Aflac’s Workforces Report for Brokers recently divulged that nearly 50 percent of brokers are considering leaving the industry, due largely to a landscape vastly changed by PPACA. Employee health benefits have become an increasingly complex industry in the past four years — which is precisely the reason that a solid broker workforce is more needed than ever. When it comes to reporting requirements, your employer clients need advice on everything from W-2 reporting to treatment of self-insured plans to reporting around minimum essential coverage. Here, you’ll find answers.
1. What is the W-2 reporting requirement and when is it effective?
Employers, including those with grandfathered plans, must report the “aggregate cost” of “applicable employer sponsored coverage” on an employee’s Form W-2. This cost generally consists of employer-sponsored coverage under a group health plan (insured or self-funded) that is excludable from the employee’s gross income. IRS Notice 2012-9 supersedes earlier notices that delayed and created exceptions to the PPACA W-2 reporting requirement, which originally was to apply for 2011 W-2s that normally would be issued by employers in January 2012. The W-2 reporting requirement, which was delayed by the IRS, first applies to 2012 W-2s that generally will be issued in January 2013 unless an exception (discussed in Q5) applies.
2. What is the income tax impact of this requirement to employers and employees?
None. This requirement is merely designed to provide information to the federal government. It does not change any rules regarding the employer’s deductions or the taxation to the employee. Failure to properly report will not cause coverage that is excludible from gross income under Code Section 106 or any other Code provision to become taxable or to be reported in any other box on Form W-2.
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3. Which employers must comply with the expanded W-2 reporting?
This requirement includes employers that are federal, state and local government entities, churches and other religious organizations, and employers that are not subject to the COBRA continuation coverage requirements under Code Section 4980B.
4. Is the amount reported on the W-2 the amount for health coverage paid by the employer?
No. The reportable cost generally includes the amounts paid by both the employer and employee, regardless of whether paid through pre-tax or after-tax contributions. The aggregate reportable cost is reported on Form W-2 in Box 12, using Code DD.
5. Which employers are exempt from the W-2 reporting requirement?
The W-2 reporting requirement does not apply to the following:
- Employers with fewer than 250 W-2s issued for the prior calendar year until further notice.
- An employer that would have filed only 100 Forms W-2 for the previous year had it not used an agent under Code Section 3504 will not be subject to the reporting requirement for the year, nor will an agent under Code Section 3504 with respect to that employer’s Forms W-2 for the year. In contrast, if the same employer would have filed 300 Forms W-2 for the previous year had it not used an agent under Code Section 3504, that employer would be subject to the reporting requirement for the year. If an agent under Code Section 3504 is used again, the information will need to be provided to the agent and reported on the Form W-2.
- An employer is not required to report any amount in Box 12 using Code DD for an employee who, pursuant to §31.6051-1(d)(1)(i), has requested to receive a Form W-2 before the end of the calendar year during which the employee terminated employment.
- Coverage under a flexible spending arrangement if contributions occur only through employee salary reductions.
- “Excepted benefits,” which include dental and vision plans offered under a separate policy, certificate, or contract of insurance, or if the participants have the right to elect the dental or vision benefits and, if they do, pay an additional premium or contribution.
- Excess reimbursements that are includible in the income of highly compensated individuals under Code Section 105(h) or payments or reimbursements of health insurance premiums for a 2 percent shareholder-employee of an S corporation.
- The cost of hospital or other fixed indemnity coverage, or coverage only for a specified disease or illness, is not reportable if the coverage is offered as an independent, noncoordinated benefit and is includible in the employee’s income or paid for on an after-tax basis. However, the cost of such coverage is reportable when paid for on a pre-tax basis under a cafeteria plan or with employer contributions that are excludable from income.
6. What about related employers that each employ and pay the same person?
Related employers that do not use a common paymaster can either provide the full reportable cost to an employee on a single Form W-2 or allocate the cost and reporting among the employers. The notice does not define the term “related employers.” Presumably, it means related employers as defined for W-2 purposes. This definition includes the following types of corporations if they satisfy any one of the following four tests at any time during a calendar quarter:
(i) The corporations are members of a “controlled group of corporations,” as defined in Code Section 1563, or would be members if Code Section 1563(a)(4) and (b) did not apply and if the phrase “more than 50 percent” were substituted for the phrase “at least 80 percent” wherever it appears in Code Section 1563(a).
(ii) In the case of a corporation that does not issue stock, either 50 percent or more of the members of one corporation’s board of directors (or other governing body) are members of the other corporation’s board of directors (or other governing body), or the holders of 50 percent or more of the voting power to select such members are concurrently the holders of more than 50 percent of that power with respect to the other corporation.
(iii) Fifty percent or more of one corporation’s officers are concurrently officers of the other corporation.
7. How is the amount of reportable cost determined?
Employers that use a composite rate to determine premiums for active employees and another method to determine COBRA premiums may use either rate to determine the reportable cost, but they must use that method consistently when reporting the cost for each applicable group. An employer may also include in the reportable cost of coverage certain amounts that need not be reported, such as the cost of coverage for a Health Reimbursement Account.
The reportable cost of coverage may be based on the information available to the employer on December 31, and need not be adjusted for later elections or notifications, such as a divorce or other change in family status that retroactively affects coverage during the prior year.
8. How do employers with self-insured health plans calculate the aggregate cost of applicable employer-sponsored coverage?
There are COBRA rules governing how a self-insured plan determines its applicable premium, generally requiring that such plans calculate the applicable premium through the actuarial method or the past cost method. Presumably these are the methods used, as the IRS notices provide no special guidance.
9. How is the cost for EAPs, wellness programs and on-site medical clinics reported?
The cost of EAPs (employee assistance programs), wellness programs, and on-site medical clinics is includible in the reported cost of coverage to the extent that the program is a group health plan. However, such coverage is not reportable if the employer does not charge a premium for that coverage for purposes of COBRA (or other federally required continuation coverage) or if the employer is not subject to COBRA.
10. What is the penalty for failure to follow the W-2 reporting requirements?
There is no special penalty for failure properly to report healthcare costs. Presumably, the normal W-2 penalties will apply.
11. What about health costs paid for retirees not entitled to a W-2?
Employers are not required to issue a W-2 to report health plan costs to persons not otherwise required to receive a W-2.
12. Has the IRS provided a chart summarizing the W-2 health cost reporting requirements?
Yes, it is as follows: