HUMAN CAPITAL PRACTICEALERT:HEALTH CARE REFORM BILLFebruary 2012 www.willis.comW-2 COST OF COVERAGEREQUIREMENT – JUST GOTA LITTLE EASIERCODE REQUIREMENTS AND REGULATORYGUIDANCEEFFECTIVE DATESThe Patient Protection and Aﬀordable Care Act of 2010 (PPACA), § 9002 requires employers, forthe ﬁrst time, to include on Form W-2 Wage and Tax Statements, the “cost of employer-sponsored health coverage.” The amount will be reported in Box 12, code DD. There is nocorresponding requirement to report health care costs on the Form W-3 (Transmittal of Wageand Tax Statements). The reporting requirement was to take eﬀect for calendar year 2011 W-2reporting, but, in Notice 2010-69, the Internal Revenue Service (IRS) conﬁrmed that compliancewould be deferred until 2012.Reporting is required for larger employers starting with the 2012 W-2, due out in January 2013.A larger employer is one who ﬁles W-2 information electronically with the IRS – a rule thatgenerally applies to an employer who issues 250 or more W-2s (partnerships with more than 100partners must also ﬁle returns electronically). An IRS representative has conﬁrmed that thecalculation of 250 employees is per employer, not on a “controlled group” basis – so, for example,where there are three companies, one parent and two wholly owned subsidiaries, and each has100 employees, none of them would be required to report the cost of coverage in 2012 under thesmall employer exception.The W-2 reporting requirements will ultimately apply to almost every employer who providesemployer-sponsored health coverage, including state and local government entities, churchesand other religious organizations, and employers that are not currently subject to COBRAcoverage requirements, but excluding federally recognized Indian tribal governments or relatedcorporations that are wholly owned by tribal governments. Certain plans are not required toreport the cost of coverage in 2012, nor until further guidance is provided, including smalleremployers, plans maintained primarily for members of the military and their families, and plansof employers that are not subject to COBRA (e.g., self-insured church plans, whether the churchplan voluntarily oﬀers COBRA or not).Caution: The employer is solely responsible for accurately reporting wages and withholdingtaxes. Failure to comply with this informational reporting may trigger the same penalties thatapply to W-2 reporting in general – an amount ranging from $30 to $100 per W-2, depending onthe length of time the employer fails to comply (maximum penalty provisions apply to smallbusinesses). There is a second, separate penalty for failure to correct the W-2. Each penalty hasa maximum of $1,500,000 ($500,000 for small businesses).
LET YOUR PAYROLL SYSTEMS/PROCESSES BE YOUR COMPLIANCE GUIDEAs we noted in July 2011, the delay in enforcing the new reporting requirements gives employers, softwareproviders, payroll administrators, and third-party service providers adequate time for implementation. W-2reporting of health coverage is for informational purposes only – employer and employee pre-tax contributionscontinue to be excluded from gross income and wages for employment tax purposes.As with all other elements reported on the W-2, plan sponsors will be heavily dependent on payroll administratorswho in turn will depend on software providers to accurately code the systems and elements of coverage used toaccumulate and generate W-2 data. Envisioned is a process, perhaps similar to that used to accumulatecontributions for a savings plan under Internal Revenue Code (IRC) § 401(k) – contributions which are alsoreported on the W-2. Because the accumulation and reporting processes will generally be driven by payroll systems,compliance and accuracy will largely be a function of the information reported by the employer. This summary is acompliance starting point. However, the guidance includes many questions and answers that should be readcarefully by those responsible for Form W-2 preparation and those individuals the preparer must rely upon toreport and coordinate cost information. Additional information on the reporting requirements can be found in IRSNotice 2011-28, as further adjusted by IRS Notice 2012-09.