This is our second Alert in a series designed to help employers understand and address the effects of Health Care Reform on their businesses so they are in the best position to make decisions in response to these new requirements. Our first Alert dealt with the implementation of New Health Flexible Spending Account Limits. At this point, most of the regulatory guidance needed has not yet been issued. Therefore, we will provide the best possible guidance based on existing knowledge.
Reporting cost of Health Care Coverage on Form W-2
One of the new Health Care Reform requirements obligates employers to report the aggregate cost of applicable employer-sponsored health care coverage on an employee’s Form W-2.
Although the Affordable Care Act imposed this requirement for all employers in 2011, the Internal Revenue Service (IRS) made it optional for all employers for 2011 because necessary guidance was not available early enough in 2011. Beginning with 2012, however, this reporting is no longer optional for “large” employers (defined below). Reporting remains optional for employers that are not large employers until the IRS issues additional guidance.
For purposes of this requirement, a “large” employer is an employer that was required to file at least 250 Forms W-2 for the preceding calendar year. For the initial reporting required on 2012 Forms W-2, an employer that filed at least 250 Forms W-2 for 2011 must report the cost of employer-sponsored health care coverage on all employees’ Forms W-2 for 2012, even if the employer files fewer than 250 Forms W-2 for 2012. An employer that files at least 250 Forms W-2 for 2012 will be required to report the cost of employer-sponsored health care coverage on all employees’ Forms W-2 for 2013, regardless of the number of 2013 Forms W-2 the employer is required to file.
It is important to note that “large employer” status for this reporting requirement is based solely on the number of Forms W-2 filed by the employer,not the number of employees or full-time equivalents the employer had or has at any point during the preceding or current calendar year. This 250 Form W-2 threshold is based on the Internal Revenue Code requirement that an employer filing at least 250 Forms W-2 for the current year must electronically file those Forms W-2. Note also that an employer with a large number of seasonal or temporary employees may end up subject to this reporting requirement even though the employer never has 250 full-time employees during the year. Similarly, an employer with high employee turnover may end up subject to this reporting requirement even though the employer never has 250 employees at any one time during the preceding calendar year.
Health care coverage subject to Form W-2 reporting
In general, “applicable employer-sponsored coverage” subject to the reporting requirement is coverage under any group health plan offered and sponsored by the employer that is not taxable to the employee. This includes:
- Group medical and prescription drug coverage (whether fully insured or self-insured by the employer)
- Dental coverage or vision coverage if the coverage is an integral part of the medical coverage and cannot be elected or declined by the employee separately from the medical coverage
- Employer contributions to a flexible spending account (FSA), but not including “flex credits” that an employee can elect to receive in cash or apply as contributions to a Code Section 401(k) plan
- Employee Assistance Programs (EAPs), wellness programs, and on-site medical clinics, but only if the EAP, wellness program, or on-site clinic is a “group health plan” for HIPAA purposes and the employer charges a COBRA premium to continue the EAP, wellness program or on-site clinic coverage during the COBRA continuation coverage period
- Specific disease or illness coverage (such as cancer insurance) or hospital indemnity or other fixed indemnity insurance if the employer pays for any part of the coverage on a non-taxable basis or the employee pays for coverage on pre-tax basis
- Retiree health coverage, but only if the employer otherwise must issue a Form W-2 to the retiree
The following types of coverage are not subject to Form W-2 reporting:
- Health reimbursement accounts (HRAs) (until further guidance is issued)
- Employer or employee contributions to a health savings account (HSA)
- Employer or employee contributions to a multiemployer group health plan (union-affiliated health and welfare plan)
- Dental coverage or vision coverage that an employee can elect or decline separately from the medical coverage
- Employee salary reduction contributions to a flexible spending account (FSA), including “flex credits” that an employee can elect to receive in cash or apply as contributions to a Code Section 401(k) plan
- EAPs, wellness programs and on-site medical clinics that are not “group health plans” for HIPAA purposes or the employer does not charge a COBRA premium to continue the EAP, wellness program or on-site clinic coverage during the COBRA continuation coverage period
- Specific disease or illness coverage (such as cancer insurance) or hospital indemnity or other fixed indemnity insurance if the employer includes any employer contribution in the employee’s taxable income or the employee pays for coverage on an after-tax basis
- Coverage for accident or disability income insurance, including supplemental disability insurance
- Liability insurance, including general liability and automobile insurance
- Worker’s compensation or similar insurance
- Credit-only insurance
Aggregate cost to be reported
The aggregate cost of “applicable employer-sponsored coverage” to be reported on employees’ Forms W-2 includes both amounts paid by the employer and amounts paid by the employee, regardless of whether the amounts are paid on a pre-tax or after-tax basis. This includes any employee contributions made on a pre-tax basis through a Code Section 125 Cafeteria Plan.
