IRS Issues Guidance on Reporting Health Coverage Cost on Forms W-2

CLICK HERE for IRS FAQ's on reporting the cost of employer-provided heath care coverage on employees' Form W-2s.

On Jan. 3, 2012, the U.S. Internal Revenue Service (IRS) issued Notice 2012-9, with interim guidance on meeting the requirement under the Patient Protection and Affordable Care Act (PPACA) to report on employees' W-2 forms the cost of their group health insurance coverage. This information must be furnished beginning with 2012 W-2 forms, which generally must be provided to employees by the end of January 2013. The aggregate cost of an employee's health care coverage is to be determined under rules similar to the rules for determining the applicable premium for COBRA continuation coverage.

Generally, all employers are required to meet the new W-2 reporting requirement, but the IRS provided some exemptions in transition relief, including one for small employers who filed fewer than 250 Forms W-2 in 2011. Such employers are not required to report the value of employer-provided health care for 2012.

Background
PPACA defines applicable employer-sponsored coverage subject to the reporting requirement as coverage under any group health plan that is excludable from the employee's gross income, or that would be so excludable if it were employer-provided coverage under the Internal Revenue Code.

Observation: It is important to recognize that health coverage is treated as applicable employer-sponsored coverage without regard to whether the employer or the employee pays for the coverage and whether the value of the coverage is includible in the employee's income.

General Requirements
All employers providing applicable employer-sponsored coverage must report the cost on their employees' Forms W-2. This includes federal, state and local government entities, churches and other religious organizations and employers not subject to the COBRA continuation coverage requirements. But it does not include federally recognized Indian tribal governments. Notice 2012-9 adds that corporations owned by Indian tribal governments also are excluded. Transition relief is provided to certain of these employers under the notices, as described below.

The cost of the coverage is to be reported beginning with the Forms W-2 issued for 2012, in Box 12 with a Code DD.

Certain Coverage Not Included
Applicable employer-sponsored coverage does not include:

• Long-term care insurance.
• "Excepted benefits," which includes accident or disability income insurance; liability insurance; coverage issued as a supplement to liability insurance; workers' compensation or similar insurance; automobile medical payment insurance; credit-only insurance; and other similar insurance coverage under which benefits for medical care are secondary or incidental.
• Limited scope dental or vision care provided under a separate policy.
• Coverage only for a specific disease or illness, hospital indemnity or other fixed indemnity insurance.

In addition, the cost of coverage does not include contributions to health savings accounts (HSAs) of the employee or the employee's spouse, contributions to a health reimbursement arrangement (HRA), salary reduction contributions to health flexible spending arrangements (health FSAs) or contributions to Archer medical savings accounts (MSAs).

Also excluded are the costs of self-insured plans not subject to the COBRA requirements (such as a self-insured church plan), multiemployer plans to which the employer contributes, and plans provided by governmental employers to members of the military or their families.

Notice 2012-9 provides that an employer may elect to report the cost of coverage that is excluded under these rules as long as the coverage is applicable employer-sponsored coverage and the general rules for determining the cost of coverage are met. Where an employer has a plan that includes applicable employer-sponsored coverage and other benefits, such as a long-term disability plan that provides health benefits, Notice 2012-9 provides that any reasonable method for determining the reportable costs may be used.

Important Clarifications
Clarifications in Notice 2012-9 that are worth noting include:

Health FSAs.A new example illustrating the exclusion for salary reduction contributions to a health FSA. Any employer contributions to the FSA in excess of the employee's salary reduction must be reported. 

Stand-alone vision and dental plans.The standard for determining whether the cost of coverage under a vision or dental plan is subject to the reporting requirement is the same as the standard for determining whether the plan is subject to HIPAA rules. Thus, if the coverage is offered under a separate plan or policy where participants may elect not to be covered, and those who elect coverage must pay an additional premium, the coverage need not be reported. 

EAPs, wellness programs and on-site clinics.The cost of coverage under an employee assistance program (EAP), a wellness program or an on-site medical clinic is not required to be reported if the employer does not charge a premium for the cost of this coverage to COBRA beneficiaries. 

Hospital indemnity/specific disease coverage.The exclusion from "applicable employer- sponsored coverage" for hospital indemnity plans, fixed indemnity insurance and coverage for a specific disease does not apply if the employer makes any contribution to the cost of coverage that is excludable from income, or if the employee purchases the policy on a pre-tax basis under a cafeteria plan; such contributions must be reported. 

