In April 2011, the IRS issued Notice
2011-28, which furthered delayed the Form W-2 reporting requirement for small
employers and provided interim guidance on the reporting requirement. On Jan.
3, 2012, the IRS issued Notice
2012-9, which revised and clarified the IRS’s interim guidance on
the Form W-2 reporting requirement.

The Form W-2 reporting requirement is optional for small
employers (those that file fewer than 250 Forms W-2) for 2012 and for future
years, unless and until the IRS issues further guidance. Large employers must comply with the reporting requirement starting in
2012 (for the Forms W-2 that must be provided by the end of January
2013).

The IRS’s interim guidance is written in question-and-answer (Q&A)
format and provides information on a variety of issues related to the Form W-2
reporting requirement. Employers and payroll providers may find the information
helpful when updating their systems to comply with the new reporting
requirements. The interim guidance is generally applicable beginning with the
2012 Forms W-2. Employers that voluntarily report the cost of coverage on the
2011 Forms W-2 may also rely on the interim guidance.

This Legislative Brief contains the Q&A interim guidance as
provided by the IRS in Notice 2012-9.

q&A guidance on w-2 reporting

In General

Q-1: What does (Internal Revenue Code) §
6051(a)(14) require?

A-1: Section 6051(a)(14) generally
requires the aggregate cost of applicable employer-sponsored coverage to be
reported on Form W-2.

Q-2: Does the requirement under §
6051(a)(14) to report the aggregate cost of employer-sponsored coverage on Form
W-2, or compliance with this requirement, have any impact on whether such
coverage is taxable?

A-2: No. The requirement is
informational only. The provisions of § 6051(a)(14) do not affect whether any
particular coverage is excludable from gross income under § 106 or any other
Code provision, and the reporting of any amount on Form W-2 in compliance with
the requirements of § 6051(a)(14) will not affect the amount includable in
income or the amount reported in any other box on Form W-2. The purpose of the
reporting is to provide useful and comparable consumer information to employees
on the cost of their health care coverage.

Employers Subject to the Reporting
Requirement

Q-3: What employers are subject to the
reporting requirement under § 6051(a)(14)?

A-3: Except as provided in this
Q&A-3, all employers that provide applicable employer-sponsored coverage
(see Q&A-12) during a calendar year are subject to the reporting
requirement under § 6051(a)(14). This includes employers that are federal,
state and local government entities, churches and other religious
organizations, and employers that are not subject to the COBRA continuation
coverage requirements under § 4980B, to the extent such employers provide
applicable employer-sponsored coverage under a group health plan. (Notice
2010-69, 2010-44 I.R.B. 576, provides that reporting by these employers is not
mandatory prior to the issuance of the 2012 Forms W-2 (the forms required for
the calendar year 2012 that employers generally are required to furnish to
employees by the end of January 2013 and then file with the Social Security
Administration (SSA))).

Employers that are Federally recognized
Indian tribal governments are not subject to the reporting requirements of §
6051(a)(14). Until further guidance is issued, employers that are tribally
chartered corporations wholly-owned by a Federally recognized Indian tribal
government also are not subject to the reporting requirements.

Also, in the case of the 2012 Forms W-2
(and Forms W-2 for later years unless and until further guidance is issued), an
employer is not subject to the reporting requirement for any calendar year if
the employer was required to file fewer than 250 Forms W-2 for the preceding
calendar year. (This rule is based upon the rule in § 6011(e) that exempts
employers from filing returns electronically if they file fewer than 250
returns.) Therefore, if an employer is required to file fewer than 250 2011
Forms W-2, the employer would not be subject to the reporting requirement for
2012 Forms W-2. For this purpose, whether an employer is required to file fewer
than 250 Forms W-2 for a calendar year is determined based on the Forms W-2 that
employer would be required to file if it filed Forms W-2 to report all wages
paid by that employer and without regard to the use of an agent under § 3504.
For example, an employer that would have filed only 100 Forms W-2 for the
previous year had it not used an agent under § 3504 will not be subject to the
reporting requirement for the year, nor will an agent under § 3504 with respect
to that employer’s Forms W-2 for the year. In contrast, if the same employer
would have filed 300 Forms W-2 for the previous year had it not used an agent
under § 3504 of the Code, that employer would be subject to the reporting
requirement for the year so that if an agent under § 3504 is used again the
information will need to be provided to the agent and reported on the Form W-2.

