on Employee W-2s: New Requirements Mastering the Procedures for - - PowerPoint PPT Presentation

Reporting Costs of Health Insurance

• n Employee W-2s: New Requirements

Mastering the Procedures for Disclosing and Valuing Coverage Starting in 2013

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THURSDAY, DECEMBER 20, 2012

Presenting a live 110-minute teleconference with interactive Q&A

Norbert Kugele, Partner, Warner Norcross & Judd, Grand Rapids, Mich. Andy Anderson, Partner, Morgan Lewis & Bockius, Chicago

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Reporting Costs of Health Insurance on Employee W-2s: New Requirements Seminar

Norbert Kugele, Warner Norcross & Judd nkugele@wnj.com

• Dec. 20, 2012

Andy Anderson, Morgan Lewis & Bockius aanderson@morganlewis.com

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Agenda

7

 Overview  Employers subject to reporting requirement  Applicable employer-sponsored coverage  Aggregate cost  Inclusions, exclusions, calculation methods  Form W-2 reporting  Planning considerations  Questions

7

Overview

8

 Patient Protection and Affordable Care Act  ―Aggregate cost‖ of ―applicable employer-sponsored coverage‖ to

be reported on Form W-2.

 Dress rehearsal for ―Cadillac tax‖ in 2018  IRS Notice 2010-69  IRS Notice 2011-28  IRS Notice 2012-9  Effective for 2012 Forms W-2 issued in January 2013  IRS Web site FAQs and chart updated May 2, 2012  http://www.irs.gov/newsroom/article/0,,id=237894,00.html.

8

Employers Subject To Reporting Requirement

9

 All employers, unless specifically excluded  Who is excluded:  Employers who filed fewer than 250 forms W-2 for the previous

year

 E.g., employers filing fewer than 250 2011 forms W-2 (issued in

January 2012) not required to report on 2012 forms W-2 (issued in January 2013)

 Federally recognized Indian tribal governments

9

Applicable Employer-Sponsored Coverage

10

 ―Applicable employer-sponsored coverage‖ is:  Coverage under any employer-provided group health plan that is

non-taxable to the employee

 Includes coverage for civilian employees under government plans

10

Applicable Employer-Sponsored Coverage (Cont.)

11

 ―Group health plan‖  Any plan of, or contributed to by, an employer (or employee

• rganization) to provide healthcare

 Insured or self-insured  Good-faith application of a reasonable interpretation of rules

11

Applicable Employer-Sponsored Coverage (Cont.)

12

 Applicable employer-sponsored coverage excludes:  HIPAA excepted benefits (other than on-site clinics)  Accident, disability and AD&D insurance  Workers’ compensation insurance  Liability insurance  Long-term care  Separate policy substantially for treatment of mouth or eyes  Independent, non-coordinated benefits  Specified disease, hospital or fixed-indemnity insurance

12

Aggregate Cost

13

 Total cost of coverage under all applicable employer-sponsored

coverage

 Aggregate cost includes:  Costs paid by the employer and employee (pre-tax and post-tax

premiums)

 Even if included in the employee’s gross income  Domestic partner  Dependent older than 26

13

Aggregate Cost (Cont.)

14

 Excluded from aggregate cost:  Archer MSAs  HSAs  Salary reductions-only FSAs  Special rule for FSAs with ER credits, match, etc.  Governmental plans for military

14

Aggregate Cost (Cont.)

15

 Additional exclusions (until future guidance is issued):  Multi-employer plans  HRAs  Stand-alone dental and vision plans  EAPs, on-site clinics, wellness IF no COBRA premiums  Self-insured church and other plans that are not subject to federal

COBRA

 Any change to the transition relief will apply prospectively and will not

apply to any calendar year beginning within six months of its issuance.

 If guidance issued by 6/30/12, then no earlier than 2013  If guidance issued by 7/30/12, then no earlier than 2014

15

Aggregate Cost (Cont.)

16

 ―Aggregate cost‖ to be determined under rules similar to COBRA

premiums

 Good-faith compliance  No additional COBRA pricing guidance offered  A welcome omission!

16

Aggregate Cost: Calculation Methods

17

 COBRA applicable premium method (minus 2%)  Premium charged method – for insured plans  Modified COBRA premium method – for employer-subsidized

coverage or if employer bases COBRA on prior-year premiums

 Also:  Special rules for composite rates (e.g., single coverage class)  Special rules for determining whether to include health FSA

contributions (employer flex credits)

17

Aggregate Cost: More Rules

18

 Cost is determined on a calendar-year basis.  Employers must track changes to the costs and coverage occurring

during the calendar year.

 Mid-year cost changes  When employees commence, change or terminate coverage  Employer can use any reasonable method to determine the cost.  New employees mid-month: Cost at beginning or end of month, or

pro-rate

 Terminated employees: May report COBRA costs (or not)  Can ignore retroactive changes after year-end  Must be consistent for all employees in plan

Drilling Into The Details

Example Of Benefits To Be Included

20

 Widget Company has 340 employees in 2011 and offers the

following benefits:

 Major medical: Reported  Dental (self-insured, integrated with medical): Reported  Vision (non-integrated, insured): Must be excluded  HRA: Need not be reported  Health FSA with employer and employee contributions:  Employee’s contributions are not reported.  Employer contributions are reported IF the employee’s total

salary reductions are less than the value of the Health FSA.

