The Patient Protection and Affordable Care Act (PPACA) enacted this year has many titles and subtitles that don’t actually have much to do with how health care coverage is provided or delivered by health plans. One such provision includes a requirement for employers to use employee W-2 forms to report the value of whatever health insurance is provided to an employee. This provision was originally set to become effective in 2011, but the IRS has since followed up and made the reporting optional for 2011. So all W-2 Forms issued in January 2013 must include the health insurance value information, and employers can optionally report the values on the 2011 W-2s.
However, employers need to be primed for the new requirement before the effective date, as IRS regulations have a “quirk” where former employees can request a W-2 from employers at any time during the year. By law, the previous employer only has 30 days to respond to the W-2 request. Essentially, this quirk means that employers should be ready to comply with the valuing health insurance provision by early 2012.
There are two main reasons behind the new provision to value health insurance. Firstly, it should provide a means to educate employees about the cost of whatever health insurance benefits are
being received. Congress decided that the W-2 Form would be the best portal for employees to get this information. The second reason has to do with the excise on “Cadillac” health plans. It was determined
that compliance with the provision to value health insurance would also help employers to know if they have a high-cost plan subject to the excise tax on “Cadillac” plans. This knowledge would then provide
ample time for any desired coverage modification before the excise tax takes effect in 2018. A third reason is that this provision could be a tool to monitor compliance of the PPACA employer and individual
“pay or play” mandates that will become effective in 2014.
While the IRS has yet to issue specific compliance guidance and such for this new health insurance valuing provision, there are a few points that are already clear.
- Employer-provided health insurance is still a tax-free benefit; the provision will not change the existing tax status.
- All employers offering applicable employer-sponsored coverage must report the collective cost of coverage. Amounts under self funded medical reimbursement plans, amounts under health reimbursement arrangements or HRA’s, employee assistance plans, employer-provided Medicare supplemental insurance, mini-med, limited coverage plans, or any other major medical coverage are all examples of applicable employer-sponsored coverage.The following would be examples of that which isn’t required to be reported – value of a specific illness or disease coverage, health savings account contributions, stand-alone vision and dental plan values, and medical flexible spending accounts salary reduction contributions.
- The basis of the value placed on the W-2 form will be the coverage provided to an employee and employees that are similarly situated. A “similarly situated employee” is determined by the coverage option selected under the plan. Take a plan that offers family, employee plus 2, employee plus 1, and employee only coverage for example. This plan will have four categories of similarly situated employees, with each category being representative of each of the offered coverage types. Employers will report the value of the appropriate coverage option for all employees that select each coverage type.
- Value is determined using the same method that COBRA premiums are calculated. The determined value will have nothing to do with usage. Employers that aren’t familiar with COBRA, a smaller employer that isn’t subject to COBRA for example, and those that haven’t calculated COBRA premiums for all coverage options will need to start. It will also need to be broken down for similarly situated employees.
It’s clear that employers need to start planning to implement the requirements of this provision now. Employers are being counseled to periodically monitor for incoming technical IRS guidance on the provision. For example, guidance related to setting COBRA premiums for self-funded plans is expected to be released by the IRS shortly. Until the guidance is available, employers should instruct payroll personnel to initiate system updates that will add a feature to obtain and report the information needed for compliance.