“APPLICABLE EMPLOYER-SPONSORED COVERAGE” DEFINEDApplicable Employer-Sponsored Coverage (ESC) includes employer and employee organization health coverage(insured and self-insured) provided to employees, former employees, the employer and others associated orformerly associated with the employer in a business relationship, and their families. ESC is deﬁned using the samedeﬁnition of coverage as used under COBRA – so that it generally includes all coverage from all plans, regardless ofwhether it is excludable from income. But some types of health coverage are exempted from the reportingrequirement. In Notice 2011-28 and Notice 2012-09, the IRS interpreted these exemptions, and theyprovided some additional exemptions. They promised further guidance which will be appliedprospectively with at least six months advance notice. So, unless the IRS guidance speciﬁcally excludes acoverage item, employers should include the cost for that item in the 2012 W-2, box 12, code DD.Accordingly, employers should be aware of the possibility that the items exempted for 2012 may be subject to thereporting requirement in future years.Excluded from ESC: Under IRS Notice 2011-28, conﬁrmed by Notice 2012-09, the following items are not includedin ESC for 2012:1. Contributions to an Archer Medical Savings Account2. Contributions to a Health Savings Account (HSA)3. Employee pre-tax contributions to a health Flexible Spending Account (FSA) (however, where the health FSA coverage exceeds the employee’s pre-tax contributions, such as where there are employer contributions to a FSA, that diﬀerence must be included in ESC*)4. Coverage only for a speciﬁed disease or illness (e.g., cancer) and hospital indemnity or other ﬁxed indemnity coverage oﬀered on an independent, non-coordinated basis, and funded solely with after-tax employee contributions5. Dental or vision coverage that is “not integrated” into a group health plan that provides reportable coverage (Note: This is the same standard that applies under the Health Insurance Portability and Accountability Act of 1996 (HIPAA), excluding dental and/or vision coverage where it is oﬀered under a separate policy, certiﬁcate or insurance contract; or, participants elect such coverage separately and where elected, they pay an additional premium or contribution for such dental or vision coverage)6. Long-term care coverage7. Coverage only for accidents or disability income coverage or a combination of both8. Liability coverage or coverage issued to supplement liability coverage9. Workers’ compensation or similar insurance10. Coverage under a multi-employer plan11. Automobile medical payment insurance12. Credit-only insurance* The IRS has provided speciﬁc guidance for full ﬂex/cafeteria plans. 2 Willis North America • 02/12
The exclusion for HIPAA excepted beneﬁts (accident or disability “applicable premium” under COBRA (minusincome, liability, workers’ compensation or similar insurance, auto the 2% COBRA administrative fee, if charged).med pay, credit only, and other similar coverage where medical care The entire cost of ESC provided to anbeneﬁts are secondary or incidental) does not extend to the cost of employee must be reported, without regard tomedical care provided by on-site medical clinics, nor care provided who is covered and regardless of who paid thethrough an Employee Assistance Program (EAP), wellness program cost – the employer or the employee. While anor similar program. Such costs must be included in the reportable employer may use a diﬀerent method forcost. However, in Notice 2012-09, the Internal Revenue Service has diﬀerent plans (options), they must use theconﬁrmed that employers can exclude the cost of such coverage from same method for every employee whoW-2 reporting in 2012 where a covered COBRA beneﬁciary would receives coverage under a speciﬁc plannot be charged any premium. (option). Besides using the COBRA applicable premium method, the Notice provides twoAs a result, the cost of medical coverage to be reported as part of the additional methods to calculate the cost ofcost of ESC includes: coverage:1. Major medical 1. PREMIUM CHARGED METHOD This2. “Mini-med” plans method is for insured plans only and uses3. On-site medical clinics providing more than ﬁrst aid services the premium charged