As the swirl of legislative changes make their way to the “to do” list for Human Resources and payroll professionals, number one on the list is calculating and preparing the payroll systems for reporting the value of employer- sponsored healthcare coverage on W-2s. The Patient Protection and Affordable Care Act (PPACA) as amended by the Health Care & Education Reconciliation Act of 2010, requires employers to report the aggregate (lump medical, dental, eye and prescription drug coverage) costs for that employees specific benefit package.
Although there are many false reports floating on the internet surrounding this requirement, the truth is, this is only a reporting requirement. Employees gross income will not be increased by the value of the employer sponsored healthcare coverage. The employee will not be taxed on the value of this coverage as part of regular earnings. However, the IRS has not yet determined how the information will be reported on the W-2.
So what should employers do to prepare for compliance with this mandate?
- Get the payroll department ready to meet the reporting requirement on January 1, 2011.
Although the new rule doesn’t apply to 2010 W-2 reporting, employees who leave a position with a company are eligible to receive a W-2 earlier in the year. Thus, employees leaving after January 1, 2011 would have to receive a W-2 complying with the new regulations.
- Calculate the value of your healthcare plans.
Included in the reporting requirement are:
- Medical plans
- Prescription drug plans
- Executive physicals
- On-site clinics if they provide more than de minimus care
- Medicare supplemental policies
- Employee assistance programs
- Dental and vision plans are included unless they are “stand-alone” plans6
Excluded from the value of plans are:
- Disability, long-term care or accident benefits
- Specified policies for illnesses such are cancer, or indemnity insurance policies when the full premium is paid by the employee on an after tax basis
- Salary reduction contributions to health FSAs
- MSA or HAS contributions of the employee or the employee’s spouse
The aggregate cost is expected to be determined similar to rules used for COBRA exclusive of the 2 percent administrative charge allowed under COBRA. For fully insured plans, the COBRA cost of coverage generally equals the premium paid to the provider. For self-funded plans, the COBRA cost of coverage is usually based on a reasonable actuarial estimate of future costs.7 Including on-site clinics will provide more of a challenge as they have not been previously valued for COBRA purposes. Employees will be on their own to determine values for the coverage provided through on-site clinics.
- Calculate the value monthly.
The reporting requirements appear to require monthly calculations according to Maureen Maley of Faegre & Benson, LLP. Although she clarifies this position by stating future regulations may be clearer on how to report coverage of less than one month.
- Assume that the regulations include former employees, if they still receive coverage.
Although it still isn’t clear who is covered beyond current employees, the regulations seem to include former employees who are still provided with coverage, including retirees, terminated employees on COBRA and surviving spouses, Maley goes on to say.
The impact on payroll may be significant. Employers should start now working with internal and, if necessary, vendor payroll providers to implement these changes in preparation for 2011