Congress Repeals Expanded 1099 Reporting and IRS Issues W-2 Reporting Guidance. Edward Fensholt and Mark Holloway

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1 VOL. 24, NO. 3 AUTUMN 2011 BENEFITS LAW JOURNAL Federal Benefits Developments Congress Repeals Expanded 1099 Reporting and IRS Issues W-2 Reporting Guidance Edward Fensholt and Mark Holloway The federal agencies tasked with implementing the Patient Protection and Affordable Care Act (PPACA), last year s sweeping federal health reform law, have released guidance on a variety of matters, including rules on W-2 reporting of health coverage values. In the meantime, Congress was finally able to reach an agreement on repealing the Form 1099 reporting requirement that was generating considerable angst. Congress Repeals Health Reform Law s Form 1099 Requirement Congressional Republicans and Democrats don t agree on much, but they agreed on this for months: the health reform law s obligation on employers to begin filing IRS Forms 1099, reporting payments to vendors for goods and services totaling $600 or more per year, is unduly burdensome and should be repealed. The devil was in the details, but federal lawmakers vanquished the devil and passed Edward Fensholt and Mark Holloway are Directors of Compliance Services with the Lockton Benefit Group of Lockton Companies, LLC, in Kansas City, Missouri.

2 H.R. 4, a Republican-sponsored measure that repeals the enhanced reporting obligation. 1 The enhanced reporting obligation would have applied for payments beginning after The legislation essentially restores the pre-health care reform status quo with respect to Form 1099 reporting; the long-standing obligation to file Forms 1099 for things like wages paid to contractors, for example, is unaffected. 2 Lawmakers had squabbled for weeks over how to pay for the lost tax revenue the enhanced Form 1099 filing obligation was expected to generate. Republicans intended to make up the lost revenue by requiring that Americans who receive larger health insurance subsidies than they re entitled to, under the health insurance exchanges scheduled to open in 2014, pay back a greater share of their overpayments. Overpayments could occur, for example, if after an individual applies for subsidies in an insurance exchange, his or her household income for the remainder of the year exceeds the individual s estimate at the time of the subsidy application (the larger someone s annual household income, the smaller the amount of subsidies to which he or she may be entitled). Democrats balked at requiring larger repayments, concerned that individuals would decide not to buy subsidized health insurance through an insurance exchange if they could be required to repay all or nearly all of any subsidy overpayment, even an inadvertent overpayment. In the end, the Republican view prevailed. 3 IRS Explains W-2 Reporting of Health Plan Values The IRS has issued 19 pages of FAQs pertaining to the obligation on employers to begin reporting health plan coverage values. 4 Before we proceed any further, let s be clear about one point. Notwithstanding hysterical Internet messages to the contrary, nothing in the health reform law makes health coverage taxable if it is now nontaxable. The W-2 reporting of health plan values is for informational purposes only. 5 The W-2 reporting obligation applies to employers, and applies to all employers except Indian tribal governments. However, the health coverage values for some health plans are not reported, even though the employer may otherwise be subject to the reporting obligation. Reporting of health coverage values is mandatory for the 2012 W-2 (issued to employees in January 2013), but small employers those who issued fewer than 250 W-2s for the preceding year are excused until further guidance to the contrary. It s not clear from the recent guidance whether the number of W-2s issued by an employer is calculated on a controlled group basis or on an employer identification number (EIN)-by-EIN basis. 6 We suspect it s the latter. BENEFITS LAW JOURNAL 2 VOL. 24, NO. 3, AUTUMN 2011

3 W-2s Issued to Terminating Employees Employees who terminate employment during the year pose a couple of issues which the IRS has resolved practically. Even though such an employee may demand a Form W-2 immediately (and the employer must supply it), there is no need to report health coverage values on his or her W-2. Rather, the obligation to report health coverage values applies only to W-2s issued after the close of the year. In addition, employers can choose whether to include on the Form W-2 at year s end only the value of coverage supplied up to the date of termination, or include the value of Consolidated Omnibus Budget Reconciliation Act (COBRA) coverage purchased by the employee through the end of the year. But whatever method the employer adopts, it must apply it consistently. 7 Retirees, COBRA Beneficiaries, and Others Who Don t Typically Receive a W-2 Good news. There is no requirement to report coverage values with respect to an individual to whom the employer is not otherwise required to issue a Form W-2. So with respect to retirees, spouses and dependent children purchasing COBRA, independent contractors, and other individuals who would not otherwise receive a Form W-2 from the employer, there is no need for the employer to issue them a W-2 simply to report the value of health coverage they received from the employer. 8 Transfers, Common Paymasters, and the Form W-3 Where there are related employers with a common paymaster, an employee who receives coverage through two or more of the related employers should receive a single W-2 from the common paymaster, showing the aggregate value of all the reportable coverage. The related employers who are not the common paymaster do not report the cost of coverage they provide. Where an employee transfers to an employer that is considered a successor employer for FICA tax purposes, both the predecessor and successor employers report the cost of coverage that each provided to the employee during the year... unless the successor employer chooses to report the coverage values supplied by both employers. In that case, the predecessor employer does not also report the value of the coverage it supplied prior to the transfer. Employers are not required to report the aggregate value of health coverage supplied to all employees on their Form W-3 transmittals. 9 BENEFITS LAW JOURNAL 3 VOL. 24, NO. 3, AUTUMN 2011

