Summary: The IRS has issued Notice 2012-9, interim guidance for employers on Form W-2 reporting. The Patient Protection and Affordable Care Act (PPACA) requires employers to report the aggregate cost of employer-sponsored health coverage on the employee's W-2. Guidance had previously been issued in October 2010 and April 2011. Responding to comments received on the various aspects of the reporting requirement, this new interim guidance restates and amends previous guidance, and provides some new guidance.
Specifically, the guidance modifies and clarifies provisions on the reporting requirements (or lack thereof) for:
Employers filing fewer than 250 W-2s
Federally recognized Indian tribal governments
Certain related employers not using a common paymaster
Dental or vision plans that are considered HIPAA "excepted benefits"
Amounts that are included in gross income because of tax nondiscrimination issues
The use of a composite rate charged to active employees
Third-party sick-pay providers providing W-2s
The notice provides new guidance on the application of the reporting requirement for:
Employee assistance programs (EAPs), wellness programs or onsite medical centers where a COBRA premium is not charged
The consequences of reporting the cost of coverage for coverage that is not required to be reported because of interim relief (e.g., HRAs)
How to calculate the reportable amount in circumstances where only a portion of the coverage constitutes reportable group health plan coverage
How to calculate the reportable amount in instances where, on or after the end of the calendar year (December 31), the employee notifies the employer of an event (which occurred during the calendar year) that would affect the employee's reportable cost of coverage (e.g., divorce or other change in family status)
How to calculate the reportable amount in instances where a coverage period extends into the subsequent calendar year (e.g., the last payroll period includes December 31 and a few days into the subsequent calendar year)
The guidance also clarifies how the exception for certain hospital indemnity or other fixed indemnity insurance paid for by employees on an aftertax basis is applied for reporting purposes.
Affected Employers: Employers that issue 250 or more W-2s to employees will generally be affected by this guidance.
Timing: Compliance is required beginning with the W-2 that will cover the 2012 tax year (delivered to employees in January 2013). Reporting for years prior to 2012 is optional.
Key Implications: Generally, employer payroll departments and outside payroll vendors will need to begin monitoring and collecting health care cost information for employees receiving a W-2. Those in the benefits administration function will need to coordinate data on the value of the coverage that must be aggregated and reported for each employee who has group health coverage subject to reporting. Several transition rules provide temporary reporting relief for some types of health coverage (e.g., HRAs) and for small employers (those filing fewer than 250 W-2s). The new IRS questions and answers added to the guidance provide additional information for employers.
General Discussion and Observations: The PPACA amended Internal Revenue Code (IRC) Section 6051(a)(14) to require employers to report the aggregate cost of “applicable employer-sponsored coverage” on Form W-2. Applicable employer-sponsored coverage is defined, with certain exceptions, as coverage under any group health plan made available to the employee by an employer that is excludable from the employee’s gross income under IRC Section 106 (or coverage that would be excludable if it were employer-provided coverage within the meaning of Section 106). Exceptions provided under the PPACA include coverage under “a separate policy, certificate or contract of insurance which provides benefits substantially all of which are for treatment of the mouth (including any organ or structure within the mouth) or for treatment of the eye” (i.e., limited scope dental and vision coverage), fixed indemnity plans that are paid by the employee on an aftertax basis, long-term care coverage, workers compensation and certain other types of coverage. The law provides that the aggregate cost of health coverage is determined under rules similar to those used to determine the “applicable premium” under the COBRA continuation rules. The IRS exercised its authority to delay the effective date of this reporting. Thus, reporting is not mandatory for 2011 W-2s, but will be required for 2012 W-2s.
The interim guidance includes eight additional questions and answers, and should be read carefully by anyone responsible for preparation of Form W-2, as well as those who may need to coordinate the group health plan cost information needed for this new annual task. A brief discussion of existing requirements and some highlights of the clarifications and modifications made to the interim guidance are provided below.
In General
The notice reiterates that reporting the cost of group health insurance coverage will not cause employer-provided health care coverage to become taxable. Form W-2 reporting is for informational purposes, "to provide useful and comparable consumer information to employees on the cost of their health care coverage."
