Monday, April 4, 2011

IRS issues guidance on informational reporting of health coverage under ACA

The IRS has issued interim guidance to employers on informational reporting on each employee's annual Form W-2 of the cost of the health insurance coverage they sponsor for employees.

According to the IRS, this new reporting to employees is for their information only, to inform them of the cost of their health coverage. It does not cause excludable employer-provided health coverage to become taxable. Employer-provided health coverage continues to be excludable from an employee's income, and is not taxable.

The Affordable Care Act (i.e., 2010 health reform legislation) provides that employers are required to report the cost of employer-provided health care coverage on the Form W-2. Notice 2010-69, issued last fall, made this requirement optional for all employers for the 2011 Forms W-2 (generally furnished to employees in January 2012). This guidance, Notice 2011-28, provides further relief for smaller employers (those filing fewer than 250 W-2 forms) by making this requirement optional for them at least for 2012 (i.e., for 2012 Forms W-2 that generally would be furnished to employees in January 2013) and continuing this optional treatment for smaller employers until further guidance is issued.

Using a question-and-answer format, Notice 2011-28 also provides guidance for employers that are subject to this requirement for the 2012 Forms W-2 and those that choose to voluntarily comply with it for either 2011 or 2012. The notice includes information on how to report, what coverage to include and how to determine the cost of the coverage.

Employers subject to reporting requirement. All employers that provide applicable employer-sponsored coverage are subject to the reporting requirement. This includes federal, state, and local government entities, churches and other religious organizations, and employers that are not subject to COBRA to the extent such employers provide applicable employer-sponsored coverage under a group health plan. Federally recognized Indian tribal governments are not subject to the reporting requirement until the 2012 Forms W-2 (i.e., the forms required for the calendar year 2012 that employers generally are required to furnish to employees in January 2013).

Applicable employer-sponsored coverage. "Applicable employer-sponsored coverage" means, with respect to any employee, coverage under any group health plan made available to the employee by the employer which is excludable from the employee's gross income under Code Sec. 106 or would be so excludable if it were considered employer-provided coverage under Code Sec. 106. Coverage is treated as applicable employer-sponsored coverage regardless of whether the employer or employee pays for the coverage.

Applicable employer-sponsored coverage does not include coverage for long-term care, accidents, or disability income insurance. Nor does it include coverage that applies to only a specified disease or illness, hospital indemnity, or other fixed indemnity insurance, the payment for which is not excludable from gross income and deductible under Code Sec. 162(l). Applicable employer-sponsored coverage does not include any salary reduction contributions to a flexible spending arrangement (FSA) under a cafeteria plan or contributions to an Archer medical savings account (MSA) or health savings account of the employee or the employee's spouse.

Methods of calculating the cost of coverage. An employer may calculate the reportable cost under a plan using the COBRA applicable premium method. Alternatively, (1) an employer that is determining the cost of coverage for an employee covered by the employer's insured plan may calculate the reportable cost using the premium charged method; and (2) an employer that subsidizes the cost of coverage or that determines the cost of coverage for a year by applying the cost of coverage in a prior year may calculate the reportable cost using the modified COBRA premium method. The reportable cost for an employee receiving coverage under the plan is the sum of the reportable costs for each period (such as a month) during the year as determined under the method used by the employer. An employer is not required to use the same method for every plan, but must use the same method with respect to a plan for every employee receiving coverage under that plan.

COBRA applicable premium method. Under the COBRA applicable premium method, the reportable cost for a period equals the COBRA applicable premium for that coverage for that period. If the employer applies this method, the employer must calculate the COBRA applicable premium in a manner that satisfies the requirements under Code Sec. 4980B(f)(4).

Premium charged method. The premium charged method may be used to determine the reportable cost only for an employee covered by an employer's insured group health plan. If the employer applies this method, the employer must 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.

Modified COBRA premium method. An employer may use the modified COBRA premium method with respect to a plan only where it subsidizes the cost of COBRA or where 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. If the employer subsidizes the cost of COBRA, the employer may determine the reportable cost for a period based upon a reasonable good faith estimate of the COBRA applicable premium for that period.

Small employer exception. In the case of 2012 Forms W-2 and until the issuance of further guidance, an employer is not subject to the reporting requirement for any calendar year if the employer was required to file fewer than 250 Forms W-2 for the preceding calendar year. Therefore, if an employer files fewer than 250 2011 Forms W-2 (meaning the Forms W-2 for the 2011 calendar year that employers generally furnish to employees in January 2012 and then file with SSA), the employer would not be subject to the reporting requirement for Forms W-2 for the 2012 calendar year.

For a comprehensive analysis of the Patient Protection and Affordable Care Act, including the full text of the law and additional information on health reform implementation and other recent developments in employee benefits, just click here.


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