IRS Issues Revised Guidance on Form W-2 Health Coverage Cost ReportingTodd Solomon
March 12, 2012 — 2,138 views
The Internal Revenue Service (“IRS”) recently released guidance clarifying the requirement under Patient Protection and Affordable Care Act of 2010 (“PPACA”) that employers report the cost of employer-sponsored group health plan coverage on Form W-2, Wage and Tax Statement. The recent guidance restates, expands and clarifies prior IRS guidance on this requirement. Specifically, the recent guidance addresses the type of coverage that must be included in the cost calculation and the calculation methodologies employers may use to produce reportable figures.
Although the Form W-2 reporting requirement was optional for calendar year 2011 (for Forms W-2 that were issued to employees in January 2012), such reporting is mandatory for most employers beginning in calendar year 2012 (for Forms W-2 that will be issued to employees in January 2013). Employers should familiarize themselves with the recent guidance in order to prepare for mandatory reporting in calendar year 2012.
What Coverage Must Be Included When Calculating Aggregate Cost?
The PPACA provides generally that the aggregate cost of employer-sponsored group health plan coverage must be reported to employees via Form W-2. For purposes of this reporting requirement, “group health plan coverage” means coverage made available to an employee or a former employee under any group health plan, including most self-insured plans, which is excludable from the employee’s gross income. Certain types of coverage, however, are excepted from the reporting requirement. For example, employers do not need to include the following items when calculating and reporting aggregate cost:
- Cost of coverage under a dental or vision plan if such plans are excepted from HIPAA;
- Amounts contributed to an Archer MSA or a Health Savings Account;
- Amounts of any salary reduction election to a health Flexible Spending Arrangement;
- Cost of coverage under a Health Reimbursement Arrangement not included in aggregate reportable income;
- Cost of coverage under a multiemployer plan; and
- Cost of coverage provided under a self-insured group health plan that is not subject to federal continuation coverage requirements (i.e., a church plan).
Also, certain types of coverage are included only in specific circumstances. For example, coverage provided under an Employee Assistance Program (“EAP”), wellness program, or on-site medical clinic is includible in the aggregate reportable cost to the extent that the coverage is provided under a group health plan and the employer charges a premium for such coverage to beneficiaries of federal continuation coverage (e.g., COBRA).
Similarly, although the amount of any salary reduction election to a health FSA does not need to be included in the aggregate reportable amount, employers may need to report amounts if the employer itself contributes to the FSA or otherwise provides flex credits through a Section 125 cafeteria plan.
The IRS stated that until further guidance is issued, employers may rely upon a good faith application of a reasonable interpretation of existing guidance for purposes of determining whether a particular arrangement constitutes “group health plan coverage.”
How to Calculate and Report Aggregate Cost for Includible Coverage?
Aggregate cost may be calculated in accordance with one of several methods. First, employers may use the “COBRA applicable premium” method, under which the reportable cost for a particular period equals the COBRA premium for the relevant coverage that period, minus any applicable administrative fees. Alternatively, employers may use the “premium charged” method, under which the reportable cost for a particular period equals the actual premium charged by the insurer for an employee’s coverage that period. This method is only available for calculating the cost to employees who are covered by an employer’s insured group health plan. Finally, employers that subsidize the cost of COBRA may use a “modified COBRA premium” method, under which the employer may use a reasonable good faith estimate of the COBRA premium for the particular period.
Special rules apply to employers that charge employees a composite rate for coverage (i.e., the same premium for different types of coverage). Under these rules, 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 selected is applied consistently.
Once employers have calculated the aggregate reportable cost in accordance with one of the foregoing methods, such cost must be reported on Form W-2 in Box 12 using code “DD.”
Employers have three options for calculating cost when the last payroll period in a given year extends beyond December 31. 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.
Similarly, when calculating the cost of coverage, special consideration must 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 that period, such as using the cost at the beginning of the period or at the end of the period, or prorating costs, provided that the method selected is applied consistently.
The IRS clarified in the recent guidance that the aggregate reportable cost may be based solely on information available to the employer as of December 31 of the year at issue. Thus, any retroactive election or notice provided in the subsequent year is not required to be accounted for, and the employer does not have to issue a revised Form W-2 due to updated information.
Next Steps for Employers
Effective compliance with the Form W-2 reporting requirements will require thoughtful planning. Employers should begin charting their compliance strategy and assessing which types of coverage in their benefits package are subject to the reporting requirements and how they will accurately calculate and report the cost of such coverage. For more information, employers should review IRS Notice 2012-9.
Todd A. Solomon is a partner in the Employee Benefits Practice Group of McDermott Will & Emery’s Chicago office. He is the author of the third, fourth and fifth editions of Domestic Partner Benefits: An Employer’s Guide, and was the co-author of the book’s first and second editions.
Brian J. Tiemann is a member of the Employee Benefits Practice Group in the Chicago office of McDermott Will & Emery.
Employee Benefits Practice Group of McDermott Will & Emery's Chicago Office
Todd A. Solomon is a partner in the Employee Benefits Practice Group of McDermott Will & Emeryâ€™s Chicago office. He is the author of the third, fourth and fifth editions of Domestic Partner Benefits: An Employerâ€™s Guide, and was the co-author of the bookâ€™s first and second editions.