IRS Provides Additional Guidance on W-2
Reporting under PPACA
The Patient Protection and Affordable Care Act (“PPACA”) amended the Internal Revenue Code to require that employers report the aggregate cost of “applicable employer-sponsored coverage” on employee Form W-2. To assist employers in fulfilling this obligation, the IRS issued Notice 2011-28 on March 28, 2011 and posted FAQs on the IRS website.
On January 3, 2012, the IRS issued Notice 2012-9 to clarify guidance issued in Notice 2011-28 and to provide eight additional Questions & Answers in light of comments received in response to Notice 2011-28.
References below relate to Q&As from Notice 2012-9.
Employers are cautioned that several items are “transitional relief,” and the notice states that the rules may change with future guidance. However, any changes will be effective prospectively and will not apply earlier than January 1st of the calendar year beginning at least six months after the guidance is issued.
The most significant changes, shown in more detail below, address the following topics:
- An exemption for tribally chartered corporations;
- Interim relief for employers providing fewer than 250 Form W-2s in the prior calendar year;
- Application of reporting requirements to common paymasters;
- Contributions to healthcare flexible spending accounts made through employee salary
- The standard to determine whether stand-alone dental and vision benefits are included in the
“aggregate reportable cost;”
- Clarification that the reporting requirement does not apply to premiums for 2% shareholder
employees who are required to include the premium payments in gross income or the cost of
excess coverage required to be included in income under Section 105(h);
- Use of composite rates; and
- New guidance on EAPs, wellness programs, and on-site clinics, HRAs, partial year
coverage, and application of the reporting requirement to fixed indemnity insurance.
Tribally Chartered Corporations
Notice 2011-28 exempted plans sponsored directly by Federally recognized Indian tribal governments. Under IRS Notice 2012-9, until further guidance is issued, the PPACA Form W-2 reporting requirement will not apply to tribally chartered corporations that are wholly owned by a Federally recognized Indian tribal government.
Transition Relief for Employers Providing Fewer than 250 Form W-2s in Prior Year
Under the IRS Notice 2011-28, employers that filed fewer than 250 Form W-2s for the previous calendar year were exempted from reporting the aggregate of employer-sponsored health coverage on Form W-2 for the current calendar year. For example, an employer that filed fewer than 250 Form W-2s in calendar year 2011 would not be required to report the aggregate reportable cost on Form W-2s for calendar year 2012. This rule is based on the exemption from filing Form W-2 returns electronically for employers that file fewer than 250 Form W-2s. IRS Notice 2012-9 clarified that when determining how many Form W-2s an employer filed in the prior year, the employer is only required to count the Form W-2s it would be required to file without regard to the use of an agent under Section 3504. (An employer may appoint an agent under Section 3504 of the Internal Revenue Code to perform acts such as withholding, reporting and paying federal employment taxes with regard to wages paid by the agent for the employer, as well as the agent’s own employees.)
Under the initial IRS Form W-2 reporting guidance, a common paymaster among a group of
related employers, within the meaning of IRS Code Section 3121(s), would be required to
aggregate reportable cost of coverage provided to an employee by all of the employers for whom the organization served as the common paymaster. IRS Notice 2012-9 clarifies that if employers are among a group of related employers within the meaning of Section 3121(s), but do not compensate an employee that is concurrently employed by a group of related employers through a common paymaster, then the related employers may either report the entire aggregate cost on one of the Form W-2s provided to the employee, or they may allocate the aggregate reportable cost among the employers concurrently employing the individual using any reasonable allocation method. In other words, if the group does not use a common paymaster and thus must provide multiple Form W-2s to an individual, the aggregate can either be reported on one Form W-2 on behalf of the whole group of related employers, or each employer in the group may report an allocated amount on the Form W-2 that employer provides to the individual.
Healthcare Flexible Spending Arrangements
IRS Notice 2012-9 clarifies that the Form W-2 reporting requirement does not apply to coverage under a healthcare Flexible Spending Arrangement (“health FSA”) if contributions are made only through employee salary reduction elections. For example, if an employee elects a $1,500 salary reduction to contribute to a health FSA, and the total amount of the FSA election is $1,500, the $1,500 is not included in the amount reported as the aggregate reportable cost.
HIPAA Excepted Benefits
Under the 2011 IRS guidance, employers were required to include the costs of dental and vision coverage if they were “integrated” with medical coverage. The recent guidance clarifies that the cost of dental and vision benefits that are HIPAA “excepted benefits” do not have to be reported on Form W-2. Generally, dental or vision benefits are HIPAA excepted benefits if they are either:
- offered under a separate policy, certificate, or contract of insurance; or
- participants must have the right not to elect the dental or vision benefits and if they do elect the dental or vision benefits, they must pay an additional premium or contribution for that
S-Corporations & Excess Reimbursements for Highly Compensated Individuals
The 2011 IRS Guidance stated that the aggregate cost of employer-sponsored health coverage would include excess reimbursements for highly compensated individuals required to be included in those individuals’ gross income as a result of Section 105(h) of the Internal Revenue Code. Under the latest guidance, excess reimbursements that are includable in income must be excluded from the aggregate reportable cost. The status of coverage for 2% or greater shareholder-employees of S-Corporations was unclear. Under the latest guidance, payments or reimbursements of health insurance premiums for a 2% or greater shareholder-employee of an S-corporation do not have to be reported on Form W-2 if the individual is required to include the premium payments in his or her gross income.
Notice 2012-9 also provides clarification for employers that charge a “composite rate.” An
employer is considered to be charging a “composite rate” if: (1) all employees are charged the same premium or coverage under the plan, regardless of scope of the coverage (e.g., single or family coverage); or (2) there are different levels of coverage (e.g., employee-only and employee plus family) and employees are charged the same premium for each level (e.g., all employees pay $200 for single coverage and $500 for family coverage).