Third-party sick pay.Third-party sick pay providers furnishing Forms W-2 are not required to report the cost of employer-provided health care, but any Form W-2 provided by the employer must include such costs whether or not a third-party payer is separately reporting sick pay. 

Excess reimbursement for highly compensated Individuals.The reporting requirement does not apply to the cost of coverage includible in income under tax code section 105(h) (discriminatory self-insured medical plans) or payments includible in gross income for a 2 percent shareholder employee of an S corporation that is required to include the premium payments in gross income.

Informational Only
Notice 2012-9 reiterates the statement included in prior guidance that this reporting is informational only; nothing in the statute or in the guidance issued or contemplated for the future causes or will cause otherwise excludable employer-provided health care coverage to become taxable.

Observation: PPACA will impose a 40 percent tax on the value of excess health coverage beginning in 2018. Form W-2 reporting of the value of employee health coverage will likely provide valuable information to the IRS in assessing this high-cost-plan tax in the future.

Terminated Employees
Notice 2012-9 includes the helpful guidance from the earlier notice concerning the reporting requirement with respect to employees who terminate employment during the year. As long as the employer is consistent in reporting the cost of coverage under a particular health plan for all employees who terminate employment during the year, any reasonable method may be used. For example:

• The employer may report only the costs for the portion of the year during which employees were active employees covered by the plan, and ignore any costs for post-employment coverage, such as COBRA continuation coverage.
• Alternatively, the employer may choose to report the cost of both pre-and post-employment coverage on the employee's Form W-2 for the year of termination, as long as this is the treatment for all covered employees who terminated during the year.
• Employers are not required to report the cost of coverage on a Form W-2 furnished to a former employee who requests their Form W-2 before the end of the year in which the employee terminated employment.
• No reporting is required for an individual to whom the employer is not otherwise required to issue a Form W-2, such as a retiree or other former employee who received no compensation.

Observation: Employers may use any reasonable method to report the cost of coverage to terminated employees as long as they use the same method consistently for all terminated employees. Thus, for the first year in which an individual retires, an employer may choose to report the cost of coverage for the entire year, including both the active coverage and the retiree coverage, on the Form W-2 that reports the employee's final compensation from the employer. Alternatively, the employer may choose to report only the value of the active coverage.

For future years, when no Form W-2 is required to be provided to the retiree, there is no requirement to report the cost of health coverage.

Calculating the Cost of Coverage
The total cost of coverage provided to the employee is to be reported, whether paid by the employer or by the employee. PPACA provides that the reportable cost is to be determined under rules similar to those for determining the applicable COBRA premium under the Internal Revenue Code. The employer may use the COBRA applicable premium method, the premium charged method or the modified COBRA premium method under the COBRA regulations. The additional 2 percent allowed to be added to the applicable premium charged to COBRA beneficiaries is not included in the reportable cost.

Observation: Current regulations under COBRA do not address the calculation of the COBRA premium specifically but provide that this determination must be made in good faith compliance with a reasonable interpretation of the statutory requirements.

The premium charged method may be used to determine the reportable cost only for an employee covered by an insured plan. The employer must report the premium charged by the insurer for that employee's coverage for the period.

The modified COBRA premium method may be used where the employer subsidizes the cost of COBRA coverage. Under this method, the reportable cost is to be determined based on a reasonable good faith estimate of the COBRA applicable premium for the period (if that is the method used to determine the subsidized premium), or where the employer charges COBRA beneficiaries the prior year's premium, in which case the reportable cost may be based on the prior year's cost.

Notice 2012-9 provides that an employer who uses a composite rate for active employees but not for COBRA beneficiaries may use either rate for determining the applicable cost to be reported, provided it is used consistently.

The reportable cost for a year must take into account any changes in coverage for the employee during the year, and it must be determined on a calendar year basis for all employees regardless of the plan year. Notice 2012-9 includes new guidance for determining applicable costs where a pay period spans Dec. 31 in any year, and where an employee notifies the employer of changes in his or her coverage for a prior calendar year after Dec. 31 of that year.

