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The first part of 2011 has seen a number of new developments related to the Patient Protection and Affordable Care Act (PPACA), more commonly known as the Health Care Reform law. These include guidance from the IRS on PPACA’s W-2 reporting requirement for the cost of heath care coverage; new interpretive statements from the IRS, DOL, and HHS; and legislative repeal of PPACA’s free choice voucher program. This Bulletin provides an overview of these and other recent developments under Health Care Reform.

IRS Issues Interim Guidance on PPACA’S W-2 Reporting Requirement

On March 29th, the IRS issued Notice 2011-28 (available at Notice 2011-28), providing interim guidance on PPACA’s requirement that employers report the cost of applicable employer-sponsored group health plan coverage on Forms W-2. The requirement takes effect for 2012 Forms W-2 that employers generally will issue in January 2013. Employers that decide to voluntarily report the cost of coverage on 2011 Forms W-2 (issued in January 2012) can rely upon this notice when doing so. The notice reiterates that W-2 reporting is for informational purposes only and does not cause excludable employer-sponsored coverage to become taxable. The reporting is intended to provide information to employees regarding the cost of their coverage for comparison purposes. It is expected that the cost of coverage reported on Forms W-2 will ultimately be used to calculate PPACA’s “Cadillac Tax” beginning in 2018, but Notice 2011-28 does not address this specifically.

Exemptions and Transitional Relief

Notice 2011-28 provides relief for certain employers and for certain types of employer-sponsored coverage, exempting them from the reporting requirement for 2012 or longer. Notably, exemptions apply to the following:

  • Employers required to file fewer than 250 Forms W-2 in 2011.
  • Coverage provided under collectively bargained multiemployer plans.
  • Self-insured health plans of employers that are not subject to COBRA or similar federal continuation requirements, such as self-insured church plans.
  • Coverage under Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs).
  • Dental and vision plans that qualify as HIPAA excepted benefits.

Future IRS guidance may limit the transition relief or exemptions after 2012. However, any future guidance that expands the reporting requirement will be prospective only. See the table beginning on the next page of this Bulletin for an overview of the types of coverage that should and should not be included on Forms W-2.

Aggregate Cost of Coverage

Employers will use code DD in box 12 of Form W-2 for reporting the cost of coverage. The amount reportable includes the total cost (calculated as explained below), regardless of whether it is paid for by the employer, the employee, or a combination of the two. The reportable cost is not affected by whether the coverage or premiums are pre-tax or post-tax. All coverage provided to the employee must be included, including coverage for the employee’s dependents (including adult children) and the employee’s spouse or domestic partner.

For employees who work only part of a calendar year but elect continuation coverage under COBRA or a similar program, the employer may decide to either (a) report only the cost of coverage when the employee was actively employed, or (b) report the entire cost of coverage, including coverage during the COBRA continuation period, but the method selected must be applied consistently for all employees covered under the plan. Employers are not required to include cost of coverage information on Forms W-2 furnished to employees who terminate before the end of a calendar year and request a Form W-2 before the end of that year. Also, a Form W-2 with health coverage cost information is not required for any individual to whom the employer is not otherwise required to provide a Form W-2, such as a retiree.

Types of Employer-Sponsored Coverage to Include on Form W-2

Employers must report on Form W-2 the aggregate cost of “applicable employer-sponsored coverage,” which generally includes all coverage under any employer-sponsored group health plan, with certain exceptions. IRS Notice 2011-28 provides guidance to help identify which plans qualify as applicable employer-sponsored coverage reportable on Form W-2. The following table provides a quick overview:

Coverage Type Include?
Coverage under a Multiemployer Plan No
Medical/Prescription Drug Plans Yes
Fully-Insured Dental and Vision Plans Yes, unless the dental or vision plan is offered under a separate policy, certificate or contract of insurance.
Self-Insured Dental and Vision Plans Yes, unless the dental or vision plan is not “integrated” into a group health plan. This term is not defined, but we believe it’s reasonable to treat dental or vision as not “integrated” if participants (1) make a separate coverage election, and (2) pay an additional premium for the coverage if elected.
EAPs and Wellness Programs Only if considered a group health plan (e.g., if counseling services are included).
“Excepted Benefits” described in Code § 9832(c)(1) (this includes benefits such as liability insurance and workers’ comp), except on-site medical clinics. No. However, the cost of on-site medical clinics must be included.
HRAs, HSAs, and Archer MSAs. No
Coverage for a specified disease or illness, or hospital indemnity insurance No
Self-insured plans not subject to COBRA or other federal continuation coverage laws, such as self-insured church plans No
Coverage under a government plan Yes, unless the plan is maintained primarily for members of the military and their families.
Coverage provided by Federally-recognized Indian tribal governments No
Health Flexible Spending Arrangements (Health FSAs) Only in limited circumstances that involve employer flex credits.*
Executive Physical Programs Yes**

* A Health FSA is reportable only if its “cost” exceeds the employee’s total salary reduction election for all qualified benefits (including medical and dental premiums) for the year. A Health FSA’s cost equals the sum of the employee’s salary reduction election for the Health FSA and any optional employer flex credits allocated to the FSA. The employee’s salary reduction contributions to the Health FSA are subtracted from the reportable cost.

