Interim Guidance Issued On Group Health Insurance Reporting For W-2s
Recently, interim guidance on the who, what, when and how for W-2 reporting of group health insurance was issued. And it wasn’t as bad as we feared! In fact, some of the more complicated areas to report have been delayed until further guidance is issued.
Background
The Affordable Care Act of 2010 provided for the mandatory reporting of the aggregate cost of applicable employer-sponsored health coverage to all their employees. This was initially required on each employee’s Form W-2 beginning on or after January 1, 2011. Previous guidance already made 2011 Form W-2 reporting voluntary with required reporting scheduled for the 2012 Form W-2 that will generally be issued in January of 2013.
Notice 2011-28, issued March 29, 2011, provides interim guidance to assist employers in completing the Form W-2 and relief from some of the filing requirements, and is applicable until further guidance is issued. The guidance is in a very detailed question and answer format with examples to make clear the obligation for most employers.
The amounts reported on the Form W-2 are purely informational. Neither this notice nor any additional guidance that is contemplated will cause otherwise excludable employer-provided health care coverage to become taxable to employees.
Who Must Report?
All employers that provide applicable employer-sponsored coverage must include this information on Form W-2. This includes federal, state and local government entities, churches and other religious organizations, and employers that are not subject to COBRA continuation requirements. As with most rules, there are a couple of exceptions, including plans maintained by federal, state and local government entities whose plans primarily cover members of the military and their families and federally recognized Indian tribal governments, even if those plans include civilians of such entities.
Also excluded from reporting the cost of coverage are employers who file fewer than 250 W-2s and W-2s issued to retirees or those not receiving compensation.
What Is Employer-Sponsored Coverage?
A group health plan that is considered an employer-sponsored plan (including a self-insured plan) is one that is contributed to and provided by an employer (including a self-employed person) or employee organization to provide health care to the employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families. It also includes on-site medical clinics.
The employer may rely upon a good faith application of a reasonable interpretation of the statutory provisions and applicable guidance in determining their employer-sponsored plans.
What Must Be Reported?
The aggregate cost of applicable employer-sponsored coverage must be reported on the Form W-2. This is the total cost of coverage under any group health plan made available to an employee by an employer — excludable from the employee’s gross income or would be excludable if it were employer-sponsored coverage.
The aggregate reportable cost 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 the cost through pre-tax or after-tax contributions. For instance, coverage paid for an adult child over the age of 26 would be paid with taxed dollars. This coverage is included along with coverage paid by the employer that is not included in the employee’s income. Another example would be for excess reimbursement to highly compensated employees that is included in gross income.
However, there are exceptions for certain coverage that need not be reported:
• Amounts contributed to any Archer MSA.
• Amounts contributed to any health savings account (HSA).
• Any employee salary reduction amount to a health flexible spending arrangement (FSA). However, it does include employer flex credits or contributions made to a heath FSA in certain circumstances. See Employer Flex Credits below.
• Cost of coverage under a health reimbursement arrangement (HRA).
• Long term care coverage.
• Coverage described in IRC Section 9832(c)(1), similar to accident or disability income insurance—to name a few. The exception is for on-site medical clinics.
• Coverage under a separate policy, certificate or contract of insurance for dental or vision care. However, the employer must report the cost of dental or vision care coverage that is integrated into a group health plan.
• Coverage described in IRC Section 9843(c)(3), in the vein of specified disease or indemnity insurance, the payment for which is not excludable from gross income and for which a deduction under regulation 1621 is not allowable.
• Coverage for a terminated employee who requests his W-2 before the end of the calendar year.
• Cost of coverage provided under a multi-employer plan.
• Cost of coverage provided under a self-insured group health plan that is not subject to any federal continuation coverage requirements (as a church plan) including COBRA, ERISA or Public Health Service Act and the temporary continuation coverage requirement under the Federal Employees Health Benefits program.
• Coverage provided by the federal government, the government of any state or political subdivision thereof, or any agency or instrumentality of any such government, under a plan maintained primarily for members of the military and their families.
Employer Flex Credits to a Cafeteria Plan
The amount of the health FSA for a cafeteria plan year equals the amount of the employee salary reduction plus any optional employer flex credits that the employee applies to the health FSA. In determining the aggregate reportable cost, the amount of the health FSA is reduced (but not below zero) by the employee’s salary reduction election.
If the amount of the salary reduction for all qualified benefits in a cafeteria plan elected by an employee equals or exceeds the amount of the health FSA for the plan year, the employer does not include the amount of the health FSA for that employee in the aggregate reportable cost. However, if the amount of the health FSA for the plan year exceeds the salary reduction elected by the employee for the plan year, then the amount of that employee’s health FSA minus the employee’s salary reduction election for the health FSA must be included in the aggregate reportable cost.