Transition Relief
Under PPACA, the W-2 reporting provision was to become effective with respect to 2011 Forms W-2, but in Notice 2010-69, issued in October 2010, the IRS made the requirement optional for 2011. In addition, IRS Notice 2011-28, issued in March 2011, provided that employers were not required to report the cost of health coverage on the Form W-2 for 2012 and later years if they filed fewer than 250 Forms W-2 in the prior year (these employers also are exempt from the requirement to file returns electronically.) This exemption will apply until further notice but at least through 2012.

Notice 2012-9 clarifies this exception with respect to employers using an agent to file Forms W-2 so that the determination is made without regard to the use of the agent. If the employer would have been required to provide at least 250 Forms W-2 in the prior year had the employer not used the agent, the reporting requirement will apply for the current year.

The exception for small employers, as well as the exceptions from the reporting requirements for coverage under a self-insured plan that is not subject to any federal continuation coverage requirements, the exception for plans maintained primarily for members of the military and their families, and the exceptions with respect to Forms W-2 provided to terminated employees before the end of the year, multiemployer plans, HRAs and stand-alone dental and vision plans are all effective unless limited by future guidance.
Any such future guidance likely will be applicable not earlier than the calendar year beginning at least six months after publication of the guidance.

Birgit Anne Waidmann is director of PricewaterhouseCoopers human resource services, based in Washington, D.C.

Creating a Safe, Healthy and Happy Workplace

Creating a safe, healthy and happy workplace will ensure that your employees feel at home and stay with your organization for a very long time. 

Open Book Management Style
Sharing information about contracts, sales, new clients, management objectives, company policies, employee personal data etc. ensures that the employees are as enthusiastic about the business as the management. Through this open book process you can gradually create a culture of participative management and ignite the creative endeavor of your work force. It involves making people an interested party to your strategic decisions, thus aligning them to your business objectives. Be as open as you can. It helps in building trust & motivates employees. Employee self-service portals are the tools available today to the management to practice this style.

Performance Linked Bonuses
Paying out bonuses or having any kind of variable compensation plan can be both an incentive and disillusionment, based on how it is administered and communicated. Bonus must be designed in such a way that people understand that there is no payout unless the company hits a certain level of profitability. Additional criteria could be the team's success and the individual's performance. Never pay out bonus without measuring performance, unless it is a statutory obligation.

360-Degree Performance Management Feedback System
This system, which solicits feedback from seniors (including the boss), peers and subordinates has been increasingly embraced as the best of all available methods for collecting performance feedback. Gone are the days of working hard to impress only one person, now the opinions of all matter, especially if you are in a leadership role (at any level). Every person in the team is responsible for giving relevant, positive and constructive feedback. Such systems also help in identifying leaders for higher-level positions in the organization. Senior managers could use this feed back for self-development.

Fair Evaluation System for Employees
Develop an evaluation system that clearly links individual performance to corporate business goals and priorities. Each employee should have well defined reporting relationships. Self-rating as a part of evaluation process empowers employees. Evaluation becomes fairer if it is based on the records of periodic counseling & achievements of the employee, tracked over the year. For higher objectivity, besides the immediate boss, each employee should be screened by the next higher-level (often called a Reviewer). Cross - functional feedback, if obtained by the immediate boss from another manager (for whom this employee's work is also important), will add to the fairness of the system. Relative ratings of all subordinates reporting to the same manager is another tool for fairness of evaluation. Normalization of evaluation is yet another dimension of improving fairness.

Knowledge Sharing
Adopt a systematic approach to ensure that knowledge management supports strategy. Store knowledge in databases to provide greater access to information posted either by the company or the employees on the knowledge portals of the company. When an employee returns after attending any competencies or skills development program, sharing essential knowledge with others could be made mandatory. Innovative ideas (implemented at the work place) are good to be posted on these knowledge sharing platforms. However, what to store & how to maintain a knowledge base requires deep thinking to avoid clutter.

Highlight Performers
Create profiles of top performers and make these visible though company intranet, display boards etc. It will encourage others to put in their best, thereby creating a competitive environment within the company. If a systems approach is followed to shortlist high performers, you can surely avoid disgruntlements.

Open House Discussions and Feedback Mechanism
Great organizations recognize, nurture and execute great ideas. Employees are the biggest source of ideas. The only thing that can stop great ideas flooding your organization is the lack of an appropriate mechanism to capture ideas. Open house discussions, employee-management meets, suggestion boxes and ideas capture tools such as Critical Incidents diaries are the building blocks that can help the Managers to identify & develop talent.

