IRPAC Seeks More Clarity in Guidance on Employer Reporting Requirements

Dear Commissioner Shulman:

The Information Reporting Program Advisory Committee (IRPAC)¹ was established in 1991 as a result of an administrative recommendation contained in the final conference report for the Omnibus Budget Reconciliation Act of 1989. The recommendation suggested that the Internal Revenue Service (IRS) consider "the creation of an advisory group of representatives from the payer community and practitioners interested in the Information Reporting Program (IRP) to discuss improvements to the system."

The IRPAC thanks the Service for timely releasing IRS Notice 2011-28 (interim guidance on informational reporting to employees on the cost of their group health insurance coverage). This Notice answers many questions and provides welcome transition relief. However, there are a number of areas where additional clarifications or relief is needed, which we address more fully below.

• Health Flexible Spending Accounts (FSA). Add an example for a typical FSA arrangement and, to the extent possible, streamline the existing examples.

• Definition of Applicable Employer-Sponsored Coverage. Clarify the interplay between Q&A-12 and Q&A-15 of the Notice and permit the 2% COBRA administrative fee to not be taken into account.

• Health Reimbursement Arrangement (HRA). Permit (but do not require) a reasonable good faith cost estimate to be used for HRAs.

• Self-Funded Dental and Vision Coverage. Clarify that "integrated" refers to the HIPAA definition.

• Hospital Indemnity Plans. Clarify the treatment of hospital indemnity plans that are provided on a pre-tax basis.

• Sick Pay Reporting. Extend the transition relief to include sick pay providers.

• Former Employees. Extend the transition relief to include any former employee, regardless of whether or not he or she is receiving a W-2.

• Amended W-2. Limit the need to issue a W-2c in the event that the "DD" amount was determined in accordance with a reasonable good faith standard.

Q&A 19 (Notice 2011-28), Example 1 is confusing and if the key point is that none of the health FSA amount is taken into account for purposes of determining the aggregate reportable cost if none of the employer flex credit applies to the health FSA, the example can be streamlined. Moreover, we recommend that another example is needed (either in the Notice or the FAQs) that addresses a typical health FSA arrangement, as follows:

Proposed Example -- An employer offers a premium conversion plan, allowing employees to pay for the major medical plan through salary reduction. The amount of salary reduction for the major medical plan depends on the tier of coverage selected by the employee. The employer also offers a health FSA. No employer credits are provided to the health FSA. The health FSA is funded only through salary reduction. For purposes of reporting on Form W-2, none of the health FSA amount is taken into account for purposes of determining the aggregate reportable cost, regardless of the amount of salary reduction elected for the major medical plan.

2. Definition of Applicable Employer-Sponsored Coverage

Q&A-12 of the Notice appears to conflict with Q&A-15. Q&A-12 defines applicable employer-sponsored coverage as coverage under a health plan that is excludable from the employee's income under § 106, or would be so excludable if it were employer-provided coverage (within the meaning of § 106). Q&A-15 provides that the aggregate reportable cost includes any portion of the cost that is includable in an employee's gross income. The interplay between these two provisions should be clarified. For example, is coverage that is imputed as wages required to be counted? Also, please clarify that the cost of applicable employer-sponsored coverage can exclude COBRA's 2% administration charge.

3. Health Reimbursement Arrangement (HRA)

It would be helpful if IRS stated that while employers are not required to report the value of a health reimbursement arrangement during the transitional relief period, employers can make a reasonable good faith effort to calculate a value and include the HRA cost in the total cost reported, if they so choose.

After the transitional relief period ends, IRS should continue to permit employers to use a reasonable good faith effort to calculate an HRA value.

4. Dental and Vision Coverage

Q&A-20 of the Notice provides transition relief for dental and vision plans that are not integrated into a group health plan. It would be helpful if the Service used the terminology from HIPAA for the definition of "excepted benefits." HIPAA provides a clear definition of what is not an "integral part" of a group health plan.

5. Hospital Indemnity Plans

The questions and answers posted on the IRS website exclude certain types of coverage from the definition of applicable employer-sponsored coverage. One type is coverage only for a specified disease or illness and hospital indemnity or other fixed indemnity insurance, if the employee pays the premiums on an after-tax basis. Clarification is needed as to whether the Service intends for these indemnity plans to be included in the aggregate reporting if they are paid on a pre-tax basis.

6. Sick Pay Reporting

Many employers use third party sick pay providers to handle W-2s for short term and/or long term disability payments. However, there has been no guidance as to whether this reporting obligation extends beyond the "employer." This issue is further complicated by the election between the third party insurance provider and the employer where the provider actually files the Forms W-2 under their EIN. Moreover, sick pay providers are not prepared from a systems standpoint to meet any W-2 health care reporting requirement, and are particularly disadvantaged by the fact that these providers generally do not have access to data regarding the various types of health coverage that the employer is providing to these employees. Therefore, at a minimum, we request that the transition relief be extended to include sick pay providers from having to comply with these provisions.

After the transitional relief period ends, IRS should continue to exempt sick pay providers from this reporting requirement.

7. Former Employee Reporting

Q&A-9 of the Notice should be modified to provide that, at least during the transition period, employers that continue to issue a Form W-2 to a former employee are not required to report the cost of the health coverage. The fact that a former employee is receiving nonqualified deferred compensation, severance pay, group term life insurance, or some other amount that constitutes wages following termination of employment should not trigger this new reporting requirement. The burdens involved with complying with this new provision (as this data is often not available to health care providers and system changes are costly and time consuming) outweigh the benefit to these former employees.

After the transitional relief period ends, IRS should continue to permit employers to exclude former employees from this reporting requirement.

8. Amended W-2

At least during the transition relief period, provide that a calculation of the cost of heath coverage under a reasonable, good faith standard does not require that a W-2c be issued to correct the amount of this reporting. In the event that an insurance company provides rebates of premiums, provide that no Forms W-2c will be required.

After the transitional relief period ends, IRS should continue to permit employers to avoid W-2c reporting for reasonable, good faith errors with this reporting requirement.