverage.
Notice 2011-28 provides guidance in a Q&A format. The following are some of the highlights to which employers should pay special attention:
- General Reporting Requirement. Under the Health Care Reform (officially named the Patient Protection and Affordable Care Act and the related Health Care and Education Reconciliation Act of 2010), employers are required to report on Forms W-2 the aggregate cost of applicable employer-sponsored coverage provided to employees for the calendar year. The reporting requirement applies generally to both the employee and employer portions of the cost (regardless of whether the employee portion is pre-tax or after-tax). Coverage provided to retirees and other former employees is not subject to this reporting obligation if the employer is not otherwise required to issue such individual a Form W-2.
- Transition Relief for Certain Employers. Until future guidance is issued, an employer is not subject to this reporting requirement for any calendar year if the employer was required to file fewer than 250 Forms W-2 for the preceding calendar year. In addition, employers which are federally recognized Indian tribal governments are not required to comply with this reporting obligation. It is important to note that all other employers, including governments, churches and even those employers not subject to the COBRA continuation coverage requirements, are required to report the cost of health coverage on the 2012 Forms W-2. While it is possible this relief may be limited by future guidance, such guidance will only apply prospectively.
Drinker Biddle Note: For example, employers who filed fewer than 250 2011 Forms W-2 will not be required to report the cost of health coverage on the 2012 Forms W-2 generally furnished to employees in January 2013.
- COBRA Coverage Reporting Must Be on a Reasonable Basis. For employees that terminate employment during the calendar year, the employer has the option to report just the cost of coverage while the employee was performing services or to also include the cost of continuation coverage. The only requirement is that the reporting be consistent for all employees who terminated employment during the calendar year.
- Exceptions to Reporting Employer-Sponsored Coverage. The reporting obligation will apply to any group health plan coverage (determined applying a good faith, reasonable interpretation of the COBRA regulations defining group health plan) unless there is a specific exception. The following types of employer-sponsored coverage do NOT need to be reported: (i) long-term care; (ii) most HIPAA excepted benefits described in section 9832(c)(1) of the Internal Revenue Code (Code) (e.g., accident only coverage, workers compensation); (iii) vision and dental coverage that are not integrated with a group health plan that is otherwise subject to the reporting requirement; (iv) independent specified disease and hospital or other fixed indemnity coverage as described in section 9832(c)(3) of the Code; (v) amounts contributed to an Archer MSA; (vi) amounts contributed to a health savings account; (vii) the amount of any salary reduction election to a flexible spending arrangement (see below for additional detail on health care FSAs); (viii) self-insured group health plans that are not subject to any federal continuation coverage requirements; and (ix) coverage provided by certain government entities or maintained primarily for members of the military and their families.
Further, an employer's contributions to multiemployer plan coverage or a health reimbursement arrangement are not required to be included in the aggregate cost of coverage reported. Therefore, if the only employer-sponsored coverage is under a multiemployer plan or health reimbursement arrangement, then no reporting is required.
Drinker Biddle Note: Although on-site medical clinics are generally a HIPAA excepted benefit, the new IRS guidance is consistent with the statutory provisions of Health Care Reform that provide that on-site medical clinics are not exempt from the W-2 reporting obligation. Unfortunately, the new IRS guidance does not provide additional detail about when such clinics are considered group health plans and how to value the coverage provided by clinics if they are. Employers that provide an on-site medical clinic should engage appropriate employee benefits counsel to determine whether such clinics rise to the level of being a "group health plan" subject to the W-2 reporting requirements.
- Cost of Coverage for Dependents Must Be Reported. The employer must include the cost of coverage under the employer's group health plan, not only of the employee, but also any other person covered under such plan because of a relationship to the employee -- regardless of whether such cost is includible in the employee's gross income. This includes domestic partners and adult children who do not meet the definition of a dependent under the Code.
- Cost Calculation Methods Available to Employers. Employers can calculate the cost of coverage under a group health plan, which must be determined on a calendar year basis, by using a good faith, reasonable application of one of the following: (i) the COBRA applicable premium method (e.g., self-insured plans can estimate the cost of providing coverage, determined on an actuarial basis); (ii) the premium charged method (the actual premium charged by the insurer for the coverage provided); or (iii) the modified COBRA premium method — if the employer subsidizes the cost of coverage, the employer can estimate the COBRA applicable premium OR if the employer uses the prior year method for establishing COBRA premiums (actual current year premium is equal to the applicable premium for the prior year), the employer can use the prior year's applicable premium amount as the reportable cost for the current year. For those employers using a composite rate (e.g., only one coverage class regardless of the number of dependents covered or there is a single rate for all coverage levels), the composite rate may be used to establish the cost of coverage provided.
Drinker Biddle Note: Under the IRS guidance, the same method is not required for each plan sponsored by the employer. However, the same method must be consistently applied for every employee receiving coverage under a particular plan. In addition, the cost of coverage reported must reflect increases or decreases in costs (e.g., where the COBRA cost changes in the middle of the calendar year, as would be the case for plans that do not operate on a calendar year basis), and take into account changes in coverage level (e.g., employee only vs. employee + spouse).
- Employers That Offer a Health Flexible Spending Arrangement (FSA) Through a Section 125 Cafeteria Plan May Need to Report a Portion of The Cost. An employer does not report the amount of the health FSA for an employee if the amount of the salary reduction elected by the employee for all qualified benefits offered by the employer equals or exceeds the amount of the health FSA for the plan year. However, if the amount of the health FSA exceeds the salary reduction elected by the employee, then the difference between the amount of the employee's health FSA and the amount of salary reduction elected by such employee must be reported.
Example: An employer provides a 100 percent match on any employee salary reduction for a health FSA. An employee electing a salary reduction of $1,000 receives a $1,000 match from the employer, resulting in a total health FSA amount of $2,000. Because the $2,000 total exceeds the employee's salary reduction of $1,000, the difference of $1,000 must be reported.
Please note that these highlights are to help employers gain a general understanding of what will need to be reported on the Forms W-2 and the information needed to comply with the reporting requirements. Although employers will have until January 2013 (when the 2012 Forms W-2 will be due) to include this information on the Form W-2, employers should act now to review their calculation methodology, establish appropriate payroll administration (including system updates and procedures for data capture and tracking), and develop employee communication materials about the new reporting obligation.
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.