Health Care Reform Part VII: Employers Must Prepare to Report Health Benefit Costs on Employees 2012 W-2 Forms

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1 Health Care Reform Part VII: Employers Must Prepare to Report Health Benefit Costs on Employees 2012 W-2 Forms Written by: Douglas R. Chamberlain, Esq., co-chair of Sulloway's Health Care Practice Group As part of the health care reform legislation enacted in 2010, Congress required employers to begin reporting the value of employer-sponsored health coverage on employees' W 2 forms. While implementation of this requirement was delayed for a year, it will apply to health benefits provided by larger employers during The IRS has now issued guidance for employers on complying with this new reporting requirement. This seventh article in our series on health care reform explains the new reporting requirement works and sub-regulatory guidance issued thus far, to help employers prepare to meet this new requirement. BASICS OF THE REPORTING REQUIREMENTS Under the Patient Protection and Affordable Care Act (PPACA), employers must report the value of employer-sponsored health coverage on their employees' W-2 forms. This is intended to build employee awareness of the cost of these benefits, so that they will become more careful consumers of healthcare services. More importantly, this requirement is a precursor to healthcare reform provisions that, beginning in 2018, will impose a tax on so-called "Cadillac plans" providing extremely generous benefits at correspondingly high costs. This requirement applies even if the cost and value of the coverage is excludable from the employee's gross income for income and employment tax purposes. This requirement was originally slated to apply beginning in However, to give employers time to adapt their payroll systems to comply, the requirement was delayed until In Notice , the IRS provides guidance for complying with the new requirement, beginning with any W-2 form issued in January, 2013 or later. Thus, in general the requirement first applies to health coverage provided by employers during The employer complies by reporting the "aggregate cost" of "applicable employer-sponsored coverage" in Box 12 on Form W-2, using code "DD." However, this information need not be reported on the corresponding Form W-3, Transmittal of Wage and Tax Statements. The employer must report the cost of coverage on a calendar year basis corresponding to the W-2 form in question, regardless of the plan year used by the health plan. Employers who fail to comply will be subject to the same penalties that apply to W-2 forms in general, ranging from $30 to $100 per form, depending on how long it takes the employer to comply. Reporting is not required for any employee who would not otherwise ordinarily be issued a W-2 form. Thus, no additional reporting is required with respect to retiree health

2 coverage unless the retired employee would otherwise receive a Form W-2, for example, covering the last year of active employment. Nor, of course, will forms be required with respect to self-employed individuals (such as partners) covered by an employer group health plan that also covers common law employees who do receive W-2 forms, since self-employed individuals generally do not receive these forms otherwise. If an employee terminates employment and requests a final W-2 form prior to the close of the year of termination, the employer need not report the cost of coverage on that form. Nor is the employer required to issue a separate W-2 after the close of the year solely for the purpose of satisfying the health coverage reporting requirement. Therefore, as to terminating employees, generally the cost of coverage must be provided on the W-2 form with respect to the employees' final year of employment only if the employee waits to receive a form issued in the normal course after the close of the taxable year, typically by the end of the following January. WHICH EMPLOYERS AND PLANS MUST COMPLY (AND WHEN)? The reporting requirement in general applies to all employers, including governmental and tax-exempt employers. However, the requirement will be delayed for at least one additional year for employers who issued fewer than 250 W 2 forms for the prior year. As of now these employers will only need to begin complying with the requirement in early 2014, with respect to the 2013 calendar taxable year. Further guidance may be issued with respect to these small employers at a later date, and until that guidance is issued they will continue to be exempt from the reporting requirement. The requirement applies to employer-sponsored group health plans, whether insured or self-insured and regardless of whether an employer, employee organization (such as a union) and/or the current or former employees contribute to the plan. To determine whether a specific arrangement is a group health plan for this purpose, employers can rely on a good faith interpretation of PPACA and other relevant guidance, including COBRA regulations. Under the requirement, in general the employer must report the aggregate cost of "applicable employer-provided coverage," generally including all coverage provided under a plan made available to the employee by the employer, regardless of (1) whether it is excludable from gross income for tax purposes; (2) who pays for the coverage; and (3) who is covered (such as the spouse and dependents of the employee). COVERAGE EXEMPTED FROM THE REQUIREMENT Notwithstanding the general rule, there are a number of types of coverage that need not be reported, including the following: Salary reduction contributions to a health flexible spending account (FSA) are exempt, although contributions funded by employer contributions, such as flexible spending dollars, must be reported.

3 Coverage for a specific disease, such as cancer, and fixed indemnity coverage (such as that provided by AFLAC) is excluded from the requirement; but only if funded on an after-tax basis. If these benefits are paid for by the employer or through pre-tax salary reductions under a cafeteria plan, they must be reported. Stand alone dental or vision coverage, funded by a contract that is completely separate from other health coverage (for example, dental coverage secured through a firm such as Delta Dental, need not be reported. On the other hand, if the coverage is provided as part of a group health plan (as is often the case with vision coverage), eventually the cost of this coverage will need to be reported. However, for the present all dental and vision coverage will be exempt, at least with respect to W-2 reporting for the 2012 taxable year. Coverage under a health reimbursement arrangement (HRA)need not be reported; along with the following: Contributions to an Archer medical savings account (MSA) or health savings account (HSA). Long term care coverage. Coverage under a multi-employer plan. Coverage for members of the military and their family. Credit insurance. Automobile medical payment insurance. Worker's compensation and similar insurance. Liability insurance. Coverage issued as a supplement to liability coverage. Accident and disability income insurance coverage. Coverage under a self-insured employer plan that is not subject to the COBRA requirements (such as church plans). It is important to note that some of these exclusions only apply on a transitional basis with respect to the 2012 Form W-2. The IRS may issue further guidance limiting the scope or availability of these exclusions. CALCULATING COVERAGE COSTS