Employers Subject to Reporting
Employers that provide "applicable employer-sponsored coverage" during a calendar year are subject to the reporting requirement, including federal, state and local government entities, churches and other religious organizations, and employers that are not subject to COBRA. This requirement, however, does not apply to federally recognized Indian tribal governments. Additionally, employers required to file fewer than 250 W-2s for the preceding calendar year are not subject to this reporting.
Method of Reporting
The aggregate cost of the employee's coverage is reported on Form W-2 in box 12, using code DD.
Terminated employees — In terms of employees who terminate employment during the year, an employer may use any reasonable method to report the cost of coverage, as long as the method is used consistently for all employees. For example, an employer can omit the cost of COBRA coverage or opt to include the cost of COBRA coverage on Form W-2 of terminated employees, provided they do so consistently. An employer is not required to report any amount for employees who terminate during the calendar year and request to receive a W-2 before the end of the calendar year. An employer is not required to report the cost of coverage for an individual who is not otherwise receiving a W-2, such as a retiree or other former employee who received no compensation during the year.
Aggregate Cost of Applicable Employer-Sponsored Coverage
The aggregate cost of applicable employer-sponsored coverage is the total cost of coverage under all applicable employer-sponsored health coverage provided to an individual employee. Thus, the amount reported may differ among a company's employees depending on each employee's specific election of coverage (PPO, HMO, single, family, etc.). The cost of coverage under a particular group health plan is referred to as the "reportable cost," and the aggregate cost of applicable employer-sponsored coverage is referred to as the "aggregate reportable cost." "Applicable employer-sponsored coverage" means coverage under any group health plan (including onsite primary-care medical clinics) made available to the employee by an employer that is excludable from the employee's gross income under Section 106 or would be excludable if it were employer-provided coverage. (Thus, employee-pay-all group health coverage is included.) However, applicable employer-sponsored coverage does not include the following coverage:
Long-term care
Accident or disability income insurance, or any combination of the two
Supplement to liability insurance
Liability insurance, including general liability insurance and automobile liability insurance
Workers compensation or similar insurance
Automobile medical payment insurance
Credit-only insurance
Other similar insurance coverage, specified in regulations, under which benefits for medical care are secondary or incidental to other insurance benefits
Any coverage under a separate policy, certificate or contract of insurance that provides benefits substantially for treatment of the mouth (including any organ or structure within the mouth) or for treatment of the eye
Coverage only for a specified disease or illness
Hospital indemnity or other fixed indemnity insurance
The aggregate 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 through pretax or aftertax contributions. The aggregate reportable cost also includes any portion of an employer-sponsored group health plan's cost of coverage that is includable in the employee's gross income.
Coverage provided to an individual who is not a spouse, dependent or child — The cost of coverage for a person other than an employee, an employee's spouse, an employee's dependent or an employee's child who will not attain age 27 by the end of the taxable year must be included in the aggregate cost of coverage reported on Form W-2. So, for example, coverage provided to a non-tax-dependent former spouse or domestic partner that is imputed in the employee's gross income must be reported on the employee's W-2.
Aggregate Reportable Cost
Generally, the cost of coverage under all applicable employer-sponsored coverage must be included in the aggregate reportable cost, except for the following:
The amount contributed to any Archer MSA
The amount contributed to any HSA
The amount of any salary reduction election to a health FSA
The IRS guidance also gives limited exceptions to reporting in the following circumstances:
Multiemployer plan — The cost of coverage under a multiemployer plan is not required to be included on Form W-2. Thus, an employer that contributes to a multiemployer plan is not required to include the cost of coverage provided to an employee under that multiemployer plan in determining the aggregate reportable cost. If the only applicable employer-sponsored coverage provided to an employee is provided under a multiemployer plan, the employer is not required to report any amount on Form W-2 for that employee.
HRA — An employer is not required to report the cost of coverage under an HRA in an employee's aggregate reportable cost. If the only applicable employer-sponsored coverage provided to an employee is an HRA, the employer is not required to report any amount on Form W-2 for that employee.