The reportable aggregate cost also includes amounts paid by the employer and employee for coverage for the employee’s spouse, dependent, and (if offered) domestic partner. The cost for domestic partner coverage must be reported on the employee’s Form W-2 even though coverage for the employee’s domestic partner who is not a dependent is taxable to the employee.
Calculation of aggregate cost to be reported
Employers may calculate the aggregate cost to be reported on Form W-2 using one of the following methods:
- The COBRA applicable premium method
Under this method, the reportable aggregate cost is equal to the applicable COBRA premium for the period (not including the permissible COBRA administrative fee). An employer may use this method whether the group health care plan is fully insured or self-insured.
- Premium charged method (for insured programs only)
This method is available only for employers that provide group health care benefits through a fully insured program. The reportable aggregate cost is the premium charged by the insurer for the level of coverage elected by the employee (for example, single or family coverage, as applicable).
- Modified COBRA premium method
This method is available only to employers that either subsidize COBRA premiums or base the current year’s COBRA premium on the prior year’s COBRA applicable premium. If the employer subsidizes the COBRA premium, such that the COBRA qualified beneficiary’s premium is less than the actual premium cost, the employer may determine the reportable aggregate cost using a reasonable good faith estimate of the COBRA premium. If the employer uses the prior year’s COBRA applicable premium as the COBRA premium for the current year, the employer may use prior year’s COBRA applicable premium for reporting purposes.
An employer may use different methods for different plans but must use the same method for all employees receiving coverage under a plan. Additional options are also available for employers that determine employee contributions based on composite rates.
The aggregate cost reported on an employee’s Form W-2 must reflect any increase or decrease in cost during the year. The reported aggregate cost must also reflect any changes in coverage an employee may make during the year, for example, enrolling in coverage, dropping coverage or switching from single coverage to family coverage.
The aggregate cost reported must be based on a calendar year, even if the employer is using a 12-month period that is not the calendar year for purposes of determining COBRA applicable premiums.
Reporting for former employees
If an employee terminates during the year and the employer continues to provide coverage after termination of employment, through COBRA or otherwise, the employer may use any reasonable method to report the aggregate cost of coverage as long as it does so consistently for all terminated employees receiving post-termination coverage. If the terminated employee requests a Form W-2 before the end of the calendar year in which the employee terminated, the employer is not required to report the aggregate cost of applicable employer-sponsored coverage on the Form W-2 issued at the employee’s request, and the employer is not required to issue another Form W-2 at the end of the calendar year to report that cost.
If an employer is not required to issue a Form W-2 to an individual who is receiving employer-sponsored coverage, such as a retiree or other former employee who did not receive any reportable compensation during the calendar year, the employer is not required to provide a Form W-2 solely to report the aggregate cost of the employer-sponsored coverage.
Actual reporting on Form W-2
The aggregate cost of applicable employer-sponsored coverage is reported in Box 12 using Code DD.
The IRS has stressed that the reporting of this cost is informational only and has no impact on whether the reported amounts are or would be taxable. The stated purpose of this mandated reporting is to provide useful and comparable consumer information to employees on the total cost of their health care coverage.
This new reporting obligation offers employers an opportunity to highlight the cost of the benefits they are providing to their employees. Many, if not most, employees have no idea of the true total cost of the health care coverage they receive through their employer-sponsored group health care plan. They usually only see the employee contribution they are required to pay, but do not appreciate the additional amount paid by the employer to provide this benefit.
Employers should consider generating an employee relations benefit from this new reporting obligation and its attendant administrative burdens. An employee education program timed for delivery near the end of January 2013, to coincide with delivery of the 2012 Forms W-2, that specifically focuses on the health care coverage offered by the employer can illustrate to employees this important tax-free benefit the employer provides.
For assistance or further information, please contact:
Antoinette M. Pilzner
Dale R. Vlasek
Benefit programs should be a win-win for employers and employees. We strive to accomplish that goal in the design, implementation and operation of sophisticated benefit and executive compensation programs — qualified and non-qualified retirement programs and health and welfare plans. Our employee benefits team has a long track record of working to maximize the efficiency and economic feasibility of each program. We are able to accomplish this by taking advantage of the complex tax rules and by understanding and rationalizing objectives of the company and its employees. Our employee benefit attorneys routinely work with employees and their internal human resources personnel to assist them in operating and administering their plans.
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