The Employers Council on Flexible Compensation (ECFC) is asking the Internal Revenue Service (IRS) to clarify where flexible spending arrangements (FSAs) fit in with the new Form W-2 health benefits reporting requirements.
John Hickman, a lawyer representing the ECFC, Washington, has made that request in a comment letter on IRS Notice 2011-28, a document gives interim guidance on how employers should comply with the new W-2 reporting requirements created by Section 6051(a)(14) of the Patient Protection and Affordable Care Act of 2010 (PPACA).
PPACA is supposed to impose the Cadillac plan tax in 2018. The 40% tax will apply to health plan value over a specified threshold.
To implement that provision, and to give federal policymakers more information about expenditures on group health benefits, the IRS will be asking for voluntary reports on group health expenditures on the 2011 W-2 and requiring employers to provide group health expenditure reports on the 2012 W-2.
The Notices 2011-28 will exempt small employers and employers that sponsor health reimbursement arrangements (HRAs) from the reporting requirements, at least temporarily.
IRS officials note that they were still working on some projects that they need to complete before coming out with complete, permanent W-2 health cost reporting guidance, such as guidance on calculating the value of the “applicable premium” under the federal COBRA health benefits continuation program.
The ECFC – a group that represents about 100 employers, insurers, accounting firms, consulting firms and actuarial firms with an interest in FSAs, HRAs, dependent care accounts, and other types of benefit plans, arrangements and accounts – would like to see the IRS wait until complete guidance is available to apply the reporting requirement, Hickman says the ECFC comment letter.
How to value some of benefits, such as health clinics, is unclear, and employers need to know how the new Internal Revenue Code Section 4980I Cadillac plan excise tax will work before making W-2 reporting decisions, Hickman says.
“The methods that an employer may choose to determine cost under the notice may produce very different values,” Hickman says. “When the high cost plan tax is effective, these differences may become very significant. For example, whether the high cost plan tax is imposed may depend on the particular valuation method used, even if two plans have the same fair market values.”
Hickman notes elsewhere in the letter that Section 6051 states that salary reduction contributions to a health FSA are not subject to the W-2 reporting requirement.
“There is no legislative history that explains the rationale for exempting salary reduction contributions, however, a fairly obvious rationale is that employees do not need to be informed of such amounts because the employee has affirmatively elected how much to contribute to the FSA,” Hickman says. “Further, FSA contributions are generally supplemental to other health coverage.”
The IRS has provided guidance on how employers should handle optional employer flex credits.
The existing IRS guidance on flex credits is too complicated, and it indicates that the U.S. Treasury Department may be considering treating employer flex credits as salary reduction contributions for purposes of the $2,500 cap on FSA contributions that will start to take effect after Dec. 31, 2012, Hickman says.
Instead of following the approach in existing guidance, the IRS could “exempt health FSAs from reporting requirements if the FSA qualifies as an excepted benefit,” Hickman says. “For the limited number of situations where an FSA is not an excepted benefit, then reporting would be required.”
Hickman says the rule given in the IRS guidance could have the effect of excluding some employer flex credits from reportable cost.
“This is because the [guidance] provides that there is no reportable cost with respect to a health FSA if the total salary reduction contributions for all qualified benefits equals or exceeds the amount in the health FSA,” Hickman says. “It would be inconsistent with the statute and the definition of salary reduction contributions in the proposed cafeteria plan regulations to treat such employer flex credits as subject to the cap on salary reduction contributions.”