The Affordable Care Act amended the Code (I.R.C. § 5051(a)) to require employers to report the aggregate cost of applicable employer-sponsored coverage on employees’ Forms W- 2 beginning with the 2011 calendar year. The IRS made reporting for 2011 optional but mandatory for 2012 (i.e., on the Forms W-2 generally issued by January 31, 2013). Notice 2012- 9, 2012-4 I.R.B. 315 (Jan. 3, 2012) provides interim guidance on this W-2 reporting requirement. It is written in a Q&A-style format. This reporting requirement will likely involve significant time and expenditures for many employers.
Who? All employers except for employers:
1. Who filed fewer than 250 Forms W-2 for the previous calendar year
2. Who are federally recognized Indian tribal governments or tribally chartered corporations wholly-owned by a federally recognized Indian tribal government
And all employees except for:
1. individuals receiving employer-sponsored coverage but for whom the employer wouldn’t otherwise be required to issue a Form W-2 (e.g., retired employee covered under a retiree-only plan),
2. employees covered under a self-insured group health plan that is not subject to any federal continuation coverage requirements (e.g., COBRA, ERISA, PHSA, etc.), and
3. employees covered under a government plan maintained primarily for members of the military or their families.
What? The aggregate cost of applicable employer-sponsored coverage must be included in the information reported on employee’s Forms W-2.
“Applicable employer-sponsored coverage” means, with respect to any employee, coverage under any group health plan made available to the employee by an employer which is excludable from the employee’s gross income under I.R.C. § 106. It does not include:
1. coverage for long-term care,
2. certain HIPAA-excepted benefits (e.g., accident or disability income insurance, liability insurance, workers’ compensation insurance, automobile medical payment insurance, credit-only insurance, etc. if the benefits for medical care are secondary or incidental to other insurance benefits unless coverage is provided for on-site medical clinics),
3. coverage for vision or dental benefits provided under a separate policy, certificate or contract of insurance, and
4. coverage for a specified disease or illness and hospital indemnity or other fixed indemnity insurance if premiums are paid on an after-tax basis.
Coverage under an employee assistance program, wellness program, or on-site medical clinic is includible only to the extent that the coverage is provided under a program that is a group health plan.
The term “group health plan” includes self-insured plans. It means a plan of or contributed to by an employer or employee organization to provide health care (directly or otherwise) to the employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families.
“Aggregate cost” of applicable employer-sponsored coverage is the total cost of coverage under all applicable employer-sponsored coverage provided to the employee. It generally includes both the portion of the cost paid by the employer and the portion of the cost paid by the employee, regardless of whether the employee paid for that cost through pre-tax or after-tax contributions. It also includes the cost of coverage under the employer-sponsored group health plan of the employee and any person covered by the plan because of a relationship to the employee, including any portion of the cost that is includible in an employee’s gross income (e.g., domestic partners, children over age 26). It does not include amounts:
1. contributed to any Archer MSA,
2. contributed to any health savings account, and
3. of any salary reduction contributions to a health flexible spending arrangement (to the extent the amount of the health FSA for a plan year exceeds the salary reduction elected by the employee); in certain cases, flex credits are subject to the reporting requirement (flex credits are employer non-elective contributions).
The cost is generally calculated using the COBRA applicable premium method. The reportable cost for a period equals the COBRA applicable premium for that coverage for that period.
If an employer provides coverage under a fully-insured plan, the employer may use the premium charged method. The reportable cost equals the premium charged by the insurer for that employee’s coverage for each period.
There is also the modified COBRA premium method for employers who subsidize the cost of COBRA.
The same method is not required to be used for every plan maintained by the employer but is required for every employee under the same plan.
The reportable cost must be determined on a calendar year basis even where the plan is not a calendar year plan.
When? This is generally due when the employer provides Form W-2 to employees (i.e., generally by January 31, 2013).
If an employee who terminated employment during 2012 year requests in writing prior to December 31, 2012, to receive a Form W-2, the cost must be included on the Form W-2 and the Form W-2 must be provided within 30 days after the date of receipt of the written request. In the latter, whether the employer includes the cost of continuation coverage paid by the employer is up to the employer but the employer must apply this choice consistently.
Where? Form W-2 in box 12, using code DD.
