IRS Amends and Supplements "Interim" Guidance on Form W-2 Reporting of Cost of Health Coverage
Employee Benefits Alert
The IRS recently issued updated "Q&A" guidance on the new requirement, under the Patient Protection and Affordable Care Act, that employers report on Form W-2 the cost of employer-sponsored group health plan coverage provided to each employee for the year. As described in our April 27, 2011 Focus On Employee Benefits, Notice 2011-28 had provided initial, interim Q&A guidance implementing the new requirements, which are codified in Internal Revenue Code ("Code") section 6051(a)(14). The new guidance, in Notice 2012-9 (which is scheduled to be published in Internal Revenue Bulletin 2012-4, on January 23), restates, amends, and supplements the initial guidance.
Notice 2012-9 makes a number of modifications to the initial guidance, to clarify that:
- Coverage under a health flexible spending arrangement (health "FSA") funded entirely with employee salary reduction contributions (i.e., without any employer non-cash "flex credits") is not reportable on Form W-2. (Q&A-19)
- The scope of "non-integrated" dental or vision benefits that are exempt from the reporting requirements is intended to encompass all "HIPAA-excepted" dental and vision coverage. (Q&A-20)
- Any "excess reimbursements" includible in a highly-compensated individual's gross income, due to a self-funded plan's failure to satisfy the nondiscrimination requirements under Code section 105(h), are not included in the cost of coverage reported on Form W-2. This represents a change in the IRS's position from the initial guidance, which had indicated that such excess reimbursements were, in fact, includible in the reportable amount. (Q&A-23)
- Employers that use a "composite rate" for active employees' premiums, but not for COBRA beneficiaries, may use either the composite rate or the COBRA applicable premium in calculating the reportable cost of coverage, provided that the chosen method is used consistently.1 (Q&A-28)
- Special rules apply to related employers that do not use a common paymaster. (Q&A-7)
- The fact that an employer uses an agent to file some or all of its Forms W-2 essentially is ignored in determining whether it qualifies for the reporting exemption for certain "smaller" employers (i.e., those that filed fewer than 250 Forms W-2 for the previous year). (Q&A-3)
- The reporting requirements do not apply to certain tribally chartered corporations that are wholly-owned by a federally-recognized Indian tribal government. (Q&A-3)
In addition, Notice 2012-9 provides for some additional guidance in the form of new "Qs&As." Specifically, the additional guidance provides that:
- Coverage under an employee assistance program ("EAP"), wellness program, or on-site medical clinic need not be included in the cost of coverage reported on Form W-2, if the employer does not charge a premium to COBRA beneficiaries to continue their coverage in such programs following a termination of employment or reduction in hours. (Q&A-32)
- An employer may voluntarily report the cost of any group health coverage that is employer-sponsored coverage, but that is not required to be reported, pursuant to the guidance in Notices 2011-28 and 2012-9 (for example, the cost of coverage under a health reimbursement arrangement ("HRA"), multi-employer plan, EAP, wellness program, or on-site clinic). (Q&A-33)
- For a plan that provides some coverage that is reportable and some coverage that is not reportable on Form W-2 (e.g., a long-term disability program that also provides some health care benefits), an employer may use any reasonable method to allocate the portions of the plan that provide the reportable versus non-reportable coverage. In addition, the employer may report the cost of all coverage under the plan if the non-reportable portion is merely "incidental" to the reportable portion, and need not report the cost of any coverage under the plan if the reportable portion is merely incidental to the non-reportable portion. (Q&A-34)
- An employer may calculate the reportable cost of coverage for a calendar year based on the information that is available to it as of December 31 of that year, without regard to any elections made or notifications provided in the following year (even if such elections have a retroactive effect, and impact coverage provided during the preceding year). For example, where an employee in January furnishes notice to an employer of a divorce or the birth of a child, which has a retroactive effect on the employee's coverage (going back to December of the previous year), the employer will not need to take that notice or retroactive coverage change into account in calculating the cost of coverage for the preceding year. (Q&A-35)
- Where a coverage period -- such as the final payroll period for a calendar year -- includes December 31 but extends into the following calendar year, the employer can choose to treat that coverage as having been provided entirely in the first year, entirely in the second year, or partially in the first year and partially in the second year (using a reasonable allocation method that generally relates to the number of days in the coverage period that fall within the first year versus the second year). The method chosen by the employer must be applied consistently to all employees. (Q&A-36)
- The cost of coverage provided under a hospital indemnity (or other fixed indemnity) or specified disease or illness plan must be included in the cost of coverage reported on Form W-2, unless the benefits are offered as independent, non-coordinated benefits, and the employee purchases the coverage with after-tax dollars (or is taxed on the cost of the coverage provided by the employer). (Q&A-37 and 38)
- A third-party sick pay provider that furnishes Forms W-2 to employees will not need to include the reportable cost of employer-sponsored health coverage on those Forms W-2; only the Forms W-2 furnished to the employees by the "true" employer will need to include the reportable cost of coverage. (Q&A-39)
As with Notice 2011-28, the new guidance and "transition relief" apply with respect to 2012 Forms W-2, which generally must be furnished to employees in January 2013. Future guidance may limit the availability of some or all of the relief, but on a prospective basis only (applying no earlier than January 1 of the year that begins at least 6 months after the guidance is issued, and in no event applying to 2012 Forms W-2).
Employers that have specific concerns with respect to the current guidance may want to consider submitting comments to the IRS and Treasury Department. Notice 2012-9 indicates that comments submitted in response to Notice 2011-28 will continue to be considered, as the IRS and Treasury Department begin to develop regulations implementing the Form W-2 reporting requirements.
1 An employer charges a “composite rate” where (1) a single premium is charged to each employee who has coverage under a group health plan, regardless of the number of dependents who are also covered, or (2) there are different groups of coverage tiers under the plan, and employees with coverage in each respective group are charged the same premium (e.g., one premium is charged for either employee-only or employee-plus-spouse coverage (tier 1), and another premium is charged for family coverage without regard to the number of dependents covered (tier 2)).
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