4 What Is Reported? The employer reports the aggregate cost of applicable employersponsored coverage. The cost of coverage includes the employerand employee-paid portions (whether the employee portion is paid pretax or post-tax). 10 The fact that a portion of an employee s coverage might be taxable to him or her ( e.g., employer-supplied coverage for a nondependent child who will be age 27 or older during the taxable year) is irrelevant. 11 The amount is reported in Box 12 of the employee s Form W-2, using the code DD. 12 Reportable applicable employer-sponsored coverage generally includes all group health coverage supplied to the employee but does not include the following: Long-term care coverage; Certain excepted benefits such as accidental death and dismemberment coverage, disability insurance, liability insurance, workers compensation coverage, and similar coverage; Coverage for specified illnesses ( e.g., cancer insurance) or hospital indemnity coverage where the coverage is purchased on an after-tax basis; Dental or vision coverage either provided under a separate policy of insurance or otherwise not integrated with reportable health coverage. What the IRS means by integrated is not entirely clear; for example, it s not clear whether coverage is considered integrated only where there is no separate election and premium for the coverage; Health savings account (HSA) or Archer medical savings account contributions (note that employee pretax and employer HSA contributions are reported in Box 12, but under code W ); Employee pretax contributions to a health flexible spending account (FSA); Coverage under a Health Reimbursement Arrangement (HRA); The cost of coverage under a multiemployer (joint trusteed, collectively bargained) plan; The cost of coverage under a self-insured plan not subject to COBRA, such as a self-insured church plan; this exception BENEFITS LAW JOURNAL 4 VOL. 24, NO. 3, AUTUMN 2011

5 does not apply to fully insured coverage that is not subject to COBRA; and The cost of coverage under a governmental plan maintained primarily for the members of the military and their families. 13 What does this leave to be reported? Medical plan coverage (other than an HRA or employee contributions to a health FSA); Employer contributions to a health FSA; 14 Dental and vision coverage not supplied under a separate policy of insurance, and which is integrated with other reportable health plan coverage; and Coverage through an onsite clinic. Calculating the Cost of Coverage Employers must report the aggregate cost of applicable employersponsored health coverage. This will often require determining the sum of the cost of coverage under multiple plans or coverage options, some of which may be insured and some self-insured. Under the IRS FAQs, employers may determine the cost of reportable coverage by using the COBRA rate, which probably makes the most sense for self-insured plans. If the plan is insured, the employer may use the premium charged by the insurance company. If the employer subsidizes an employee s COBRA coverage, it may include the value of the employer s subsidy in the reportable cost of coverage. The employer may use different methods for different plans. In many cases, the cost of an employee s coverage changes during a calendar year. For example, assume the plan year runs from July 1 to June 30, and effective July 1 the cost of coverage increases or the employee changes from single to family or family to single coverage during the year. In these cases, the reportable cost of the employee s coverage must reflect these changes. Employers may use any reasonable method to comply with this requirement. For example, if an employee makes a coverage change during a month but the plan determines the cost of coverage on a monthly basis, the employer may choose to use the cost of coverage as of the beginning of the month or as of the end of the month, or it may prorate the cost of coverage for the month in some reasonable fashion. However, the same method must be used consistently for all employees. 15 BENEFITS LAW JOURNAL 5 VOL. 24, NO. 3, AUTUMN 2011

6 Notes 1. H.R. 4, the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011, Pub. L. No See IRC 6041, as amended by Pub. L. No See IRC 36(f)(2)(B) as amended by Pub. L. No IRS Notice available at 5. Q/A #2, IRS Notice Q/A #3, IRS Notice Q/A #6, IRS Notice Q/A #9, IRS Notice Q/As #7, 8, 10, IRS Notice Q/A #11, IRS Notice Q/A #15, IRS Notice Q/A #5, IRS Notice Q/As #12, 16 22, IRS Notice The IRS applies an interesting ordering rule where there are employer flex credits or flex dollars involved under a cafeteria plan that includes a health FSA. If the employee s total salary reduction amount equals or exceeds his health FSA benefit, the health FSA coverage is not reported on the W-2. To the extent that the FSA benefit exceeds the employee s salary reduction amount, the excess is included in the aggregate reportable cost of coverage on the employee s Form W-2. See Q/A # Q/A #24-31, IRS Notice Reprinted from Benefits Law Journal Autumn 2011, Volume 24, Number 3, pages 69-74, with permission from Aspen Publishers, Inc., Wolters Kluwer Law & Business, New York, NY, , BENEFITS LAW JOURNAL 6 VOL. 24, NO. 3, AUTUMN 2011