Now that the Supreme Court has upheld the constitutionality of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “Act”), employers must move forward with implementation. In the coming weeks, we will publish a series of newsletter articles focusing on the changes that most immediately affect employer group health plans and may require immediate attention, especially for employers who have taken a wait-and-see approach in hopes that the Act would be invalidated.
This alert, the third in the series, discusses the Act’s Form W-2 reporting requirements.
Beginning with the Form W-2 issued in January 2013 (i.e., the Form W-2 issued for the 2012 calendar year), employers must report to employees the cost of their employer-sponsored group health plan coverage. This reporting to the IRS is for informational purposes only and is intended to communicate the cost of health care coverage to employees. The IRS previously issued interim guidance on this new reporting requirement in Notice 2011-28. In response to comments on various aspects of the reporting requirement, the IRS issued Notice 2012-9, which supersedes and makes changes to the guidance provided in Notice 2011-28.
What Employers Must Comply?
As a general rule, all employers who provide applicable employer-sponsored coverage during the calendar year must comply. This includes private sector employers, federal, state and local governmental entities, churches and other religious organizations.
The new reporting requirements do not apply to the following:
- Small Employers. Until further guidance is issued, an employer is not subject to the new reporting requirements for any calendar year if the employer filed fewer than 250 Forms W-2 for the preceding calendar year. For example, if an employer filed fewer than 250 Forms W-2 for the 2011 calendar year, the employer would not have to report the cost of health coverage on any Form W-2 issued for the 2012 calendar year.
- Indian Tribal Governments and Certain Tribally Chartered Corporations. Indian tribal governments and, until further guidance is issued, tribally chartered corporations, wholly owned by federally recognized Indian tribal governments, are not subject to the new reporting requirements.
- Third-Party Sick Pay Provider. Generally, employer-sponsored health coverage is not required to be reported on a Form W-2 furnished by a third-party sick pay provider. However, a Form W-2 furnished by the employer to the employee must include the cost of employer-sponsored group health coverage regardless of whether that Form W-2 includes sick pay, or whether a third-party sick pay provider is furnishing a separate Form W-2 reporting the sick pay.
If related employers employ the same employee, but do not use a common paymaster, the employers may either report the cost of employer-sponsored group health coverage on one of the Forms W-2 provided to the employee, or allocate the cost among the employers that concurrently employ the employee using any reasonable method of allocation.
Coverage that Must be Reported
Employers are required to report the aggregate cost of employer-sponsored coverage, with a number of exceptions. The types of coverage that must be reported include the following:
- Medical plan coverage.
- Employer contributions to health flexible spending accounts (health FSAs). Notice 2012-9 provides guidance regarding how to determine employer contributions if the health FSA is offered through a cafeteria plan and there are employer flex credits.
- Coverage under an employee assistance program (EAP), wellness program, or on-site medical clinic if the coverage is provided under a program that is considered a group health plan and if the employer charges a COBRA premium for COBRA coverage. Note, these programs are typically group health plans subject to COBRA. Now would be a good time to review these programs and make sure they are in compliance.
- Specified disease or illness insurance (e.g., cancer policies) and hospital indemnity or other fixed indemnity insurance if coverage is paid by the employer or by the employee on a pre-tax basis. Note, if the employer is trying to fall within the voluntary plan exception under ERISA, the better practice is to pay premiums with employee after-tax contributions outside of the cafeteria plan. Now would be a good time to review these programs and make sure the employer continues to comply with the voluntary plan exception requirements.
- Dental and vision coverage, unless the coverage is considered “limited scope” dental or vision coverage. Limited scope dental or vision coverage is either: (1) offered through a separate policy, certificate or contract of insurance; or (2) is not an integral part of the major medical plan, meaning that employees must have the right to decline dental or vision benefits and, if they do elect dental or vision benefits, they must contribute toward the cost of coverage, even if the amount is minimal.
- Retiree medical coverage, but only for individuals for whom the employer is otherwise required to issue a Form W-2 for the calendar year.
The cost of employer-sponsored group health coverage does not need to be reported if the employer is not otherwise required to issue a Form W-2 (e.g., retiree receiving no compensation) or, until further guidance is issued, if an employee terminates employment mid-year and requests a W-2 before the end of the year.
Coverage that is Not Reported
The following types of coverage are not considered employer-sponsored group health coverage and, as a result, are not reported on the Form W-2:
- Limited-scope dental and vision coverage (explained above), until further guidance is issued.
