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Archive for January, 2012

IRS Issues New Guidance on Health Care Reform’s W-2 Reporting Requirement

On Jan. 3, 2012, the IRS issued Notice 2012-9 (the notice) which supersedes IRS Notice 2011-28 and replaces it with a modified and expanded explanation of PPACA’s W-2 reporting mandate. The majority of the information in Notice 2012-9 is a restatement of the guidance provided in Notice 2011-28, meaning employers that have already started to prepare for compliance with the W-2 reporting requirement should not expect to significantly alter their plans in light of the new guidance. Specifically, IRS Notice 2012-9 adds new Q&As 32-39 and clarifies several Q&As in Notice 2011-28 (and also republishes the Q&As provided in Notice 2011-28 that remain unchanged).

 As background, under PPACA, employers are required to report the aggregate cost of applicable employer-sponsored group health plan coverage on each employee’s Form W-2. The employer must report the cost of coverage on a calendar year basis, regardless of the plan year used for the health plan. The reporting is intended for informational purposes for the employee (to provide employees with the cost of their health care coverage). The W-2 reporting requirement does not cause the cost of such coverage to be included in the employee’s income or otherwise become subject to federal taxation.

 The reporting requirement will first apply with respect to coverage provided in 2012. This means that most employers must begin reporting the costs of employees’ health coverage for 2012 and report that value on the Form W-2, which generally will be provided to employees in January 2013.

Clarifications to Previous Guidance

Small Employer: Employers required to file fewer than 250 Forms W-2 for the preceding plan year are exempt from the reporting requirement for 2012 Forms W-2. For this purpose, Notice 2012-9 clarified that the limit of 250 includes Forms W-2 filed by an employer’s agent under IRC § 3504. For example, if an employer would have filed 300 Forms W-2 in 2011 had it not used an agent, that employer would be subject to the reporting requirement for 2012. (Q&A 3)

Federally Recognized Indian Tribes: Federally recognized Indian tribal governments are exempt from the reporting requirement. The notice expands this exemption to cover tribally chartered corporations wholly owned by federally recognized Indian tribal governments. (Q&A 3)

Health FSA Reporting: The notice clarifies that the amount of a health FSA is not required to be included in the aggregate reportable cost reported on Form W-2 if the amount of the health FSA is funded only through employee salary contributions. (Q&A 19)

Dental and Vision Plan Reporting: The notice also clarifies that the cost of coverage under a dental or vision plan is not included in the aggregate reportable cost if the plan satisfies the requirements for being a HIPAA-excepted benefit. (Q&A-20)

105(h) Clarification and S Corporations: The notice modifies the guidance on excess reimbursements to clarify that the aggregate reportable cost does not include excess reimbursements of highly compensated individuals that are included in income, because a self-funded plan violates the nondiscrimination rules in IRC § 105(h). In addition, a similar rule applies to coverage provided to 2 percent shareholder-employees of S corporations. (Q&A 23)

Multiple Employers: Notice 2012-9 clarifies that if related employers employ the same employee, but do not use a common paymaster, the employers may either report the total aggregate on a single W-2 or allocate the cost between the employers and report the divided cost on separate Forms W-2. (Q&A 7)

Use of Composite Rates: The notice clarifies that an employer who uses a composite rate for active employees but not for COBRA beneficiaries may use either rate for determining the applicable cost to be reported, as long as it is used consistently. (Q&A 28)

New Guidance

Employee Assistance Program (EAP), Wellness Program or On-site Medical Clinic: Coverage provided under an EAP, wellness program or on-site medical clinic is not required to be reported if the employer does not charge a premium for the cost of this coverage to COBRA beneficiaries. On the other hand, if a COBRA premium is charged, then the employer must report the value of the coverage. An employer who is not subject to any federal continuation coverage requirements (such as ERISA or the Public Health Service Act) is not required to include the cost of coverage under an EAP. (Q&A 32)

Reporting Benefits Exempted Under Interim Relief: An employer may include in the aggregate reportable cost the cost of coverage that is not required to be included in the aggregate reportable cost under applicable interim relief, including coverage under an HRA, a multiemployer plan, an EAP, a wellness program or an on-site medical clinic, provided such coverage is calculated using a permissible method as outlined in the notice, and is applicable employer-sponsored coverage. (Q&A 33)

