By By

Larry Grudzien Sheila Aiken Attorney at Law Aiken & Aiken, LLC

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Overview,

Employers subject to reporting,

What is “applicable employer-sponsored coverage”?,

How to determine the “aggregate reportable cost”?,

Methods for calculating the cost of coverage,

Other issues,

Transition relief,

Employer action plan, and

Questions.

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Employers must report the “aggregate cost” of “applicable employer-sponsored coverage” on an employee’s Form W-2.

Although PPACA provided that the requirement would be effective beginning with the 2011 tax year, the IRS subsequently made compliance in 2011 optional.

The Form W-2 reporting requirement is first required for the 2012 tax year–that is, the value must be reported on the Form W-2 issued in January 2013 for the 2012 tax year.

To comply with this requirement, employers must: Determine the applicable employer-sponsored coverage that is

provided to each employee; Calculate the aggregate cost of such coverage for each employee;

and Report that cost on each employee’s Form W-2.

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In the 2011 version of Form W-2 (Wage and Tax Statement) and related Instructions, one notable change is the addition of new codes for Box 12 reporting, including a new code DD to be used for reporting the cost of employer-sponsored health coverage.

In March 2011, the IRS issued Notice 2011-28, providing interim guidance on the reporting requirement (including information on how and what to report as well as certain transition relief), and also posted FAQs that incorporate the guidance in the notice.

In January 2012, the IRS issued Notice 2012-9,restating and amending its guidance and clarifying which employers are exempt, when Health FSAs are not included, when EAPs are included and other issues.

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Even though the W-2 reporting requirement is for informational purposes without triggering any tax liability, it would appear that typical information reporting penalties will apply to employers for noncompliance.

In addition, it is not clear whether penalties would apply for a good faith mistake in reporting the cost of coverage—guidance from the IRS would be welcome.

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The interim guidance clarifies that if the employer is not otherwise required to issue a Form W-2 for an individual (such as a retiree or other former employee receiving no compensation), reporting is not required.

When employees terminate employment during a calendar year, an employer may apply any reasonable method of reporting the cost of coverage provided under a group health plan, provided that the method is used consistently for all employees receiving coverage under that plan who terminate employment during the plan year.

But regardless of the method of reporting used by the employer for other terminated employees, there is no reporting requirement for an employee to receive a Form W-2 prior to the end of the calendar year, if the employee terminated employment during the year.

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All employers that provide “applicable employer-sponsored coverage” during a calendar year are subject to the reporting requirement–including federal, state, and local government entities (a few exceptions apply, such as federally recognized Indian tribal governments).

For 2012 Forms W-2, under transition relief and until the issuance of further guidance, an employer is not subject to the reporting requirement for any calendar year if the employer was required to file fewer than 250 Forms W-2 for the preceding calendar year.

Therefore, if an employer files fewer than 250 Forms W-2 in 2011, the employer would not be subject to the reporting requirement for the 2012 calendar year.

This rule applies regardless of whether the employer uses an agent.

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There are other exceptions to the reporting requirement, including transition relief for:

For employers that provide coverage under a self-insured health plan that is not subject to any federal continuation coverage requirements (e.g., certain church plans);

For plans maintained by the government primarily for members of the military and their families; and

For related employers (within the meaning of Code § 3121(s)), in which case only the common paymaster must report the cost of coverage provided to an employee by all the employers for whom it serves as the common paymaster; and

If related employers employ the same employee, but do not use a common paymaster, the employers may either: 1. report the total aggregate cost on a single W-2, or

2. allocate the cost between the employers and report the divided cost on separate Forms W-2.

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The guidance also addresses the reporting obligations of predecessor and successor employers in the case of an individual transferring to a new employer that qualifies as a successor employer under Code § 3121(a)(1).

These rules generally require that both entities report–unless the successor employer undertakes to report for the predecessor employer.

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, no reporting is required on the Form W-2. 9

The IRS has indicated that the aggregate reportable cost is not required to be reported on a Form W-2 furnished by a third-party sick pay provider.

However, a Form W-2 furnished by the employer to an employee must include the aggregate reportable cost regardless of whether that Form W-2 includes sick pay, or whether a third-party sick pay provider is furnishing a separate Form W-2 reporting the sick pay.

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The Form W-2 reporting requirement applies only to “applicable employer-sponsored coverage,” a term that generally includes any employer-provided group health plan coverage under an insured or self-insured health plan that is excludable from the employee's gross income under Code § 106, or that would be excludable if it were paid for by the employer.

