IRS ISSUES MORE GUIDANCE ON W-2 REPORTING OF HEALTH BENEFITS

On January 3, 2012, the Internal Revenue Service published Notice 2012-9, providing interim guidance on informational reporting to employees of the cost of their group health insurance coverage.  This notice restates and amends the interim guidance initially provided in Notice 2011-28. This informational reporting is required under the Patient Protection and Affordable Care Act of 2010 (the Affordable Care Act). This notice supersedes Notice 2011-28 and makes the following changes:

• Provides that until further guidance is issued, the reporting requirement will not apply to tribally chartered corporations wholly owned by Federally recognized Indian tribal governments.

• Clarifies the application of the interim relief from the reporting requirement for employers filing fewer than 250 Forms W-2 for the preceding calendar year.

• Clarifies the application of the reporting requirement to certain related employers not using a common paymaster.

• Adds a new example that demonstrates that the reporting requirement does not apply to coverage under a health flexible spending arrangement (FSA) if contributions occur only through employee salary reduction elections.

• Clarifies that the standard for determining whether coverage under a dental plan or vision plan is subject to the reporting requirement is based upon the same standard for determining whether the coverage is an “excepted benefit” under the Health Insurance Portability and Accountability Act of 1996 (HIPAA).

• Clarifies that the reporting requirement does not apply to the cost of coverage includible in income under § 105(h), or payments or reimbursements of health insurance premiums for a 2% shareholder-employee of an S corporation who is required to include the premium payments in gross income.

• Clarifies the application of the reporting requirement if a composite rate is used with respect to the premium charged active participants, but not the premium charged under COBRA to a qualifying beneficiary. In such a case, the employer using a composite rate may calculate and use the same reportable cost for a period for (1) the single class of coverage under the plan, or (2) all the different types of coverage under the plan for which the same premium is charged to employees, provided this method is applied to all types of coverage provided under the plan.

The notice also provides the following additional guidance through new Q&A’s:

• Provides that employers are not required to include the cost of coverage under an employee assistance program (EAP), wellness program, or on-site medical clinic in the reportable amount if the employer does not charge a premium with respect to that type of coverage provided under COBRA to a qualifying beneficiary.

• Clarifies that employers may include the cost of coverage under programs not required to be included, such as the cost of coverage under a Health Reimbursement Arrangement (HRA).

• Clarifies how to calculate the reportable amount for coverage only a portion of which constitutes coverage under a group health plan. An employer may use any reasonable allocation method to determine the cost of the portion of the program providing applicable employer-sponsored coverage.

• Clarifies how to calculate the reportable amount if an employer is provided notice after December 31 of a calendar year of events that occurred on or before December 31 of a calendar year that affect the prior year’s coverage, such as an employee providing an employer notice of a divorce or other change in family status that occurred during a prior calendar year. The aggregate reportable cost for a calendar year reported on Form W-2 may be based on the information available to the employer as of December 31 of the calendar year.

• Clarifies how to calculate the reportable amount where coverage extends over the payroll period including December 31. An employer may include the coverage period that includes December 31 but continues into the subsequent calendar year in one of the following manners: (1) treat the coverage as provided during the calendar year that includes December 31; (2) treat the coverage as provided during the calendar year immediately subsequent to the calendar year that includes December 31; or (3) allocate the cost of coverage for the coverage period between each of the two calendar years under any reasonable allocation method, which generally should relate to the number of days in the period of coverage that fall within each of the two calendar years. Whichever method the employer uses must be applied consistently to all employees.

• Clarifies the application of the exception for certain hospital indemnity or other fixed indemnity insurance offered by an employer on an after-tax basis. An employer is required to include in the aggregate reportable cost reported on Form W-2 the cost of coverage provided under hospital indemnity or other fixed indemnity insurance, or the cost of coverage only for a specified disease or illness, if the employer makes any contribution to the cost of coverage that is excludable under § 106 or if the employee purchases the policy on a pre-tax basis under a § 125 cafeteria plan.

• Provides that the reportable amount is not required to be included on a Form W-2 provided by a third-party sick pay provider.

This reporting to employees is for their information only. The reporting is intended to inform them of the cost of their health care coverage, and does not cause excludable employer-provided health care coverage to become taxable. Nothing in this notice, or the additional guidance that is contemplated, causes or will cause otherwise excludable employer-provided health care coverage to become taxable.

Notice 2010-69 provided that this reporting will not be mandatory for 2011 Forms W-2 (that is, the forms required for the calendar year 2011 that employers are generally required to give employees by the end of January 2012. This notice provides interim guidance that generally is applicable beginning with 2012

Forms W-2 (that is, the forms required for the calendar year 2012 that employers are generally required to give employees by the end of January. In addition, employers may rely on the guidance provided in this notice if they voluntarily choose to report the cost of coverage on 2011 Forms W-2, even though this reporting is not required for 2011. This interim guidance is applicable until further guidance is issued. Treasury and the IRS will continue to consider comments submitted in response to Notice 2011-28 as they work to develop regulations.

To the extent that future guidance applies the reporting requirement to additional employers or categories of employers or additional types of coverage, the IRS has stated that guidance will apply prospectively only and will not apply to any calendar year beginning within six months of the date the guidance is issued.

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