JUST OUT 

 Payroll Tax Cut Extended to the End of 2012; Revised Payroll Tax Form Now Available to Employers

On February 23, 2012, the Internal Revenue Service released revised Form 941 enabling employers to properly report the newly-extended payroll tax cut benefiting nearly 160 million workers.

Under the Middle Class Tax Relief and Job Creation Act of 2012, enacted on February 22, 2012, workers will continue to receive larger paychecks for the rest of this year based on a lower social security tax withholding rate of 4.2 percent, which is two percentage points less than the 6.2 percent rate in effect prior to 2011. This reduced rate, originally in effect for all of 2011, was extended through the end of February by the Temporary Payroll Tax Cut Continuation Act of 2011, enacted Dec. 23, 2011.

No action is required by workers to continue receiving the payroll tax cut. As before, the lower rate will have no effect on workers' future Social Security benefits.  The reduction in revenues to the Social Security Trust Fund will be made up by transfers from the General Fund.

Due Date For The First Service Provider Fee Disclosure Notice Extended

For calendar year plans, the initial annual disclosure of "plan-level" and "investment level" information must be furnished to participants no later than August 30, 2012.  See the related article in this newsletter for additional information.

Group Health Insurance Coverage Cost Reporting to Employees

The following article is the second of a four part series discussing the group health insurance coverage cost reporting to employees guidance contained in IRS Notice 2011-28 with the addition of IRS Notice 2012-9's clarifications, modifications and additional guidance.  The combined IRS notices contain 38 questions and answers (Q&A) in total.

Part I found in our January 2012 newsletter, covered the Background of the IRS Notices; the General Requirements; the Employers Subject to Reporting Requirements; and the Method of Reporting on the Form W-2.

This part (Part II) covers the Aggregate Cost of Applicable Employer-Sponsored Coverage and the Cost of Coverage Required to be Included in the Aggregate Reportable cost.

Part III will cover the Methods of Calculating Cost of Coverage and Other Issues Relating to Calculating the Cost of Coverage.

Part IV will cover the Additional Guidance added to IRS Notice 2012-9.

Part II

Aggregate Cost of Applicable Employer-Sponsored Coverage (Q&A #s 11-15)

The Aggregate Cost of Applicable Employer-Sponsored Coverage is the total cost of coverage under all applicable employer-sponsored coverage provided to the employee.  In IRS Notice 2011-28, the cost of coverage under a group health plan is referred to as the reportable cost and the aggregate cost of applicable employer-sponsored coverage is referred to as the aggregate reportable cost. (Q&A 11)

Applicable Employer-Sponsored Coverage means, with respect to any employee, coverage under any group health plan made available to the employee by an employer that is excludable from the employee's gross income under §106, or would be so excludable if it were employer-provided coverage except that applicable employer-sponsored coverage does not include:

·      any coverage for long-term care;

·      any coverage (whether through insurance or otherwise) described in Code §9832(c)(1)(other than coverage for on-site medical clinics described in subparagraph (G) thereof);

·      any coverage under a separate policy, certificate, or contract of insurance which provides benefits substantially all of which are for treatment of the mouth (including any organ or structure within the mouth) or for treatment of the eye; and

·      any coverage described in Code §9832(c)(3) the payment for which is not excludable from gross income and for which a deduction under Code §162(1) is not allowable.

The types of coverage described in Code §9832(c)(1) (providing that certain "excepted benefits" are not subject to the requirements of chapter 100 of the Code) that are not subject to this reporting requirement are the following:

·      coverage only for accident, or disability income insurance, or any combination thereof;

·      coverage issued as a supplement to liability insurance;

·      liability insurance, including general liability insurance and automobile liability insurance;

·      workers' compensation or similar insurance;

·      automobile medical payment insurance;

·      credit-only insurance;

·      other similar insurance coverage, specified in regulations, under which benefits for medical care are secondary or incidental to other insurance benefits.

(See questions 16 through 23 for applicable employer-sponsored coverage that is not to be included in the aggregate reportable cost. (Q&A 12)

A Group Health Plan is a plan (including a self-insured plan) of, or contributed to by, an employer (including a self-employed person) or employee organization to provide health care (directly or otherwise) to the employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families.  For purposes of identifying whether a specific arrangement is a group health plan, taxpayers may rely upon a good faith application of a reasonable interpretation of the statutory provisions and applicable guidance, including Code §54.4980B-2, Q&A-1. (Q&A 13)

The aggregate reportable cost generally includes both the employer portion paid and the employee portion paid, regardless of whether the employee paid for that cost through pre-tax or after-tax contributions.  See Q19 regarding contributions to a health FSA. (Q&A 14)

The aggregate reportable cost includes the cost of coverage under the employer-sponsored group health plan of the employee and any person covered by the plan because of a relationship to the employee, including any portion of the cost that is includible in an employee's gross income.  Thus, the aggregate reportable cost is not reduced by the amount of the cost of coverage included in the employee's gross income. (Q&A 15 with examples)

