The most onerous reporting requirements of the Patient Protection and Affordable Care Act don't go into effect for more than a year, but that shouldn't stop companies from getting started on complying with them now.
In March, the Internal Revenue Service postponed the deadline for employers to report their spending on sponsored healthcare coverage plans for employees. Companies with more than 250 employees will have until January 2013 to start reporting those numbers, while those with fewer employees will have until 2014.
The rules require employers to disclose the amount they pay for each employee's healthcare plan as well as employee contributions to the plan on the employee's W2 tax form. The reported amount will not affect the taxable income of employees.
Sounds simple, right? Not exactly.
Employers have to first figure out the premiums they pay toward each employee's health plan, which can be a tricky calculation. According to benefits lawyers, some of the terms used by the IRS have not been well defined. For example, the term “applicable employer sponsored coverage” in the notice raises plenty of questions.
“Employers should start assessing which plans will meet the definition of ‘applicable employer sponsored coverage' and begin aggregating the cost of such coverage,” says Amy Gordon, a partner at law firm McDermott Will & Emery. Aside from the medical plan, she says employers must also realize that certain medical assistance provided on-site at companies should be calculated as part of their coverage. “Many employers do not charge for on-site medical clinic services, creating difficulties when it comes to assembling all of the necessary information to comply with the reporting requirements,” she says.
The IRS notice does offer some relief for employers. For example, the agency exempted 15 types of coverage from reporting. Among the exemptions, employers do not have to report contributions to health savings and flexible spending accounts, after-tax hospitalization coverage, separate coverage of dental and vision plans, health reimbursement accounts, liability insurance, long-term care, worker's compensation, and others.
In addition, the IRS has provided recommendations of acceptable methods for employers to calculate health plans costs. According to Eric Keller, a partner at law firm Paul Hastings, if employers' healthcare plans are subscribed through an insurance firm, it should be a fairly straightforward calculation. Employers with self-funded plans, however, will find the calculations far more complex.
Most employers who offer self-funded healthcare coverage to employees, even after their employment has ended, can use the applicable premium method listed under the Consolidated Omnibus Budget Reconciliation Act (COBRA). “Employers can refer to the premium listed on the plan,” he says.
“Employers should start assessing which plans will meet the definition of ‘applicable employer sponsored coverage and begin aggregating the cost of such coverage.'”
—Amy Gordon,
Partner,
McDermott Will & Emery
Another method for reporting purposes is the modified COBRA premium, where employers who subsidize the cost of COBRA estimate the applicable premium for reporting purposes. And yet another method that employers can consider using to report their health coverage costs is the composite rate calculation. This calculation looks at the different groups; single, two-party, or family and the rates assigned to each group, which can be used as the definitive premiums paid by the employer.
Another issue employers should consider when making the calculations is changes by employees mid-year due to special circumstances, such as a change in marital status, says Gordon. “The compliance obligation is already complicated, assuming a steady stream of annual premium contributions. If a plan switch is made mid-year, that will further complicate the reporting,” she says. In such instances, employers must be vigilant in monitoring employees' benefits changes, she says. “The premiums will need to be allocated appropriately depending upon when the change is made,” she says.
Although sophisticated payroll processors will be able to handle these switches, employers who handle their own payroll processing may have added difficulties. “Companies who handle their own payroll should ensure that the payroll department is synchronized with the benefits department to keep track of these changes,” says Keller.
Business combinations and acquisitions will further complicate health plan cost calculations. If an employee transfers to a new employer that qualifies as a successor employer, both the predecessor and successor employers must report the cost of coverage provided by each, he says. If an employee works for multiple related employers and has a common paymaster that issues a single W-2 form, the common paymaster will need to report the cost.
