Included as part of the Patient Protection and Affordable Care Act (PPACA) (signed into law by President Obama on March 23, 2010) was new IRC Section 6051(a)(14). A very small change to a preexisting code section and subsection, the one line addition imposes new Form W-2 information reporting requirements for employers. Under the new requirement, employers must include on Form W-2 the value of group health insurance coverage to the employee.
A Series of Delays
The new requirements were originally planned to take effect beginning with the 2011 tax year and employers were preparing to include this additional information on forms required for calendar year 2011 (which they would be required to provide to employees in January 2012). Yet in October 2010, the IRS issued Notice 2010-69 and delayed the effective date by making compliance optional for the 2011 tax year. Under Notice 2010-69, forms to be provided in 2013 would need to include the new data. Then, in March 2011, the IRS issued Notice 2011-28 to further delay implementation of the requirement for small business owners; that is, those filing fewer than 250 W-2 forms. The recent notice also makes the W-2 requirements optional for the 2012 calendar year forms, and this optional treatment for small employers continues until further notice.
Rumors Abound and Snopes Sets It Straight
After the new reporting requirement was announced, rumors almost immediately started flying that now employer health insurance benefits would be treated taxable income to the employee. There was nothing in the legislation to suggest that these benefits were to be treated differently. IRC Section 106A states that employer-provided health coverage is not taxable to employees. Guidance regarding the requirement has also stated that the reporting is merely a way to verify medical coverage for the mandates under the PPACA. However, that did not stop commentators from surmising that the requirement to report coverage was a slippery slope that would lead to taxation of employer-provided benefits. (The individual mandate of the PPACA provides that everyone who can afford coverage, except undocumented immigrants and excluding valid exemptions on religious grounds, must have insurance or pay a penalty of $695 or 2.5 percent of annual income.)
Among others who tried to clear the air on this issue was Snopes.com, the website dedicated to setting the record straight on urban legends and internet rumors. Snopes.com reported in May 2010 that "[t]his is another case of a legislative issue which has a kernel of truth to it, but which has been misinterpreted, affects only a small percentage of the population, and has misleadingly been blown out of proportion through someone's mistaken assumption that it applies to everyone." See http://www.snopes.com/politics/taxes/hr3590.asp. What are in fact affected, and will be subject to taxation as a result of the new reporting requirement, are high coverage employer-provided health care plans. These so called "Cadillac" health care plans will be subject to a hefty excise tax if they exceed certain thresholds.
Excise Tax on Cadillac Health Plans Set for 2018
Under Title XI, Section 9001 of the PPACA, effective January 1, 2018, plan administrators or insurers will be charged a 40 percent excise tax if the total value of the employer-sponsored health coverage is above $10,200 for a single person, or $27,500 per family. See IRC Section 4980I. These amounts will be indexed annually for inflation. High cost employer-sponsored health coverage plans are familiarly known as "Cadillac" health plans. The new Form W-2 reporting requirements are a mechanism for enforcing this new limitation on "Cadillac" health plans, which are often cited as a source of unnecessary and high health care expenses. The excise tax itself is imposed on the insurer, not on the insured or the employer. It is expected that insurers will reduce premiums below the threshold subject to the tax. Employers may also find other ways to compensate employees, rather than providing high coverage health care benefits.
Where We Are Now
Interim guidance for those employers who decide to voluntarily comply with the new reporting requirements was offered earlier this year in Notice 2011-28. Comments were solicited from the IRS until July 2011, and many interested parties have commented on this interim guidance to seek changes and clarifications. (See "Payroll Group Seeks Changes to Guidance on Reporting of Employer-Provided Healthcare Coverage, Tax Notes Today (July 29, 2011); "University Asks for Clarification on Calculating Value of Employer-Provided Healthcare Coverage," Tax Notes Today (May 27, 2011).) Per the interim guidance, the disclosure amount is calculated similar to how COBRA continuation premiums are calculated. See Notice 2011-28.
The mandates for employer and individual health insurance under the PPACA, which were the impetus for the reporting requirement of IRC Section 6051(a)(14), are controversial and are being challenged in federal courts. More than 25 states, and a number of organizations and individuals, have brought suit to challenge the mandates in federal court. Thus far, courts are split and thus far the U.S. Supreme Court has not granted certiorari on this issue. See Florida v. United States HHS, 2011 U.S. App. LEXIS 16806 (Aug. 12, 2011) (11th Circuit struck down the individual mandate provision of the PPACA as unconstitutional in violation of the Commerce Clause). But see Thomas More Law Ctr. v. Obama, 2011 U.S. App. LEXIS 13265 (June 29, 2011) (6th Circuit upheld the constitutionality of the statute's individual mandates).
This commentator views the Form W-2 reporting requirement as an informational requirement only, and does not believe the recording of the value of an employee's benefits will lead to their ultimate taxation, absent other revisions to the Internal Revenue Code. With the exception of "Cadillac" health plans, no tax will currently be imposed upon the employee's benefits under the PPACA requirements. With the circuits who have addressed the constitutionality of the mandates thus far split, and with additional appeals pending in other federal circuits, the time may be ripe for the U.S. Supreme Court to address the constitutionality of the mandates overall. If the mandates are held unconstitutional, the need and administrative burden involved in reporting the value of employer-provided health benefits may not be sufficient to continue requiring this information on an employee's Form W-2.
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The U.S. Supreme Court granted certiorari to determine the constitutionality of the Patient Protection and Affordable Care Act (PPACA). Oral arguments are scheduled for March 2012. A decision is expected by July 2012. Stay tuned for more on this important development.