Issues New and Updated Guidance on W-2 Health Coverage Reporting

The IRS has issued Notice 2012-9, providing updated and new guidance on the reporting of employer-provided health plan coverage on Forms W-2, as required by the health reform law ("PPACA"). The new notice supersedes the March 2011 Notice 2011-28 (see Client Action Bulletin 11-03) and applies to taxable years beginning in 2012 (i.e., the W-2s employers generally furnish to employees by the end of January 2013).

The reporting requirement does not apply for 2012 to employers that file fewer than 250 Forms W-2, and exempt from the requirement altogether are multiemployer plans, self-insured plans such as churches that are not subject to federal healthcare continuation coverage requirements, and plans sponsored by government entities primarily for military personnel and their families.

Background

The PPACA included a requirement that employers report the cost of healthcare coverage on employees' W-2 starting with the 2011 tax year. The IRS in late 2010 provided a delay until the 2012 tax year and allowed for voluntary reporting until then.

The notice that the IRS released last March provided interim guidance on how to report the information, the types of coverage subject to the reporting requirements, and calculation methods to determine the cost of coverage. The notice also provided for voluntary reporting – at least through 2012 – by employers that file fewer than 250 Forms W-2. In addition, the notice stated that more expansive requirements the IRS later publishes would apply prospectively.

Modified Items in Notice 2012-9

The IRS's new notice clarifies that employers need not include the cost of coverage under a dental or vision plan if the plan satisfies the "excepted benefits" conditions of the 1996 Health Insurance Portability and Accountability Act (HIPAA). Among other things, HIPAA imposed access, renewability, and portability requirements for healthcare coverage but exempted certain benefits, including limited scope dental or vision benefits provided under a separate policy, certificate, or contract of insurance, or if such benefits are not an "integral" part of a health plan. Benefits are not integral to a plan – and thus exempt from the HIPAA requirements – if participants have the right to opt out of the benefit and, if they do elect such benefits, they must pay an additional premium or contribution for that coverage.

In other modifications, Notice 2012-9 provides the following:

• Employers need not report cafeteria plan health flexible spending account (FSA) amounts unless the amounts exceed the employee's salary reduction election for the plan year.
• The 250 threshold for the transitional exemption from reporting is determined based on the number of forms the small employer would be required to file if it filed Forms W-2 to report all wages paid and without regard to the use of a third-party payroll agent.
• Related employers concurrently employing an employee and that do not use a common paymaster may report the entire aggregate reportable cost on one of the Forms W-2 furnished to the employee or allocate the amount among the employing employers using any reasonable method.
• Excess reimbursements included in a highly compensated individual's gross income under tax code section 105(h) or payments/reimbursements of premiums for a 2% shareholder-employee of an S corporation are not taken into account in determining the W-2 aggregate reportable cost.
• Employers charging a composite rate for active employees but not for COBRA-qualifying beneficiaries may use either the composite rate or the applicable COBRA premium for determining the aggregate cost of coverage, provided that the same method is consistently used for all active employees and consistently used for all COBRA-qualifying beneficiaries.

Newly Addressed

Notice 2012-9 addresses the following new items:

The final rule also provides guidance to advisers on adhering to other conditions in order to qualify for the statutory exemption. They include:

Employee Assistance Programs (EAPs), Wellness Programs, and On-Site Clinics – Employers need not include the cost of coverage as part of the reportable amount if they do not charge a COBRA premium to COBRA-qualifying beneficiaries for these programs or if the employers are not subject to the COBRA healthcare continuation coverage requirements. The amounts are reportable, however, if the coverage is provided under a program that is considered a group health plan.

Optional Reporting – Employers may include the cost of employer-sponsored coverage that is not required to be reported, such as for health reimbursement accounts (HRAs), multiemployer plans, EAPs, wellness programs, or on-site medical clinics.

Health Plan Component Programs – For long-term disability or other programs that do not constitute applicable employer-sponsored coverage but that may provide health benefits, employers may use any reasonable allocation method to determine the proportionate cost.

Employers may exclude or optionally report the cost of programs providing only incidental benefits in comparison to the coverage required to be reported.

Retroactive Cost Adjustments – Employers need not recalculate or furnish a revised W-2 if information available (e.g., elections due to an employee's divorce) after Dec. 31 of a calendar year would have modified the cost of coverage reported for that year.

In addition, the notice provides guidance on: calculating the cost of coverage for a year-end payroll period that extends into a subsequent year; reporting of the cost of coverage provided under hospital indemnity or other fixed indemnity insurance, or for specified diseases or illnesses; and reporting by third-party sick-pay providers.

ACTION

Employers should review Notice 2012-9 to ensure compliance with PPACA's W-2 reporting requirements. Although there is helpful information in the notice, more guidance from the IRS will be necessary to address the broad range of practical administrative challenges that employers encounter with their health plans and related programs. Employers may wish to anticipate questions employees may have about the new reporting requirements in drafting updated communications materials, noting that the IRS continues to emphasize that the reporting is only for informational purposes and "does not cause excludable employer-provided coverage to become taxable." Employers also should ensure appropriate coordination with their recordkeeping systems and payroll administrators to take into account employees who change or drop coverage, who add or remove dependents, or who move from one health plan to another.

For additional information about the IRS's guidance on Form W-2 reporting requirements, please contact your benefits consultant.