On March 29th, the IRS issued its interim guidance detailing the "who, what and when" requirements for W-2 reporting of group health insurance. To the surprise of many, the result (Notice 2011-28) is not nearly as unfavorable to plan sponsors and administrators as anticipated. While the IRS has delayed addressing some of the more complicated requirements until a later date, there is still much in the new guidance that plan sponsors will need to know and adhere to in order to remain compliant. As always, WageWorks Compliance is here to assist with a detailed summary of the new guidance, as well as to provide recommendations for employers and plan sponsors.
The Affordable Care Act of 2010 requires employers to report the aggregate cost of employer-sponsored health coverage annually on IRS Form W-2. Initially, employers were supposed to comply with this reporting requirement by listing this information on each employee's Form W-2 beginning on or after January 1, 2011. However, the IRS had previously issued conflicting guidance that stated that the W-2 reporting requirements would be voluntary in 2011 and that the mandatory reporting requirements for 2012 would be delayed until January 2013.
This newly released interim guidance clarifies the timing of the reporting requirements, provides employers with additional assistance for completing the Form W-2 and also includes relief to employers from some of the filing requirements. The most recent interim guidance is applicable until further guidance is issued. Fortunately for all, the IRS issued the guidance in a very detailed Q&A format with helpful examples that clarifies most employers' obligations.
It is important to note that the reporting requirement is purely for informational purposes only. Neither this notice nor any additional guidance being contemplated will cause otherwise excludable employer-provided healthcare coverage (and the cost to be reported on the Form W-2) to become taxable to employees.
Who Must Report?
All employers that provide applicable employer-sponsored coverage must include the aggregate cost of employer-sponsored health coverage on their employees' Form W-2. This requirement applies to federal, state and local government entities, churches and other religious organizations, and employers that are not subject to COBRA continuation requirements. There are, however, a couple of exceptions to this rule. Employers that are exempt from this requirement include (a) plans maintained by federal, state and local government entities whose plans primarily cover members of the military and their families, (b) federally recognized Indian tribal governments, even if those plans include civilians of such entities, (c) employers who file fewer than 250 W-2s and (d) W-2s issued to retirees or those persons who do not receive compensation.
Who Reports Which Costs?
When an employee works for more than one employer in a calendar year, there will be a question of who is responsible for reporting what portion of the employee's health insurance costs.
In general, each employer providing coverage will have to report the prorated cost on the employee's W-2. If the employee is terminated, the employer can also include the COBRA payment amounts paid by the employee after termination.
If the employers are related and have a common paymaster, the paymaster may detail the aggregate reportable cost on a single W-2.
The same basic rules apply to both predecessor and successor employers, unless the successor employer opts to report all wages paid by both employers during the calendar year on a single W-2. In this case, the successor employer must also report the aggregate reportable cost of coverage provided by both employers.
Costs are determined on a month-by-month basis for employees who begin or terminate coverage during the year or for employees who change coverage during the year. Even when costs change during the year, such as when rates are not calculated on a calendar-year basis, the reportable amounts are the aggregate of the monthly, or partial-month costs. It is also reasonable for the employer to prorate the reportable costs for the calendar year.
What is Employer-sponsored Coverage?
Employer-sponsored coverage includes any group health plan (including a self-insured plan) provided and funded in whole or part by an employer (including a self-employed person) or employee organization that provides healthcare to employees, former employees, the employer or others associated or formerly associated with the employer in a business relationship, or their families. It also includes on-site medical clinics.
The employer may rely upon a good faith application of a reasonable interpretation of the statutory provisions and applicable guidance in determining whether their plan constitutes an employer-sponsored plan.
What Must be Reported?
Employers must report the aggregate cost of applicable employer-sponsored coverage on the Form W-2, which is the total cost of coverage under any group health plan made available to the employee by an employer that is excludable from the employee's gross income, or would be excludable if it were employer-sponsored coverage, and 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 the cost with pre-tax or after-tax contributions. For example, if an employee paid for healthcare coverage for an adult child over the age of 26, that cost would be paid by the employee with taxed dollars. The employer would include that cost on the employee's Form W-2, along with the amounts paid by the employer for healthcare coverage provided to the employee that is not included in the employee's income. As another example, the employer would include on the Form W-2 any excess reimbursements included as gross income made to a highly-compensated employee.
