Implementing the new health plan laws.

AuthorWalker, Deborah
PositionPart 2

This two-part article covers significant developments in late 2011 and 1 2012 in employee benefits, including employment taxes, executive compensation, health and welfare benefits, and qualified plans. Part I, published in the November 2012 issue, dealt with qualified retirement plan benefits and executive compensation. This month, Part II focuses on guidance released and changes to the rules for group health plans as a result of the Patient Protection and Affordable Care Act (PPACA). (1)

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Supreme Court Upholds PPACA's Individual Mandate

The U.S. Supreme Court on June 28, 2012, issued its much-anticipated decision in the consolidated PPACA cases. (2) The Court held PPACA's individual mandate in Sec. 5000A is a valid exercise of Congress's authority to "lay and collect taxes." The Supreme Court also upheld PPACA's expanded Medicaid eligibility provisions but held the federal government could not withhold all federal Medicaid funds from states that do not comply with the new requirements.

Form W-2 Reporting on Group Health Plan Coverage

Notice 2012-9 (3) supersedes Notice 2011-28 (4) regarding reporting on Form W-2, Wage and Tax Statement, of the cost of employer-provided group health plan coverage. This new requirement generally applies beginning with 2012 Forms W-2, which generally are required to be filed in January 2013 (and was optional for 2011 Forms W-2). The core requirements remain the same, with certain notable clarifications and modifications:

Small employer relief: Notice 2012-9 clarifies that the exemption for employers that were required to file fewer than 250 Forms W-2 for 2011 is determined without regard to the use of an agent under Sec. 3504.

Related employers: If an employee is concurrently employed by related employers and one of the employers serves as a common paymaster, the common paymaster is required to include the aggregate reportable cost of coverage that is provided to the employee by all the employers for whom it serves as common paymaster. Notice 2012-9 clarifies that, if the related employers do not compensate through a common paymaster, they may either report the entire aggregate reportable cost on one Form W-2 or allocate the cost among the concurrent employers, using any reasonable method.

Dental and vision plans: Under the prior guidance, dental or vision coverage was excludable from reporting if it was not integrated into a group health plan providing other health care coverage. Under Notice 2012-9, this coverage is excludable if it is offered under a separate policy, certificate, or contract of insurance--or the participants must have the right to decline the benefits (and if they elect coverage, are required to pay an additional premium). (5)

Cost of coverage includible in income: Notice 2012-9 clarifies that the cost of coverage that is includible in the income of a highly compensated individual under Sec. 10.5(h) and the payments or reimbursements of health insurance premiums that are includible in the income of a 2% shareholder-employee of an S corporation are not included in the aggregate reportable cost.

Calculating reportable cost: Notice 2012-9 clarifies that, if an employer is using a composite rate to determine the aggregate reportable cost for active employees but not for determining the applicable COBRA (Consolidated Omnibus Budget Reconciliation Act) premium, it may use either the composite rate or the applicable COBRA premium to determine the aggregate reportable cost of coverage--as long as the same method is used consistently for all active employees and is used consistently for all qualifying beneficiaries receiving COBRA coverage.

Employee-assistance programs: Notice 2012-9 clarifies that coverage under an employee-assistance program, wellness program, or on-site medical clinic is subject to the reporting requirements only if it is provided under a group health plan under Sec. 5000(b)(1). If so, the coverage is required to be included in the aggregate reportable cost of coverage only if the employer charges a premium for COBRA (or other federal) continuation coverage. Employers that do not charge such premiums and those not subject to COBRA (or other federal) continuation coverage requirements are not required to include the cost of coverage in the aggregate reportable cost of coverage.

Permissible inclusion: Employers are permitted to include the cost of coverage that is not required to be included (e.g., coverage under a health reimbursement arrangement (HRA), a multiemployer plan, an employee-assistance program, wellness program, or on-site medical clinic) in the aggregate reportable cost, as long as the coverage constitutes applicable employer-sponsored coverage (i.e., is coverage under a group health plan that is made available by an employer to an employee and is excludable from the employee's gross income under Sec. 106) and the calculation of the cost otherwise meets the requirements.

Programs with other benefits: If a program provides benefits that constitute applicable employer-sponsored coverage and other benefits, the employer may use any reasonable method to determine the cost of the portion that constitutes applicable employer-sponsored coverage. Moreover, if that portion is only incidental in comparison with the other portion, the employer is not required to include either portion in the aggregate reportable cost.

Dec. 31 information: The aggregate reportable cost may be based on the information available to the employer as of Dec. 31 each year. Elections or notifications made in the subsequent calendar year that have a retroactive effect on coverage need not be taken into account in calculating the aggregate reportable cost for the preceding year. Further, employers are not required to provide a Form W-2c, Corrected Wage and Tax Statement, if a Form W-2 has already been provided.

Coverage period spanning Dec. 31: For coverage periods that include Dec. 31 but cross into the next calendar year, employers can treat the whole coverage period as provided for the year that includes Dec. 31, treat the whole coverage period as provided for the subsequent year, or allocate the cost of coverage between the two years using any reasonable approach (which must generally relate to the number of days in the coverage period that fall within each of the years). Any chosen method must be applied consistently to all employees.

Exhibit: Tax treatment of medical loss ratio rebates to group health plan participants Employee Cash Rebate Premium Reduction Comments Premium Contribution Pretax Subject to federal The increased The analysis income and compensation is is the same employment taxes. subject to federal regardless of income and whether the employment taxes. rebate is provided to: The rebate is a The premium * All return of untaxed reduction causes employees who compensation for the employee's participated the year the rebate salary reduction in the plan is paid (Q&As 11 contributions to be during the and 13). reduced by that year the amount in the year rebate is the rebate is paid, paid, or which results in a corresponding increase in the employee's taxable salary (Q&As 10 and 12). * Only those employees who participated in the plan both in the year the premiums were paid and the year the rebate is paid. After-tax Not subject to Not subject to The analysis federal income or federal income or applies when employment taxes. employment taxes. the rebate is provided only to those employees who participated in the plan both in the year the premiums were paid and the year the rebate is paid. The rebate is a The rebate is a Caveat: If the return of a portion purchase price employee of the employee adjustment for a deducted the premiums paid for a prior year (Q&A prior year's prior year (i.e., a 5). premium purchase price payments on...

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