With Jennifer McCormack, Esq. Lots of different kinds of coverage will not have to report their expenses next tax year (the 2012 tax year), and lots of employers won’t have to either. Are you one of them? Beginning calendar year 2012, employers must report on Forms W-2 (which employers will give employees in January 2013) the aggregate cost of health coverage received by an employee under the employer’s health plan. Notice 2012-9, issued Jan. 5 by the IRS, clarified prior guidance for employers regarding compliance with the new W-2 health coverage reporting requirement, as mandated under health reform.
The latest guidance builds on, adds to and supersedes some of the guidance on W-2 reporting in IRS Notice 2011-28, which had a comment period. Under 2011-28, most FSAs, HRAs and HSAs were excluded from the cost analysis.
Even though the IRS has repeatedly advised that this reporting is for the employee’s information only and not to cause excludable health coverage to become taxable, employers and their employees may be hesitant about this reporting requirement. (Note: For more information about employers and health reform, read The New Health Care Reform Law: What Employers Need to Know (A Q&A Guide), 2nd Edition.)
Certain types of health coverage, however, are excluded from this reporting requirement, clarifies Notice 2012-9. For example, employers need not include the cost of coverage under an employee assistance program (EAP), health reimbursement accounts (HRA), wellness program or on site-medical clinic if the employer does not charge a premium for that type of coverage. If those programs are incorporated in the company’s health plan, however, they should be included.
Employers may include such costs – EAPs, HRAs, wellness programs and on-site medical clinics – if they are employer-sponsored, Notice 2012-9 says. Further, EAPs which provide certain medical services are considered group health plans and subject to COBRA, and if a separate COBRA cost is imposed, that separate cost must be taken into account when complying with the reporting requirement.
An exception has also been made for coverage offered under a self-funded plan which is not subject to any federal continuation coverage requirements, such as church plans or government plans.
The cost of coverage provided by the U.S. government, government of any state or political subdivision thereof, or any agency or instrumentality of any such government, and a plan maintained primarily for members of the military, or primarily for members of the military and their families are excepted from the reporting requirement.
A free-standing dental and/or vision plan are not subject to the reporting requirement if the plan is excepted from HIPAA. However, dental or vision coverage incorporated into the company’s medical plan could be subject to the requirement.
Notice 2010-9 further clarified which employers would be excluded from this reporting requirement.
While prior IRS Notice 2011-28 determined smaller employers would exempt if they are required to file fewer than 250 Forms W-2, this new guidance clarifies that an employer is exempt for any calendar year if the employer was required to file fewer than 250 Forms W-2 for the preceding calendar year.
Employers which are federally recognized Indian tribal governments are not subject to the reporting requirement. Also, employers that are tribally chartered corporations wholly-owned by a federally recognized Indian tribal government are also exempt.
The new guidance also describes when employers have to report hospital indemnity or other fixed indemnity insurance in the W-2. If employees are allowed to use pre-tax dollars to purchase these voluntary plans, the employers must report the costs.
If the coverage is not coordinated with the company’s sponsored health plan and the employee pays for it on an after-tax basis, it need not be reported. However, if the company contributes any amount to the insurance or if the employee buys the policy on a pre-tax basis through a cafeteria plan, then those kinds of coverage must be reported, Notice 2012-9 says.
Reportable costs include amounts for applicable employer-sponsored coverage: (1) paid by the employer; and (2) by the employee, regardless of whether paid through pre-tax or after-tax contributions.
Concerns over Costs and Implications
Even though the government persistently repeats it has no intention of taxing health benefits, it may not be enough to allay all employer suspicions that this is the first step to eliminating the tax-exempt status of health benefits.
Employers have many concerns regarding this requirement: (1) the administrative burden of the reporting; (2) the associated costs; and (3) the effort that will go into calculating a
per-beneficiary amount for health coverage for each employee. In light of this new requirement, anticipated costs must be contemplated by the employer.
Further, employers initially thought this was the beginning of taxing the benefit, so every time IRS discusses this, it reiterates that reporting is for employees’ information only and does not cause otherwise excludable health coverage to become taxable.
Notice 2012-9 is labeled as interim, but provides specific instructions for Form W-2 reporting. Employers required to comply with the requirements should begin discussions about their ability (or the ability of their outside payroll service provider) to calculate employer-sponsored health costs and implement processes for the 2012 tax year. Failing to comply with this reporting requirement could result in severe penalties of $200 per failed W-2 up to a maximum of $3 million per year.
Jennifer McCormack is an attorney and vice president of the Phia Group in Braintree, Mass. She specializes in healthcare and regulatory issues facing employee benefit plans and their administration.