The Patient Protection and Affordable Care Act (Health Care Reform Act) contains many provisions that have little to do with how health care is delivered or how health plans provide coverage. One of these “extra” provisions is a requirement that employers report the value of the health insurance they provide to an employee on the employee’s Form W-2. This requirement is effective for 2011, which means the information will need to be included in W-2s issued in Jan. 2012.
But IRS regulations contain a “quirk” that requires employers to be prepared for this new requirement much sooner. A former employee may request a W-2 at any time during the calendar year, and the former employer is required to respond to the request within 30 days. This means employers need to be prepared to comply with the new reporting requirement in early 2011.
The new requirement does not change the tax treatment of employer-provided health insurance. It is still a tax-free benefit.
Congress created the new reporting requirement for two reasons. First, it wants to educate employees on the cost of the health insurance benefits they receive, and it determined that reporting the value of the benefit on employers’ W-2s would accomplish that goal. Second, compliance will help employers determine whether they have a high-cost plan that will be subject to the excise tax on “Cadillac” health plans, and give them time to modify the coverage before the excise tax becomes effective in 2018. It is also a potential tool to help the federal government monitor for compliance with the individual and employer “pay or play” mandates that go into effect in 2014.
We are still waiting for IRS guidance on the specifics of complying with this new reporting requirement. But here is what we know so far:
Employers must report the aggregate cost of “applicable employer-sponsored coverage.”
Applicable employer-sponsored coverage is major medical coverage, including “mini-med” or limited coverage plans, amounts under self-funded medical reimbursement plans and HRAs, employer-provided Medicare supplemental insurance, and employee assistance plans.
The value of stand-alone dental and vision plans, salary reduction contributions to medical flexible spending accounts, contributions to a health savings account, and the value of coverage for a specific disease or illness need not be reported.
The value reported to an employee will be based on the coverage provided to the employee and “similarly-situated employees.” Employees are similarly situated based on the coverage option they select under the plan. For example, if a plan offers employee-only, employee +1, employee +2, and family coverage, it will have four categories of “similarly-situated” employees. The value of each coverage option is reported for those employees who elected that option.
The value is not determined based on usage. Instead, the value reported will be determined the same way the COBRA cost is calculated. If an employer has not been calculating a COBRA premium (for example, if it is a small employer not subject to COBRA) or if it has not been calculating COBRA premiums for each coverage option, it will need to do so and break it down for similarly-situated employees.
We will continue to monitor for IRS guidance on this issue and will provide updated information on our web site when it becomes available. For example, the IRS is expected to issue guidance in the near future regarding setting COBRA premiums for self-funded plans. But in the meantime, payroll personnel should begin the process of updating their systems to add the capability to capture and report this information.
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