IRS ISSUES INTERIM GUIDANCE
W‐2 REPORTING OF GROUP HEALTH INSURANCE COVERAGE

April 2011

THE IRS HAS ISSUED INTERIM GUIDANCE ON THE W‐2 GROUP HEALTH INSURANCE COVERAGE REPORTING REQUIREMENTS. THE IRS DELAYED THE 2011 MANDATORY PROVISION UNTIL THE 2012 CALENDAR YEAR (W‐2 STATEMENTS ISSUED IN JANUARY 2013) TO ALLOW EMPLOYERS TIME TO MODIFY PAYROLL AND REPORTING PROCEDURES. EMPLOYERS WHO VOLUNTARILY ELECT TO REPORT THE COSTS FOR THE 2011 CALENDAR YEAR MAY RELY ON THIS GUIDANCE.THIS EDITION OF INSIGHTS & IMPLICATIONS WILL DISCUSS THE INFORMATION EMPLOYERS ARE REQUIRED TO REPORT ON W‐2 STATEMENTS AND HIGHLIGHT TRANSITION RELIEF BEING GRANTED TO CERTAIN PLAN SPONSORS AND BENEFIT PLAN COVERAGES.

THE REQUIREMENTS

The Affordable Care Act (ACA) requires the “aggregate cost of applicable employer‐sponsored coverage” be reported on W‐2 statements beginning with the 2012 calendar year (statements issued in January 2013). IRS Notice 2011‐28 provides interim guidance and transition relief for the W‐2 reporting requirement which is effective until further guidance is released. The Notice emphasizes that the W‐2 reporting requirement is for informational purposes to provide “useful and comparable consumer information to employees on the cost of their health care coverage” and does not create a taxable event. The Notice answers questions such as:

Which employers must report healthcare costs?
Which benefits are included in the determination?
How is the aggregate cost‐of‐coverage determined?
Who receives a W‐2 with health cost information?

A copy of Notice 2011‐28 as well as other relevant W‐2 reporting information can be found on the IRS website at: http://www.irs.ustreas.gov/newsroom/article/0,,id=237 870,00.html. A 90 day public comment period applies.

EMPLOYERS SUBJECT TO THE W‐2 REPORTING RULES

The W‐2 reporting requirement applies to all employers that provide fully insured or self‐funded group health coverage (including government entities and religious organizations). Notice 2011‐28 relieves certain employers and benefit plans from the current W‐2 reporting requirement. Any changes to these interim rules will not become effective until the January 1st that begins six months after the IRS issues future regulations.

TRANSITION RELIEF FOR EMPLOYERS

The following employers are relieved of the ACA W‐2 reporting requirement until further notice.

Employers who issue LESS THAN 250 W‐2s in the calendar year preceding the reporting year. For example, if you issue less than 250 W‐2 statements for the 2011 calendar year (given to employees in January 2012) you do not have to report healthcare costs on the 2012 W‐2 (given to employees in January 2013). Employers with high turnover or a large number of part‐time employees not eligible for benefits may not be granted transition relief as ALL W‐2 employees during the year are considered.
An employer that contributes to a multiemployer plan IS NOT required to include the cost of coverage under that multiemployer plan on the W‐2.

BENEFITS INCLUDED IN THE DETERMINATION

The law requires the cost of group health plan coverage established by an employer be reported on the W‐2. Costs excluded from the determination are:

Amounts contributed to Health Savings Accounts.
Accident or disability insurance.
Coverage for a specific disease or illness.
Hospital indemnity or other fixed‐indemnity plans.
Salary reduction elections to a healthcare Flexible Spending Account. Caution – optional employer flex credits would be included in the calculation.

TRANSITION RELIEF – BENEFIT PLANS

The following benefit plan costs DO NOT have to be included in the W‐2 cost of coverage until further notice.

Health Reimbursement Arrangements (HRA).
Stand‐alone dental and vision plans.
Self‐funded plans not subject to any federal continuation coverage requirements (Church plans).

In general, employers may only need to report annual medical plan costs on the W‐2 statements.

DETERMINING THE AGGREGATE COST OF COVERAGE

Employers must report the total cost of coverage (equal to the employer plus the employee share of the plan costs) based on the employee’s actual level of coverage during the calendar year. For example ‐ if an employee has a change in status from single to family coverage during the calendar year, the annual cost must reflect the actual number of months under single and family coverage, respectively.The IRS has indicated the following are acceptable methods to calculate the cost of coverage:

Fully insured plans may base the cost on the premium charged for each tier of coverage.
Self‐funded plans may use a COBRA “premium equivalent”. The cost reported on the W‐2 would not include the 2% COBRA administrative fee.

A few key points of interest:

The cost of coverage is determined irrespective of whether an employee has paid for the coverage with pre or post tax contributions.
The cost of coverage does not reflect imputed income required to be included in wages. These points of interest should simplify the reporting requirement as “taxable” amounts do not need to be separately identified to adjust the cost determination.
The W‐2 cost must reflect actual costs during a calendar year. Employers with off‐calendar year plans will need to pro‐rate and reflect any cost changes that occur during the calendar year.

WHO MUST RECEIVE A W‐2 WITH HEALTHCARE COSTS?

The W‐2 statement issued to all active and terminated employees who were enrolled in employer‐sponsored coverage during the calendar year must include the aggregate cost of that coverage (except where transition relief applies as described above).

TRANSITION RELIEF FOR TERMINATED EMPLOYEES

The cost shown for terminated employees must be determined using a reasonable method applied consistently to all participants. For a terminated employee who continues on COBRA (or state continuation) for the rest of the year you may report:

The cost of coverage as an active employee only, or
The cost of coverage as an active employee and COBRA beneficiary.

We suggest that employers consider reporting the cost while an active employee only as this would seem to be the simplest approach for many employer plan sponsorsEmployers are NOT REQUIRED to issue a W‐2 with the aggregate cost of employer sponsored coverage for an employee who terminates employment and REQUESTS THEIR W‐2 BEFORE THE END OF THE CALENDAR YEAR.

There are no additional reporting requirements for retirees and COBRA beneficiaries (beyond the first year) as these individuals are not entitled to a W‐2 statement.

SUMMARY

This interim guidance issued early in 2011 should give employers and payroll vendors sufficient time to review, prepare and implement the W‐2 reporting requirement for 2012. Transition relief that simplifies the reporting elements and defers compliance for smaller employers and multiemployer plans is certainly good news.

ADDITIONAL INFORMATION

For specific questions concerning information contained in this INSIGHTS & IMPLICATIONS, please contact your Chernoff Diamond consultant.

Information contained in this INSIGHTS & IMPLICATIONS is not intended to render tax or legal advice. Employers should consult with qualified legal and/or tax counsel for guidance in respect of matters of law, tax and related regulation.

Chernoff Diamond provides comprehensive consulting and administrative services with respect to all forms of employee benefits, risk management and qualified and non‐qualified retirement plans.

For additional information about our services please contact us at (516) 683‐6100 or via e‐mail at .(JavaScript must be enabled to view this email address).

IRS ISSUES INTERIM GUIDANCE W‐2 REPORTING OF GROUP HEALTH INSURANCE COVERAGE