Health FSA — Certain health FSA amounts are required to be reported. Generally, if the health FSA is funded solely with salary reduction dollars, no reporting is required. If employer dollars, other than salary reduction amounts (e.g., flex credit dollars), are contributed to a health FSA, reporting may be required. A general rule provides that if the amount of the health FSA for the plan year exceeds the salary reduction elected by the employee for the plan year, the amount of the health FSA minus the salary reduction dollars is included in aggregate reportable cost. In effect, the employer reports the amount of flex credit dollars. Further, if the amount of salary reduction (for all qualified benefits) 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 the employee's health FSA minus the employee's salary reduction election for the health FSA must be included in the aggregate reportable cost.
Separate dental or vision coverage — An employer is not required to include the cost of coverage provided under separate dental or vision plans that are considered HIPAA-excepted benefits. These are dental or vision plans that are not integrated into a group health plan providing additional health care coverage. This provision continues to extend to self-insured dental and vision plans (through transition relief). Conversely, an employer must include on Form W-2 the cost of coverage under a dental plan or a vision plan if the plan is integrated into a group health plan whose value must be reported. Dental or vision coverage that is subject to an employee's election and contribution separate from the group health plan would not be considered integrated.
State and local employers, and Federal Employees Health Benefits Program "must reports" — Employers that provide coverage under a self-insured group health plan that is subject to federal continuation coverage requirements must report the cost of coverage on Form W-2.
Coverage for military and their families — Coverage provided by the federal government, the government of any state or any state's political subdivision, or any agency or instrument of any government under a plan maintained primarily for members of the military, or for members of the military and their families, is not required to be included in the aggregate reportable cost reported on Form W-2.
Discriminatory coverage — The reporting requirement does not apply to any amount reported as an excess reimbursement to a highly compensated individual that is included in gross income due to a failure to satisfy the nondiscrimination rules of IRC Section 105(h) and certain 2% shareholder-employees who are required to include premium payments in gross income.
Methods of Calculating the Cost of Coverage
An employer can calculate the reportable cost under a plan using the COBRA-applicable premium method, the premium-charged method or the modified COBRA premium method. The reportable cost for an employee under the plan is the sum of the reportable costs for each period (such as a month) during the year as determined under the method used by the employer. 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 that plan.
COBRA-applicable premium method — Under this method, the reportable cost for a period equals the COBRA-applicable premium for that coverage for that period. The notice provides that the employer should calculate the COBRA-applicable premium in accordance with a good faith, reasonable interpretation of the statutory requirements of COBRA. The COBRA statute generally defines "applicable premium" to be (with respect to any period of continuation coverage of qualified beneficiaries) the cost to the plan for similarly situated beneficiaries to whom a qualifying event has not occurred. Unfortunately, the final COBRA regulations do not clearly and specifically address how employers should calculate the applicable premium for COBRA purposes.
Premium-charged method — This method may be used to determine the reportable cost only for an employer's insured group health plan. The employer must use the premium charged by the insurer for that employee's coverage (e.g., for single-only coverage or for family coverage, as applicable) for each period as the reportable cost for that period.
Modified COBRA premium method — If an employer subsidizes the cost of COBRA (so that the premium charged to COBRA-qualified beneficiaries is less than the COBRA-applicable premium), the employer may use the modified COBRA premium method. In such a case, the employer can determine the reportable cost for a period based upon a reasonable good faith estimate of the COBRA-applicable premium for that period, if such a reasonable good faith estimate is used as the basis for determining the subsidized COBRA premium.
Other Issues Related to Calculating the Cost of Coverage
Composite Rate — The notice clarifies that employers that charge a composite rate for active employees but do not use a composite rate for determining applicable COBRA premiums for qualifying beneficiaries may use either the composite rate or the applicable COBRA premium for calculating the reportable cost on Form W-2, provided the same method is used consistently for all active employees and for all qualifying beneficiaries. A rate is considered a "composite rate" if all employees are charged the same premium for coverage under the plan (regardless of scope of coverage), or if there are different types of coverage (e.g., single and family) and employees are charged the same premium for each type of coverage.
If the reportable cost for a period changes during the calendar year, the reportable cost under the plan for the calendar year for an employee must reflect the increase or decrease. Form W-2 must be reported on a calendar-year basis. If the 12-month determination period for the COBRA applicable premium is not a calendar year, the reportable cost under the plan for the year must reflect any increase or decrease that occurs during the calendar year.
