recently released w-2 reporting guidance offers plan sponsors some relief
on march 29, the irs issued its interim guidance detailing the “who, what, and when” requirements for group health insurance w-2 reporting. To the surprise of many, the outcome (Notice 2011-28) is not as unfavorable to plan sponsors and administrators as anticipated. Although the IRS has delayed addressing some of the more complicated requirements to a later date, there is still much in the new guidance that plan sponsors will need to know and follow in order to remain compliant. As always, Wage Compliance is here to help with a detailed summary of the new guidance, as well as providing recommendations to employers and plan sponsors.
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Background The Affordable Care Act of 2010 requires employers to annually report the aggregate cost of employer-sponsored health coverage on IRS Form W-2. Employers were initially supposed to comply with this reporting requirement by including this information on each employee’s W-2 form beginning January 1, 2011. However, the IRS had previously issued conflicting guidance stating 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 reporting requirements, provides employers with additional assistance in completing Form W-2, and also includes relief for employers from some of the filing requirements. the most recent interim guidance is applicable until additional guidance is issued. Fortunately for everyone, the IRS issued the guide in a very detailed question-and-answer format with helpful examples that clarify the obligations of most employers.
It is important to note that the reporting requirement is for informational purposes only. neither this notice nor any additional guidance contemplated will make otherwise excludable employer-provided health care coverage (and the cost to be reported on the w-2 form) become taxable to employees.
Who should report? All employers that provide applicable employer-sponsored coverage must include the full cost of employer-sponsored health coverage on their employees’ W-2 forms. This requirement applies to federal, state, and local government entities, churches and other religious organizations, and employers that are not subject to the 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-2 forms, and (d) w-2 forms issued to retirees or persons not receiving compensation.
Who reports what 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.
Generally, each employer providing coverage must report the prorated cost on the employee’s W-2 form. if the employee is terminated, the employer may also include pay amounts paid by the employee after termination.
If the employers are related and have a common payer, the payer may itemize the total cost to be reported on a single w-2 form.
The same basic rules apply to both predecessor and successor employers, unless the successor employer chooses to report all wages paid by both employers during the calendar year on a single Form W-2. in this case, the successor employer must also report the full cost of reportable coverage provided by both employers.
Costs are determined on a month-to-month basis for employees who begin or end 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, reportable amounts are the sum of monthly or partial costs. it is also reasonable for the employer to prorate 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 in part by an employer (including a self-employed person) or employee organization that provides health care to employees, ex employees, the employer or others associated or formerly associated with the employer in a business relationship, or their families. also includes on-site medical clinics.
The employer may rely on a good faith application of a reasonable interpretation of applicable law and guidance to determine whether its plan constitutes an employer-sponsored plan.
what should be reported? Employers must report the aggregate cost of applicable employer-sponsored coverage on Form W-2, which is the total cost of coverage under any group health plan that an employer has made available to the employee and that is excludable. of the employee’s gross income, or would be excludable if it were employer-sponsored coverage, and includes both the employer-paid share of cost and the employee-paid share of cost, regardless of whether the employee paid the cost with contributions before or after taxes. For example, if an employee paid for health care coverage for an adult child over the age of 26, that cost would be paid by the employee with taxable dollars. The employer would include that cost on the employee’s W-2 form, along with amounts paid by the employer for health care coverage provided to the employee that is not included in the employee’s income. As another example, the employer would include on the W-2 form any excess reimbursement included as gross income made to a highly compensated employee.
however, certain costs are excluded from reporting requirements, including the following:
- amounts contributed to any msa archer;
- amounts contributed to any health savings account (hsa);
- the amount of any employee salary reduction contributed to a health care flexible spending account (fsa). This exemption, however, does not include employer flexible credits or contributions made to a health care fsa under certain circumstances. see “employer flexible credits” below;
- coverage costs under a health reimbursement agreement (hra);
- costs of long-term care coverage;
- coverage costs described in IRC section 9832(c)(1) (eg, costs that are similar to accident or disability income insurance). this exemption does not include costs for on-site medical clinics;
- costs of coverage under a separate policy, certificate or contract of insurance for dental or vision care. this exemption does not include any cost of dental or vision care coverage that is integrated into a group health plan;
- coverage costs described in irc section 9843(c)(3) (e.g., costs related to specific diseases or indemnity insurance, the payment of which cannot be excluded from gross income and for which it is applied a deduction under section 162(l) is not allowed);
- coverage costs for a laid off employee requesting to receive their w-2 before the end of the calendar year;
- costs of coverage provided under a multiemployer plan;
- Cost of coverage provided under a self-insured group health plan that is not subject to any federal continuation coverage requirements (eg, a church plan), including Cobra, Erisa, or the Health Service Act public health and the requirement for temporary continuation of coverage under the federal employee health benefits program;
- costs of coverage provided by the federal government, the government of any state or political subdivision thereof, or any agency or instrumentality of such government under a plan maintained primarily for members of the armed forces and their families; and
- coverage costs from an employer that is required to file fewer than 250 w-2 forms for the previous calendar year.