See also Q&A-21 for an exception to
the reporting requirement for coverage under a self-insured plan that is not
subject to any federal continuation coverage requirements and Q&A-22 for an
exception from the reporting requirement for plans maintained primarily for
members of the military, or primarily for members of the military and their
families.

Method of
Reporting on the Form W-2

Q-4: Is the reporting of the aggregate cost
of applicable employer-sponsored coverage required for Forms W-2 issued for the
2010 or 2011 calendar years?

A-4: No. Section 6051(a)(14) does not
apply to Forms W-2 for calendar years prior to 2011 and, accordingly, reporting
of the aggregate cost of applicable employer-sponsored coverage is not required
for Forms W-2 issued for the 2010 calendar year. Moreover, Notice 2010-69
provides that reporting will not be mandatory for the 2011 calendar year and,
accordingly, an employer will not be treated as failing to meet the
requirements of § 6051 for 2011, and will not be subject to any penalties for
failure to meet such requirements, merely because it does not report the
aggregate cost of applicable employer-sponsored coverage on Forms W-2 for 2011.

Q-5: How is the aggregate reportable cost
reported on Form W-2?

A-5: The aggregate reportable cost is
reported on Form W-2 in box 12, using code DD.

Q-6: What rules apply in the case of
coverage provided by the employer to an employee for a period during a calendar
year after that employee has terminated employment?

A-6: An employer may apply any
reasonable method of reporting the cost of coverage provided under a group
health plan for an employee who terminated employment during the calendar year,
provided that the method is used consistently for all employees receiving
coverage under that plan who terminate employment during the plan year and
continue or otherwise receive coverage after the termination of employment.
However, regardless of the method of reporting used by the employer for other
terminated employees, an employer is not required to report any amount in box
12 using Code DD for an employee who, pursuant to §31.6051-1(d)(1)(i), has
requested to receive a Form W-2 before the end of the calendar year during
which the employee terminated employment.

Example 1. Employee is an employee of Employer on January 1,
and continues in employment through April 25. During that entire period and
through April 30, Employee had individual coverage for himself under a group
health plan with a cost of coverage of $350 per month. Employee elects continuation
coverage for the six months following termination of employment, covering the
period May 1 through October 31, for which the Employee pays $350 per month.
Employer reports $1,400 as the reportable cost under the plan for the calendar
year, covering the four months during which Employee performed services and had
coverage as an active employee. Employer applies this method consistently for
all employees terminating during the calendar year who have coverage under that
group health plan. Employer has applied a reasonable method of reporting
Employee’s reportable cost under the plan.

Example 2. Same facts as Example 1, except that Employer
reports $3,500 as the reportable cost under the plan for the calendar year,
covering both the monthly periods during which Employee performed services and
had coverage as an active employee, and the monthly periods during which
Employee retained continuation coverage under the plan. Employer applies this
method consistently for all employees terminating during the calendar year who
retained coverage under that group health plan. Employer has applied a
reasonable method of reporting Employee’s reportable cost under the plan.

Q-7: In the case of an individual who is an
employee of multiple employers within a calendar year, must each employer
provide a Form W-2 reporting the aggregate reportable cost that such employer
provided?