Cost of Coverage Required to be Included in the Aggregate Reportable Cost (Q&A #s

16-23)

Amounts not Included

Except as provided in this and 17 through 23, the cost of coverage under all applicable employer-sponsored coverage must be included in the aggregate reportable cost.  However, the following amounts are not included in the aggregate reportable cost and are not permitted to be reported under Code §6051(a)(14):

1.    the amount contributed to an Archer Medical Savings Account (as defined in Code §220(d)),

2.    the amount contributed to any Health Savings Account (HSA) (as defined in Code §223(d)), and

3.    the amount of any salary reduction election to a flexible spending arrangement (FSA) (within the meaning of §§106(c)(2) and 125). (Q&A 16)

Multiemployer Healthcare Plans

For multiemployer healthcare plans the employer that contributes to a multiemployer plan is not required to include the cost of coverage provided to an employee under that multiemployer plan in determining the aggregate reportable cost.  If the only applicable employer-sponsored coverage provided to an employee is provided under a multiemployer plan, the employer is not required to report any amount under Code §6051(a)(14) on the Form W-2 for the employee. (Q&A 17)

Health Reimbursement Arrangements (HRA)

HRAs are not reportable if the amount of the salary reduction (for all qualified benefits) elected by an employee equals or exceeds the amount of the health FSA for the plan year.  However, if the amount of the health FSA for that exceeds the salary reduction elected by the employee for the plan year, then the amount of that employee's health FSA minus the employee's salary reduction election for the health FSA must be included in the aggregate reportable cost and reported under Code §6051(a)(14). (Q&A 18)

Flexible Spending Accounts (FSA)

The amount of a health FSA for a cafeteria plan year equals the amount of salary reduction (as defined in Proposed Treas. Reg. §1.125-1(r)), elected by the employee for the plan year, plus the amount of any optional employer flex credits (as defined under Proposed Treas. Reg. §1.125-5(b), expressed as a fixed amount, or as a formula such as matching salary reduction), that the employee elects to apply to the health FSA.  In determining the aggregate reportable cost, the amount of the health FSA is reduced (but not below zero) by the employee's salary reduction election (see Q&A 16.)

If the amount of salary reduction (for all qualified benefits) elected by an employee equals or exceeds the amount of the health FSA for the plan year, the employer does not include the amount of the health FSA for that employee in the aggregate reportable cost.  However, if the amount of the health FSA for the plan year, exceeds the salary reduction elected by the employee for the plan year, then the amount of that employee's health FSA minus the employee's salary reduction election for the health FSA must be included in the aggregate reportable cost and reported under § 6051(a)(14).  For purposes of this 19, a health FSA means an FSA (as defined in Proposed Treas. Reg. §1.125-5(a)) that is a medical reimbursement arrangement.  (See IRS Notice 2011-28 Q&A 19 for examples.) (Q&A 19)

Dental and Vision Plan Costs

Dental and vision plan costs are not included in the aggregate reportable cost if (1) the plan is being offered under a separate policy, certificate, or contract of insurance and (2) participants must have the right not to elect the dental or vision benefits and if they do elect one or the other benefit, they must pay an additional premium or contribution for that coverage.  If the dental or vision plan is integrated into a group health plan providing major medical or other health benefits, the dental and vision costs are included. (Q&A 20)

Self-Insured

The cost of coverage provided under a self-insured group health plan that is not subject to any federal continuation coverage requirements (for example, a church plan with the meaning of Code §4980B(d)(3) that is a self-insured group health plan) are not required to include the aggregate reportable cost under Code §6051(a)(14) on the Form W-2. For this purpose, federal continuation coverage requirements include the COBRA requirements under the Code, the Employee Retiree Income Security Act of 1974 or the Public Health Service Act and the temporary continuation coverage requirement under the Federal Employees Health Benefits Program.  Employers who do provide coverage under a self-insured group health plan that is subject to Federal continuation coverage requirements must report the cost of coverage on Form W-2. (Q&A 21)

Government Sponsored Health Plans

Government health plans set up primarily for members of the military and their families are not required to report the aggregate reportable cost on Forms W-2. (Q&A 22)

Highly Compensated and 2% Shareholder-Employee

The cost of applicable employer-sponsored coverage does not include excess reimbursements of highly compensated individuals that are included in gross income under Code §105(h).  An excess reimbursement that is included in income is subtracted from the cost of coverage in determining the aggregate reportable cost.  Similarly, the cost of applicable employer-sponsored coverage does not include the cost of coverage taken into income as the result of an employee being a 2% shareholder-employee of an employer that is an S corporation.  For more information regarding the treatment of the employer payment or reimbursement of health insurance premiums for a 2% shareholder-employee, see IRS Notice 2008-1, 2008-1 C.B. 251. (Q&A 23)

DOL Issues Revised Final Service Provider Fee Disclosure Rule

On Friday, February 3, 2012, the Department of Labor (DOL) published the revised final ERISA §408(b)(2) service provider fee disclosure rule that replaces the interim final rule published July 16, 2010.  Although there were some important revisions, the final rule does not substantially revise the Interim Final Rule.

