The Patient Protection and Affordable Care Act (the Healthcare Act), requires employers to report on Form W-2’s issued for 2012 the aggregate cost of applicable employer-sponsored health coverage. On March 31, 2011, the IRS issued Notice 2011-28,1 which provides interim guidance in "Q&A" format on the scope and mechanics of this reporting requirement. Notably, Notice 2011-28 clarifies that the new reporting requirement, which will be mandatory for many employers2 beginning with respect to health coverage provided during calendar year 2012,3 is informational only and does not cause otherwise excludable employer-sponsored health coverage to become taxable. The key components of Notice 2011-28 are discussed below.
Scope and Mechanics of Reporting Requirement
Employers that provide health coverage under a "group health plan" (including government entities, churches and other religious organizations) will generally be required to report the aggregate cost of applicable employer-sponsored health coverage to employees using code "DD" in Box 12 of Form W-2. However, employers will not be required to issue a Form W-2 just to report the cost of employer-sponsored health coverage if a Form W-2 is not otherwise required (for example, a W-2 would not be required for retirees who receive only non-taxable medical benefits from the employer). In addition, employers issuing fewer than 250 Forms W-2 for 2011 will not be subject to the reporting requirement until the Form W-2s issued for 2013 and, as a result, will have an additional year to prepare.
Applicable Employer-Sponsored Coverage
Applicable employer-sponsored coverage is broadly defined under the Healthcare Act and includes most employer provided group health plans and other group health care coverage if such coverage is excludable from income (or would be excludable if it were provided by an employer). However, the following types of plans and insurance are not "applicable employer-sponsored coverage" and, as such, are not covered by the reporting requirement:
- Long-term care
- Accident, disability, liability, workers’ compensation, automobile medical payment, credit-only and certain similar coverage (whether through insurance or otherwise)
- Dental and vision coverage programs (unless integrated into a group health plan that provides these additional benefits)
- Certain coverage for specified diseases or illness, hospital indemnity or other fixed indemnity insurance
- Health Reimbursement Arrangements, Health Savings Accounts and Archer MSAs
- Salary reduction contributions to a flexible spending account (but employer flex credits applied to a health flexible spending account are subject to reporting)
- Self-insured group health plans that are not subject to COBRA or any other federal continuation coverage requirements
- Government plans maintained primarily for members of the military
- Multi-employer (union) plans
Calculating the Cost of Coverage
Employers must report the "aggregate cost" of applicable employer-sponsored coverage, which includes amounts paid by the employer and/or the employee for the cost of providing coverage to the employee and his or her dependents under all covered plans. Notice 2011-28 provides three alternate methods for calculating the reportable cost of applicable employer-sponsored coverage:
- COBRA Applicable Premium Method. The COBRA applicable premium method, which may be used with respect to any type of plan, allows the employer to report the cost equal to the amount the employer charges for COBRA continuation coverage, as determined under the COBRA rules.
- Premium Charged Method. The premium charged method, available only with respect to insured group health plans, requires the employer to determine the reportable cost based on the premium actually charged by the insurer for that employee’s coverage (e.g., for family or self-only coverage) for that period.
- Modified COBRA Premium Method. The modified COBRA premium method may be used with respect to a plan for which the employer either (i) subsidizes the cost of COBRA coverage or (ii) charges premiums to COBRA qualified beneficiaries based on the COBRA premium for a prior year. Under this method, an employer that subsidizes the cost of coverage will report the full subsidized COBRA premium and an employer that charges an actual premium based on the prior-year COBRA premium will report the applicable prior-year COBRA premium as the reportable cost.
Employers may use different calculation methods for different plans, but must apply a single method consistently with respect to all participants in a particular plan. With respect to coverage provided for a period after an employee has terminated employment, an employer may apply any reasonable method of reporting the cost of coverage, as long as the method is used consistently for all employees in the plan who terminate during the plan year.
The reportable cost for a plan must be determined on a calendar year basis, even if the plan uses a different period for determining the COBRA applicable premium. For plans charging composite premiums (i.e., plans with a single coverage class or a uniform rate applied to multiple coverage classes), the composite premium, calculated in accordance with an available method, may be used for all participants subject to the composite premium.
What Employers Should Do Now
Employers should begin to assess which of their group health plans will constitute applicable employer-sponsored health coverage subject to reporting on Form W-2. In addition, employers should assess the best method(s) for calculating aggregate cost under each plan and ensure that they have the resources in place to do so. Finally, employers should discuss these reporting requirements with their payroll administrators to ensure that payroll will be prepared to properly disclose and code the healthcare costs on Form W-2 issued for 2012.