A-7: Each employer providing
employer-sponsored coverage must report the aggregate reportable cost of
coverage it provides. However, if the employers concurrently employ an employee
and are related employers within the meaning of § 3121(s) and one such employer
is a common paymaster within the meaning of § 3121(s) for wages paid to an
employee that is concurrently employed, the common paymaster must include the
aggregate reportable cost of the coverage provided to that employee by all the
employers for whom it serves as the common paymaster on the Form W-2 issued by
the common paymaster. In such case, the related employers that use the common
paymaster and that are not the common paymaster must not report the cost of
coverage they provide. If the employers are related employers within the
meaning of § 3121(s) but do not compensate an employee that is concurrently
employed with a common paymaster, then with respect to that employee, the
related employers may either report the entire aggregate reportable cost on one
of the Forms W-2 provided to the employee, or allocate the aggregate reportable
cost among the employers that concurrently employ the employee using any
reasonable method of allocation.

For employers participating in a
multiemployer healthcare plan, see Q&A-17.

Q-8: In the case of an individual who
transfers to a new employer that qualifies as a successor employer under §
3121(a)(1), must both the predecessor and successor employers report the
aggregate reportable cost of coverage each provided?

A-8: Yes, each of the predecessor and
successor employers must report the aggregate reportable cost of coverage that
that employer provided, unless the successor employer follows the optional
procedure in Rev. Proc. 2004-53, 2004-2 C.B. 320, and issues one Form W-2
reflecting wages paid to the employee during the calendar year by both the
predecessor employer and the successor employer. Consistent with the rules
applicable to reporting of wages, the successor employer following the optional
procedure must include the aggregate reportable cost of coverage provided by
both employers on the Form W-2 that it issues, and the predecessor employer
must not report the cost of coverage it provides.

Q-9: Must an employer issue a Form W-2
including the aggregate reportable cost to an individual to whom the employer
is not otherwise required to issue a Form W-2, such as a retiree or other
former employee receiving no compensation required to be reported on a Form
W-2?

A-9: No. An employer is not required to
issue a Form W-2 reporting the aggregate reportable cost to an individual to
whom the employer is not otherwise required to issue a Form W-2.

Q-10: Is the total of the aggregate
reportable costs attributable to an employer’s employees required to be
reported on Form W-3, Transmittal of Wage and Tax Statements?

A-10: No. The total of the aggregate
reportable costs attributable to an employer’s employees is not required to be
reported on Form W-3, Transmittal of Wage and Tax Statements.

Aggregate
Cost of Applicable Employer-Sponsored Coverage

Q-11: What is the aggregate cost of
applicable employer-sponsored coverage and how is the aggregate cost of
applicable employer-sponsored coverage referred to in this notice?

A-11: The aggregate cost of applicable
employer-sponsored coverage is the total cost of coverage under all applicable
employer-sponsored coverage (as defined in Q&A-12) provided to the
employee. In this notice, the cost of coverage under a group health plan is
referred to as the reportable cost and the aggregate cost of applicable
employer-sponsored coverage is referred to as the aggregate reportable cost.

Q-12: What is applicable employer-sponsored
coverage?

A-12: Applicable employer-sponsored
coverage means, with respect to any employee, coverage under any group health
plan (see Q&A-13) made available to the employee by an employer that is
excludable from the employee’s gross income under § 106, or would be so
excludable if it were employer-provided coverage (within the meaning of such §
106), except that applicable employer-sponsored coverage does not include:

(1)  any coverage for long-term care,

(2)  any coverage (whether through insurance or
otherwise) described in § 9832(c)(1) (other than subparagraph (G) thereof
(coverage for on-site medical clinics)),

(3)  any coverage under a separate policy, certificate,
or contract of insurance which provides benefits substantially all of which are
for treatment of the mouth (including any organ or structure within the mouth)
or for treatment of the eye, and

(4)  any coverage described in § 9832(c)(3) the payment
for which is not excludable from gross income and for which a deduction under §
162(l) is not allowable.

See Q&A-16 through Q&A-23 for
guidance on applicable employer-sponsored coverage that is not required to be
included in the aggregate reportable cost.