20

Example Of Reporting Requirements

21

 EAP: Must report if COBRA premiums are charged to employee;  Executive physicals: Reported  Life insurance benefits: Not reported  AFLAC supplemental insurance purchased through cafeteria plan:

Reported

 Travel insurance program: Probably must be excluded

21

When Must Information Be Included On The W-2?

22

 Must begin reporting on 2012 W-2s issued beginning in January

2013

 Thereafter, on all W-2s that are issued

• Includes W-2s issued to terminating employees who request an

immediate W-2

 Aggregate cost of applicable employer-sponsored coverage is

reported in Box 12, Code DD.

22

What About Terminated Employees?

23

 Transitional relief options:  Cost of coverage for portion of year covered as active employee  Ignore COBRA  Must use consistently for all terminated employees  Costs of both pre- and post-employment coverage  During 2012 only; not required to report costs on early W-2s

issued before January 2013

 No reporting is required for an individual to whom the employer is not

• therwise required to issue a Form W-2, such as a retiree or former

employee receiving no compensation.

23

How Do We Calculate The Cost Of Coverage?

24

 Must include both the employer and employee cost, whether pre-tax

• r after-tax

 Exception: Health FSAs (see next slide)  Include cost of coverage for employees and dependents, including

imputed income

 No breakdown on a per-plan basis  Aggregate numbers only

24

Special Rules For Contributions To Health FSA

25

 Employee contributions are NEVER included.  Employer contributions may have to be reported.  Examples of employer contributions:  Flex dollars used to fund health FSA  Employer matching dollars contributed to a health FSA  Employer seed money contributions to a health FSA  Report employer’s contributions only if total amount of employee’s

cafeteria plan salary reduction is less than value of health FSA

 Example: Flex dollars $1,000, employee salary reduction

$1,000, health FSA election $1,200

 May want to document an ordering rule

25

How Do We Calculate The Cost Of Coverage? (Cont.)

26

 Premium charged method (insured plans);  Use the amount charged by insurer for that employee’s coverage  COBRA applicable premium method (IRC 4980B(f)(4))  Cost to the plan of providing the coverage  Self-insured plan:  Actuarially determined reasonable estimate  Historical cost adjusted for inflation

26

How Do We Calculate The Cost Of Coverage? (Cont.)

27

 Modified COBRA premium method  Employer subsidizes cost of COBRA coverage.  May use a reasonable good faith estimate of the full COBRA

premium for W-2 reporting purposes

 Using prior year’s COBRA cost for this year’s COBRA premium  May use the same number for W-2 reporting purposes

27

Employers Using Composite Rates

28

 What is a composite rate?  Single coverage class under the plan (everyone pays the same,

regardless of single or dependent coverage)

 Different coverage classes; charge same premium within each

coverage class

 Can use these rates for W-2 reporting purposes  If consistently use composite rates for active employees and different

rates for COBRA: May use either composite rate or COBRA rate

28

Common Paymaster Rule

29

 Related employers who concurrently employ an individual  One employer is common paymaster: Common paymaster reports

cost on W-2

 If no common paymaster, either:  One employer reports full cost of coverage on W-2, or  Allocate cost of coverage among all employers

29

Other Factors In Calculating Cost Of Coverage

30

 No administrative fee included  Different methods for different plans permitted  Not aggregated on W-3, transmittal of wage and tax statements  COBRA rules are vague — use methods that seem reasonable  Be consistent!

30

What About Mid-Year Changes?

31

 Must be based on a calendar-year basis for all employees,

regardless of the plan year

 Must take into account any changes in coverage for the employee

during the year

 Any reasonable method is permitted:  Beginning of period cost,  End of period cost,  Average cost over period, or  Prorated period cost  Consistency is key.

31

What About Retroactive Changes?

32

 Example: Employee has a new baby in late December 2012, but

you’re not notified until 2013. Health plan coverage is retroactive to date of baby’s birth.

 What is the reportable cost for 2012?  Use known cost as of December 31.  No duty to issue a corrected W-2 if learn of retroactive change

after W-2 has issued

32

What About Payroll Periods That Span Calendar Years?

33

 Employer has options:  Treat all the coverage as provided during the calendar year that

includes December 31

 Treat the coverage as provided during next calendar year  Allocate the cost of coverage between each of the two calendar

years under any reasonable allocation method

 Method should relate to the number of days in each year.  Consistency is important.

33

Who Is Responsible For Reporting?

34

 Final responsibility is with the employer.  Discuss payroll/HRIS programming changes to capture COBRA

cost of coverage

 If rely on third-party vendors, address contractually  Caution: Some of their advice may not be correct!  Penalties for failing to file or furnish a correct W-2 will apply.

34

Where Can I Get More Information?

35

 IRS Notice 2012-9, amended Notice 2011-28  Payroll administrators  Employee benefits legal counsel