New IRS Guidance for Health Care Reform: More News You Can Use
Editor's Note: Today we are pleased to post the following health care reform update on new IRS guidance that came out last week. Many thanks to our Seattle employee benefits colleagues, authors Howard Bye, Melanie Curtice and Erin Lennon, for sharing this timely content with World of Employment.
Health care reform requires employers to report the cost of health coverage on employees’ W-2 forms. Last week, the IRS released additional information on this requirement, Notice 2011-28. Below is a summary of the additional information, including the effective date, how to calculate the cost of coverage, which benefits (e.g., vision, dental, FSA, HSA, HRA) to include in the calculation, and certain exceptions. The cost of health coverage is reported in Box 12 of the W-2 form, under code DD.
- Please note: The requirement to report the cost of the health coverage on an employee’s W-2 does not mean the value of the health coverage is included in the employee’s taxable income. The reporting requirement is for informational purposes only and the cost of the health coverage is not included in the employee’s taxable income.
Effective Date
As previously announced, the W-2 requirement was waived for 2011. The new guidance confirms that large employers (250+ employees) are not required to report the cost of health coverage on W-2 forms issued for 2011 (typically issued in January 2012). Large employers will need to report the cost of coverage on W-2 forms issued for 2012 (those issued in January 2013). Notably, the new guidance indicates that employers will not have to report the cost of coverage on interim W-2 forms requested by employees before the end of the calendar year. Therefore, the first time that employers are required to report the cost of health coverage is on the W-2 forms issued in January 2013 (for 2012 wages).
Calculating the Cost of Coverage
Employee Contributions Included: The reported cost of coverage includes both the amount paid by the employer and the amount paid by the employee. So, if an employer contributes $900/month for the employee’s coverage and the employee contributes $100/month for each month in a calendar year, the amount reported on the W-2 for the year is $12,000.
Cost of Dependent Coverage Included: The reported cost of coverage includes the cost of coverage for any other persons covered under the plan as a result of the relationship with the employee (e.g., spouse, children, domestic partner, etc.). So, if an employee elects family health coverage that costs a total of $2,000/month, the annual cost reported on the employee’s W-2 will be $24,000. If an employee changes coverage during the year (for example, adding a new dependent), the reported cost of coverage should reflect those changes. So, if an employee had self-only coverage for January through March, and then had a baby and switched to family coverage for April through December, the reported cost of coverage is the cost of the self-only coverage for three months plus the cost of family coverage for nine months.
Three Methods for Calculating Cost of Coverage: The guidance offers employers three options for calculating the cost of coverage. First, employers can simply use the same method used to calculate the COBRA premium (without including the additional two percent allowed under COBRA). Second, employers with insured plans can choose to use the premium charged by the insurer. The third option clarifies that employers who subsidize COBRA coverage must use the full, unsubsidized COBRA premium amount to calculate the cost.
- Note for self-funded plans: the guidance does not provide any additional guidance on how to properly compute COBRA premiums for self-funded plans. The Notice merely states that employers must continue to calculate the COBRA premiums “in good faith compliance with a reasonable interpretation” of COBRA.
Mid-Year COBRA Election
For employees that terminate mid-year and elect COBRA (or other continuation) coverage, the new guidance allows the employer to use “any reasonable method” of reporting the cost of coverage while the employee is on COBRA, as long as the method is used consistently for all employees on COBRA. The guidance gives two examples of reasonable methods: the employer can choose to report the cost of health coverage only when the employee was an active employee, or the employer can choose to also report the cost of health coverage when the employee was on COBRA.
Which Benefits to Include
- Vision/Dental: Vision and dental benefits should be included in the reported cost of coverage if they are “integrated” into the group health plan. Vision and dental benefits should not be included in the reported cost of coverage if they are provided under a separate policy, certificate or contract of insurance.
- Health Flexible Spending Accounts (FSAs): The amount contributed by an employee to a health FSA should not be included in the reported cost of coverage reported on the W-2. However, if an employer contributes money to the employee’s health FSA, the amount of the employer’s contributionshould be included. For employers offering flex credit or flex dollar programs, the reported cost of coverage is amount of employer flex dollars which the employee allocates to the health FSA (the total amount in the employee’s health FSA for the calendar year, minus the amount contributed by the employee through the employee’s payroll deduction).
- Health Savings Accounts (HSAs) and Archer MSAs: Amounts contributed to an HSA should not be included in the reported cost of coverage reported on the W-2.
- Health Reimbursement Arrangements (HRAs): Amounts contributed to an HRA should not be included in the reported cost of coverage reported on the W-2.
- Specific Disease Policies/Hospital or Other Fixed Indemnity Policies: These benefits (such as a cancer policy) are not included in the reported cost of coverage in most instances.
