Employers need to understand the latest IRS pertaining to the ACA, what their obligations are and have systems in place for tracking and calculating reportable costs. For many, the reporting requirement became effective for the 2012 tax year— but for qualifying small employers (filing less than 250 W-2’s) many of these obligations will take effect for the 2013 tax year.  

Background

The reform law added Section 6051(a)(14) to the Internal Revenue Code. That section generally requires all employers to report on Form W-2 the aggregate cost of employer-sponsored group health coverage (without regard to whether the cost is paid by the employer or employee). Originally the reporting requirement was effective for the 2011 tax year. But in October 2010 the IRS issued Notice 2010-69, making reporting optional for 2011 and not required until 2012 (for W-2s furnished in January 2013).

Several types of benefits are excluded from the definition of employer-sponsored coverage, including:

• Long-term care
• Separately insured dental or vision coverage
• HIPAA-excepted benefits—such as accident or disability income insurance, supplemental liability insurance, or workers’ comp—except for on-site medical clinics
• Coverage under a hospital indemnity or fixed indemnity plan—or for a specific illness or disease—if it’s offered as an independent, non-coordinated benefit
• Government-sponsored plans that provide coverage primarily for members of the military and their families

In addition, contributions to a Health Savings Account or salary reduction contributions to a Flexible Spending Account (FSA) shouldn’t be included when calculating an employee’s total cost of coverage. The new law requirement calls for informational reporting only:  It doesn’t cause excludable benefits to become taxable or chane the tax treatment in anyh way. The purpose of the requirement is “to provide useful and comparable consumer information to employees on the cost of their health care coverage.

Notice 2011-28

Notice 2011-28 provided detailed guidance, in a Q&A format, regarding the employers subject to the reporting requirement, types of coverage included, methods for calculating and reporting the cost, and other issues. To facilitate compliance, the notice provided “transition relief” that indefinitely delays the effective date for small employers (as described above) and certain types of coverage, including:

• Multi-employer plans Health reimbursement Arrangements
• Stand-alone dental and vision plans
• Self-insured plans not subject to Cobra or other federal coverage continuation requirements, such as church plans

This transition relief applies at least until W-2s for 2012 are furnished in January 2013. After that, it will stay in effect unless and until further guidance is issued (with at least six months’ notice). For example, if the IRS decides to apply the reporting requirement to small employers, the earliest W-2s the requirement can apply to are the 2013 W-2s that will be furnished in January 2014—and only if the IRS issues guidance before June 30, 2013.

Notice 2012-9

Based on comments it received, the IRS issued Notice 2012-9 to modify and expand its earlier guidance. Notable changes include:

Clarifying that the transition relief for employers is limited to those required to file fewer than 250W-2s in 2011, regardless of whether they file the forms themselves or use an agent.

Outlining reporting methods for individuals employed by related employers, that don’t use a common paymaster.

Clarifying that an employer should include the cost of a health FSA in reportable costs only to the extent the cost exceeds the employee’s salary reduction election (by virtue of an employer matching contribution, for example).

Modifying the transition relief for stand-alone dental and vision plans to provide that they’re excludable from reportable costs if they qualify as HIPAA-excepted benefits, meaning either 1) the benefits are offered under a separate policy, certificate, or insurance contractor 2) participants have the right to opt out of dental or vision coverage and must pay an additional premium if they accept it.

Providing that the cost of coverage does not include excess reimbursements of highly compensated individuals that are included in gross income (Notice2011-28 said they were included) or premium payments or reimbursements included in the income of a greater than 2% shareholder-employee of an S corporation.

Notice 2012-9 also added new guidance on several issues. Highlights include:

• Providing that employers need not include the cost of coverage under employee assistance programs, wellness programs, or on-site medical clinics, so long as they don’t charge Cobra premiums for these benefits
• Clarifying that, in calculating reportable costs, employers may include the costs of health reimbursement plans, multi-employer plans, or other benefits that aren’t required to be included, so long as they otherwise meet the requirements of the guidance
• Outlining cost all location methods for programs that include both health and non-health benefits, such as long-term disability
• Clarifying that reportable costs need not be adjusted for post-year-end elections or notifications (of a divorce during the tax year, for example) that affect the cost of coverage for the tax year
• Outlining cost allocation methods for coverage periods that straddle two tax years
• Providing that third-party sick pay providers that furnish W-2s aren’t required to report aggregate health coverage costs
• Clarifying that the cost of coverage under a hospital indemnity or fixed indemnity plan—or for a specific illness or disease—need not be reported to the extent an employer merely provides the opportunity for employees to purchase an independent, non-coordinated policy and the employee pays the full amount of the premium with after-tax dollars; if the employer makes a contribution or employees pay with pretax dollars, the cost must be reported