Newslink: Health and Welfare

Timing Change on $2,500 Health Care Limit Decrease for Off-Calendar Year Plans

IRS guidance has been issued that changes the timing of the $2,500 Health Care Flexible Spending Account reduced maximum for off-calendar year plans. The decreased limit of $2,500 is effective for plan years beginning on or after January 1, 2013. Also, the IRS has requested comments on possible modification options to the use-or-lose rules for health flexible spending accounts. Watch for a TRI-AD news alert with details in the coming weeks.

W-2 Reporting of Health Care Coverage Costs

The Patient Protection and Affordable Care Act of 2010 (PPACA) requires employers to report the cost of health care coverage on W-2 forms. The health care coverage is not taxable to the employees, but is reportable to provide health care coverage cost information to the employees and the government. This was originally to be effective beginning in 2011 but was extended until 2012 because the IRS could not provide guidance to employers soon enough.

The IRS has issued Notice 2012-9 providing W-2 reporting requirements for 2012 W-2 forms which amends and restates the IRS original guidance, Notice 2011-28.

The IRS is providing reporting transition relief for: 1) employers who will file less than 250 W-2 forms in the prior calendar year, 2) stand alone dental/vision plans, 3) health reimbursement arrangements, 4) multiemployer plans, 5) self-insured plans that are not subject to COBRA (i.e. church plans), 6) relief with respect to certain forms W-2 furnished to terminated employees before the end of the year, and 7) certain employers with respect to coverage under an employee assistance program, on-site medical clinic or wellness program. This relief continues until further guidance is published.

Below is a chart that outlines the provisions of Notice 2012-9.

For additional information:

IRS Notice 2012-9 at:

IRS Questions & Answers at:,,id=237894,00.html

W-2 Reporting of Health Care Coverage Costs
Provision Rules
Required effective dates
Larger employers – effective for 2012 W-2's for larger employers who file 250 or more W-2's in prior calendar year, due no later than January 31, 2013.
Smaller employers – smaller employers who file fewer than 250 W-2's in prior calendar year are exempt from reporting until further guidance is issued.
Employers required to report
All employers that provide "applicable employer-sponsored coverage" including:
  • Federal, state and local government entities
  • Churches and other religious organizations
  • Employers that are not subject to COBRA continuation, to the extent such employers provide applicable employer-sponsored group health plan coverage
Employers not required to report
  • Federally recognized Indian tribal governments
  • Tribally chartered corporations wholly owned by Federally recognized Indian tribal governments
  • Government plans covering mostly military members
  • Employers with self-insured group health plans who are not subject to COBRA continuation requirements (i.e. certain church plans)
Applicable employer-sponsored coverage that must be reported
Regardless of grandfather status, coverage under any group health plan provided by an employer that is excludable from the employee's gross income under Internal Revenue Code 106 that provides health care to the employees, former employees, the employer, others associated with the employer in a business relationship, or their families must be reported on the W-2. Coverage shall be treated as applicable employer-sponsored coverage without regard to whether the employer or employee pays for the coverage.
Employer-sponsored coverage NOT required to be reported
  • Stand alone dental and vision plans (not integrated with a group health plan) – no reporting is required if the stand alone plan benefit is offered under a separate policy and employees may elect not to participate. If they participate in a separate plan, they must pay an additional premium.
  • Health savings account (HSAs) contributions
  • Health reimbursement arrangements (HRAs) contributions
  • Pre-tax salary reductions to a health flexible spending account (HFSA)
  • Employee assistance program (EAP), wellness or on-site medical clinic if the employer does NOT charge a COBRA premium for these benefits
  • Archer MSA contributions
  • Long-term care
  • Coverage only for accident or disability income insurance
  • Coverage issued as a supplement to liability insurance
  • Liability insurance including general and automobile liability insurance
  • Workers' compensation or similar insurance
  • Automobile medical payment insurance
  • Credit-only insurance
  • Other similar insurance coverage, specified in regulations, under which benefits for medical care are secondary or incidental to other insurance benefits
  • Coverage for hospital indemnity, other fixed indemnity or coverage only for a specified disease or illness that are includable in the employees' gross income or are NOT paid by employees on a pre-tax basis under a Section 125 cafeteria plan
  • Amounts included in income for 105(h) nondiscrimination failures
  • Premium payments for 2% share-holder employees of S Corporations
Methods of calculating the aggregate reportable cost of coverage
Three methods may be used to calculate the cost of coverage (see below for the explanation of these methods):
  • COBRA applicable premium method
  • Premium charged method (for insured plans)
  • Modified COBRA premium method
The aggregate reportable cost of coverage will include:
  • the amount paid by the employer and the employee,
  • the costs for a spouse and/or dependent(s),
  • after-tax costs for a person covered by the plan due to a relationship with the employee (i.e. domestic partners, same-sex spouses, or children age 26 or older if covered in the plan).
  • The employer is not required to use the same method for every plan but must use the same method with respect to a plan for every employee receiving coverage under that plan.
  • The reportable cost under a plan must be determined on a calendar year basis (even if the 12 month determination period is not the calendar year).
  • If the coverage cost increases or decreases during the calendar year, the reportable cost must reflect the increase or decrease for the applicable periods.
  • If an employee changes coverage during the year, the reportable cost under the plan for the employee for the year must take into account the change in coverage by reflecting the different reportable costs for the coverage elected by the employee for the periods for which such coverage is elected.
  • Any election or notification that is made or provided in the subsequent calendar year that has a retroactive effect on coverage in an earlier year is not required to be included in the aggregate reportable cost for the calendar year.
  • For coverage periods that include December 31 but continue into the subsequent year, employers may: 1) treat the coverage as provided during the calendar year that includes December 31, 2) treat as coverage during subsequent year, or 3) allocate costs between years.
COBRA applicable premium method
Under this method, the reportable cost for a period equals the COBRA applicable premium for that coverage for that period. Employers can use the same rates they are charging for COBRA coverage, less any COBRA administration fees (i.e. do not include the 2% or 50% administration fee).
Premium charged method
Under this method, the reportable cost is the premium charged by the insurer for that employee's coverage for each period. For example, the reportable premium would be the single-only coverage premium or the family coverage, as applicable to the employee. This would include what the employer pays and what the employee pays. This method can only be used for fully insured plans.
Modified COBRA premium method
This method can be used in either of the following situations:
  • The employer subsidizes the cost of COBRA where COBRA qualified beneficiaries (QB's) pay less than the COBRA applicable premium. The reportable cost is the employer's reasonable good faith estimate of the COBRA applicable premium for that period, if such reasonable good faith estimate is used as the basis for determining the subsidized COBRA premium.
  • The employer charges COBRA QB's for each period in the current year equal to the COBRA applicable premium for each period in a prior year. The employer may use the COBRA applicable premium method (see above) for each period in the prior year as the reportable cost for each period in the current year.
Cost of coverage for a health flexible spending account
Usually employers do not make employer contributions toward a health flexible spending account (HFSA). If the employer does not and the only contributions are salary reduction contributions by the employee, employers do not report the HFSA salary reductions.