Certain costs are, however, excluded from the reporting requirements, including the following:
Employer Flex Credits to a Cafeteria Plan
The amount of the healthcare FSA for a cafeteria plan year equals the amount of the employee salary reduction plus any optional employer flex credits that the employee applies to the healthcare FSA. In determining the aggregate reportable cost, the amount of the healthcare FSA is reduced (but not below zero) by the employee's salary reduction election.
If the amount of the salary reduction for all qualified benefits in a cafeteria plan elected by an employee equals or exceeds the amount of the healthcare FSA for the plan year, the employer does not include the amount of the healthcare FSA for that employee in the aggregate reportable cost. If, however, the amount of the healthcare FSA for the plan year exceeds the salary reduction elected by the employee for the plan year because of the employer flex credits, the amount of that employee's healthcare FSA, less the employee's salary reduction election for the healthcare FSA, must be included in the aggregate reportable cost. Essentially, this would be equal to the value of the flex credits used for the healthcare FSA.
As you can imagine, this provision makes reporting a little more onerous because the employer is not able to look at coverage on a global basis. Rather, the employer must look at each employee's individual elections to the cafeteria plan. For example, let's say an employee makes a $2,000 salary reduction election for several benefits for a calendar-year cafeteria plan, including $1,500 to the healthcare FSA. In addition, the employer offers a flex credit of $1,000. In this example, none of the healthcare FSA amount is taken into account for purposes of determining the aggregate reportable cost because the employee's salary reduction exceeds the amount of the healthcare FSA election. As a result, the cost of qualified benefits for the employee is $3,000 (salary reduction of $2,000, plus $1,000 provided by the employer).
Here's another example. An employee makes a $700 salary reduction election for the healthcare FSA and the employer matches the employee's salary redirection with an additional $700 for the healthcare FSA. The amount of the employee's healthcare FSA is $1,400, which exceeds the salary reduction election of $700 for the plan year. In this example, the employer must include the $700 flex credit in determining the aggregate reportable cost. As a result, the cost of qualified benefits for the employee is $700.
Methods of Calculating the Cost of Coverage
An employer may apply any reasonable method for reporting the cost of coverage provided under a group health plan by using one of the following methods:
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 who receives coverage under the plan. These are methods – not to be construed as reporting COBRA premiums actually being paid or provided by the employee or employer.
And remember, the employer need not report COBRA premiums paid after termination of employment – it is optional.
How Is the Cost of Coverage Reported?
The cost of coverage is reported by the employer on each employee's Form W-2 in Box 12 using code "DD." And when transmitting the Form W-2 figures to the Internal Revenue Service (IRS), the combined total is not included on the Form W-2, "Transmittal of Wage and Tax Statements."
See the 2011 Form W-2 and instructions at: www.irs.gov under ""Forms and Publications."
When is Reporting Required?
Employers must include the aggregate cost of their group health insurance for calendar years starting after December 31, 2011, which means that employers must report this information on their employee's 2012 Form W-2s that are generally issued in January of 2013. Of course, employers may begin to comply with this reporting requirement on the 2011 Form W-2s if their procedures are already in place.
"Still More to Come"
The Form W-2 reporting guidance is both technical and lengthy. In addition, certain provisions of this interim guidance only provide transition relief. In other words, new rules are yet to come. In fact, further guidance may limit the availability of some or all of this transition relief. So let's take a look at what's yet to come:
These items are awaiting further guidance and have not yet received a blanket exception for all times, but will continue until further guidance is issued.
We can look forward to more directives on Form W-2 reporting to fill some of the holes that were not addressed in this interim guidance. If you would like to read the entire Notice or send comments to the IRS about this interim guidance, go to http://www.irs.gov/pub/irs-drop/n-11-28.pdf.
The information contained in this memo is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use and these comments are not directed to address specific situations. If you have questions about your specific situation, we recommend that you obtain independent advice.