For employers that charge a composite rate for active employees but do not use a composite rate to determine applicable COBRA premiums for qualifying beneficiaries, the employer may use either the composite rate or the applicable COBRA premium to determine the aggregate cost of coverage reported on the Form W‐2, but it must use the same method consistently for all active employees and for all qualifying beneficiaries.
EAPs, Wellness Programs and On-site Clinics
IRS Notice 2012-9 states that the cost of coverage provided under an Employee Assistance
Program(“EAP”), wellness program, or on-site medical clinic that qualifies as a group health plan does not have to be included in the aggregate reportable cost if (and only if) the employer does not charge a premium to any COBRA participant that qualifies for the EAP, wellness program or on-site clinic during the COBRA continuation period. If the employer charges a COBRA premium for such coverage, then it must be included in the aggregate reportable cost on the Form W-2.
For example, many employers allow former employees to continue benefits under their EAP, wellness program or clinic for the duration of the applicable COBRA period without charging for access because the cost of such coverage is difficult to value. Thus, Notice 2012-9 provides welcome relief to such employers permitting them to exclude the cost from the aggregate reportable cost for any employees of an EAP, wellness program or on site medical clinic if those benefits are provided to qualifying beneficiaries receiving COBRA without cost. However, if an employer charges a COBRA premium, the employer must include the premium in the aggregate reportable cost on the Form W2.
Additionally, the recent guidance provides relief to any employer that is not subject to any federal continuation coverage requirements (i.e., ERISA, Public Health Service Act or the Federal Employees Health Benefits Program). Specifically, an employer that is not subject to any federal continuation coverage requirement (e.g., a church plan) does not have to report the cost of coverage provided under an EAP, wellness program, or on-site medical clinic, even if the coverage qualifies as group health coverage.
Incidental Group Health Plan Benefits
Group health plan coverage provided as an add-on or value-added program (e.g., an EAP
provided “free” by a long-term disability carrier) does not have to be reported if the portion of the program providing the health benefits is only incidental in comparison to the portion of the program providing the other benefits.
Hospital or Other Fixed Indemnity Insurance or Specified Illness Insurance
If the employer: (1) makes any contribution towards the cost of the fixed indemnity or specified illness insurance; or (2) allows employees to purchase the coverage on a pre-tax basis under a Section 125 cafeteria plan, then the cost must be included in the aggregate reportable cost. The cost of hospital indemnity or other fixed indemnity insurance or specified illness coverage does not have to be reported on Form W-2 if the employer merely provides the opportunity for employees to purchase the coverage and the employee pays the full amount of the premium with after-tax dollars.
Third Party Sick Pay Provider
Under Notice 2012-9, third party sick pay providers who furnish Forms W-2 to employees are not required to report the aggregate reportable cost of employer sponsored group health plan coverage. However, a Form W-2 furnished by an employer must include the aggregate reportable cost even if that Form W-2 includes sick pay or if a third party provider is furnishing a separate Form W-2 reporting the sick pay.
Impact of Status Changes after the End of the Reporting Year
Under Notice 2012-9, employers may rely on information available as of December 31st of the reporting year, without regard to any election or notification made by an employee after December 31st that retroactively affects coverage. Thus, if an employee provides notification of a status change in January 2013, which affects the cost of coverage in 2012, the changes in the cost
of coverage need not be reflected in the aggregate reportable cost for 2012. For example, if an employee has employee plus spouse coverage at the beginning of 2012, but then provides notice in January 2013 that her child was born in December 2012 and she wants coverage increased to employee plus family coverage effective on the child’s birthday, the employer need only report her aggregate reportable cost based upon employee plus spouse coverage for the entire year because that was the state of the information it had on December 31, 2012. The Notice also provides that a Form W‐2c need not be furnished if a Form W‐2 has already been provided for a calendar year, before the election or notification.
Payroll Deductions that Span Two Taxable Years
Many employers make payroll deductions – as permitted by the cafeteria plan regulations – for coverage periods that relates to the end of one taxable year and the beginning of another taxable 5 year. Under Notice 2012-9, such employers may handle reporting of such coverage in one of three ways (if it does so consistently). If a coverage period includes December 31st but continues into the following year, the employer may:
- treat the coverage as provided under the calendar year that includes December 31st;
- treat the coverage as provided during the following calendar year; or
- allocate the cost of coverage between each of the two years, using any reasonable allocation method (e.g., which generally should relate to the number of days of coverage). Q&A-36.
Voluntary Reporting of Coverage Not Required to be Included
An employer may voluntarily report on Form W‐2 the cost of coverage that is not required to be included in the aggregate reportable cost under applicable interim relief, including coverage under a Health Reimbursement Arrangement (HRA), a multiemployer plan, a HIPAA-excepted dental or vision plan, an EAP, a wellness program, or on‐site medical clinic, provided such coverage constitutes applicable employer‐sponsored coverage and is calculated using a permissible method under the IRS Guidance.
* Determine whether stand-alone dental and/or vision coverage qualify as HIPAA-excepted
* Determine whether reporting for employer-sponsored EAPs, wellness programs or on-site
clinics is required.
* Determine whether voluntary reporting of any benefits is desirable.
* Work with payroll administrators and outside payroll vendors to determine best method to
capture and report appropriate coverage.
* Communicate Form W-2 reporting changes to employees. (optional)
* Confirm that any health benefits provided under an LTD policy are incidental.
* If you are a “S” corporation confirm that excess reimbursements under Code Section 105(h) are included in gross income will not be included in “applicable employer-sponsored coverage.”
This information is not legal advise. Please discuss the application of this legislative guidance with your attorney.