Reporting Employer-Provided Health Coverage in Form W-2
Starting in tax-year 2011, the Patient Protection and Affordable Care Act (“ACA”, P.L. 111-148, as amended) required employers to report the value of the health insurance coverage they provide employees on each employee’s annual Form W-2. However, to provide employers the time they needed to make changes to their payroll systems or procedures, the IRS deferred the reporting requirement until January 2013 for large employers (those with more than 250 W-2 form employees), making the reporting optional in 2011 and 2012. IRS Notice 2011-28 provided further relief for smaller employers filing fewer than 250 W-2 forms by making the reporting requirement optional for them at least for 2012 and continuing this optional treatment for smaller employers until further guidance is issued.
The W-2 will indicate the total dollar value of health insurance coverage sponsored by the employer, that is, it will show contributions made by both the employer and the employee. The value is determined using the same methodology used to calculate COBRA premiums. However, if the plan provides for the same COBRA continuation coverage premium for both the individual and the family, the plan would be required to separate individual and family premiums for reporting purposes. This provision does not change the tax treatment of an employer’s contribution toward workers’ premiums; it continues to be available on a pre-tax basis.
Although this information must be included on the W-2, it is not counted as taxable income. It is included for informational purposes only. The amount will not include any amounts contributed to an Archer Medical Savings Account (“MSA”) or Health Savings Account (“HSA”), as these amounts are already required to be listed on the W-2. In addition, the reported amount will not include any salary-reduction contributions to a flexible spending arrangement (“FSA”) made through cafeteria plans.
Reporting Requirements to Show an Individual Has Fulfilled the Individual Mandate Information on Minimum Essential Coverage
Every person (including employers, insurers, and government programs) who provides minimum essential coverage to any individual must provide a return to the IRS. The same person providing coverage must also give this information to every insured person along with contact information.
The return must include:
- the name, address, and tax identification number of the primary person insured and others covered under the policy;
- the period for which each individual was provided with coverage;
- whether or not the coverage is a qualified health plan offered through an exchange and, if so, the amount of any advance payment of any cost-sharing reduction or any premium tax credit;
- for coverage provided through the group plan of an employer, the portion of the premium, if any, paid by the employer; and
- other information required by the Secretary of the Treasury.
Information Provided by Large Employers to the Internal Revenue Service
Large employers (defined as those with more than 50 full-time equivalent employees) must provide a return to the Internal Revenue Service (“IRS”). The employer must also provide its full-time employees the specific information included in the return for that individual, along with contact information.
As prescribed by the Secretary, the return must include:
- the name, date, and employer identification number of the employer;
- a certification as to whether the employer offers its full-time employees (and dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan;
- the length of any waiting period, months coverage was available, and monthly premiums for the lowest cost option;
- the employer’s share of total allowed cost of benefits (i.e., the percentage of covered benefits paid for by the plan);
- the number of full-time employees, and the name, address and tax identification number of each full-time employee; and
- additionally, an offering employer must provide information about the plan for which the employer pays the largest portion of the costs (and the amount for each enrollment category).
The Secretary of the Treasury will work to coordinate this requirement with other similar requirements, and an employer may enter into an agreement with a health insurance issuer to provide necessary returns and statements.
Certification of Exemption from Individual Mandate Provided by the Exchange
An exchange must grant a certification attesting that an individual is exempt from the individual mandate or from the penalty because (1) there is no affordable qualified health plan available through the exchange or the individual’s employer, or (2) the individual meets the requirements for any other such exemption from the mandate or penalty. The exchange must provide the Secretary of the Treasury with the names and the taxpayer identification number for each of these individuals.
Reporting Requirements of Medical Loss Ratio for Insurers
In broad terms, a medical loss ratio (“MLR”) measures the share of enrollee premiums that health insurance companies spend on medical claims, as opposed to other non-claims expenses such as administration or profits. Historically, a number of states, as the primary regulators of health insurance, have had their own MLR requirements, which they use to evaluate companies and compare health plans. Private entities, such as stock and bond analysts and lenders, also use MLRs when assessing the financial performance of health insurers.