New and Additional Information
EAP, wellness program or onsite medical center — The notice provides additional guidance with respect to reporting the cost of coverage received under an EAP, wellness program or onsite medical center. If coverage under these types of programs is considered a group health plan under the Section 6051(a)(14), it is required to be reported on Form W-2. Section 6051(a)(14) generally defines a group health plan as a plan (including a self-insured plan) of, or contributed to by, an employer (including a self-employed person) or employee organization to provide health care (directly or otherwise) to the employees and former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families. The IRS received comments from employers that valuing an EAP, wellness program or onsite medical center, where no COBRA premium is charged, is difficult. As a result, the notice states that if an employer does not charge a premium for coverage under an EAP, wellness program or onsite medical clinic to qualifying beneficiaries receiving COBRA, then employers are not required to report the cost of such coverage for any employee. However, if an employer adheres to a COBRA process for such coverage, the employer is required to include the cost of the coverage provided. Note that the notice does not provide guidance as to whether or not COBRA coverage should be provided for these coverages.
Reported but not required — The notice confirms that an employer may include on Form W-2 the cost of coverage that is not required to be included in the aggregate reportable cost under applicable interim relief, including coverage under a health reimbursement arrangement (HRA), a multiemployer plan, an EAP, wellness program or onsite medical center provided such coverage constitutes applicable employer-sponsored coverage and is calculated using a permissible method.
Partially covered benefits — For a benefit program under which an employee receives benefits that constitute applicable employer-sponsored coverage, and other benefits that do not, an employer may use any reasonable allocation method to determine the cost of the portion of the program providing applicable employer-sponsored coverage. The notice further provides that if the portion of the program providing a benefit that is applicable employer-sponsored coverage is incidental compared to the portion of the program providing other benefits, the employer is not required to include the cost of the program in the aggregate employer cost. Similarly, if the portion of the program providing a benefit that is not applicable employer-sponsored coverage is incidental, then, at the employer's option, the entire cost of the program may be reported.
Effect of employee status changes — The notice provides that the aggregate reportable cost for a calendar year can be based on information available to the employer as of December 31 of that year, regardless of any election or notification made in the subsequent plan year that might retroactively affect coverage.
Coverage spanning two taxable years — If a coverage period extends over the payroll period including December 31, the employer may:
Treat the coverage as provided under the calendar year that includes December 31
Treat the coverage as provided during the following calendar year
Allocate the cost of coverage between each of the two years, using any reasonable allocation method (e.g., days of coverage)
Whatever method is selected, it must be applied consistently to all employees.
Hospital indemnity insurance, etc. — The notice provides new guidance for coverage provided under hospital indemnity or other fixed indemnity insurance, or coverage for a specified disease or illness (e.g., a cancer policy). Generally, the cost of these types of coverage is not required to be included in the aggregate reportable cost if the benefit is offered as an independent, non-coordinated benefit and is paid for by the employee with aftertax dollars, or is includable in the employee's gross income.
Third-party sick-pay provider — The notice provides new guidance for third-party sick-pay providers. The guidance relieves these providers, which may not have access to the health plan information needed for reporting purposes, of reporting aggregate reportable cost on a W-2 furnished by the third-party sick-pay provider. However, a W-2 furnished by an employer must include the aggregate reportable cost, even if that W-2 includes sick pay or if a third-party provider is furnishing a separate W-2 reporting the sick pay.
Transition Relief
The notice provides that certain provisions considered transition relief may be subject to change, but that any future guidance limiting these provisions will be provided on a prospective basis and will not be applicable earlier than January 1 of the calendar year beginning at least six months after the guidance is issued. This includes relief for:
Employers that file fewer than 250 W-2s
W-2s furnished to terminated employees before the end of the year
W-2s for employees in multiemployer plans
Reporting the cost of HRAs
Reporting the cost of dental and vision plans
Reporting the cost of self-insured plans that are not subject to COBRA or similar continuation requirements
Reporting the cost of EAPs, wellness programs and onsite medical centers
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