offices have inquired about the recently issued Notice 2011-28 from the IRS,
which provides greater clarity to employers in connection with how to
administer new Form W-2 reporting requirements for costs of employer-provided
health coverage. This reporting is required under Section 6051(a) (14) of the
Internal Revenue Code ("Code"), which was added by Section 9002 of the Patient
Protection and Affordable Care Act ("PPACA"). The IRS has requested comments on
the Notice, which will be due 90 days after the Notice is officially published
in the Federal Register.
The reporting requirement was scheduled to become
effective for the 2011 tax year, but the IRS issued Notice 2010-69 last
October, which delayed enforcement of the requirement until the 2012 tax year (i.e.,
for Forms W-2 required to be issued by end of January 2013). Notice 2011-28
provides further transitional relief for certain employers as described below.
It is important for employers to begin working with their health
care and payroll providers now to ensure that any needed system changes are in
place by January 1, 2012. In part, this is because unlike Notice 2010-69,
Notice 2011-28 does not provide any penalty relief for failure to comply with
the new reporting requirements. The penalty for such a failure is $200 per Form
W-2, up to a maximum of $3 million.
Key provisions from the Notice are summarized below.
Employers Subject to the Reporting
Except as provided in the Notice's transitional relief described
below, virtually all employers that provide "applicable employer-sponsored
coverage" under a group health plan must comply with the new reporting
requirement. This includes federal, state, and local government entities,
churches and other religious organizations, and employers that are not subject
to the COBRA continuation requirements.
Additionally, the Notice provides transitional relief for
employers filing fewer than 250 Forms W-2 in the previous calendar year. Under
the transitional relief, these small employers will not be required to report
until the IRS issues further guidance.
Categories of Coverage for Which
Reporting is Required
Employers must report the cost of all "applicable
employer-sponsored coverage," which includes any group health plan coverage
that is excludable under Section 106 of the Code or would be excludable if it
were employer-sponsored coverage. The Notice makes clear that the employer
contributions to an Archer MSA or Health Savings Account, as well as an
employee's salary reduction contributions to a health flexible spending account
("health FSA"), do not need to be reported. Any employer flex credits
contributed to a Health FSA, however, would need to be reported. The Notice
provides that the following types of coverage are specifically excluded from
the reporting requirement:
* Stand-alone dental or vision coverage.
* Coverage provided by a federal or state government, or agency
of such government, primarily for members of the military and their families.
* Coverage for long-term care.
* Coverage for HIPAA-excepted benefits (except for on-site
medical clinics); and
* Hospital or fixed indemnity coverage or insurance for a
specified disease or illness, but only if the coverage is a HIPAA-excepted
benefit and is paid for by the employee on an after-tax basis.
Additionally, reporting for the following types of coverage
will not be required until the IRS issues further guidance: (1) the cost of
coverage under a Health Reimbursement Arrangement; (2) coverage provided under
a multiemployer group health plan; and (3) coverage provided by a self-insured
group health plan that is not subject to any federal coverage continuation
requirements (e.g., COBRA).
Calculating the Cost of Coverage
The Notice makes clear that the cost of coverage includes
both the employers' and the employees' share of the cost of coverage.
Additionally, the reportable cost includes any amount that is required to be
included in an employee's taxable income, such as imputed income for coverage
of certain individuals (e.g., domestic partners or adult
children over the age of 27) or amounts includible as excess reimbursements
under Code Section 105(h). In determining aggregate cost, the employer may
choose to include the cost of any continuation coverage, if it applies the same
methodology for all plan participants for the applicable calendar year.
The Notice provides three methods that an employer may use to
calculate the cost of coverage. The employer is not required to use the same
method for each of its plans, but it must use the same method with respect to
each employee receiving coverage under each respective plan.
(1) COBRA Applicable Premium
Method: Under this method, the reportable
cost equals the COBRA applicable premium for coverage for the period based on a calculation made in good faith compliance with the requirements of Code Section
(2) Premium Charged Method: For
fully insured plans, the employer may use the actual premium charged by the
insurer to calculate the cost of coverage.
(3) Modified COBRA Premium
Method: If the employer subsidizes the cost
of COBRA, then the employer may utilize a good faith estimate of the COBRA
applicable premium to determine the reportable cost. Additionally, if the
actual COBRA premium charged by the employer for each period in the current
year is equal to the premiums charged for each period in a prior year, the
employer may use the COBRA applicable premium for the prior year to determine
the reportable costs for the current year.
Special Considerations for
Calculating the Cost of Coverage
Changes in Coverage. If an
employee changes coverage during the year, the amount reported on Form W-2 must
consider the change in coverage. If the change occurs during a period, such as
in the middle of a month, the employer may use any reasonable method to
determine the reportable cost for such period. The Notice provides that using
the reportable cost at the beginning of the month or the end of the month or
averaging or prorating the reportable costs are all reasonable methods.
Changes in Cost of Coverage. The
employer must also consider changes in the cost of coverage that occur during a
Employers Charging Blended or Composite Rate. The notice provides that, if an employer charges the same rate for all employees
under the plan, regardless of the scope of coverage, the employer can report
the same amount for all employees for the period. Similarly, if the plan has
different tiers of coverage (e.g., employee-only, family, etc.), and
employees in each tier pay the same premium, the employer may report the same
amount for each coverage group for the period.
Determination Period Not the Calendar Year. If
the employer uses a 12-month determination period that is not the calendar year
for purposes of calculating the COBRA applicable premium under the plan, the
employer cannot use such a determination period when calculating the cost of
coverage. The reportable cost must be determined on a calendar year basis. To
convert the COBRA-applicable premium to a calendar year amount, the employer
will need to apply rules like the rules for calculating the cost of coverage
when an employee has a change in coverage during the year, or when the cost of
coverage changes during the year.
Other Key Points from the Guidance
The Notice clarifies several other important items, as summarized
* The cost of coverage is to be reported in Box 12 of Form W-2,
using Code "DD".
* The reporting is for informational purposes only and will not
affect the taxability of any such coverage; and
* If an employee terminates employment mid-year and requests a
Form W-2 at termination, the employer is not required to report any amount for
Notice 2011-28 can be found here: http://www.irs.gov/pub/irs-drop/n-11-28.pdf