Current Exceptions
- Retirees: Employers do not have to report the cost of health care coverage for any individual for whom the employer does not have to issue a W-2. Therefore, employers do not have report health care coverage costs for retirees.
- Small Employers: Employers that are required to file fewer than 250 2011 Forms W-2 are exempt from the reporting requirement for 2011 and 2012 wages. Thus, the soonest a small employer could be subject to the reporting requirement is January 2014 (for 2013 wages).
- Multiemployer Plans: Employers that provide coverage to their employees through a multiemployer plan are not subject to the W-2 reporting requirement.
The IRS indicates that future guidance may change these requirements and exceptions, but no future guidance will take effect until the calendar year beginning at least six months after the new guidance is issued.
President Obama to Sign Jobs Bill Today
President Obama is today expected to sign the Hiring Incentives to Restore Employment (HIRE) Act, which in its final form passed The House of Representatives 217-201 on March 4 and the Senate 68-29 on March 17. Click here to download the final version of the HIRE Act.
Key provisions of the HIRE Act include:
- An exemption from Social Security payroll taxes for private employers for each worker hired in 2010 who previously had been unemployed for at least 60 days;
- A $1,000 income tax credit, or a credit of 6.2% of total wages paid, for private employers for each new employee hired in 2010 and retained for at least 52 weeks and claimed on the employer's 2011 income tax return;
- An extension of the small business “expensing” tax break for one year, allowing small businesses to continue writing off up to $250,000 of certain capital expenditures instead of depreciating them over time;
- A $4.6 billion Build America Bonds program, which would provide an optional direct subsidy payment in lieu of a tax credit for tax credit bonds issued for certain school and energy projects; and
- Expanded federal aid for highway programs estimated to save or create 1 million jobs.
As previously reported in the Stoel Rives World of Employment, a slightly different version of the HIRE Act passed through the Senate on February 24. While the bill was in the House, several changes were to the Act, including increased funding to the Build America Bonds program and greater flexibility to the hiring tax credit program.
Senate Jobs Bill: Tax Incentives to Hire Unemployed, but no COBRA Subsidy Extension
Yesterday the U.S. Senate voted 70-28 to approve the Hiring Incentives to Restore Employment (HIRE) Act, a $15 billion bill aimed at creating jobs, helping small businesses, and rebuilding public infrastructure. However, the bill does not include a further extension of the current COBRA subsides for unemployed workers, nor does it increase funding for state unemployment insurance programs. Click here to read the New York Times' coverage of the HIRE Act's passage. Click here to read the full text of the HIRE Act.
The key features of the HIRE Act include:
- An exemption from Social Security payroll taxes for private employers for each worker hired in 2010 who previously had been unemployed for at least 60 days;
- A $1,000 income tax credit for private employers for each new employee hired in 2010 and retained for at least 52 weeks and claimed on the employer's 2011 income tax return;
- An extension of the small business “expensing” tax break for one year, allowing small businesses to continue writing off up to $250,000 of certain capital expenditures instead of depreciating them over time;
- A $2 billion Build America Bonds program, which would provide an optional direct subsidy payment in lieu of a tax credit for tax credit bonds issued for certain school and energy projects; and
- Expanded federal aid for highway programs.
The HIRE Act now goes to the House of Representatives. Although some House Democrats have grumbled that the bill does not do enough, it is still expected to quickly pass and become law.
While the HIRE Act does not extend the COBRA subsidy or unemployment insurance, extensions of those programs are not off the table. Both of those programs are set to expire on February 28, but yesterday Senate Majority Leader Harry Reid proposed language that would extend the unemployment benefits program to April 5, 2010 and COBRA benefits to March 28, 2010. Click here to read the text of Senator Reid's proposed COBRA extension. We expect to see quick debate on Senator Reid's proposal, either as an amendment to an existing bill or a stand-alone bill, so stay tuned to the Stoel Rives World of Employment Blog to see if it passes.
New Bicycle Tax Credit Takes Effect in 2009
Here's another new employment law that goes into effect on January 1, 2009: the Bicycle Tax Credit (BTC). Passed as part of that $700 billion bailout plan we've all heard so much about, the BTC allows employers to reimburse employees up to $20 per month for bicycle-commuting related expenses; the employer can then claim a tax deduction for the reimbursements. Click here for an informative article on the tax credit from the San Francisco Chronicle. (Even though he eventually voted against the bailout bill that contained the BTC, the tax credit is the brainchild of Oregon Congressman Earl Blumenauer, a long-time bicycle advocate who just happens to be this author's congressman.)
If you are interested in starting a bike commuting reimbursement program at your workplace, you might want to consult a tax lawyer to make sure you follow all legal requirements. Want more information on bike commuting? Here's our favorite bike blog, bikeportland.org.
