Health Care Reform Requires Employers to Disclose the Cost of Health Care on Form W-2April 15, 2011
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Creative Benefit Planning
Beginning in tax year January 1, 2012, The Patient Protection and Affordable Care Act (PPACA) requires that employers disclose the aggregate value of employer-sponsored health coverage to each employee on form W-2, Box 12D. Employers do not need to specify the cost of the different types of health coverage, but only report the total cost of coverage.
This provision was originally scheduled to be effective on this year's W-2; however, the IRS deferred the reporting requirement to allow employers an extra year to plan for the procedural and systems changes needed to record and report the health care coverage costs. On March 30, 2011, the IRS released interim guidance on the form W-2 requirements in Notice 2011-28.
- Transitional relief was provided to small employers who issue less than 250 W-2's in 2011. These employers may defer reporting their aggregate cost until tax year 2013
- Employers offering self-insured medical plans not subject to federal continuation requirements are not subject to reporting aggregate health care costs on employees' W-2s
While most employers will not report the value of health care coverage to employees before January 2013, there are many reasons to begin planning now.
The first step in the process will be to identify which plans are included in the reporting requirement. Employers must report the value of both fully insured and self-insured plans. ERISA defines an employee welfare benefit plan as one established and maintained by an employer to provide participants and beneficiaries with the purchase of insurance. Applicable plans must be exempted from employee's gross income. This broad definition can include all medical, surgical and hospital plans, mini-med plans, prescription drug plans, Medicare Supplemental or Advantage plans and EAP's. It may also include certain executive prerequisites.
Specifically excluded from the disclosure requirements are HSAs, HRA's, Health Care FSAs, MSAs and standalone vision and dental plans. Employer contributions to multiemployer plans are also exempted from reporting requirements.
Once the employer-sponsored health plans have all been identified, the next step is to establish the value for each plan using a COBRA method valuation calculation. The aggregate cost must include both the employer and employee contributions to the plan.
For fully insured plans, utilization is not taken into consideration. The employer can use one of three methods to calculate the aggregate cost.
- The COBRA applicable premium method
- The premium charged method
- The modified COBRA premium, where the employer makes a good faith estimate of the current year premium
- The COBRA composite rate, where one premium is the same for all coverage classes
Determining the value for self-insured employer plans is more complex. The Internal Revenue Code has special rules for determining the premium for self-insured health care plans. The premiums must be a reasonable estimate of the cost. An employer can select one of two methods:
- The Actuarial Determined Method - A qualified actuary would perform this computation taking into account factors to be prescribed by the regulations.
- The Past Cost Method - The average per person or per family utilization from the previous plan year is used to determine the expected reimbursement in the current year. Separate rates are calculated for each coverage class of employees.
IRS Notice 2011-28 provides guidance regarding who should receive a W-2 disclosing Health care costs. Currently, employers must provide a W-2 for any employee who has received remuneration or for whom the employer withheld taxes or could have withheld taxes. The form W-2 must be delivered to all active employees by January 31st of 2013.
Employers may apply any reasonable method for determining the reportable aggregate cost for an employee who terminated during the calendar year. Should a terminated employee make a written request for an early W-2, their post retirement coverage is not reported.
Other situations can present challenges in providing an accurate calculation of the aggregate cost:
- Mid-year plan anniversary dates will require the employer to recalculate the cost of health insurance for some or all of the plans during the calendar year. Factoring in new hire effective dates of coverage, employers should calculate aggregate costs on a monthly basis for all employees.
- Qualifying events that result in mid-year plan elections will change the aggregate cost for each affected employee.
- The aggregate cost for any person covered under the plan must be included in the aggregate cost. This specifically includes non-IRS dependents such as children over age 27.
There are two reasons behind the change in health care reporting:
- To educate employees about the value of their health insurance. Employees may be confused about this new disclosure on their W-2, which traditionally includes information that affects their taxable income. Educate employees early and often, before they receive their new W-2's, that health insurance remains a tax-free benefit.
- To educate employers on the true cost of their health care benefits package and give employers time to make changes before the 2018 "Cadillac" coverage tax becomes effective. The tax will be on plans exceeding $10,200 for employee-only coverage.
Employers should immediately begin working with their payroll administrators to set in place processes and system changes needed to collect and report the aggregate cost of health care on a monthly basis for all active and former employees. Make sure the payroll system has the requisite data fields to accept and compile the information transferred from the HR and Benefits Team. Be prepared to distribute both the annual W-2 and any mid-year W-2 that must be issued. Watch for further guidance from the IRS regarding W-2 reporting requirements as you continue to develop your plans.