by the insurer for4. Medicare Supplemental options each appropriate period.5. Medicare Advantage options6. Employee assistance plans that provide medical services (more 2. MODIFIED COBRA PREMIUM than referral services) METHOD This method can be used only7. Wellness programs that provide medical services when one of the following occurs:8. Executive physicals The employer subsidizes the cost ofThe IRS has provided a guidelist on coverage items to include or COBRA (in which case the Form W-2exclude at: http://www.irs.gov/newsroom/article/ reportable cost is based upon a0,,id=254321,00.html reasonable good-faith estimate of the COBRA “applicable premium”)Special rules apply where coverage is also treated as wages (and The actual premium charged by thereported in Box 1 of the W-2). Where the cost of coverage is imputed employer for each period in theas wages for a 2% shareholder-employee of an S-Corporation or current year is equal to the COBRAwhere the cost of coverage is imputed as income to highly “applicable premium” for each periodcompensated employees because the self-insured medical plan in the prior year (in which case thediscriminates in favor of highly compensated employees, those Form W-2 reportable cost is based onamounts should not be reported in Box 12, Code DD. However, the COBRA applicable premium intaxable coverage provided to a same-gender spouse would be the prior year)included both in Box 1, as wages and in Box 12, Code DD. The Notice also describes how to calculate theREPORTABLE COST OF ESC reportable cost for a period when theGuidance anticipates a cumulative process in determining the employer charges employees a composite rateamount to be reported. The reportable cost is the sum of the (i.e., if there is a single coverage class or ifreportable costs for each coverage period during the year as employees are charged the same premium fordetermined under the method used by the employer. Coverage costs each type of coverage under the plan).can be accumulated on a monthly or more frequent basis. Generallyspeaking, until additional guidance is provided, employers can If the cost of coverage for a period changescalculate the reportable cost based on methods to estimate during the year, the reportable cost must 3 Willis North America • 02/12
reﬂect the change in cost. Further, with respect to an employee who commences, changes orterminates coverage during the year, the reportable cost must consider the change in coverage.For example, if coverage begins mid-month where costs are determined on a monthly basis, theemployer can use any reasonable method to determine the cost (such as using the cost ofcoverage in eﬀect on the ﬁrst day of the month, the last day of the month, or by prorating thereportable costs) so long as the method is used consistently for all employees with coverageunder the plan.Example: An employee elects single coverage for 2012 during annual enrollment. The cost ofcoverage is $300 per person, per month. She marries in February 2012 and adds the spouse inMarch 2012. The cost of coverage increases June 1 to $400 per person, per month. She waivescoverage in July 2012 and enrolls in the spouse’s employer’s plan. She re-enrolls in coverageNovember 16, 2012, selecting the full family “tier” coincident with the birth of a baby. As a result,the reportable cost on the 2012 W-2, issued in January 2013, could be reported as: CALCULATING REPORTABLE COST – EXAMPLE MONTH AMOUNT January $ 300 February 300 March 600 April 600 May 600 June 800 July 0 August 0 September 0 October 0 November* 600 December 1,200 TOTAL $ 5,000 *Prorated method selected by employer. Regulations also allow employers to use a 1st day rule ($0) or a last day rule ($1,200), so long as consistently applied to all employees.The cost of any ESC needs to be reported for any year in which an employee receives a W-2. Twospecial rules allow the employer to ignore certain items:1. The employer can ignore the cost of coverage in the calendar year of separation, but only for the periods after separation in that year2. The employer can ignore retroactive changes in coverage that are made after December 31 of the calendar yearHere are examples:1. For an employee who separates on June 30, 2012, the employer