- IRS Releases Updated Guidance On W-2 Reporting Of Cost Of Employer-Sponsored Health Care Coverage
- March 29, 2012
- Law Firm: McGrath North Mullin & Kratz, PC LLO - Omaha Office
Beginning with the 2012 calendar year, employers will be required to report the cost of employer-sponsored group health plan coverage to employees on Form W-2. In recently issued Notice 2012-9, the Internal Revenue Service (IRS) provides guidance relating to how employers must report such information.
Section 6051(a)(14) was added to the Internal Revenue Code (the “Code”) by the Patient Protection and Affordable Care Act of 2010 (the “Affordable Care Act”) to require that employers report the cost of employer-sponsored group health plan coverage to employees on Form W-2. Intended only to provide useful and comparable consumer information to employees on the cost of their health care coverage, this reporting requirement does not cause excludable employer-provided health care coverage to become taxable.
As passed, the Affordable Care Act required reporting of the cost of employer-sponsored coverage on Form W-2 effective for taxable years beginning on or after January 1, 2011. However, the IRS made this requirement optional for 2011 so that employers would have more time to update their payroll systems. In January of 2012, the IRS issued new interim guidance in Notice 2012-9 which amends and restates previously-issued guidance concerning informational reporting to employees of the cost of their employer-sponsored group health plan coverage.
Employers Subject to the Reporting Requirement
Except for employers that file fewer than 250 Forms W-2 in the preceding calendar year, all employers that provide “applicable employer-sponsored coverage” during a calendar year are subject to the reporting requirement under Section 6051(a)(14). This includes employers that are federal, state and local government entities, churches and other religious organizations, and employers that are not subject to the COBRA continuation coverage requirements, to the extent such employers provide applicable employer-sponsored coverage under a “group health plan.”
The term “applicable employer-sponsored coverage” means coverage under any “group health plan” made available to the employee by an employer which is excludable from the employee’s gross income. For purposes of the reporting requirement, “group health plan” means a plan of, or contributed by, an employer or employee organization to provide health care to employees and former employees, the employer, others associated with the employer in a business relationship, or their families. The term “applicable employer-sponsored coverage” does not include:
coverage for long-term care;
coverage under a stand-alone plan, policy, certificate or contract for dental or vision insurance;
coverage only for a specified disease or illness (or for hospital indemnity or other fixed indemnity insurance), unless the employer makes contributions to the cost of coverage that are excludable from income or if the employee pays for the coverage on a pre-tax basis under a cafeteria plan;
coverage for insurance under which benefits for medical care are secondary or incidental to other insurance benefits (including, but not limited to, accident, disability, general liability or workers’ compensation insurance).
An employer is not subject to the reporting requirements for any calendar year if the employer was required to file fewer than 250 Forms W-2 for the preceding calendar year. The determination of whether an employer is required to file fewer than 250 Forms W-2 is based on the Forms W-2 that the employer would have been required to file without regard to the employer’s use of an agent under Code Section 3504.
Aggregate Cost of Applicable Employer-Sponsored Coverage
Section 6051(a)(14) provides that the aggregate cost to be reported is to be determined under rules similar to the rules used to determine the applicable premium for purposes of COBRA continuation coverage. 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 pre-tax or after-tax contributions. The aggregate reportable cost also includes any portion of the cost of coverage under an employer-sponsored group health plan that is includible in the employee’s gross income and is not reduced by the amount of the cost of coverage included in gross income. However, the following amounts are not included in the aggregate reportable cost and are not reported under Section 6051(a)(14):
the cost of coverage under a stand-alone dental or vision plan;
the cost of coverage under a multiemployer plan;
the cost of coverage provided under a self-insured group health plan that is not subject to federal continuation coverage requirements;
the amount contributed to an Archer Medical Savings Account;
the cost of coverage under a Health Reimbursement Arrangement;
the amount contributed to any Health Savings Account;
the amount of any salary reduction election to a health Flexible Spending Arrangement (a “health FSA”), except that, if an employer offers a health FSA through a cafeteria plan, the amount of the health FSA is required to be included in the aggregate reportable cost reported on Form W-2 if the amount of the health FSA for the plan year exceeds the salary reduction elected by the employee for the plan year.
Coverage provided under an employee assistance program (EAP), wellness program or on-site medical clinic is only includible in the aggregate reportable cost to the extent the coverage is provided under a group health plan. Further, an employer is not required to include the cost of coverage provided under an EAP, wellness program, or on-site medical clinic that otherwise would be required to be included in the aggregate reportable cost reported on Form W-2 because it constitutes applicable employer-sponsored coverage, if that employer does not charge a premium with respect to that type of coverage provided to a beneficiary qualifying for coverage in accordance with any applicable federal continuation coverage requirements. If an employer charges a premium with respect to that type of coverage provided to a beneficiary qualifying for coverage in accordance with any applicable federal continuation coverage requirements, that employer is required to include the cost of that type of coverage provided.