It is subject to numerous exceptions , such as: Coverage for long-term care; Coverage (whether through insurance or otherwise) described in

Code § 9832(c)(1) (but no exception applies for coverage for on-site medical clinics);

Certain stand-alone vision or dental coverage; and Coverage described in Code § 9832(c)(3) (under certain

circumstances).

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For purposes of determining whether a specific arrangement is a group health plan, employers may rely upon a good faith application of a reasonable interpretation of the statutory provisions and applicable guidance, including the definition under the IRS COBRA regulations.

Thus, any coverage subject to the COBRA regulations' definition of group health plan would, in the absence of an exception or transition rule, be subject to the W-2 reporting requirement.

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Certain Benefit Types Under Code § 9832(c)(1) Are Not Includible:

The following benefits are not subject to the Form W-2 reporting requirement:

Coverage only for accidents (including accidental death and dismemberment coverage);

Disability income coverage;

Liability insurance, including general liability and auto liability insurance;

Workers' compensation or similar coverage;

Automobile medical payment insurance;

Credit-only insurance; and

Other similar coverage, specified in the regulations, under which benefits for medical care are secondary or incidental to other insurance benefits (but no such coverage is mentioned in the regulations).

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Dental and Vision Coverage Is Not Includible Under Certain Circumstances (Transition Relief):

Applicable employer-sponsored coverage subject to the reporting requirement does not include stand-alone dental, or vision coverage that are “HIPAA-excepted benefits.”

Generally, to be an excepted benefit, dental or vision benefits must either be offered under a separate policy, certificate or contract of insurance; or participants must have the right not to elect the benefits and if they do elect the benefits, they must pay an additional premium or contribution for that coverage.

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Certain Independent, Noncoordinated Benefits Under Code § 9832(c)(3) Are Not Included Under Certain Circumstances:

Under this category, coverage only for a specified disease or illness and hospital indemnity or other fixed indemnity insurance is not subject to W-2 reporting, provided that the coverage is offered as independent, noncoordinated benefits.

▪ However, to be excepted, such coverage must be funded by the employee on an after-tax basis for which a deduction under Code § 162(l) is not allowable.

This exception would include most hospital indemnity (e.g., $100 per day) and cancer insurance plans.

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Coverage Under Health Savings Accounts (HSA) or Archer MSAs Contributions Is Not Includible:

Strictly speaking, HSA and Archer MSA contributions are included in the definition of applicable employer-sponsored coverage, but they are explicitly excluded from the W-2 reporting obligation.

The IRS confirmed this treatment for HSA and Archer MSA contributions.

Coverage Under Health Reimbursement Arrangements (HRA) Is Not Includible (Transition Relief):

Under transition relief provided in IRS Notice 2011-28, an employer is not required to include the cost of coverage under an HRA in determining the aggregate reportable cost.

If the only applicable employer-sponsored coverage provided to an employee is an HRA, no reporting is required on the Form W-2.

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Salary Reduction Elections to Health FSAs Are Not Includible:

Health FSA contributions are included in the definition of applicable employer-sponsored coverage.

While the amount of any salary reduction election to a health FSA is excluded from the aggregate reportable cost and is not reported on Form W-2, separate rules apply for health FSAs offered through cafeteria plans under which optional employer flex credits can be applied.

If an employer provides a flex credit, the cost of the FSA should not be reported unless the flex credit causes the employee’s health FSA to exceed his or her salary reduction election.

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Coverage Under On-Site Medical Clinics, Wellness Programs and Employee Assistance Programs:

The cost of employee assistance programs (EAPs), onsite clinics, and other wellness initiatives which qualify as group health plans (as defined in Internal Revenue Code § 5000(b)(1)) may have to be reported on Form W-2.

▪ It will depend on how the employer administers COBRA continuation coverage for such benefits.

▪ If the employer does not charge a COBRA premium for continued coverage under the EAP, on-site clinic, or wellness programs, the employer is not required to report the value of such coverage on the employee’s W2.

▪ However, if the employer does charge a COBRA premium, it must report the value of the coverage.

Employers will need to carefully review their EAP and wellness programs to determine whether they qualify as “group health plans.”

Failure to properly administer such benefits as group health plans could have potentially far-reaching impact, including COBRA penalties, ERISA penalties, and now W-2 reporting penalties.