Q-13: What is a group health plan?

A-13: A group health plan is a plan
(including a self-insured plan) of, or contributed to by, an employer
(including a self-employed person) or employee organization to provide health
care (directly or otherwise) to the employees, former employees, the employer,
others associated or formerly associated with the employer in a business
relationship, or their families. Until further guidance is issued, for purposes
of identifying whether a specific arrangement is a group health plan, taxpayers
may rely upon a good faith application of a reasonable interpretation of the
statutory provisions and applicable guidance, including §54.4980B-2, Q&A-1.

Q-14: Does the aggregate reportable cost
include both the portion of the cost paid by the employer and the portion of
the cost paid by the employee?

A-14: Yes. The aggregate reportable cost
generally includes both the portion of the cost paid by the employer and the
portion of the cost paid by the employee, regardless of whether the employee
paid for that cost through pre-tax or after-tax contributions. However, see
Q&A-19 regarding contributions to a health FSA.

Q-15: Does the aggregate reportable cost
include any portion of the cost of coverage under an employer-sponsored group
health plan that is includible in the employee’s gross income, for example, the
cost of coverage for a person other than an employee, the spouse of the
employee, a dependent of the employee, or a child of the employee (provided
that child will not have attained age 27 by the end of the taxable year)?

A-15: Yes. The aggregate reportable cost
includes the cost of coverage under the employer-sponsored group health plan of
the employee and any person covered by the plan because of a relationship to
the employee, including any portion of the cost that is includible in an
employee’s gross income. Thus, the aggregate reportable cost is not reduced by
the amount of the cost of coverage included in the employee’s gross income. For
the treatment of coverage included in gross income under § 105(h), or payments
or reimbursements of health insurance premiums for a 2% shareholder-employee of
an S corporation who is required to include the premium payments in gross
income, see Q&A-23.

Example. An employee has family health coverage under an
employer-sponsored group health plan for himself, his spouse and dependents,
and an adult child age 28, with a cost of coverage of $15,000. The fair market
value of the health coverage for the adult child age 28 is included in the
income and wages of the employee. The aggregate reportable cost with respect to
the family health coverage is $15,000.

Cost of Coverage Required to be
Included in the Aggregate Reportable Cost

Q-16: Is the cost of coverage under all
applicable employer-sponsored coverage required to be included in the aggregate
reportable cost?

A-16: Except as provided in this Q&A
and in Q&A-17 through Q&A-23, the cost of coverage under all applicable
employer-sponsored coverage must be included in the aggregate reportable cost.
However, the following amounts are not included in the aggregate reportable
cost and are not reported under § 6051(a)(14)1[1]:

(1)  the amount contributed to any Archer MSA (as defined
in § 220(d)),

(2)  the amount contributed to any Health Savings Account
(as defined in § 223(d)), and

(3)  the amount of any salary reduction election to a
health Flexible Spending Arrangement (FSA)(within the meaning of §§ 106(c)(2)
and 125).

Q-17: Is the cost of coverage under a
multiemployer plan (as defined in § 54.4980B-2, Q&A-3) required to be
included in the aggregate reportable cost reported on Form W-2?

A-17: No. An employer that contributes
to a multiemployer plan is not required to include the cost of coverage
provided to an employee under that multiemployer plan in determining the
aggregate reportable cost. If the only applicable employer-sponsored coverage
provided to an employee is provided under a multiemployer plan, the employer is
not required to report any amount under § 6051(a)(14) on the Form W-2 for that
employee.

Q-18: Is the cost of coverage under a
Health Reimbursement Arrangement (HRA) required to be included in the aggregate
reportable cost reported on Form W-2?

A-18: No. An employer is not required to
include the cost of coverage under an HRA in determining the aggregate
reportable cost. If the only applicable employer-sponsored coverage provided to
an employee is an HRA, the employer is not required to report any amount under
§ 6051(a)(14) on the Form W-2 for that employee.