If the employer makes contributions or allows flex credits to a HFSA, and if the amount of the health FSA for the plan year exceeds the salary reduction elected by the employee for the plan year, then the amount of the employee's health FSA minus the employee's salary reduction election for the health FSA must be included in the aggregate reportable cost.
Reporting requirements for terminated employees
An employer may use any reasonable method of reporting the cost of coverage for an employee who terminated employment during the calendar year as long as the method used is applied consistently for all terminated employees. Employers may elect to only include the aggregate reportable costs while an individual is an active employee for the company and receiving wages and active benefits. Once the employee terminates employment and is no longer active, an employer can elect to include the cost of COBRA continuation coverage on the W-2 or they can elect not to.

Employers are not required to report any aggregate reportable cost of coverage for an employee who has terminated and requests a W-2 before the end of the calendar year in which he or she terminated.

If employers are providing a W-2 for a terminated employee in January of the year following the employee's termination, the aggregate reportable cost should be included on the W-2. An employer does not need to include the cost of COBRA continuation coverage, but only the cost of coverage while an active employee. The employer must report cost of coverage for all terminated employees consistently.

Employers are not required to report aggregate reportable costs on a W-2 to former employees or retirees receiving no wages and therefore not reportable on W-2.
Reporting the aggregate reportable cost of coverage on the W-2
  • The aggregate reportable cost is reported in box 12 of the W-2, using code DD.
  • Employers do not include the aggregate reportable cost on Form W-3, Transmittal of Wage and Tax Statement.
Penalties for failure to report
  • Failure to file correct returns or furnish correct payee statements ranges from $30 to $100 per form with maximum penalties ranging from $250,000 to $1.5 million based on when the corrected W-2 form is filed.
  • Unclear if penalties apply if incorrect amounts are reported since amounts reported have no impact on taxation to the individual.


2013 Limits Released for Health Savings Accounts

The Internal Revenue Service has released 2013 limits for Health Savings Accounts (HSAs). Below is a chart comparing the 2012 limits to the recently-released limits for 2013.

Health Savings Accounts 2013 2012

Contribution Limit per Individual
$3,250 $3,100

Contribution Limit per Family
$6,450 $6,250

Out-of-pocket Maximum per Individual
$6,250 $6,050

Out-of-pocket Maximum per Family
$12,500 $12,100

Minimum Deductible per Individual
$1,250 $1,200

Minimum Deductible per Family
$2,500 $2,400


Proposed Guidance Provided – Comparative Effectiveness Research Fee

The health care reform law added a comparative effectiveness research fee that will have to be paid to the government by either insurers or plan sponsors. The research fee will generally be paid between 2012 and 2019 and will be used by the government to fund research for evaluating and comparing health outcomes and the clinical effectiveness, risks, and benefits of medical treatments, services, etc. After 2019, the fee will no longer apply unless the law is extended. Below is information from the recently published IRS proposed guidance on the fees.