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An employer may include in the aggregate reportable cost the cost of coverage that is not otherwise required to be included under applicable interim relief, such as the cost of coverage under an HRA, a multi-employer plan, an EAP, wellness program, or on-site medical clinic, provided that the calculation of the cost of coverage otherwise meets the requirements and provided that such coverage constitutes applicable employer-sponsored coverage.

In addition, there is guidance on reporting for programs that include benefits that constitute applicable employer-sponsored coverage and other benefits that do not constitute applicable employer-sponsored coverage, such as a long-term disability program that also provides certain health benefits.

In this instance, an employer may use any reasonable allocation method to determine the cost of the portion of the program providing applicable employer-sponsored coverage

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If the portion of the program providing a benefit that is applicable employer-sponsored coverage is only incidental in comparison to the portion of the program providing other benefits, the employer is not required to include either portion of the cost in the aggregate reportable cost.

Similarly, if the portion of the program providing a benefit that is not applicable employer-sponsored coverage is only incidental to the portion of the program providing a benefit that is applicable employer-sponsored coverage, the employer may, at its option, include the benefit that is not applicable employer-sponsored coverage in determining the reportable cost, notwithstanding the general prohibition on reporting coverage that is not applicable employer-sponsored coverage.

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The aggregate cost of applicable employer-sponsored coverage provided to an employee is referred to as the “aggregate reportable cost.”

Because the amount that must be reported relates to the cost of coverage provided, it would appear that in cases where coverage is extended retroactively, W-2 reporting must still be made—it would be helpful if the IRS confirmed this and provided guidance on how to retroactively report for this purpose.

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Both Employer and Employee Portions of the Cost are Included (and No Adjustment for Imputed Income Amounts)

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.

It also includes the cost of coverage of the employee and any person covered by the plan because of a relationship to the employee, including any portion of the cost that is includible in the employee's gross income–thus, aggregate reportable cost is not reduced by any imputed income included in the employee's gross income.

▪ This might include coverage for certain adult children over age 27 as well as non-dependent domestic partners for whom income is imputed to the employee as a result of the coverage.

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No Adjustment for Excess Reimbursements Under a Self-Insured Discriminatory Plan

In determining aggregate reportable cost, the cost of applicable employer-sponsored coverage does not include excess reimbursements of highly compensated individuals that are included in gross income under Code § 105(h).

An excess reimbursement that is included in income is subtracted from the cost of coverage.

Similarly, the cost of applicable employer-sponsored coverage does not include the cost of coverage taken into income as the result of an employee being a 2% shareholder-employee of an employer that is an S corporation.

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Special Rules for Health FSA Contributions:

Health FSA contributions are included in the definition of applicable employer-sponsored coverage, but special rules apply with respect to the W-2 reporting obligation.

The amount of any salary reduction election to a health FSA is excluded from the aggregate reportable cost and is not reported on Form W-2.

Where the health FSA is offered through a cafeteria plan under which optional employer flex credits (expressed as a fixed amount, or as a formula such as matching salary reduction) can be applied to the health FSA, special rules must be applied to determine whether any amount must be included in the aggregate reportable cost as follows:

▪ If the amount of the employee's salary reduction (for all qualified benefits) equals or exceeds the amount of the health FSA for a plan year, then the amount of the employee's health FSA is not included in the aggregate reportable cost.

▪ If the amount of the employee's health FSA for a plan year exceeds the employee's salary reduction for that 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. 24

Coverage that Straddles Two Reporting Years:

Where a coverage period (e.g. final payroll period) extends beyond December 31 of a reporting year, employers may use a reasonable allocation method to divide the cost between the two years, or treat the coverage period as occurring either entirely before December 31 or entirely after December 31.

The option selected by the employer should be applied consistently to all employees.

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Aggregate cost is determined under “rules similar to” the COBRA rules for applicable employer-sponsored coverage (including employee and employer contributions), including the special rules governing self-insured plans.

Employers are permitted to calculate reportable cost (i.e., the cost of coverage under a group health plan) using one of three methods:

The COBRA applicable premium method;

The premium charged method (for insured plans); or

The modified COBRA premium method (for an employer that subsidizes the cost of coverage or determines the cost of coverage for a year by applying the cost of coverage in a prior year).

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COBRA Applicable Premium Method:

Under this method, the reportable cost equals the COBRA applicable premium for that coverage for that period.

The employer must calculate the COBRA applicable premium in a manner that satisfies the requirements under Code § 4980B(f)(4).