** Executive physical programs were discussed in PPACA’s legislative history, but are not specifically addressed in Notice 2011-28.

Calculating the Cost of Coverage

IRS Notice 2011-28 provides several methods for calculating the cost of coverage to include on Forms W-2. Employers are not required to use the same method for all plans, but must use the same method for all employees covered under a particular plan. For most employers, the cost will be based on a monthly cost, with a month being a “period” of coverage. The various methods are:

  • The “premium charged” method. This method applies only to insured plans. The cost is equivalent to the premium charged by the insurance company.
  • The “applicable premium” method. Under this method, the employer uses the COBRA “applicable premium” rate (before the 2% administrative charge) for each period of coverage. Most self-insured plans will use this method.
  • The “modified COBRA premium” method. Only employers that subsidize COBRA or base their COBRA premium on the prior year’s COBRA applicable premium may use this method. Employers that subsidize COBRA will report a reasonable good faith estimate of the COBRA applicable premium, and employers base their COBRA premium on the prior year’s applicable COBRA premium will report based on 100% of the prior year’s COBRA applicable premium.
  • The “composite cost” method. Finally, plans with a composite rate may use the composite cost when reporting the cost of coverage. A plan has a composite rate if (1) there is a single class of coverage (i.e., the rate is the same regardless of whether only the employee is covered or the employee enrolls a spouse or dependents), or (2) there are different classes of coverage (single, family, etc.) but the employees are charged the same premium for each type of coverage.

Regardless of the method, the employer must report the cost on a calendar-year basis. If the cost of coverage changes during the year, the reported cost must reflect the premium change. In addition, if an employee changes coverage types or plans during the year, the W-2 reported cost must take into account such changes in coverage.

DOL, IRS and HHS Issue New FAQs on PPACA Interpretive Issues

The DOL, IRS and HHS have issued several sets of Frequently Asked Questions (FAQs) providing interpretative guidance on various PPACA requirements. These are available on the DOL’s website, at A summary of the most recent FAQs (posted in April) is provided below. For highlights of prior FAQs, see our Summary of 2010 Legal Developments in Benefits Law, available at 

Grandfather Plan Anti-Abuse Rules

The interim final grandfather plan regulations contain an anti-abuse rule related to the transfer of employees from one plan (or benefit package) to another. Under this rule, if the terms of the transferee plan are inferior to the terms of the transferor plan in certain respects,1 the transferor plan will lose its grandfathered status unless there is a “bona fide employment-based reason” for the transfer. The FAQ provides a list of circumstances that the agencies believe qualify as a bona fide employment-based reason to transfer employees between plans, including:

  1. When a benefit package is being eliminated because the issuer is exiting the market;
  2. When a benefit package is being eliminated because the issuer no longer offers the product to the employer (for example, because the employer no longer satisfies the issuer’s minimum participation requirement);
  3. When low or declining participation by plan participants in the benefit package makes it impractical for the plan sponsor to continue to offer the benefit package;
  4. When a benefit package is eliminated from a multiemployer plan as agreed upon as part of the collective bargaining process; or
  5. When a benefit package is eliminated for any reason and multiple benefit packages covering a significant portion of other employees remain available to the employees being transferred.

The FAQ stresses that this is a non-exclusive list, and that other circumstances could qualify as a bona fide employment-based reason for a transfer.

Grandfather Plan Guidance on Reclassifying Prescription Drugs within Existing Tiers

The FAQ clarifies that where a grandfathered plan provides prescription drug benefits with different tiers of cost-sharing depending on whether or not a generic alternative to a brand name drug is available, the reclassification of a drug to a higher tier of cost-sharing due to the release of a generic alternative will not cause the plan to lose its grandfathered status.

Guidance related to “Value-Based Insurance Design”

PPACA requires non-grandfathered plans to cover a variety of recommended preventive care services without imposing any cost-sharing requirements. However, plans may use reasonable medical management techniques to control costs, including the use of “value-based insurance designs” (VBIDs). Generally, a VBID is a plan design that provides incentives for participants to utilize higher-value and/or higher-quality services or venues of care. In a previous FAQ, the agencies stated that reasonable medical management techniques could be used to “steer” plan participants towards receiving preventative care services in a particular high-value setting. In the example given, a plan didn’t impose a copayment for colorectal screenings preformed at an in-network ambulatory surgery center, but did charge a copayment for such screenings when performed at an in-network hospital (unless the attending provider determined it would be medically inappropriate for the screening to be provided in an ambulatory setting). The new FAQ clarifies that a plan may add a VBID like the one described above without losing its grandfathered status, even though the new design may result in imposition of a copayment where there was none previously.