General Information about MLR
In general, the higher a plan’s MLR, the more value a consumer is receiving (i.e., the more each dollar of premiums paid goes toward health benefits and not towards overhead). The MLR is based on a health plan’s overall performance, however, not on individual experience. It is an aggregate measure that in general terms compares the benefits paid to aggregate premiums.
Section 1001 of the ACA imposes a new federal, minimum MLR requirement on fully funded health plans, which are plans where insurance companies assume the full risk for medical expenses incurred. Each year that these insurance companies do not meet MLR standards established by ACA for individual, small group, and large group policies, they must issue rebates to policyholders. The ACA MLR requirement allows insurers to add certain quality improvements to the health benefits calculation, while letting companies disregard certain taxes, fees, and other expenses when calculating non-claims expenses. The MLR requirement is intended to provide “greater transparency and accountability around the expenditures made by health insurers and to help bring down the cost of health care.”
The ACA MLR provisions took effect in calendar year 2011. The Department of Health and Human Services (“HHS”) announced in July 2012 that based on 2011 performance, insurers covered by the law would be required to issue about $1.1 billion in rebates to 12.8 million individuals by August 1, 2012. About 80 million people were covered by insurance plans subject to the MLR standards in 2011. Of that total, about 66.7 million were insured by companies that met the MLR standards, and 12.8 million, or 14%, were covered by companies that did not.
MLR Reporting Requirements under ACA
The ACA MLR standards require that covered insurers in the individual and small group markets meet a minimum MLR of 80%. For insurers that sell large group plans, the minimum MLR is 85%. The higher MLR requirement for the large group market accounts for economies of scale; in other words, it’s more efficient to sell insurance to a large company that will offer coverage for many individuals and families than it is to have to market a product to one individual at a time, or to firms that cover a smaller group of individuals. Thus, the higher MLR standard for large companies reflects their assumed lower administrative costs.
For purposes of calculating the MLR, the ACA defines large group policies as policies sold to employers with more than 100 workers, and small group policies as those up to and including 100 workers. Individual policies can be policies bought through an insurance agent or broker, or through an association that is not part of a larger group policy. Once health insurance exchanges are established in 2014, an individual plan could be one purchased through an exchange.
In addition, MLR reporting requirements exclude premiums and claims experience of newly introduced health insurance offerings, under certain circumstances.
Timeline for Compliance
Under ACA, health insurers were required to provide their first MLR reports to the HHS by June 1, 2012, detailing financial activity for 2011. Each insurer covered by the law must report aggregated activity within each state for the three market segments: large group, small group, and individual policies. If a group policy covers workers in more than one state, the activity is recorded in the state where the policy is issued. Going forward, the ACA requires annual reports by June 1 of the year following the calendar year on which the MLR calculation is based. The rules to implement the ACA MLR policies allow penalties to be imposed on companies that do not comply with reporting, auditing, rebate, or other requirements, equal to $100 per entity per affected individual each day the insurer is out of compliance.
State Reporting Requirements to HHS and Treasury
- Verification of eligibility
- Reporting on exchange operations
- Certification of Qualified Health Plans
- Reporting related to Medicaid
Each state is required to report information to HHS and the Treasury for verification of eligibility. Potential data points:
- Social Security # (for data linkages)
- Date of Birth
- Household Income (“MAGI”)
- Citizenship/Immigration Status
- Family Size (tax definition)
Required Electronic Data Matching for Eligibility Verification:
- State Wage Information Collection Agency
- Social Security Administration (“SSA”)
- Other social services programs
- Federal Data Hub
- Public Assistance Reporting Information System (“PARIS”)
Employers should consider the above information when assessing current healthcare plans and making changes to comply with new regulations. Due to the nature of these changes and the uncertainty of the future of health care reform, companies are advised to seek legal counsel at an early stage in the process when handling such issues.