HCR Update: Form W-2 Guidance; State Exchanges

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IRS Issues Additional Guidance on Form W-2 Health Care Coverage Reporting Requirement
The U.S. Internal Revenue Service (IRS) has issued Notice 2012-9 to provide additional guidance on the informational reporting to employees of the cost of their employer-sponsored group health plan coverage on Form W-2.  The IRS requested public comments on the W-2 reporting requirement in Notice 2011-28. Notice 2012-9 responds to these comments and amends, restates and supersedes Notice 2011-28.  Specifically, the new notice includes guidance on the W-2 reporting as it relates to small employers, flexible spending accounts, dental and vision plans, COBRA and health reimbursement arrangements.

Health care cost information will have to be reported on 2012 W-2s, which will be issued in 2013. Under previous IRS guidance, smaller employers -- those that distribute fewer than 250 W-2s in 2011 -- are exempt from this requirement until at least 2014 and possibly longer.

The latest guidance, released Tuesday, makes clear that employers can -- but are not required to -- report contributions to health reimbursement arrangements in calculating health care costs.  In addition, the cost of providing coverage through employee assistance programs, wellness programs or on-site medical clinics is not required to be reported if the employer does not charge premiums for the coverage to COBRA beneficiaries.  The guidance also clarifies that the reporting requirement does not apply to Indian Tribal governments.

The latest guidance also reiterates numerous provisions in last year's guidance, including that that the cost of coverage that is taxable to employees, such as for a child over age 26, must be reported on the W-2, and that contributions employees make to flexible spending accounts are to be excluded from the health care cost figure.

The full 23-page text of the Notice can be found at:
http://www.irs.gov/pub/irs-drop/n-12-09.pdf.


CRS Analyzes Effect of Definition of Income in New Law on State Exchange Premium Credits A new law signed by President Barack Obama (P.L. 112-56) has changed the definition of modified adjusted gross income (MAGI) to include nontaxable Social Security income, for purposes of qualifying for both Medicaid and premium assistance for state exchanges that are being created as per the Patient Protection and Affordable Care Act (PPACA).  According to a report issued by the Congressional Research Service (CRS), this is expected to reduce Medicaid enrollment by between approximately 500,000 to one million people, starting in 2014, although, under the PPACA, certain groups are exempt from income eligibility determinations for Medicaid based on MAGI anyway, including:

• Foster children
• Those receiving Supplemental Security Income (SSI)
• The elderly
• The disabled 
• The medically needy
• Those enrolled in a Medicare Savings Program
• Also, prior to 2014, states are not required to use MAGI when determining Medicaid eligibility for the new mandatory Medicaid eligibility group created by the PPACA, which includes all nonelderly, non-pregnant individuals, such as childless adults, certain parents, and certain people with disabilities, who are not otherwise eligible for Medicaid and are also not entitled to or enrolled in Medicare Part A or Part B.

Those losing Medicaid eligibility could include many early retirees, as well as some people receiving survivor benefits or disability benefits.  Many of those people would, in turn, become eligible for premium assistance and cost sharing subsidies in the new state exchanges, although some people that would have been eligible for premium assistance prior to the enactment of P.L. 112-56 will now no longer be eligible.

The net effect of the new eligibility provisions is expected by the CBO and the Joint Committee on Taxation to increase enrollment in the health exchanges by about 500,000 in any given year between 2014 and 2021.  Changing the definition of MAGI to include all Social Security benefits, both taxable and non-taxable, was also estimated by the CBO to reduce the deficit by three billion dollars over the period of 2012-2016 and by approximately $13 billion from 2012 to 2012.
In its report, the CRS points out that it was the intent of the ACA to make Medicaid eligibility and premium credit eligibility more inclusive and consistent with other low-income programs.  The CRS is warning, however, that the inclusion of non-taxable income besides nontaxable Social Security income, which is something the government is considering, may be administratively cumbersome and expensive, because, unlike non-taxable Social Security income, not all nontaxable income is reported (for informational purposes) on tax returns.  Verification of income for MAGI purposes is streamlined at the moment, but attempting to verify multiple sources of other nontaxable income would presumably be administratively complex.