On January 3, 2012, the IRS published Notice 2012- 9, restating and amending its previous interim guidance on how to comply with the Form W-2 reporting requirements enacted as part of the Patient Protection and Affordable Care Act (the “Affordable Care Act”). The notice is available at: http://www.irs.gov/pub/irs-drop/n-12-09.pdf.
Section 9002 of the Affordable Care Act requires that employers report the aggregate cost of employer-sponsored group health plan coverage on an employee’s Form W-2. The aggregate cost includes both the employer and employee contributions for the group health plan coverage. For insured group health plans, this aggregate amount is generally determined by the premium charged by the insurer. Self-funded plans will generally use the applicable COBRA premium to determine the aggregate cost. This amount is reported on box 12 of the Form W-2, using code DD.
As we discussed in our April 2011 issue, Notice 2011–28 provided transition relief on this Form W-2 reporting requirement by delaying its applicability until the 2012 Forms W-2 issued in January 2013. At this point, the requirement is informational only, designed to help employees understand the cost of their health coverage. Many believe that this reporting will have tax consequences in the future for purposes of determining whether an individual is subject to the so-called “Cadillac tax” on high-cost health coverage that is currently scheduled to take effect in 2018.
IRS Notice 2012–9 Clarifies Previous Guidance
Notice 2012– 9 includes a number of changes that help explain previous IRS guidance on this topic. The following bullet points include a summary of some of the more significant topics that Notice 2012– 9 modified:
- Interim Exemption for Small EmployersEmployers that are required to file fewer than 250 Forms W-2 for 2011 are not subject to the reporting requirements for the 2012 Form W-2. Notice 2012– 9 provides that this exemption for small employers willcontinue for future years unless the IRS issues further guidance to the contrary.
- Exemption for Multiemployer PlansNothing in Notice 2012– 9 affects the exemption already provided to multiemployer plans in prior guidance.
- Health FSAs Are Not IncludedEmployers are not required to include the amount of any salary reduction contribution under a cafeteria plan to a health flexible spending account in the cost of coverage reported on the Form W-2.
- HIPAA-Excepted Dental and Vision Benefits Are Not IncludedEmployers are not required to include the cost of dental and vision benefits that are excepted benefits for purposes of HIPAA’s portability provisions. To be an excepted benefit, the dental or vision coverage must meet one or both of the following requirements:
- The benefits must be offered under a separate policy, certificate, or contract of insurance from the other major medical benefits.
- Participants must have the right not to elect the dental or vision benefits, and they must be charged an additional premium or contribution amount if they do elect such coverage.
Prior guidance relating to dental and vision benefits did not explicitly state that HIPAA-excepted dental and vision benefits are not subject to the Form W-2 reporting requirements.
- Calculating the Cost of Coverage Under a Composite RateAn employer charges a “composite rate” if the cost of coverage does not vary based on the number of individuals the employee elects to cover (e.g., employee-only, employee-plus-spouse, employee-plus-child, family), or the plan only offers coverage for all such dependents under a single class of coverage with a single rate regardless of the number of dependents covered. This structure makes it difficult to determine the actual cost of coverage for an employee, because employees with few or no dependents are essentially subsidizing the cost of coverage for those with many dependents. Accordingly, for plans that charge a composite rate, the employer may calculate the aggregate cost of coverage by using the same reportable cost for each class of coverage or, if applicable, the single class of coverage offered under the plan. In other words, an employer that applies a composite rate does not have to account for the fact that the actual cost of family coverage is greater than employee-only coverage in determining the reportable cost of coverage under either class. Plans that use a composite rate for active employees but not for determining the applicable COBRA premiums can use either the composite rate or the applicable COBRA premium for determining the aggregate cost of coverage.
IRS Notice 2012–9 Provides Guidance on Topics Not Previously Addressed
Notice 2012– 9 also provides guidance on topics that were not previously addressed. A few of the items that are more likely to be relevant to employer-sponsored coverage are discussed below:
- EAPs, Wellness Programs, and On-Site Medical ClinicsEmployers are not required to include the cost of coverage provided under an employee assistance program (EAP), wellness program, or an on-site medical clinic if the employer does not charge a COBRA premium for continued participation in such benefits. If the employer charges a premium to receive COBRA coverage under an EAP, wellness program, or an on-site medical clinic, then the employer must report the cost of such coverage on the Form W-2.
- HRAs and Voluntary ReportingNotice 2012– 9 clarifies that an employer may report the cost of coverage for health benefits that are not currently required to be reported, such as a health reimbursement account (HRA), multiemployer plan, EAP, wellness program, or on-site medical clinic. Employers may wish to include such coverage on the Form W-2 so that employees are aware of the total cost of coverage for their health benefits. Employers that choose to include such non-required coverage on the Form W-2 as part of the aggregate cost of coverage must calculate the reportable cost in accordance with the otherwise applicable requirements.
- Plans Offering Both Group Health Coverage and Non-Reportable CoverageIf a plan provides both reportable benefits and non-reportable benefits (e.g., a group health plan that offers both major medical coverage and long-term disability benefits), the employer may use any reasonable method to determine the aggregate cost of the portion of the plan that provides reportable benefits. Notice 2012– 9 also provides that if the non-reportable benefits are only incidental to the reportable benefits, the employer may include the entire amount as the aggregate cost of coverage without the need to allocate the reportable and non-reportable amounts.
- Reporting Changes in Coverage that are Retroactive to a Prior YearEmployers do not have to account for any changes in coverage made in a subsequent year that have a retroactive effect to the prior year, nor does the employer have to provide a corrected Form W-2c to address the retroactive change. The employer’s aggregate reportable cost may instead be based on the information available to the employer as of December 31. Therefore, for example, an employer will not have to report the additional cost of coverage in December for an employee who in January retroactively enrolls a newborn child, or a newly adopted child or child placed with the employee for adoption pursuant to the HIPAA special enrollment right. Nor would the employer have to retroactively reduce the reportable amount where an employee notifies the plan in January of a divorce that terminated the former spouse’s eligibility in December.
IRS Notice 2012-9 provides welcome additional guidance for employers as they prepare to comply with this new reporting requirement for 2012 Forms W-2 distributed in January of 2013. Although the reporting is only informational at this point, employers must carefully follow this guidance to avoid any costs associated with providing a corrected Form W-2c or potential IRS penalties. This reporting requirement will require employers to closely coordinate with their payroll department or external payroll vendor, and may also require coordination with actuaries, consultants, and legal counsel. Furthermore, stay alert to the latest benefits news because there will likely be more IRS guidance on these reporting requirements prior to January 2013. Please contact us if you have any questions.