may, but need not, include the cost of ESC for the period July 1, 2012 through December 31, 2012 (COBRA, retiree medical, etc.). However, if coverage continues into 2013 and if the individual receives a 2013 W-2 (due to payments for severance pay, unused vacation, deferred compensation, etc.), the 2013 W-2 must include the cost of coverage.2. For an employee whose spouse has a baby on December 16, 2012, but who fails to report the event until January, where coverage changes are retroactive to the date of birth, the employer need not adjust the amount reported on the 2012 W-2. The employer is permitted to use information as of December 31. 4 Willis North America • 02/12
Finally, reportable cost is a calendar year calculation, regardless ofthe plan year used for the health plan and regardless of the 12-month SPECIAL SITUATIONSperiod for determining the COBRA applicable premium. Employer- There is guidance for special situations.sponsored coverage costs must be reported on a calendar year basis,so the W-2 reportable cost under the plan for an employee for the SEPARATIONyear must reﬂect the reportable cost, with any increases or decreases An employer may apply any reasonablethat occur during the calendar year. method of reporting the cost of coverage for an employee who terminates employment before the end of the calendar year. TheClariﬁcations from New Guidance Issued in January 2012 employer has the ﬂexibility to report only the cost of coverage received prior to terminationInternal Revenue Service Notice 2012-9 also conﬁrmed with respect or to include the cost of post-employmentto reporting the 2012 cost of Employer Sponsored Coverage (ESC): COBRA coverage (or retiree medical coverage, etc.) so long as the same method is Elements that are not required to be reported, such as the cost of used for all who terminate. In 2012, if the W-2 a Health Reimbursement Arrangement, can be included in the is requested prior to the end of the calendar cost reported on the W-2, so long as the coverage is ESC and the year, no cost of coverage amount need be cost is calculated using one of the required methods. reported in Box 12. However, if the employer Where ESC is provided incidental to a non-reportable beneﬁt regularly issues W-2s mid-year after (e.g., where an insurer provides coverage for a day in an overseas separation, it must include the cost of emergency room as part of an Employee Assistance Program coverage on that W-2. (EAP) that otherwise provides only referral services), the employer need not calculate and report the value of the potential emergency room beneﬁt as part of ESC. INDIVIDUALS WITH MULTIPLE Where ESC is combined with a non-reportable beneﬁt (e.g., RELATED EMPLOYERS where the insurer commingles medical and disability coverage), Special rules apply for individuals who the employer can use any reasonable method, applied in a perform services for multiple related reasonable manner, to allocate costs between the ESC and the employers within the meaning of IRC non-reportable beneﬁt. §3121(s), where one of the employers is a Except for W-2s issued by third-party sick pay providers, any “common paymaster.” There, the common other W-2, whether issued by the employer or the employer’s paymaster must include aggregate reportable agent, must include the cost of ESC – even if the agent issues the costs for coverage provided by all employers it W-2 with income information and the employer issues a separate serves. The individual employers do not W-2 with only the cost of coverage information. report the cost of coverage that they provided. In any year after separation, if a W-2 is issued, it must also include cost of coverage information. 5 Willis North America • 02/12