What coverage is subject to the fee?
The fee will apply to group health plans, fully insured and self insured. Benefits that are excepted benefits under HIPAA are not subject to the fee. Fully-insured, stand-alone dental/vision plans are exempt. Self-insured dental/vision plans are exempt if employees can elect and pay a separate premium for coverage. Health Reimbursement Arrangements (HRA's), including retiree-only HRA's, will have to pay the fee. Health Care Flexible Spending Accounts (HCFSA) do not have to pay the fee if they are excepted benefits under HIPAA.

Who is responsible to pay the fee?
For fully-insured health plans, the issuers of the policies will be responsible to pay the fee. For self-insured health plans, plan sponsors (employers, unions or boards of trustees) are responsible to pay the fee.

How much is the fee?
The fee is $1 multiplied by the number of average lives covered under the plan under the particular policy year. For the second year, the fee is supposed to increase to $2 and thereafter, the fee may change and will be determined by information published by HHS.

How is the average lives determined?
Plan sponsors will need to determine the fee for self-insured plans. There are three methods to calculate this average for self-insured plans – actual count, snapshot, 5500 form method. For the first year, there are some counting transition rules. A brief description of the three methods is below:

  • Actual count method – the sum of lives covered for each day of the policy year and dividing that sum by the number of days in the plan year
  • Snapshot method – adding the totals of lives covered on one date in each quarter, or an equal number of dates for each quarter, and dividing the total by the number of dates on which a count was made. For this purpose, the number of lives covered on a date may be determined as equal to either the sum of the actual number of lives covered on the dates (snapshot method) or the sum of: 1) the number of participants with self-only coverage on that date, plus 2) the product of the number of participants with coverage other than self-only coverage on the date and 2.35 (the snapshot factor method).
  • 5500 form method – for plans that offer self-only coverage, sum the total number of participants at the beginning of the plan year and end of plan year on the 5500 form and divide by two. For plans offering more than self-only coverage, an employer may add the number of participants at the beginning of the plan year to the number of participants at the end of the plan year because the 5500 form does not usually identify whether the coverage is self-only coverage or family (or some other tiers of coverages).

For account-based plans such as HRA's, dependents do not need to be included in the average lives count. Where there is a fully insured plan plus an integrated HRA, the issuer will pay the fee on the coverage in the health plan and the plan sponsor will pay the fee on the HRA. Plan sponsors that maintain a self-insured plan with an integrated HRA will only pay the fee once, i.e., the sponsor does not have to pay the fee on both plans.

How does the responsible party pay the fee?
The insurer or the plan sponsor will have to file IRS Form 720 to report the annual fee. Generally, the fee is due by 7/31 of the calendar year immediately following the last day of the policy year/plan year. For calendar year plan years, the first Form 720 with fee payment is due July 31, 2013.

TRI-AD will continue to monitor this legislation and contact our clients regarding compliance.


Legislative Issues TRI-AD is Monitoring

Dependent Care Tax Credit
Beginning with tax year 2013, the Dependent Care Tax Credit will be reduced to $2,400 for one qualifying individual, and $4,800 for two or more qualifying individuals. The current maximums are $3,000 for one qualifying individual, and $6,000 for two or more qualifying individuals. The tax credit was a provision that was increased by the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) in 2001. EGTRRA provisions were all slated to sunset on December 31, 2010. Most, but not all, were extended. This particular credit amount was extended through December 31, 2012. We are anticipating that a proposal will be introduced in Congress to keep the limits at the current levels.

If the EGTRRA limits are not extended, participants who routinely file for the Dependent Care Tax Credit should be made aware of this change this year, as it may impact their decision regarding participating in the Dependent Care FSA for 2013. If the tax credit reduction goes into effect, participating in the Dependent Care FSA will become more appealing, as the limits will be higher in the FSA.

Pre-Tax Education Assistance
Another item expiring in 2013 due to the EGTRRA sunset provisions is pre-tax benefits for employees for education assistance. If the existing tax-preferred status of employer-sponsored tuition assistance is not extended, employees will no longer be able to exclude from their taxable income any tuition assistance money provided by their employer. We anticipate a proposal will be introduced in Congress to keep these benefits tax-free.

Reduction of Deemed Dependent Income Limits
Beginning with tax year 2012, the deemed earned income related to a spouse who is attending school full time, actively looking for work, or incapable of self-care will be reduced to $200 per month for one qualifying individual, and $400 for two or more qualifying individuals. Currently, the deemed earned income is $250 per month for one qualifying individual, and $500 for two or more qualifying individuals. This reduction will further limit the maximum election into the Dependent Care Account if the participant's spouse is not working but they qualify to use the Dependent Care FSA because they meet the special criteria (student, seeking work, or incapable of self-care).

Not Legal or Tax Advice: Nothing in this newsletter should be construed as tax or legal advice. TRI-AD may not be considered your legal counsel or tax advisor. If you have questions about how anything discussed in this newsletter pertains to your personal or your organization's situation, we encourage you to discuss the issue with your attorney and/or tax advisor. TRI-AD's communications are not privileged under attorney-client privilege.

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