Q-19: If an employer offers a health FSA
through a § 125 cafeteria plan, is the amount of the health FSA required to be
included in the aggregate reportable cost reported on Form W-2?

A-19: Yes, the amount of the health FSA
is required to be included in the aggregate reportable cost reported on Form
W-2, but only if the amount of the health FSA for the plan year exceeds the
salary reduction elected by the employee for the plan year. The amount of a
health FSA for a cafeteria plan year equals the amount of salary reduction (as
defined in Proposed Treas. Reg. §1.125-1(r)) elected by the employee for the
plan year, plus the amount of any optional employer flex credits (as defined
under Proposed Treas. Reg. §1.125-5(b)) that the employee elects to apply to
the health FSA. In determining the aggregate reportable cost, the amount of the
health FSA is reduced (but not below zero) by the employee’s salary reduction
election (see Q&A-16).

If the amount of salary reduction (for
all qualified benefits) elected by an employee equals or exceeds the amount of
the health FSA for the plan year, the employer does not include the amount of
the health FSA for that employee in the aggregate reportable cost. However, 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 that employee’s
health FSA minus the employee’s salary reduction election for the health FSA
must be included in the aggregate reportable cost and reported under §
6051(a)(14).

For purposes of this Q&A-19, a
health FSA means an FSA (as defined in Proposed Treas. Reg. §1.125-5(a)) that
is a medical reimbursement arrangement.

Example 1: Employer maintains a § 125 cafeteria plan that
offers permitted taxable benefits (including cash) and qualified nontaxable
benefits (including a health FSA). The plan permits contributions only through
employee salary reduction elections, and does not offer any employer flex credits.
Employee makes a $2,000 salary reduction election for several qualified
benefits under the plan, including a health FSA for $1,500. For purposes of
reporting on Form W-2, none of the health FSA amount is included for purposes
of determining the aggregate reportable cost.

Example 2: Employer maintains a § 125 cafeteria plan that
offers permitted taxable benefits (including cash) and qualified nontaxable
benefits (including a health FSA). The plan offers an employer flex credit of
$1,000. Employee makes a $2,000 salary reduction election for several qualified
benefits under the plan, including a health FSA for $1,500. The cost of the
qualified benefits for Employee under the plan for the year is $3,000. The
amount of Employee’s salary reduction election ($2,000) for the plan year
equals or exceeds the amount of the health FSA ($1,500) for the plan year.
Thus, for purposes of reporting on Form W-2, none of the health FSA amount is
permitted to be included for purposes of determining the aggregate reportable
cost.

Example 3: Employer maintains a § 125 cafeteria plan that
offers permitted taxable benefits (including cash) and qualified nontaxable
benefits (including a health FSA). The plan offers a flex credit in the form of
a match of each employee’s salary reduction contribution. Employee makes a $700
salary reduction election for a health FSA. Employer provides an additional
$700 to the health FSA to match Employee’s salary reduction election. The
amount of the health FSA for Employee for the plan year is $1,400. The amount
of Employee’s health FSA ($1,400) for the plan year exceeds the salary
reduction election ($700) for the plan year. The employer must include $700
($1,400 health FSA amount minus $700 salary reduction) in determining the
aggregate reportable cost.

Q-20: Is the cost of coverage under a
dental plan or a vision plan included in the aggregate reportable cost if that
plan satisfies the requirements for being excepted benefits for purposes of
HIPAA under §54.9831-1(b)(3)?

