Last week, the Internal Revenue Service (Service) issued Notice 2011-28 which provides interim guidance regarding the informational reporting to employees of their employer-sponsored group health plan coverage (the Notice). The informational reporting requirement was added to the Internal Revenue Code of 1986 (Code) by the Affordable Care Act last year. Under this new requirement, employers must provide to each employee who is receiving coverage from a group health plan sponsored by the employer information regarding the cost of such coverage. Employers are required to comply with the informational reporting requirement beginning with 2012 Forms W-2 (i.e., forms required for the 2012 calendar year that employers must furnish to employees in January 2013).
Code Section 6051(a)(14) requires the aggregate cost of applicable employer-sponsored coverage to be reported on a Form W-2. The amount is reported in Box 12, using Code DD. This dollar amount is for informational purposes only, and the amount reported does not affect the existing general rules regarding whether the coverage is excludable from gross income. Beginning with the 2012 calendar year, all employers that provide applicable employer-sponsored coverage to their employees in an applicable calendar year are required to comply with the informational reporting requirement. However, an exception exists for small businesses. Until further guidance is issued, an employer is not required to comply with the informational reporting requirement for a calendar year, if the employer was required to file less than 250 Forms W-2 for the preceding calendar year. In addition, exceptions exist for self-insured plans that are not subject to federal COBRA continuation coverage laws and plans maintained primarily for military members and their families.
The Notice confirms that employers must only report the aggregate cost of applicable employer-sponsored coverage to an individual for whom the employer is otherwise required to issue a Form W-2. This means that employers are not required to send a Form W-2 to individuals who are enrolled in employer-sponsored health coverage, but who do not otherwise receive a Form W-2 for the applicable year. This may include retirees, surviving spouses and dependents, COBRA participants and other terminated employees with continuation coverage. However, if an individual has compensation to report on a Form W-2, then the employer must report the aggregate cost of employer-sponsored coverage for that year. For example, if an individual receives severance pay during the year and is enrolled in COBRA, the aggregate cost of employer-sponsored coverage would be reported on the individual’s Form W-2.
Applicable Employer-Sponsored Coverage
Applicable employer-sponsored coverage (Employer Coverage) is coverage under any group health plan that is excludable from the employee’s gross income or would be excludable if it were Employer Coverage. This is a broad definition that includes many types of Employer Coverage, such as major medical coverage (both self-insured and insured), mini-med coverage, on-site medical clinic coverage and employer flex credits to a health flexible spending arrangement (FSA). However, the Notice provides for a number of exceptions to the reporting requirements. The following are not required to be reported as Employer Coverage -
- Long term care coverage or insurance
- Stand alone dental and vision (self-insured and insured)
- HIPAA-excepted insurance for a specified disease or illness, but only if it is paid on an after-tax basis
- Any amount contributed to a Health Savings Account (HSA) or Archer MSA
- Any salary reduction amount contributed to a health FSA by an employee (however, employer flex credits to a health FSA are required to be reported as noted above)
- Health Reimbursement Arrangement (HRA) coverage
- Other HIPAA-excepted coverage, such as AD&D and disability (however, on-site medical clinic coverage is reportable as noted above)
Aggregate Cost of Employer Coverage
The total cost of all Employer Coverage must be included in the aggregate reportable cost (subject to the exceptions noted above). This means that all types of Employer Coverage are added together and reported on the Form W-2 as one amount. For example, if the employee has both major medical and on-site medical clinic coverage, both coverages are aggregated and reported on the Form W-2. Further, the Notice provides that the aggregate reportable cost includes the following -
- Both the employee and employer portions of the Employer Coverage, regardless of whether the employee pays for the coverage on a pre-tax or after-tax basis.
- The cost of Employer Coverage for all individuals covered by the group health plan because of the employee (e.g., spouse, domestic partner, children and other individuals).
- The cost of Employer Coverage that is imputed as additional wages for individuals who are not Federal income tax dependents.
The Notice provides that the employer may calculate the reportable cost under a group health plan using one of the following four methods -
- COBRA Applicable Premium Method: Under this method, the reportable cost for a period equals the COBRA applicable premium under Code Section 4980B(f)(4) for that coverage for that period. The employer is required to follow the generally applicable requirements of COBRA used in establishing COBRA continuation coverage rates.
- COBRA Premium Charged Method: Fully insured plans may use the premium charged method, which equals the total premiums charged by the insurer for that employee’s coverage.
- Modified COBRA Premium Method: Employers may also use the modified COBRA premium method with respect to a plan, if it subsidizes the cost of COBRA or if the actual premium charged by the employer to COBRA participants for each period in the current year is equal to the premium calculated under the COBRA applicable premium method for each period in the prior year.
- Composite Rates: Special rules exist for employers who charge a single composite rate for all coverage tiers or if there is only one coverage tier for the group health plan.
Because the COBRA rules themselves are not entirely clear on how to calculate COBRA rates, employers appear to have some flexibility in determining the aggregate cost of Employer Coverage, as long as the employer follows a good faith interpretation of the rules. Further, if an employee commences, changes or terminates Employer Coverage during the year, the reportable cost for the employee for that year must take into account the change in coverage. For example, if an employee is enrolled in an HMO and changes to a PPO mid-year or adds a spouse and dependent to the employee’s coverage, those changes must be reflected in the aggregate reportable cost. If the change in coverage occurs during a period (for example, in the middle of a month where costs are determined on a monthly basis), an employer may use any reasonable method to determine the reportable cost for such period, such as using the reportable cost at the beginning of the period or at the end of the period, or averaging or prorating the reportable costs, provided that the same method is used for all employees with coverage under that plan. Last, if an employee commences coverage or terminates coverage during a period, an employer may use any reasonable method to calculate the reportable cost for that period, provided that the same method is used for all employees with coverage under the plan.
Treasury and the Service have requested comments by June 27, 2010, regarding the items addressed in the Notice, and future guidance in the form of proposed regulations or other guidance may revise the rules included in the Notice for calendar years after the 2012 calendar year.