McGuireWoods Healthcare Reform Guide: Installment No. 20 – IRS Releases Transition Guidance for Reporting of Healthcare Costs

McGuireWoods Healthcare Reform Guide: Installment No. 20

April 8, 2011

This is the 20th in a series of WorkCite articles concerning the Patient Protection and Affordable Care Act and its companion bill, the Health Care and Education Reconciliation Act of 2010 (referred to collectively as the Act). This WorkCite discusses interim guidance issued by the Internal Revenue Service (IRS) in Notice 2008-28 (Notice) on the Act’s requirement that the aggregate cost of applicable employer-sponsored group health plan coverage be included in the information reported on Forms W-2 provided to the IRS and employees. Below is a summary of the key topics covered in the Notice.

Observation: According to the Notice, the new reporting requirement is “to provide useful and comparable consumer information to employees on the cost of their health care coverage.” It is doubtful, however, that many employees bother to notice any amounts reported on their Form W-2s other than wages paid and income taxes withheld. Also, it is not clear how much healthcare comparison shopping employees could or would undertake, based upon what must be reported on these forms under the Act. The cost to employers of compliance with the new reporting requirement, plus the cost to the Government of enforcement, may outweigh any possible benefits to employees.

Reporting Required Beginning for Year 2012

The Act requires reporting of healthcare costs on Forms W-2 effective for calendar years beginning on or after January 1, 2011. However, the IRS indicated last year that reporting would not be mandatory for the 2011 calendar year. In the Notice, the IRS states that employers may rely on the guidance provided therein if they voluntarily choose to report the cost of coverage on 2011 Forms W-2. Therefore, the first mandatory reporting will begin with the production of the 2012 Form W-2, which would typically occur in January 2013.

Employers Affected

The Notice provides that almost all employers are subject to the reporting requirements, including government and tax-exempt entities, churches and other religious organizations and employers that are not subject to COBRA, ERISA, or PHSA healthcare continuation requirements. However, for the year 2012, and until the issuance of further guidance, employers who file fewer than 250 Form W-2s are not required to report. Moreover, federally-recognized Indian tribal governments are excluded from the reporting requirements.

If employers are “related employers” under the Internal Revenue Code (Code) and one such employer is a “common paymaster” within the meaning of Code Section 3121(s) for wages paid to the employee, the common paymaster must include the aggregate reportable cost of the coverage provided to that employee by all the employers for whom it serves as the common paymaster on the Form W-2 issued by the common paymaster.

What Must Be Reported

Under the Notice, an employer must report 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 under the Code, or would be so excludable if it were employer-provided coverage. This includes both the portion of the cost paid by the employer and the portion paid by the employee, whether through pre-tax or after-tax contributions. Reportable cost also includes the full amount of the employee’s health flexible spending account for the year, reduced (but not below zero) by his or her salary reduction election for such account.

However, the costs for the following types of coverage are not reportable:

  • Any coverage for long-term care.
  • Coverage only for accident, or disability income insurance, or any combination thereof.
  • Any coverage under stand-alone dental or vision programs or plans.
  • Coverage under a health reimbursement arrangement, health savings account or Archer MSA.
  • An employee’s salary reduction contributions to a health flexible spending account.
  • Coverage issued as a supplement to liability insurance.
  • Liability insurance, including general liability insurance and automobile liability insurance.
  • Workers’ compensation or similar insurance.
  • Automobile medical payment insurance.
  • Credit-only insurance.
  • Other similar insurance coverage, specified in regulations, under which benefits for medical care are secondary or incidental to other insurance benefits.
  • Coverage only for a specified disease or illness, and hospital indemnity or other fixed indemnity insurance, the payment for which is not excludable from gross income and for which a deduction for health insurance costs for self-employed individuals is not allowable (e.g., a cancer insurance plan).
  • Coverage under a multiemployer plan.
  • Coverage provided under a self-insured group health plan (such as certain church plans) that is not subject to any COBRA continuation coverage requirements.
  • Coverage provided by the federal government, the government of any state or political subdivision thereof, or any agency or instrumentality of any such government, under a plan maintained primarily for members of the military or for members of the military and their families.

Determination of Cost of Coverage

The Notice provides that an employer can determine the reportable cost for a period by using the COBRA “applicable premium” for that coverage for that period. Under current guidance, the COBRA applicable premium calculation would meet these requirements if the employer made such calculation in good faith compliance with a reasonable interpretation of the statutory requirements under the Code.

Observation: The reason that the Notice is vague on this point is because, a full 25 years after COBRA was enacted, the IRS has yet to issue regulations on the calculation of COBRA premiums.

If the employer subsidizes the cost of COBRA, it may determine the reportable cost for a period based upon a reasonable good faith estimate of the COBRA applicable premium for that period, if such estimate is used as the basis for determining the subsidized COBRA premium.

If the actual premium charged by the employer to COBRA qualified beneficiaries for each period in the current year is equal to the COBRA applicable premium for each period in a prior year, the employer may use the COBRA applicable premium for each period in the prior year as the reportable cost for each period in the current year.

Alternatively, if an employee is covered by an employer’s insured group health plan, the employer can use the premium charged by the insurer for that employee’s coverage (for example, for single-only coverage or for family coverage, as applicable to the employee) for each period as the reportable cost for that period.

Employers that maintain plans on non-calendar plan years will need to report costs on a calendar year basis, using costs from the applicable portion of both plan years. Similarly, where an employee changes coverage during a calendar year, the Form W-2 must reflect the different reportable coverage costs for the periods that were separately elected.

How to Report

The cost of coverage should be reported in Box 12 of Form W-2, using the Code “DD.”

No Reporting for Certain Former Employees

According to the Notice, an employer does not have to issue a Form W-2 including the reportable cost of health coverage to an individual to whom the employer is not otherwise required to issue a Form W-2, such as a retiree or other former employee receiving no compensation who receives group health plan coverage.

Observation: An employer is required to report on Form W-2 all amounts deferred under a nonqualified deferred compensation plan (including earnings on amounts deferred) by an employee that are includible in his or her income under Section 409A of the Code because the plan failed to satisfy the requirements of Section 409A. If such a Form W-2 is provided to a former employee, the employer would have to include on that form the cost of any group health plan coverage of such former employee.

No Impact on Tax Liability

The Notice states that the disclosures are for informational purposes only and that they have no effect on an employee’s tax liability.

Observation: It is possible that the government may use the healthcare costs reported on Form W-2s for other purposes in connection with healthcare reform under the Act.

Penalties for Non-Compliance

Each willful failure to comply with the new reporting requirement can result in a penalty of $50. This is the same penalty that applies to any other willful failure to furnish a required statement to an employee.

Interim Guidance

The Notice is specifically described as being “interim.” More information on the Form W-2 requirements will be issued, but most changes will be applied only prospectively.