W-2 REPORTING MUST HAVES
Below, Paul Hastings describes what items must be included in W-2 reporting and what should be excluded:
Employers generally must report the full cost of coverage under all applicable employer-sponsored coverage, including:
both the employer- and employee-paid costs (regardless of whether paid on a pre-tax or after-tax basis);
the cost of coverage for any person covered by the plan because of a relationship to the employee (e.g., dependent coverage) even if the value of that coverage is included in the employee's gross income;
employer contributions to health flexible spending arrangements (FSAs) other than contributions made via salary reduction elections;
if an employee elects a health FSA under a Section 125 cafeteria plan, the portion of the health FSA coverage, if any, that exceeds the amount of salary reduction (for all qualified benefits) elected by an employee;
the cost of coverage under dental or vision plans that do not qualify as stand-alone plans; and
the cost of coverage under self-insured group health plans that are subject to federal continuation coverage requirements (such as COBRA, ERISA, the Public Health Service Act, and the temporary continuation coverage requirement of the Federal Employees Health Benefits Program).
The following items are permanently excluded from Form W-2 cost reporting:
the amount contributed to any Code Section 220(d) Archer MSA;
the amount contributed to any Code Section 223(d) Health Savings Account (HSA);
the amount of any salary reduction election contribution to Code Sections 106(c)(2) and 125 flexible spending arrangements (FSAs);
the cost of insured coverage under stand-alone dental or vision plans;
long-term care coverage;
stand-alone coverage for a specified disease or illness (e.g., cancer) or stand-alone coverage for most types of indemnity insurance to the extent the payment for which is not excludible from gross income and for which a deduction under Code Section 162(l) is not available;
other coverage described in Code Section 9832(c)(1) (e.g., accident and disability insurance, coverage supplemental to liability coverage, liability insurance, workers' compensation and similar insurance, automobile medical payment insurance, credit-only insurance, and other similar coverage under which medical care benefits are secondary or incidental to other insurance benefits), but reporting generally is required reporting for on-site medical clinics; and
the cost of coverage with respect to an individual, if the employer is not otherwise required to issue a W-2 to that individual (e.g., with respect to retirees or former employees receiving no compensation from the employer).
Source: Paul Hastings Report on Healthcare Act W-2 Requirements.
“Although the current W2 reporting obligation is not a taxable event, it is a way for the government to get a handle on the amount of potential tax revenue in employer-provided health benefits as proposed to under the Cadillac tax to be implemented in 2018,” says Gordon. The Cadillac tax is a 40 percent non-deductible excise tax on high-cost health coverage, which includes contributions to flexible spending account.
More Health Plan Disclosure Requirements
Another healthcare reporting requirement is in the works. In August the Department of Health and Human Services, the Labor Department, and Treasury proposed a joint rule requiring insurers and plan administrators—usually employers—to provide a 4-page summary of benefits and coverage (SBC) and a uniform glossary for health plans participants in the early enrollment period or at request.
The summary should inform participants of their entitled benefits and coverage, their plan options, cost-sharing provisions, limitations, and exceptions. SBCs must be sent to members 60 days prior to any upcoming changes proposed on company health plans.
The proposal also calls for SBCs to include a new standardized health plan comparison tools for consumers. It will illustrate different claims processing scenarios to show consumers the coverage options they have under the plan. The rule is scheduled to take effect in March 2012.
The SBC requirement will increase cost, says Melissa Fuchs, an associate at law firm Frost Brown Todd. Employers will not only have to spend time and manpower to review and distribute the SBC, they will also face penalties for non-compliance, including $1,000 for each failure to distribute the SBC and a pending proposal to add an additional $100 fine per day. “Insurance carriers will have the burden of preparing and maintaining the latest SBC, which will drive up overall plan costs for employers and employees,” she says.
Employers can generally delegate the responsibility for providing the SBC to the insurance carrier, says Fuchs, but that doesn't exempt employers for ensuring that they provide the material by the 60-day deadline.
“An employer can contractually assign the responsibility to the insurer, but if the insurer fails to meet the requirements, the employer could be penalized too,” she adds.
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