The Patient Protection and Affordable Care Act of 2010 added Section 6051(a)(14) to the Internal Revenue Code (IRC), requiring all employers to compile the appropriate information and report on Form W-2 the aggregate cost of “applicable employer-sponsored group health coverage” (without regard to whether the cost is paid by the employer or employee).
For many employers, the reporting obligation is required for the 2012 tax year — that is, it will apply generally to 2012 Form W-2’s furnished in January 2013. It will also apply to any W-2’s issued in 2012 reporting 2012 wages. Reporting this information was optional for 2011 W-2’s.
Qualifying small employers — those required to file fewer than 250 W-2’s for the 2011 calendar year — do not have to comply until the IRS issues additional guidance.
The new requirement calls for informational reporting only — it doesn’t cause excludable benefits to become taxable or change the tax treatment in any way. The purpose of this new W-2 reporting requirement is “to provide useful and comparable consumer information to employees on the cost of their health care coverage.”
Important Next Steps:
- Determine whether you are subject to the new reporting requirements. Are you an exempt “qualified small employer?”
- Determine what information you need to gather.
- Determine how you are going to accumulate the necessary information.
Many group insurance carriers, payroll service providers, and group benefits advisory practices have already or are quickly developing programs to respond to this need for information.
Applicable employer-sponsored group health coverage generally includes any employer-provided group health plan coverage under an insured or self-insured plan that is excludable from the employee’s gross income under IRC Section 106, or would be excluded if the coverage were paid for by the employer. Examples of applicable employer-sponsored coverage include:
- Medical plans,
- Prescription drug plans,
- Dental and vision plans that are part of/or bundled with the employer’s group medical or prescription drug plans,
- Executive physicals,
- On-site clinics if they provide more than de minimis care,
- Medicare supplemental policies, and
- Employee assistance programs (affected by Notice 2012-9 below).
For W-2 reporting purposes, applicable employer-sponsored group health coverage excludes:
- Long-term care,
- Stand-alone dental and/or vision plans,
- HIPAA-excepted benefits — such as accident or disability income insurance, supplemental liability insurance, or workers’ compensation — except for on-site medical clinics,
- Coverage under a hospital indemnity or fixed indemnity plan — or for a specific illness or disease — if offered as an independent, noncoordinated benefit, and
- Government-sponsored plans that provide coverage primarily for members of the military and their families.
In addition, employer or employee contributions to a Health Savings Account (HSA) or employee salary reduction contributions to a Flexible Spending Account (FSA) shouldn’t be included when calculating an employee’s total cost of coverage.
For reporting purposes, employers generally use the same value for all similarly situated employees receiving the same category of coverage. Therefore, a common value would be used for all employees electing single coverage and a different common value would be used for all employees electing family coverage.
If an employee enrolls in employer-sponsored health insurance coverage under multiple plans, the aggregate value, including employer and employee paid premiums, of all such health coverage must be disclosed.
If an employee enrolls in employer-sponsored health insurance coverage under a major medical plan and related/bundled dental and vision plans, the employer is required to report the total value of the combination of all of these health related insurance policies.
Employers should not provide a specific breakdown of the various types of coverage but must only report an aggregate cost.
Notice 2011-28 provided detailed guidance, in a Q&A format, regarding the employers subject to the reporting requirement, types of coverage included, methods for calculating and reporting the cost, and other issues.
To facilitate compliance, the notice provides “transition relief,” indefinitely delaying the effective date for small employers (as described above) as well as for certain types of coverage, including:
- Multiemployer plans,
- Health Reimbursement Arrangements (HRAs),
- Stand-alone dental and vision plans (that is, plans that are not bundled together with a group medical and/or prescription drug plan), and
- Self-insured plans not subject to COBRA or other federal coverage continuation requirements, such as church plans.
Based on comments it received, the IRS issued Notice 2012-9 to modify and expand its earlier guidance. Notable changes include:
- Clarifying that the transition relief for small employers is limited to those required to file fewer than 250 W-2’s in 2011, regardless of whether they file the forms themselves or use an agent.
- Outlining reporting methods for individuals employed by related employers that don’t use a common paymaster.
- Clarifying that an employer should include the cost of a health FSA in reportable costs only to the extent of employer contributions (employee salary reduction contributions are excluded).
- Modifying the transition relief for stand-alone dental and vision plans to provide that they’re excludable from reportable costs if they qualify as HIPAA-excepted benefits – that means that either 1) the benefits are offered under a separate policy, certificate, or insurance contract, or 2) participants have the right to opt out of dental or vision coverage and must pay an additional premium if they accept it.
- Providing that the cost of coverage does not include excess reimbursements of highly compensated individuals that are included in gross income (Notice 2011-28 said they were included) or premium payments or reimbursements included in the income of a greater than 2% shareholder-employee of an S corporation.
Notice 2012-9 also added new guidance on several issues. Highlights include:
- Providing that employers need not include the cost of coverage under employee assistance programs, wellness programs, or on-site medical clinics, so long as they don’t charge COBRA premiums for these benefits.
- Clarifying that, in calculating reportable costs, employers may include the costs of health reimbursement plans, multiemployer plans, or other benefits that aren’t required to be included.
- Outlining cost allocation methods for programs that include both health and nonhealth benefits, such as long-term disability.
- Clarifying that reportable costs need not be adjusted for post year-end elections or notifications (of a divorce during the tax year, for example) that affect the cost of coverage for the tax year.
- Outlining cost allocation methods for coverage periods that straddle two tax years.
- Providing that third-party sick pay providers that furnish W-2’s aren’t required to report aggregate health coverage costs.
- Clarifying that the cost of coverage under a hospital indemnity or fixed indemnity plan – or for a specific illness or disease – need not be reported to the extent an employer merely provides the opportunity for employees to purchase an independent, noncoordinated policy and the employee pays the full amount of the premium with after-tax dollars. If the employer makes a contribution or employees pay with pretax dollars, the cost must be reported.
How We Can Help:
Plante Moran can assist employers in understanding the new W-2 reporting requirements for group health coverage costs and in evaluating the employer's employee benefit plans to determine the information that needs to be compiled and reported on form W-2.
If you have any questions regarding this alert, please contact your Plante Moran client services representative.
The information provided in this alert is only a general summary and is being distributed with the understanding that Plante Moran, PLLC is not rendering legal, tax, accounting, or other professional advice, position, or opinions on specific facts or matters and, accordingly, assumes no liability whatsoever in connection with its use.