employer flexible credits to a cafeteria plan: the health care fsa amount for a cafeteria plan year is equal to the amount of the employee’s salary reduction plus any optional employer flexible credits the employee applies to the health care fsa. When determining the total cost to report, the amount of the health care fsa is reduced (but not below zero) based on the employee’s salary reduction election.
if the salary reduction amount for all qualified benefits in a cafeteria plan chosen by an employee equals or exceeds the health care fsa amount for the plan year, the employer does not include the salary reduction amount health care fsa for that employee in the total reportable cost. however, if the amount of the health care fsa for the plan year exceeds the salary reduction elected by the employee for the plan year due to employer flex credits, the amount of that employee’s health care fsa, minus the employee’s wage reduction election for health care. fsa, must be included in the total reportable cost. Essentially, this would be equal to the value of the flex credits used for the health care fsa.
As you might imagine, this provision makes reporting a bit more onerous because the employer cannot analyze coverage globally. rather, the employer must consider each employee’s individual choices for the cafeteria plan. For example, let’s say an employee makes a $2,000 salary reduction election for various benefits for a calendar year cafeteria plan, including $1,500 for the health care FSA. In addition, the employer offers a flexible credit of $1,000. In this example, none of the health care fsa amount is taken into account in determining the total cost that must be reported because the reduction in the employee’s wages exceeds the health care fsa election amount. As a result, the employee’s cost of qualified benefits is $3,000 ($2,000 salary reduction, plus $1,000 provided by the employer).
here is another example. An employee elects a $700 wage reduction for the Health Care FSA and the employer matches the employee’s wage redirection with an additional $700 for the Health Care FSA. The employee’s health care fsa amount is $1,400, which exceeds the $700 salary reduction election for the plan year. In this example, the employer must include the $700 flexible credit when determining the total cost to report. As a result, the employee’s cost of qualified benefits is $700.
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methods for calculating the cost of coverage An employer may apply any reasonable method to report the cost of coverage provided under a group health plan using one of the following methods:
- The applicable premium method charged that meets the requirements of IRC section 4908b(f)(4) may be used to report the cost of coverage for a fully insured plan.
- A premium charged or modified charge calculation may be used.
- The “charged premium” method can only be used for an employer’s fully insured plan and would be the actual premium charged by the insurer.
- The “modified premium charges” method involves a plan in which the employer subsidizes the cost of charges. If the actual premium charged by the employer to qualified cobra beneficiaries is equal to the premium charged in a prior year, the employer may use the premium charged in the prior year as the reportable cost for the current year. In other words, both employer and employee costs toward the premium collected would be reported.
- A “composite rate” refers to premiums that are the same dollar amount, regardless of whether the employee chooses individual or family coverage or whether there are different types of coverage, such as self-only, family, or one plus one and family coverage. The employer may calculate the same reportable coverage for the single class or all different types under the plan for which employees are charged the same premium, provided that this method applies to all types of coverage provided under the plan.
- exclusion to report coverage for hras;
- exclusion of w-2 forms provided to employees laid off before the end of the year;
- multi-employer plan exclusion;
- exclusion of dental and vision plan;
- exclusion for self-insured plans not subject to charges; and
- employer exclusion for those employers who annually file fewer than 250 w-2 forms
An employer is not required to use the same method for each plan, but must use the same method with respect to a plan for each employee covered under the plan. these are methods, which should not be construed as reporting premiums actually paid or provided by the employee or employer.
And remember, the employer does not need to report premiums paid after termination of employment; is optional.
How is the cost of coverage reported? The employer reports the cost of coverage on each employee’s W-2 form in box 12 using the code “dd.” And when transmitting Form W-2 figures to the Internal Revenue Service (IRS), the combined total is not included in Form W-2, “Transmission of Wage and Tax Statements.”
See the 2011 W-2 form and instructions at: www.irs.gov under “Forms and Publications.”
When is reporting required? Employers are required to include the full cost of their group health insurance for calendar years beginning after December 31, 2011, which means employers are required to report this information on their employees’ 2012 W-2 form, which typically It is issued in January 2013. Of course, employers can begin to comply with this reporting requirement on the 2011 Form W-2s if their procedures are already in place.
“even more to come” the w-2 reporting guide is both technical and lengthy. furthermore, certain provisions of this interim guidance only provide transitional relief. in other words, the new rules are yet to come. in fact, the additional guidance may limit the availability of some or all of this transitional relief. so let’s take a look at what’s to come:
These items are awaiting further guidance and have not yet received an all-time blanket exception, but will continue until further guidance is issued.
We can expect more directives on w-2 reporting to fill in some of the gaps not addressed in this interim guidance. If you would like to read the full notice or submit 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 memorandum is not intended to be legal, accounting or professional advice. We assume no liability in connection with their use and these comments are not intended to address specific situations. If you have questions about your specific situation, we recommend that you seek independent advice.