Under current guidance, this means that the employer must make such calculation in good faith compliance with a reasonable interpretation of the statutory requirements under Code § 4980B.

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Premium Charged Method:

The premium charged method may be used to determine the reportable cost only for an employee covered by an employer's insured group health plan.

In such a case, the employer must use the premium charged by the insurer for that employee's coverage (i.e., for single-only coverage or for family coverage, as applicable to the employee) for each period as the reportable cost for that period.

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Modified COBRA Premium Method:

This method is available to an employer 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 COBRA cost, it 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.

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Reportable Cost Must Be Determined on a Calendar-Year Basis:

Although an employer may use a 12-month determination period that is not the calendar year for purposes of applying the COBRA applicable premium under a plan, that same 12-month period may not be used for purposes of calculating the reportable cost for the year under the plan.

Instead, the reportable cost under a plan must be determined on a calendar-year basis.

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Employer Must Reflect Any Changes in Reportable Cost During the Year:

If the cost for a period changes during the year (e.g., under the COBRA applicable premium method because the 12-month period for determining the COBRA applicable premium is not the calendar year), the reportable cost under the plan for an employee for the year must reflect the increase or decrease.

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Employer Must Account for Any Changes in Employee's Coverage During the Year:

If an employee changes coverage during the year, the reportable cost must take into account the change in coverage by reflecting the different reportable costs for the coverage elected by the employee for different periods.

If the change in coverage occurs during a period (for example, in the middle of a month where costs are determined on a monthly basis), an employer may use any reasonable method to determine the reportable cost for such period, such as using the reportable cost at the beginning of the period or at the end of the period, or averaging or prorating the reportable costs, provided that the same method is used for all employees with coverage under that plan.

Similarly, if an employee commences or terminates coverage during a period, an employer may use any reasonable method to calculate the reportable cost for that period, provided that the same method is used for all employees with coverage under the plan.

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Using a Composite Rate:

An employer is considered to charge employees a composite rate:

▪ If 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

▪ If 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.

In such a case, the employer using 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 provided under the plan. 33

The IRS has indicated that future guidance may prospectively limit the availability of some or all of this transition relief–but it will not apply earlier than January 1 of the calendar year beginning at least six months after it is issued and will not limit the availability of the transition relief for the 2012 Forms W-2.

Transition relief is available for the following:

Employers filing fewer than 250 Forms W-2;

Certain Forms W-2 furnished to terminated employees before the end of the year;

Relief with respect to multiemployer plans;

HRAs;

Certain dental and vision plans; and

Self-insured plans of employers not subject to COBRA continuation coverage or similar requirements.

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The notice clarifies that the reporting requirement does not apply to certain types of coverage, including the following: Dental and vision plans meeting the conditions of an

“excepted benefit” for certain HIPAA purposes;

Coverage in an employee assistance program, wellness program or on-site medical clinic if COBRA enrollees aren’t charged a premium for that coverage;

Health flexible spending arrangements funded solely by salary reduction contributions; and

Certain independent, non-coordinated hospital or fixed indemnity insurance offered on an after-tax basis to employees.

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New and revised information in the notice includes these details:

Coverage cost may be based on the employer’s available information as of Dec. 31. Therefore, subsequent notifications or elections (e.g., divorce) needn’t be considered.

Alternative methods may be used to calculate the reportable amount if coverage extends over a payroll period that includes a Dec. 31, provided the method is used for all employees.

Coverage reporting relief for employers filing fewer than 250 Forms W-2 is based on the prior calendar year and is determined without taking into account the use of certain agents.

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Employers should add the following new items to their Form W-2 action plan:

Determine whether stand-alone dental and vision benefits meet the HIPAA definition of “excepted benefits.”

Evaluate whether EAP, wellness programs, and onsite clinics are “group health plans” for purposes of COBRA, and if so, how the reportable cost will be determined.

Choose a consistent method for allocating the cost of coverage when a benefit program includes both medical and nonmedical benefits, and for allocating the cost of coverage for reporting periods that straddle two reporting years.

As always, coordinate with payroll staff and vendors to ensure proper reporting on the Form W-2.

Communicate with employees regarding the new information they’ll see reported on their Form W-2.

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Larry Grudzien

Phone: 708-717-9638

Email: larry@larrygrudzien.com

Website: www.larrygrudzien.com

Sheila Aiken, Aiken & Aiken, LLC

Phone: 847-245-2336

Email: saiken@aikenandaiken.com

Website www.aikenandaiken.com

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