IRS Issues Revised Form W-2 Health Coverage Reporting Requirements

Posted by BAS - 09 January, 2012

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The IRS issued revised guidance on reporting the cost of employer-sponsored health coverage. Notice 2012-9 clarifies prior guidance and provides details for employers on complying with the new health coverage reporting requirement.

Under the Affordable Care Act, most employers are required to inform employees about the cost of employer-sponsored group health plan coverage. The aggregate value to employees of coverage must be reported in Box 12, Code DD of employees' Form W-2. The reporting obligation begins January 2013 (for the 2012 Form W-2). The IRS has stated that the new, mandated Form W-2 reporting is for informational purposes, only, and will not cause health coverage to become taxable to an employee.

The IRS has clarified that 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. This is a welcome extension of transition relief to smaller-sized employers. Also clarified is the exception for self-insured plans not subject to federal continuation coverage requirements, such as church plans and governmental employers.

The reporting requirement applies to applicable employer-sponsored coverage. This is generally coverage under a group health plan that an employer makes available to an employee that is not taxable to the employee. Medical plan coverage is included in the report. Free-standing dental and visions plans are not subject to the reporting requirement if the plans are excepted from HIPAA; but dental and vision coverage coupled with the medical plan could be subject to the reporting requirement. Employers do not have to report the cost of an EAP, wellness program or on-site medical clinic if the employer would not charge a premium for the coverage to COBRA participants. Indemnity insurance paid with after-tax dollars does not have to be reported. Health flexible spending accounts funded with employee contributions, only, are not reported, but a reporting obligation may arise if an employer contributes to the FSA or otherwise provides flex-dollars through a Code section 125 plan. Employers may choose to include in the aggregate reportable cost the cost of coverage that is not required to be reported.

The aggregate reportable cost includes both the employer and employee-paid portion of coverage, regardless of whether the employee paid for that coverage through pre-tax or after-tax contributions. It includes the cost expended for coverage of the employee, as well as for any person covered under the plan because of a relationship to the employee (i.e., Employee coverage, as well as Dependent/Family coverage).

Aggregate reportable cost may be calculated in one of a few different ways. Employers will likely report using a COBRA applicable premium method. Alternatively, (1) an employer that is determining the cost of coverage in an insured plan may calculate the reportable cost using the premium charged method; and (2) 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 a modified COBRA premium method. There are special rules for employers that charge employees a composite rate for coverage (i.e., the same premium for different types of coverage).

Under the COBRA method, the employer reports an amount equal to the COBRA applicable premium for the coverage period. This is the cost of coverage for non-COBRA beneficiaries (including both employer and employee contributions), but excluding administrative fee added on top of the COBRA-calculated rate.

Under the premium charged method, an employer reports the cost of insured coverage using the premium charged by the insurer for the employee's coverage.

To use the modified COBRA premium method, the employer must subsidize the cost of COBRA coverage or charge COBRA beneficiaries a prior year's rate. If this applies, the employer may determine the reportable cost for a period based upon a reasonable good faith estimate of the COBRA premium for the period.

If an employer charges a composite rate (charges for a single coverage class under the plan, or charges the same premium for all coverages), the employer may calculate and use the same reportable cost for the single class of coverage or for the different types of coverage, provided the method is applied consistently.

Employers have three options for addressing reporting costs when the last payroll period in a year crosses the calendar year. Employers can either attribute the full cost to the prior year, attribute the full cost to the subsequent year, or split the cost pro-rata between the years. Special consideration must be to be given to changes in coverage such as mid-year enrollments or terminations. If the change in coverage occurs during a calculation period, the employer may use any reasonable method to determine the reportable cost for the period, such as using the cost at the beginning of the period or at the end of the period, or averaging or prorating costs, provided the method is used consistently. Similarly, when the last payroll period for a year crosses the calendar year, an employer can either attribute the full cost to the prior year, attribute the full cost to the subsequent year, or split the cost pro-rata between the years. The IRS clarifies that the reportable cost may be based on information available to the employer as of December 31 of the calendar year. Any election or notice provided in the subsequent year with a retroactive effect is not required to be accounted for, and the employer does not have to issue a revised Form W-2 due to updated information.

Notice 2012-9, still labeled as "interim" guidance, provides detailed, specific rules for Form W-2 health coverage reporting. Employers subject to the reporting requirements should begin to think about their ability to calculate employer-sponsored health coverage costs and put processes in place to provide the Form W-2 reporting for the 2012 tax year.

For more information, please contact Marla G. Roshkoff, General Counsel, at pr@BASusa.com.

Topics: Health Care Reform (ACA)


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