4 In its guidelines the IRS provides four methods that may be used to calculate the cost of coverage reportable by employers under this requirement. Employers can use different methods for different plans, but the same method must be used for every employee with respect to any given plan. The approved methods are as follows: 1. The premium actually charged by the insurer for the employee's coverage for the applicable period. 2. The applicable COBRA premium for the period in question, including a good faith estimate of the COBRA premium, for example, in the case of self-insured plans. 3. If an employer subsidizes COBRA costs, a reasonable good faith estimate of the applicable COBRA premium may be used for this purpose. 4. Finally, the employer may report the cost of coverage on a composite basis, using the same reportable cost for the period for (1) the single class of coverage under the plan, or (2) all the different types of coverage under the plan for which the same premiums is charged, if this method is applied to all types of coverage provided under the plan. A plan with a composite rate would be one that charges an individual employee, two-person or family rate, regardless of how many members are in the family. If coverage cost changes during the taxable year, the reported amount must be adjusted accordingly. Otherwise, reporting the cost of coverage with respect to insured plans, as well as plans where COBRA costs are regularly calculated, should pose no particular difficulties. However, with respect to other types of coverage for which reporting is required, such as the value of medical clinics provided at the workplace, employee assistance plans, wellness benefits, etc., determining this cost may be difficult, and at this point the IRS has provided no guidance as to how these costs should be determined. If there is a change in coverage during the year, the reported amount must take into account the change in coverage by using any reasonable method to determine the reportable costs, such as averaging or prorating reportable costs. However, the same method must be used for all employees covered under the plan. If an employee has multiple employers during a calendar year, each employer must report the cost of coverage it provides. If the employee had a "common paymaster" (to use the applicable federal tax term) among multiple employers (for example, the employee moves from one corporate subsidiary to another during the year), the common paymaster reports the cost of the coverage. If an employee transfers to a successor employer (for example, due to a corporate acquisition, merger or reorganization), the successor employer can report the cost of coverage for both employers. FURTHER CONSIDERATIONS Employers should be alert for future IRS guidance with respect to various aspects of the requirement that may be applicable to them in the year ahead (especially small employers, who will presumably be required to comply with the requirement at some

5 point, albeit perhaps on a modified basis). We can also anticipate future guidance with respect to the reporting of benefits furnished via an HRA, as well as methods for valuing certain other types of coverage. The applicability of the reporting requirement to dental and vision benefits integrated with the employer's core health plan also should be clarified at some future date. Finally, further changes may well be required once the IRS issues guidance with respect to the tax on Cadillac plans, slated to take effect in 2018 assuming, of course, Congress does not repeal or significantly modify PPACA in the meantime. Finally, it must be emphasized that at least until the Cadillac plan tax takes effect, this is a reporting requirement only. It does not alter the tax treatment of employer-furnished group health coverage. Since traditionally the information on the Form W-2 has dealt primarily with taxable compensation (for purposes of preparing the employees' federal income tax returns), the potential definitely exists for confusion or alarm on the part of employees when they receive W-2 forms indicating the cost of their employer-provided health insurance coverage. Employers may thus wish to consider whether some sort of outreach to employees would be appropriate when the new-style W 2 forms are issued. In this regard, note that many employers have for years provided employees with information concerning the total value of their compensation package (taxable and nontaxable elements) for employee relations and compensation management purposes. With the enactment of healthcare reform, a school of thought emerged that would discourage such disclosure. In this case, however, the same might prove valuable in terms of anticipating and addressing employee questions and concerns relative to the tax treatment of their employer-provided health coverage. No doubt employer opinions and approaches to this issue will evolve as the ongoing saga of healthcare reform continues to unfold. CONCLUSION Employers who will be subject to the health coverage reporting requirement for the 2012 taxable year (that is, those who will issue 250 or more W-2 forms for 2011) should begin to modify their payroll systems immediately, so that they will have the required information in hand for the 2012 W-2 forms that must be distributed in January of Employers and their payroll services must implement systems to determine what coverage is subject to the reporting requirements for each employee, calculate the cost of that coverage and report its aggregate value on each form. Finally, employers must be alert for future IRS guidance on this topic, and be prepared to respond to employee questions and take steps to allay their concerns. IRS Notice is available at The IRS has also published a chart based on IRS Notice , which the Agency reports contains the requirements for tax-year 2012 and beyond, until further guidance. The IRS indicates that the chart contains items listed as "optional" which are designated as such based on transition relief provided by Notice , and their "optional" status

6 may be changed by future guidance. However, any such change will not be applicable until the tax year beginning at least six months after the date of issuance of such guidance. The chart was created at the suggestion of and in collaboration with the IRS's Information Reporting Program Advisory Committee (IRPAC). IRPAC's members are representatives of industries responsible for providing information returns, such as Form W-2, to the IRS. The chart is available on line at: If you have any questions concerning the new reporting requirements or any aspect of health care reform, please contact Doug Chamberlain, co-chair of our firm's Health Care Practice Group. A version of this article will appear in a forthcoming issue of the New Hampshire Employment Law Letter, published by M. Lee Smith Publishers, LLC of Brentwood, Tennessee and edited by the attorneys of Sulloway's Labor and Employment Group.