Reward Ceremonies
Merely recognizing talent does not work, you need to couple it with ceremonies where recognition is broadcast. Looking at the Dollar Check is often less significant than listening to the thunderous applause by colleagues in a public forum.

Delight Employees with the Unexpected
The last but not least way is to occasionally delight your employees with unexpected things that may come in the form of a reward, a gift or a well-done certificate. Reward not only the top performers but also a few others who are in need of motivation to exhibit their potential.

Does your company have innovate ways to master the "Happy Workplace"? We would love to hear from you.

Improve Employee Relations - Strengthen the Team

For the organization to perform better it is important that the employees are comfortable with each other, share a good rapport and work in close coordination towards a common objective. People feel responsible and motivated to do good work and enjoy their work rather than taking it as a burden.

It is important that the management promotes healthy employee relations at workplace to extract the best out of each individual. Competition is essential but it should not promote negativity or any kind of enmity among the employees.

To follow are some strategies for a healthy employee relationship in the organization.

Involve your team members: They should feel important and indispensable for the organization. An individual must be assigned responsibilities according to their interests and responsibilities. Don’t impose work on them. Let them willingly accept challenges. They must enjoy whatever they do otherwise they would end up fighting with their superiors and fellow workers.

Encourage individuals to share their work with each other: This way people tend to talk with each other more, discuss things among themselves and thus the comfort level increases. Let them work together and take decisions on their own. A team leader should intervene only in extreme cases of conflicts and severe misunderstandings.

Assign them targets and ask all your team members to contribute equally and achieve the target within the desired time frame. Motivate them to work in groups. This way employees have no other choice than to trust their fellow workers and take each other’s help as well. An employee must have the liberty to express his ideas and all of them should sit together to decide on something which would be beneficial to all.

One should try his level best that all the employees must have their lunch together at the same time. Half an hour to forty-five minutes must be dedicated to lunch and one should not discuss work during lunch time. There are other topics as well. Discuss movies, sports, shopping or any other thing under the sun. There will be no harm if the employees go out together once in a while for get-togethers, picnics or shopping. Ask them to bring their family members as well.

Encourage effective communication among the team members. It has been observed that poor communication leads to confusions and misunderstandings. The communication has to be precise and relevant. One should not play with words and be very specific about his expectations from his fellow workers as well as the organization. If you are not very happy with your colleague’s proposal, don’t keep things to yourself. Voice your opinion and do express your displeasure. It will definitely prevent a conflict among employees later and improve the relations among them. Be straightforward. Don’t pretend things just to please your boss. If you find anything unacceptable, discuss with your superior but in a polite way.

Written modes of communication must be promoted among the employees for better transparency. Verbal communication is not as reliable as written communication. The agendas, minutes of the meeting, important issues must be circulated among all through emails. Make sure that all the related employees are in the loop. Don’t communicate individually with any of the employees as the other one might feel neglected and left out.

Morning meetings is another effective way to improve the relation among the employees. Let everyone come together on a common platform and discuss whatever issues they have. The meetings must not be too formal. Allow the team members to bring their cups of coffee. Start your day with a positive mind. Greet everyone with a warm smile. Exchange greetings and compliments. If any of your team member is not in a pleasant mood, do take the initiative and ask what is wrong with him. Try your level best to provide him a solution.

Organize birthday parties, Christmas parties, New Year parties etc. at the workplace. These small initiatives actually go a long way in strengthening the bond among the employees. Ask all of them to decorate the office, their work stations and make all the necessary arrangements themselves. You will actually be surprised to find out that everyone would be ready with something or the other. Employees would actually take the initiative and organize things on their own. Let them enjoy with each other and have fun.

Praise the individual if he has done something exceptionally well. Reward him suitably. The names of the top performers must be displayed on the notice boards for others to draw inspiration from them. Encourage everyone to perform well to live up to the expectations of the superiors as well as the management.

A healthy relation among employees promotes a positive ambience at the work place and employees feel happy and satisfied at work. They look forward to going to office daily and also work hard to realize their team’s as well as organization’s goals. 

What are some things you do to build a better bond and increase productivity in your workplace? Let us know below.