As you can imagine, this provision makes reporting a little more onerous. The employer is not looking at coverage on a global basis, but on individual elections to the cafeteria plan. Here’s an example:
Let’s say an employee makes a $2,000 salary reduction election for several benefits, including $1,500 to the health FSA, for a cafeteria plan calendar year. In this example, the employer offers a flex credit of $1,000. Therefore, the cost of qualified benefits for the employee is $3,000 (salary reduction of $2,000 plus $1,000 provided by the employer). In this scenario, none of the health FSA amount is taken into account for purposes of determining the aggregate reportable cost because the employee’s salary reduction exceeds the amount of the health FSA election.
Here’s another example. An employee makes a $700 salary reduction election for the health FSA and the employer matches the employee’s salary redirection with an additional $700 for the health FSA. The amount of the employee’s health FSA is $1,400 and exceeds the salary reduction election of $700 for the plan year. In this scenario, the employer must include the $700 flex credit in determining the aggregate reportable cost.
Who Reports Which Costs?
There are many instances in which an employee works for more than one employer during the year or terminates with an employer. The question then arises concerning which costs should be reported.
In general, those receiving employer-sponsored coverage will have information reported on their W-2. An employee of multiple employers during the year will have his cost of coverage reported on each W-2 received and a terminated employee’s coverage can be prorated for just the cost of coverage received while employed or can include COBRA payments after termination.
Related employers with a common paymaster will detail the aggregate reportable cost of the coverage provided to that employee by all the employers for whom it serves as the common paymaster.
Basically the same rules apply to both predecessor and successor employers unless the successor employer follows the optional procedure and issues one Form W-2. The successor can report wages paid to the employee during the calendar year by both the predecessor employer and the successor employer. Under this circumstance, the successor employer should report the aggregate reportable cost of coverage provided by both employers and the predecessor employer must not report the cost of coverage it provides.
Costs are determined on a month-by-month basis for employees beginning or terminating coverage during the year or for employees who change coverage during the year. Even when costs change during the year, such as when rates are not calculated on a calendar-year basis, the reportable amounts are the aggregate of the monthly or partial-month costs. It is also reasonable for the employer to prorate the reportable costs for the calendar year.
Methods of Calculating the Cost of Coverage
An employer may apply any reasonable method of reporting the cost of coverage provided under a group health plan using one of the following methods:
1. The COBRA applicable premium method that satisfies the requirements under IRC Section 4908B(f)(4) can be utilized for reporting the cost of coverage for a fully-insured plan.
2. Alternatively, a premium charged or modified COBRA premium calculation can be used.
• “Premium charged” method may be used only for an employer’s fully insured plan and would be the actual premium charged by the insurer.
• “Modified COBRA premium” method involves a plan where the employer subsidizes the cost of COBRA. If the actual premium charged by the employer to COBRA qualified beneficiaries is equal to the COBRA premium in a prior year, the employer may use the COBRA premium in the prior year as the reportable cost for the current year. In other words, both the employer and the employee costs toward the COBRA premium would be reported.
3. A “composite rate” refers to premiums that are the same dollar amount regardless if the employee elects single or family coverage or if there are different types of coverage such as self only, family or self plus one and family coverage. The employer may calculate the same reportable coverage for the single class or all the different types under the plan for which the same premium is charged to the employees, provided this method is applied to all types of coverage provided under the plan.
An employer is not required to use the same method for every plan, but must use the same method with respect to a plan for every employee receiving coverage under the plan. These are methods—not to be construed as reporting COBRA premiums actually being paid or provided by the employee or employer.
And remember, the employer need not report COBRA premiums paid after termination of employment—this is optional.
How Is the Cost of Coverage Reported?
The cost of coverage is reported on each employee’s W-2 in box 12 using code DD. And when transmitting the W-2 figures to the Internal Revenue Service (IRS), the combined total is not included on the Form W-3, “Transmittal of Wage and Tax Statements.”
See the 2011 Form W-2 and instructions at: www.irs.gov under “Forms and Publications.”
When Is Reporting Required?
Original guidance slated employers to begin this reporting requirement on the 2011 Form W-2. However, previous relief afforded employers an extra year to comply. Employers must include the aggregate cost of their group health insurance for calendar years starting after December 31, 2011 (this is the 2012 W-2 that is generally issued in January of 2013). Of course, employers may begin to comply with the 2011 W-2 if their procedures are already in place.
Still More to Come
The Form W-2 reporting guidance is both technical and lengthy. In addition, certain provisions of this interim guidance only provide transition relief. In other words, new rules are yet to come. In fact, further guidance may limit the availability of some or all of this transition relief. So let’s take a look at what’s to come in the way of exclusions:
• HRA reporting coverage.
• Forms W-2 provided to terminated employees before the end of the year.
• Multiple employer plans.
• Dental and vision plans.
• Self-insured plans not subject to COBRA.
• Employers who annually file fewer than 250 Forms W-2.
These items are waiting for further guidance and have not yet received a blanket exception for all times but will continue until further guidance is issued.
We can look forward to more directives on W-2 reporting to plug some of the holes in this guidance. If you would like to read the entire notice or send comments to the IRS about this interim guidance, go to www.irs.gov/pub/irs-drop/n-11-28.pdf.
The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.