An employer may include the cost of coverage that is not required to be included in the aggregate reportable cost, such as the cost of coverage under a Health Reimbursement Account, multiemployer plan, an EAP, wellness program, or on-site medical clinic, provided that the calculation of the cost meets requirements of calculating the cost of coverage, and that such coverage constitutes applicable employer-sponsored coverage.
For a program under which an employee receives benefits that constitute applicable employer-sponsored coverage and other benefits that do not constitute applicable employer-sponsored coverage, an employer may use any reasonable allocation method to determine the cost of the portion of the program providing employer-sponsored coverage.
Methods of Calculating the Cost of Coverage
An employer may calculate the reportable cost under a plan using the “COBRA applicable premium method.” Alternatively, an employer that is determining the cost of coverage for an employee covered by the employer’s insured plan may calculate the reportable cost using the “premium charge method,” and an employer that subsidizes the cost of coverage or that determines the cost of coverage for a year by applying the cost of coverage in a prior year may calculate the reportable cost using the “modified COBRA premium method.”
Under the COBRA applicable premium method, the reportable cost for a period equals the COBRA applicable premium for that coverage for that period. If the employer applies this method, the employer must calculate the COBRA applicable premium in a manner that satisfies the requirements under Section 4980B(f)(4). Under current guidance, the COBRA applicable premium calculation would meet these requirements if the employer made such calculation in good faith compliance with a reasonable interpretation of the statutory requirements.
If the employer applies the premium charge method, the employer must use the premium charged by the insurer for that employee’s coverage (for example, for self-only coverage or for family coverage, as applicable to the employee) for each period as the reportable cost for that period.
An employer may use the modified COBRA premium method with respect to a plan only where it subsidizes the cost of COBRA (so that the premium charged to COBRA qualified beneficiaries is less than the COBRA applicable premium) or where the actual premium charged by the employer to COBRA qualified beneficiaries for each period in the current year is equal to the COBRA applicable premium for each period in a prior year. If the employer subsidizes the cost of COBRA, the employer may determine the reportable cost for a period based upon a reasonable good faith estimate of the COBRA applicable premium for that period, if such reasonable good faith estimate is used as the basis for determining the subsidized COBRA premium. If the actual premium charged by the employer to COBRA qualified beneficiaries for each period in the current year is equal to the COBRA applicable premium for each period in a prior year, the employer may use the COBRA applicable premium for each period in the prior year as the reportable cost for each period in the current year.
Employers charging employees a composite rate may calculate and use the same reportable cost for a period for the single class of coverage under the plan or all the different types of coverage under the plan for which the same premium is charged to employees (provided this method is applied to all types of coverage under the plan). An employer is considered to charge employees a composite rate if (i) there is a single coverage class under the plan (that is, if an employee elects coverage, all individuals eligible for coverage under the plan because of their relationship to the employee are included in the elections and no greater amount is charged to the employee regardless of whether the coverage will include only the employee or the employee plus other such individuals), or (ii) there are different types of coverage under a plan (for example, self-only coverage and family coverage, or self-plus-one coverage and family coverage) and employees are charged the same premium for each type of coverage.
Method of Reporting on the Form W-2
The aggregate reportable cost is reported on Form W-2 in box 12, using code DD. For an individual who is an employee of multiple employers, each employer must report the cost on a Form W-2. A common paymaster of related employers must report the total aggregate cost for all employers for whom it serves as the common paymaster.
The Affordable Care Act requires larger employers to take steps to capture and report the costs of applicable employer-sponsored health coverage. Prior guidance gave employers answers to many questions concerning implementation of the Act’s requirements, and the recent IRS Notice 2012-9 clarifies certain items and addresses several other parts of the reporting rules. Larger employers should plan to review their benefit plans and determine which plans fit the definition of “applicable employer-sponsored coverage.” Larger employers should consider whether their wellness programs, EAPs, or even on-site medical clinics may constitute group health plans under the IRS’ rules. Furthermore, larger employees should consider whether they must report the costs of such coverage (employers may also consider whether COBRA coverage should be offered for these programs). Finally, employers should also decide which costs are to be excluded from the determination of aggregate cost and plan to modify their data collection procedures and/or payroll systems to accurately capture the data required for Form W-2 reporting.