EMPLOYEE TRANSFERS TO SUCCESSOR EMPLOYERIf an employee transfers to a successor employer, both the predecessor andthe successor must report the aggregate reportable cost of coverage that eachprovided unless the successor employer chooses to issue one W-2 reﬂectingwages paid and the aggregate reportable cost of ESC provided to the employeeduring the calendar year by both the predecessor and successor employers. Last July we issued anRETIREES, COBRA PARTICIPANTS Alert on the same subjectAn employer is not required to report the cost of coverage to an individual forwhom the employer is not otherwise required to issue a W-2. based on guidance issued by Treasury/Internal Revenue Service (IRS) with respectCONCLUSION to reporting the cost ofMost employers will be able to rely on their payroll administrators to achieve health coverage on thecompliance with the new W-2 reporting requirements. We anticipate, 2012 Form W-2. Thishowever, that payroll administrators will require employers to provide them February 2012 Alertwith the health coverage costs to accumulate and include on the W-2. updates and restates the July 2011 Alert based onBeyond the operational compliance issues, employers will want to consider the most recent Treasury/how such information will be communicated to workers. Will the new IRS guidance issuedmandated disclosure on the 2012 Form W-2 be adequate? Are additional earlier in 2012.communications needed to place the new informational item in context?For comparison, most employees who participate in tax preferred beneﬁts (a401(k), cafeteria plan, etc.) are generally unable to explain the diﬀerencebetween their federal wages (Box 1), FICA wages (Box 5), state wages (Box 16)and local wages (Box 19). Employees may not even notice the new health costnumber on their W-2 – or at the other extreme, it may surprise them orconfuse them because few employees understand the cost of health coverage.The new W-2 reporting requirements oﬀer employers a choice betweensimple compliance and incorporating the new reporting requirement into alarger strategy designed to conﬁrm the value of the health coverage oﬀered.Your Willis Client Advocate® can provide assistance with yourcommunications surrounding this new mandated disclosure. 6 Willis North America • 02/12
KEY CONTACTSU.S. HUMAN CAPITAL PRACTICE OFFICE LOCATIONSNEW ENGLAND Wilmington, DE Jacksonville, FL 302 397 0171 904 355 4600Auburn, ME207 783 2211 ATLANTIC Marietta, GA 770 425 6700Bangor, ME Baltimore, MD207 942 4671 410 584 7528 Miami, FL 305 421 6208Boston, MA Bethesda, MD617 437 6900 301 581 4261 Mobile, AL 251 544 0212Burlington, VT Knoxville, TN802 264 9536 865 588 8101 Orlando, FL 407 562 2493Hartford, CT Memphis, TN860 756 7365 901 248 3103 Raleigh, NC 704 344 4856Manchester, NH Nashville, TN603 627 9583 615 872 3716 Savannah, GA 912 239 9047Portland, ME Norfolk, VA207 553 2131 757 628 2303 Tallahassee, FL 850 385 3636Shelton, CT Reston, VA203 924 2994 703 435 7078 Tampa, FL 813 490 6808NORTHEAST Richmond, VA 813 289 7996 804 527 2343Buffalo, NY Vero Beach, FL716 856 1100 Rockville, MD 772 469 2842 301 692 3025Cranford, NJ MIDWEST908 931 3005 SOUTHEAST Appleton, WIFlorham Park, NJ Atlanta, GA 800 236 3311973 410 4622 404 224 5000 Chicago, ILMorristown, NJ Birmingham, AL 312 288 7700973 829 6374 205 871 3300 312 621 4843973 829 6465 312 348 7678 Charlotte, NCNew York, NY 704 344 4856 Cleveland, OH212 915 8802 216 861 9100 Gainesville, FLNorwalk, CT 352 378 2511 Columbus, OH203 523 0501 614 326 4722 Greenville, SCRadnor, PA 704 344 4856 East Lansing, MI610 254 7289 517 349 3226 7 Willis North America • 02/12
Grand Rapids, MI San Antonio, TX248 735 7249 210 979 7470Milwaukee, WI Wichita, KS414 203 5248 316 263 3211414 259 8837 WESTERNMinneapolis, MN763 302 7131 Fresno, CA763 302 7209 559 256 6212Moline, IL Irvine, CA309 764 9666 949 885 1200Pittsburgh, PA Las Vegas, NV412 645 8506 602 787 6235 602 787 6078Schaumburg, IL847 517 3469 Los Angeles, CA 213 607 6300SOUTH CENTRAL Novato, CAAmarillo, TX 415 493 5210806 376 4761 Phoenix, AZAustin, TX 602 787 6235512 651 1660 602 787 6078Dallas, TX Portland, OR972 715 2194 503 274 6224972 715 6272 Rancho/Irvine, CADenver, CO 562 435 2259303 765 1564303 773 1373 San Diego, CA 858 678 2000Houston, TX 858 678 2132713 625 1017713 625 1082 San Francisco, CA 415 291 1567McAllen, TX956 682 9423 San Jose, CA 408 436 7000Mills, WY307 266 6568 Seattle, WA 800 456 1415New Orleans, LA504 581 6151 The information contained in this publicationOklahoma City, OK is not intended to represent legal or tax advice and has been prepared solely for educational405 232 0651 purposes. You may wish to consult your attor- ney or tax adviser regarding issues raised in thisOverland Park, KS publication.913 339 0800 8 Willis North America • 02/12