- Specified disease or illness insurance and hospital indemnity or other fixed indemnity insurance if coverage is completely paid by the employee on an after-tax basis.
- Coverage under an EAP, wellness program, or on-site medical clinic if the employer does not charge a COBRA premium for COBRA coverage or is not subject to COBRA, until further guidance is issued.
- Salary reduction contributions to a health FSA.
- Coverage under a health reimbursement arrangement, until further guidance is issued.
- Contributions to a health savings account or Archer MSA (these are reported elsewhere on the Form W-2).
- Long-term care coverage.
- Coverage that is considered an “excepted benefit” - accident or disability income insurance; supplemental liability insurance; liability insurance, including general liability insurance and automobile liability insurance; workers’ compensation or similar insurance; automobile medical payment insurance; credit-only insurance; and other similar insurance coverage under which benefits for medical care are secondary or incidental to other insurance benefits.
- Self-insured group health plan coverage that is not subject to any federal continuation coverage requirements (e.g., a church plan that is self-funded), until further guidance is issued.
- Coverage under multiemployer plans, until further guidance is issued.
- Federal, state or local government coverage under a plan maintained primarily for members of the military.
Calculating the Cost of Coverage
The aggregate reportable cost is determined on a calendar year basis and is the sum of the reportable cost for each period (such as a month) during such year. The reportable cost generally includes:
- Both the portion of the cost paid by the employer and the portion of the cost paid by the employee, regardless of whether the employee paid for that cost on a pre-tax or after-tax basis, although special rules apply to health FSAs; and
- The cost of coverage for the employee and any person covered by the plan because of a relationship to the employee (e.g., spouse, children, domestic partner), including any portion of the cost that is includable in an employee’s gross income, such as coverage for a domestic partner who is not a tax dependent.
For insured plans, the cost of the coverage will equal the premium charged by the insurer for that employee and his family members.
For self-funded plans, the cost of the coverage will generally equal the COBRA premium assuming the COBRA premium is calculated in good faith compliance with a reasonable interpretation of COBRA’s statutory requirements. However, a modified COBRA premium is also available under certain limited circumstances. If the employer subsidizes the cost of coverage, the employer may determine the cost of coverage using a reasonable good faith estimate, if such estimate is used for determining the subsidized COBRA premium. If the COBRA premium charged by the employer in the current year is equal to the COBRA premium in the prior year, the employer may use the COBRA premium in the prior year as the reportable cost in the current year.
An employer may use composite rates (e.g., employee and family rates), provided that the employer is consistent.
Until further guidance is issued, the employer may choose whether or not to report the cost of COBRA coverage received by an employee who terminates employment during the calendar year. However, it must do so uniformly for all employees who terminate employment during the same calendar year.
Notice 2012-9 also clarifies that employers may, at their option, include the cost of coverage under programs not required to be reported under temporary relief, such as the cost of coverage under a health reimbursement arrangement.
Calculating Reportable Cost When a Program Provides Both Employer-Sponsored Group Health Coverage and Other Coverage
If a benefit provides both employer-sponsored group health coverage that is subject to the reporting rules and other benefits that are not subject to the reporting rules, an employer may use any reasonable allocation method to determine the cost of the portion of the program providing employer-sponsored group health coverage. If the group health benefits are “incidental” in comparison to the other benefits, the group health benefits do not have to be reported. Similarly, if the other benefits are incidental in comparison to the group health benefits, the employer may, at its option, include the other benefit in the reportable cost.
Reflecting Cost and Coverage Changes
Mid-year changes in the cost of employer-sponsored group health coverage must be reflected when the plan has a non-calendar plan year or when an employee makes a mid-year election change. However, any election or notification that is made in the subsequent calendar year that has a retroactive effect on coverage in the earlier year is not required to be included in the calculation of the reportable cost for the earlier calendar year.
To comply with this new requirement, employers should consider taking the following actions:
- Determine which benefits are considered employer-sponsored health coverage subject to the reporting requirements.
- Determine how to calculate the aggregate reportable cost of employer-sponsored health coverage (e.g., decide whether to use composite rates).
- Make sure systems are in place to track employee coverage and coordinate with finance, payroll and human resources staff and vendors to ensure accurate reporting.
- Report the cost of employer-sponsored group health coverage on each employee’s Form W-2, in box 12, using code DD, beginning with the Form W-2 issued in January 2013 (i.e., the Form W-2 issued for the 2012 calendar year).