FORM W-2 REPORTING OF HEALTH COVERAGE UNDER HEALTH CARE REFORM
As we reported in our December, 2011 Advisory, "Five Items on the Health Care Reform Radar for 2012," large employers will be responsible to report the cost of employer-provided health coverage on employee Form W-2's beginning with Form W-2's for 2012 due in January, 2013. Recent guidance provided by the Internal Revenue Service has clarified certain reporting issues for employers.
The reporting obligation distinguishes between large and small employers based on the number of Form W-2's issued for the prior year. Only employers that issued 250 or more Form W-2's for 2011 must report starting with Form W-2's issued for 2012. For small employers (those that issued less than 250 Form W-2's for 2011), reporting is currently optional. Until further guidance is issued, such small employers are not required to begin reporting until the year after that for which the employer issues 250 or more Form W-2's. Employers that use agents to issue Form W-2's must count the Forms prepared for the employer by the agent for purposes of determining whether the employer has met the reporting requirement threshold.
Employers must report the "aggregate cost of coverage" which includes both the employer's costs and the amount an employee is required to pay for coverage. In accordance with the guidance, there are three methods to determine the aggregate cost for coverage: (1) the premium charged by the insurance company, (2) the amount charged for COBRA, excluding the 2% surcharge if applicable; or (3) a modified COBRA premium amount for employers that subsidize the cost for COBRA or base COBRA on the prior year's costs. For insured plans, it is anticipated that most employers will utilize the premium charged method. Of course, self-insured plans will be unable to use the premium charged method and must use the COBRA-based methods to determine the amount to be reported.
Certain health related benefits are not subject to reporting. These include HRA's, FSA's to which only employees contribute, long term care plans and disease specific, dental and vision plans that are not integrated with an employer's medical coverage and are excepted from HIPAA. Also, certain government and church plans are exempt from reporting.
Reporting must be based on calendar year costs. The reported cost must reflect any changes to an employee's aggregate cost of coverage during the year occurring as a result of either a change to overall coverage costs, e.g. premium amounts, or a modification of an employee's coverage election, e.g. switching from single to family coverage. If such a change occurs during the middle of a period, e.g. a month, a reasonable method of determining the cost for such period is acceptable, e.g. cost at the beginning or end of the period or an average or proration of such costs, as long the same method is used for all similarly situated employees.
For an employee who terminates employment during the year, an employer may elect to report the cost for such employee based on either the aggregate cost of coverage while an employee or the cost for the entire year, in the event the employee elects COBRA. The method chosen by the employer must be applied to all employees who terminate during a year. In the event an employee requests his or her Form W-2 at the time of termination, the employer is relieved of any reporting requirement with respect to such employee.
Although the deadline to issue 2012 Form W-2's is a year away, large employers should be begining the process of designing systems to track the aggregate cost of coverage on an employee-by-employee basis and coordinate with payroll service providers regarding data collection and reporting sooner rather than later. Employers need to take the lead to ensure that systems preparation is completed and data collection methods are established long before the end of 2012, when such tasks could be overwhelming.