By Susan H. Sherman of Miller Johnson
The Patient Protection and Affordable Care Act enacted in March 2010 contains many provisions that have little to do with how health care is delivered or how health plans provide coverage. One of these “extra” provisions is a requirement that employers report the value of the health insurance they provide to an employee on the employee’s Form W-2. This requirement is effective for 2011, which means the information will need to be included in W-2s issued in January 2012.
But IRS regulations contained a “quirk” that would have required employers to be prepared for this new requirement much sooner. A former employee may request a W-2 at any time during the calendar year, and the former employer is required to respond to the request within 30 days. This would have meant employers needed to be prepared to comply with the new reporting requirement in early 2011. However, the IRS has made reporting the cost of coverage optional with respect to 2011 (see box, below).
Congress created the new reporting requirement for two reasons. First, it wants to educate employees on the cost of the health insurance benefits they receive, and it determined that reporting the value of the benefit on employees’ W-2s would accomplish that goal. Second, compliance will help employers determine whether they have a high-cost plan that will be subject to the excise tax on “Cadillac” health plans, and give them time to modify the coverage before the excise tax becomes effective in 2018. It is also a potential tool to help the federal government monitor for compliance with the individual and employer “pay or play” mandates that go into effect in 2014.
The new requirement does not change the tax treatment of employer-provided health insurance. It is still a tax-free benefit.
The IRS still needs to issue guidance on the specifics of complying with this new reporting requirement. But here is what is known so far:
• Employers must report the aggregate cost of “applicable employer-sponsored coverage.”
• Applicable employer-sponsored coverage is major medical coverage, including “mini-med” or limited coverage plans, amounts under self-funded medical reimbursement plans and health reimbursement arrangements (HRAs), employer-provided Medicare supplemental insurance, and employee assistance plans.
• The value of stand-alone dental and vision plans, salary reduction contributions to medical flexible spending accounts, contributions to a health savings account, and the value of coverage for a specific disease or illness need not be reported.
• The value reported to an employee will be based on the coverage provided to the employee and “similarly-situated employees.” Employees are similarly-situated based on the coverage option they select under the plan. For example, if a plan offers employee-only, employee +1, employee +2, and family coverage, it will have four categories of “similarly-situated” employees. The value of the appropriate coverage option is reported for those employees who elected that option.
• The value is not determined based on usage. Instead, the value reported will be determined the same way the COBRA premium is calculated. If an employer has not been calculating a COBRA premium (for example, if it is a small employer not subject to COBRA) or if it has not been calculating COBRA premiums for each coverage option, it will need to do so and break it down for similarly-situated employees.
Employers are advised to continue to monitor for IRS guidance on this issue. For example, the IRS is expected to issue guidance regarding setting COBRA premiums for self-funded plans. But in the meantime, payroll personnel should begin the process of updating their systems to add the capability to capture and report this information.
Susan H. Sherman is an employee benefits attorney at law firm Miller Johnson in the firm's Grand Rapids office and an integral member of the firm’s Health Care Reform Team. She can be reached at (616) 831-1782 or firstname.lastname@example.org.
© 2010 Miller Johnson, all rights reserved. Reposted with permission.
Draft Form Issued for Reporting Health Costs on W-2s;
Requirement Made Optional for 2011
The IRS issued a draft Form W-2 for 2011, which employers use to report wages and employee tax withholding. The IRS also announced that it will defer the new requirement for employers to report the cost of coverage under an employer-sponsored group health plan, making that reporting by employers optional in 2011.
The draft Form W-2 includes the codes that employers may use to report the cost of coverage under an employer-sponsored group health plan. The Treasury Department and the IRS have determined that this relief is necessary to provide employers the time they need to make changes to their payroll systems or procedures in preparation for compliance with the new reporting requirement. The IRS will be publishing guidance on the new requirement later this year. (To learn more, see "Draft Form Issued for Reporting Health Care Costs on W-2s.").
Draft Form Issued for Reporting Health Care Costs on W-2s, SHRM Online Benefits Discipline, October 2010
Health Care Reform Includes Form W-2 Reporting Requirement, SHRM Online Benefits Discipline, May 2010
SHRM Online Benefits Discipline
SHRM Online Health Care Reform web page