Plans Not Covered

Annuity contracts and custodial accounts issued to affected employees before January 1, 2009 with respect to 403(b) plans or arrangements, where the sponsoring employer ceased making contributions, are not covered. In order for such 403(b) contracts or accounts not to be covered, however, the rights or benefits of the individual contract owners must be enforceable against the insurer or custodian without sponsor involvement, and such contract owners must be fully vested in benefits provided under the annuity or account.

Effective Date Extended

The effective date of the service provider fee disclosure rule has been extended from April 1, 2012 to July 1, 2012. The final rule also extends certain deadlines with respect to participant-level fee disclosure rules under ERISA §404(a).

For calendar year plans, the initial annual disclosure of "plan-level" and "investment level" information must be furnished to participants no later than August 30, 2012 (60 days after the 408b-2 rule effective date).

The first quarterly statement participant-level disclosure reflecting the fees and expenses actually deducted from the participant's account must be furnished no later than 45 days following the end of the quarter during which the initial disclosure was required.  For a calendar year plan, the first quarterly disclosure statement must be provided to participants no later than November 14, 2012, since August 30, 2012 falls during the third calendar quarter.  The disclosure, however, only needs to reflect the third quarter expenses.

New Requirement for Initial Disclosure

The disclosure to the responsible plan fiduciary of indirect compensation paid by third parties to a service provider has been expanded. A requirement has been added for describing the arrangement between the third party paying the indirect compensation and the service provider that results in such payment.

A Change to the Failure to Provide Disclosure

Under the Interim Final Rule, in order for the responsible plan fiduciary to be able to rely on the class exemption from fiduciary breach, the fiduciary (upon discovering that a covered service provider has failed to disclose certain required information) would have had to request such information in writing from the provider. Now, the final rule requires that if the provider fails to comply with the fiduciary's written request within 90 days, the fiduciary must determine whether to terminate or continue the contract or arrangement "...consistent with its duty of prudence under ERISA §404..."  In addition, the responsible plan fiduciary must terminate the services of the covered service provider "...as expeditiously as possible...", but consistent with its duty of prudence under ERISA §404, if the information relates to future services and is not disclosed promptly after the 90-day period.

Changes to the Investment-Related Disclosures

Fiduciary Services.

Two additional disclosures for designated investment alternatives (DIAs) are required at the plan level. (1) The total annual operating expenses of the DIA must be calculated in a manner consistent with the participant-level disclosures of ERISA §404(a) and expressed as a percentage. (2) Disclosure of any other information relating to DIAs that is within the control of, or reasonably available to, the covered service provider is required, if the information is considered investment-related and of a nature which must be provided under the participant-level disclosures.

Record-keeping and/or Brokerage Services.

A covered service provider may now comply with disclosure requirements for investment-related information by distributing current disclosure materials provided by the DIA issuer(s), or by the replication of such materials. For this relief to be effective, however, the issuer of the DIA must be one of the following entities:

*         a registered investment company (mutual fund company);

*         an insurance company qualified to do business in a State;

*         an issuer of a publicly traded security (undefined in the final rule); or

*         a financial institution supervised by a State or Federal agency.

The covered service provider disseminating pass-through information must act in good faith; must not know that the materials are incomplete or inaccurate; and must state that it makes no representations as to the completeness or accuracy of such materials.

DISCLOSURE TIMING AND CHANGES

The original distribution of investment-related information must still be prior to the date of the initial engagement, extension, or renewal.  At least annually, the responsible plan fiduciary must be provided with disclosures of all investment-related information. The deadline for disclosure of changes to investment-related information that has been previously disclosed, however, must still be provided "as soon as practicable, but not later than 60 days from the date on which the covered service provider is informed of such change, unless such disclosure is precluded due to extraordinary circumstances beyond the covered service provider's control, in which case the information must be disclosed as soon as practicable".

ERRORS

Disclosure of errors contained in previously distributed information must be corrected (and disclosed) within 30 days after the covered service provider knows of the error or omission.

DEFINITION OF COMPENSATION

The final rule allows the covered service provider to make a "reasonable and good faith" estimate of compensation or cost if it cannot otherwise readily describe the compensation or cost. In such an event, the covered service provider must explain the methods and assumptions it has used for the estimate. The explanation of compensation or cost for purposes of disclosure may still be expressed by monetary amounts, formulae, percentages, per capita charges, or other reasonable methods.