Reporting Methods When Program Includes Non-Covered Benefits: For a program where an employee receives benefits that constitute applicable employer-sponsored coverage as well as benefits that do not constitute applicable employer-sponsored coverage (such as long-term disability), an employer may use any reasonable method to determine the cost of the portion of the program providing applicable employer-sponsored coverage. (Q&A 34)

Retroactive Changes to Coverage After Year-end: The notice provides that the aggregate reportable cost for a calendar year may be based on information available to the employer as of Dec. 31 of that year, without regard to any election or notification made after such date that retroactively affects coverage. Therefore, any election or notification that is made or provided in the subsequent calendar year that has a retroactive effect on coverage in the earlier year is not required to be included in the calculation of the aggregate reportable cost for the calendar year. (Q&A 35)

Coverage Covering Two Reporting Years: New guidance is provided concerning how to report the cost of coverage that spans two taxable years. Where a coverage period extends beyond Dec. 31 of a reporting year, the employer has the option to:

• Treat the coverage as provided under the calendar year that includes Dec. 31;
• Treat the coverage as provided during the calendar year immediately subsequent to the calendar year that includes Dec. 31; or
• Allocate the cost of coverage for the coverage period between each of the two calendar years under any reasonable allocation method, which generally should relate to the number of days in the period of coverage that fall within each of the two calendar years.

Whichever method the employer decides to use must be applied consistently to all employees. (Q&A 36)

Hospital Indemnity/Specific Disease Coverage: The notice provides that the exclusion from applicable employer-sponsored coverage for hospital indemnity plans, fixed indemnity insurance and coverage for a specific disease does not apply if the employer makes any contribution to the cost of coverage that is excludable from income, or if the employee purchases the policy on a pre-tax basis under a cafeteria plan. On the other hand, the cost of coverage for hospital indemnity plans, fixed indemnity insurance and coverage for a specific disease is not required to be included if the benefit is offered as an independent, noncoordinated benefit and is paid for with after-tax dollars or is includible in gross income. (Q&A 37 38)

Third-party Sick Pay Providers: Generally, a third-party provider that makes payments of sick pay to employees on the employer’s behalf has no responsibility for reporting such payments on a W-2. 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. (Q&A 39)

IRS Notice 2012-9

January 19, 2011: Compliance Update

Initial HHS Proposal Gives States Flexibility to Define Essential Health Benefits

On Dec. 16, 2011, HHS released a “pre-rule” bulletin to provide information and solicit comments on the regulatory approach that HHS plans to propose to define essential health benefits (EHB) under PPACA, § 1302(b). Non-grandfathered plans in the individual and small group markets inside and outside of the exchanges must cover EHB beginning in 2014. Section 1302(b)(1) provides that EHB include items and services within the following 10 benefit categories:

• Ambulatory patient services
• Emergency services
• Hospitalization
• Maternity and newborn care
• Mental health and substance use disorder services, including behavioral health treatment
• Prescription drugs
• Rehabilitative and habilitative services and devices
• Laboratory services
• Preventive and wellness services and chronic disease management
• Pediatric services, including oral and vision care

Under HHS’ intended approach as announced in the bulletin, states would have the flexibility to select an existing health plan to set the benchmark for the items and services included in the EHB package. States would choose one of the following health insurance plans as a benchmark:

• One of the three largest small group plans in the state
• One of the three largest state employee health plans
• One of the three largest federal employee health plan options
• The largest HMO plan offered in the state’s commercial market

To meet the EHB coverage standard, HHS intends to require that a health plan offer benefits that are “substantially equal” to the benchmark plan selected by the state and modified as necessary to reflect the 10 coverage categories.

The bulletin addresses only the services and items covered by a health plan, not the cost sharing, such as deductibles, copayments and coinsurance, which will be addressed in future bulletins. Final rules are expected to be issued sometime next year. HHS is accepting comments on the proposal, which are due by Jan 31, 2012, and may be sent to EssentialHealthBenefits@cms.hhs.gov.

Essential Health Benefits Bulletin

Fact Sheet

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