Why? To provide useful and comparable consumer information to employees on the cost of their health care coverage. The reporting requirement is informational only and will not cause additional taxable income for the employees.
Failure to include this information will subject the employer to a tax penalty of $50 per failure.
Flexible Spending Account Limit
The Affordable Care Act added subsection 125(i) to the Code. It is effective for plan years beginning on or after January 1, 2013.
A section 125 cafeteria plan is a written plan that allows employees to elect between permitted taxable benefits such as cash and certain qualified benefits such as a health FSA. If an employee makes the election before the start of the plan year, among other requirements, the employee’s election of one or more qualified benefits does not result in gross income to the employee.
Prior to the addition of subsection (i), the proposed regulations require cafeteria plans providing a health FSA to specify the maximum salary reduction contribution as a maximum dollar amount, a maximum percentage of compensation, or other method of determining the maximum salary reduction contribution, but did not specify a regulatory or statutory maximum amount.
New subsection (i) limits the maximum amount to $2,500/year (indexed for inflation beginning in 2014). The limit applies on a plan year basis. The IRS only permits changing a plan year for a valid business purpose and has declared that delay of the application of the $2,500 limit is not a valid business purpose. If the plan year is changed, the $2,500 limit must be prorated.
The limit applies on an employee-by-employee per employer basis. The maximum salary reduction contribution for an employee is $2,500 regardless of how many individuals whose medical expenses are reimbursable under the employee’s health FSA. And if an employer employs, for example, a husband and wife, each may make a salary reduction contribution up to $2,500. If an employee has 2+ employers who are not treated as a single employer, the employee may make a salary reduction contribution up to $2,500 under each employer’s plan.
The limit only applies to the employee’s salary reduction contributions. It does not apply to employer non-elective contributions, sometimes called flex credits. However, if an employer provides flex credits that employees may elect to receive as cash or as a taxable benefit, those flex credits are treated as salary reduction contributions for purposes of the limit amount.
The limit does not limit the amount permitted for reimbursement under other employer-provided coverage, such as employee salary reduction contributions to an FSA for dependent care assistance or adoption care assistance. The limit also does not apply to salary reduction contributions to a cafeteria plan that are used to pay an employee’s share of health coverage premiums, contributions to a health savings account (HSA) or to amounts made available by an employer under an health reimbursement arrangement (HRA).
Cafeteria plans may provide for a grace period up to 2 ½ months. During this grace period, unused salary reduction contributions to the health FSA for the plan year may be carried over into the grace period. Any carried-over amounts do not count against the $2,500 limit applicable to the subsequent plan year.
Employers need to amend their written plans to include this limitation. As long as the plan is operating as though the limit is included in the written plan, retroactive amendments will be permitted through December 31, 2014. This is an exception to the general rule that cafeteria plan amendments may only be made prospectively.
Employers also need to comply with the $2,500 limitation in operation. As long as an operational error results from a reasonable mistake by the employer and is not due to willful neglect by the employer and as long as the amount in excess of the limit is paid to the employee and reported as wages for income tax withholding and employment tax purposes, correction is allowed without disqualifying the plan.
If a cafeteria plan fails to operate in compliance with section 125 (including new subsection (i)) or fails to satisfy any of the written plan requirements for health FSAs, the plan is not a section 125 cafeteria plan and an employee’s election of nontaxable benefits results in gross income to the employee.
The current proposed regulations contain a position referred to as the “use-or-lose” rule. The rule generally prohibits any contribution or benefit under a health FSA from being used in a subsequent plan year or period of coverage. In other words, unused amounts in a health FSA are forfeited if they remain unused at the end of the plan year. Some plans have adopted a grace period up to 2 ½ months after the end of the plan year to use up the remaining amounts. The Treasury Department and IRS request comments whether the proposed regulations should be modified to provide additional flexibility with respect to the operation of the use-or-lose rule for health FSAs, and, if so, how any such flexibility might be formulated and constrained. The flexibility may be in addition to or instead of the current grace period allowance. ________________________________________________________________________ This information is provided for educational and informational purposes only and does not contain legal advice. The information should in no way be taken as an indication of future legal results. Accordingly, you should not act on any information provided without consulting legal counsel. This article reflects the opinions of the author and does not necessarily reflect the view of the firm or all members of the firm.