The Affordable Care Act (ACA) requires small group, large group, and self-funded employers to calculate and report the aggregate cost of applicable employer-sponsored coverage on their employees’ W-2 forms. The reporting requirements were made optional for 2011 W-2s, but will be mandatory beginning with the 2012 tax year. However, for employers issuing less than 250 W-2s, the reporting requirement will not apply until tax years beginning in 2013.
This mandate broadly defines employer-sponsored coverage as coverage under any group health plan that would be excludable from income under IRS Code § 106, which details excludable employer contributions. In addition to medical coverage offered through insurance carriers, examples of applicable employer-sponsored coverage include on-site medical clinics, wellness programs, Employee Assistance Programs which provide any medical care (including trained counselors), and executive medical reimbursement plans.
Both the employer and employee portions of contribution are reportable, whether the employee paid through pre-tax or after-tax contributions.
The following benefits are NOT reportable under this mandate:
- Long-term care coverage
- Accident and disability coverage
- Stand-alone vision or dental coverage
- Specified disease, hospital indemnity and other fixed indemnity coverage when paid on an after-tax basis
- Health Savings Accounts, Medical Savings Accounts, Health Reimbursement Accounts, and, in most circumstances, health Flexible Spending Accounts.
Calculating aggregate costs of benefits
The methodology for calculating the costs of applicable benefits is detailed in IRS Notice 2011-28 beginning on page 13. The notice provides three permissible methods:
- The “premium charged method”, where the employer calculates the premium(s) charged by the insurance carrier (this applies to fully insured groups only).
- The “COBRA premium method”, wherein the reportable cost for a period equals the applicable COBRA premium for that period.
- The “modified COBRA premium method” wherein the employer may determine the reportable cost for a period based upon a reasonable good faith estimate of the COBRA applicable premium for that period. (This method is only applicable for groups that subsidize COBRA costs)
ASO groups cannot rely on using premiums charged by carriers to calculate their aggregate costs since they are self-insured. They will need to work with their consultant or actuary to implement one of the COBRA methods outlined above.