Timing of loss of grandfathered status and mid-year amendments

The FAQs also address the timing of loss of grandfathered status, clarifying that grandfathered status ends on the effective date of any amendment making one of the specific changes prohibited for grandfathered plans (as identified in the interim final grandfather plan regulations), even if this is in the middle of a plan year.

Repeal of PPACA Free-Choice Voucher Requirement

The “Budget Compromise” bill, enacted into law on April 14, 2011, included a provision that eliminated PPACA’s free choice voucher program. This program, which was scheduled to go into effect in 2014, would have required most employers that sponsor group health plans to provide certain low-income employees with a “free choice voucher.” Vouchers would have had a value equal to the amount the employer would have paid for the employee’s coverage, and employees could use them to purchase health insurance through an Exchange, receiving any excess amount as taxable income. Employers raised various concerns regarding the voucher program, including adverse selection considerations and concerns over how employee eligibility (which is income-based) would be determined, a key factor leading to its repeal.

Other Health Care Reform Developments

The following are some other recent Health Care Reform developments of note:

•CMS has announced that, effective May 6, 2011, it will no longer accept applications for participation in the Early Retiree Reimbursement Program (ERRP). This does not impact plans that have already been approved for the program. As of March 17, 2011, approximately $1.8 billion of the $5 billion appropriated for the Program had been expended.

•On April 8th, the DOL, IRS and HHS held a public forum on PPACA’s automatic enrollment requirement for health plans maintained by employers with more than 200 full-time employees, a preliminary step in the development of regulatory guidance on this rule. The automatic enrollment requirement will not become effective until after regulations are issued.

•Incremental progress is being made on regulations defining “essential health benefits” (EHBs) under the Health Care Reform law. The definition of EHBs impacts Health Care Reform’s prohibition on annual and lifetime dollar limits for employer-sponsored group health plans, as benefits that aren’t EHBs are generally exempt from this rule. The definition of EHBs will also dictate the scope of benefits that must be covered by insurance offered through the Exchanges starting in 2014. HHS has requested that the Institute of Medicine (IOM) undertake a study and make recommendations on the criteria and methods it should use for determining EHBs. The IOM held meetings in January and March soliciting input from experts and stakeholders on this issue, and the IOM is expected to provide its recommendations to HHS later this year.

•Non-grandfathered plans are subject to new claim and appeal procedure rules under Health Care Reform. Last year, the DOL issued interim final regulations and other technical guidance on these new requirements, and also announced a non-enforcement policy through July 1, 2011 with respect to many of the new requirements. In March, the DOL extended this non-enforcement policy (with some modifications) through the end of the last plan year beginning before January 1, 2012. The DOL’s Technical Release is available at Tech. Rel. 2011-01.

•HHS recently published a set of FAQs on the Community Living Assistance Services and Supports (“CLASS”) program, a voluntary, public, long-term care insurance program created by PPACA. These FAQs provide some clarity on the timing of the CLASS program – HHS is required to announce the details of the program by October 12, 2012, and enrollment will not begin until sometime after HHS issues that guidance. Additionally, the FAQs clarify that employer participation in the CLASS program is voluntary.  Some commentators have questioned the actuarial viability of this program, which must be entirely self-supporting.

•In connection with Health Care Reform’s adult child coverage mandate, PPACA modified the federal Tax Code to make employer-provided health care coverage for an employee’s children under age 27 tax free, regardless of their tax dependent status. Unfortunately, not all state income tax codes automatically conform to changes made to the federal Tax Code, so there is potential disparity between federal and state tax treatment of coverage for adult children in some states. In April, California retroactively amended its state income tax code to conform to the federal Tax Code on this issue. This remains an issue in some states, however.

•Lastly, regulations on PPACA’s uniform benefit summary requirement are expected any day, as HHS’s initial March 2011 deadline for issuing preliminary guidance on this issue has already passed.

Not Intended As Legal Advice.

  1. To qualify for the exception to the strict compliance standard, a de minimis failure must: (a) not cause or be likely to cause prejudice or harm to the claimant; (b) occur in the context of an ongoing, good faith exchange of information; (c) be for good cause or due to matters beyond the plan’s or insurer’s control; and (d) not be part of a pattern or practice of failures by the insurer or plan.