A-20: No. An employer is not required to
include the cost of coverage under a dental plan or a vision plan if the plan
satisfies the requirements for being excepted benefits for purposes of HIPAA
under §54.9831-1(b)(3). (Generally, to be excepted benefits for purposes of HIPAA
under §54.9831-1(b)(3), the dental or vision benefits must either (1) be
offered under a separate policy, certificate, or contract of insurance (that
is, not offered under the same policy, certificate, or contract of insurance
under which major medical or other health benefits are offered) or (2)
participants must have the right not to elect the dental or vision benefits and
if they do elect the dental or vision benefits they must pay an additional
premium or contribution for that coverage.) An employer must include the cost
of coverage under a dental plan or a vision plan if the plan does not satisfy
the requirements for being excepted benefits for purposes of HIPAA under
§54.9831-1(b)(3).

Q-21: Is the cost of coverage provided
under a self-insured group health plan that is not subject to any federal
continuation coverage requirements (for example, a church plan within the
meaning of § 4980B(d)(3) that is a self-insured group health plan) required to
be included in the aggregate reportable cost reported on Form W-2?

A-21: No. An employer is not required to
include in the aggregate reportable cost the cost of coverage provided under a
self-insured group health plan that is not subject to any federal continuation
coverage requirements. If the only group health plan coverage provided to an
employee by the employer is provided under a self-insured group health plan
that is not subject to any federal continuation coverage requirements, the
employer is not required to report any amount under § 6051(a)(14) on the Form
W-2 for that employee. Employers who provide coverage under a self-insured
group health plan that is subject to Federal continuation coverage requirements
must report the cost of coverage on Form W-2. For this purpose, federal
continuation coverage requirements include the COBRA requirements under the
Code, the Employee Retirement Income Security Act of 1974, or the Public Health
Service Act and the temporary continuation coverage requirement under the
Federal Employees Health Benefits Program.

Q-22: Is the cost of coverage provided by
the Government of the United States, the government of any State or political
subdivision thereof, or any agency or instrumentality of any such government,
under a plan maintained primarily for members of the military or for members of
the military and their families, required to be included in the aggregate
reportable cost reported on Form W-2?

A-22: No. The cost of coverage provided
by the Government of the United States, the government of any State or
political subdivision thereof, or any agency or instrumentality of any such
government, under a plan maintained primarily for members of the military or
for members of the military and their families, is not required to be included
in the aggregate reportable cost reported on Form W-2

Q-23: In determining the aggregate
reportable cost, how should an employer treat an excess reimbursement of a
highly compensated individual that is included in gross income under § 105(h),
or payments or reimbursements of health insurance premiums for a 2%
shareholder-employee of an S corporation who is required to include the premium
payments in gross income?

A-23: The cost of applicable
employer-sponsored coverage does not include excess reimbursements of highly
compensated individuals that are included in gross income under § 105(h); that
is, an excess reimbursement that is included in income is subtracted from the
cost of coverage in determining the aggregate reportable cost. Similarly, the
cost of applicable employer-sponsored coverage does not include the cost of
coverage taken into income as the result of an employee being a 2%
shareholder-employee of an employer that is an S corporation. For more
information regarding the treatment of the employer payment or reimbursement of
health insurance premiums for a 2% shareholder-employee, see Notice 2008-1,
2008-1 C.B. 251.

Example: Employer provides self-insured health coverage
with a cost of coverage of $12,000 under which a highly compensated individual
receives a $4,000 excess reimbursement. As a result, under § 105(h), that
individual must include the $4,000 excess reimbursement in gross income. The
excess reimbursement is not included in the determination of the aggregate
reportable cost, so that Employer must include $8,000 as the cost of coverage
under the plan in determining the aggregate reportable cost for that
individual.

Methods of
Calculating the Cost of Coverage

Q-24: How may an employer calculate the
reportable cost under a plan?

A-24: An employer may calculate the
reportable cost under a plan using the COBRA applicable premium method
(Q&A-25). Alternatively, (1) an employer that is determining the cost of
coverage for an employee covered by the employer’s insured plan may calculate
the reportable cost using the premium charged method (Q&A-26); and (2) an
employer that subsidizes the cost of coverage or that determines the cost of
coverage for a year by applying the cost of coverage in a prior year may
calculate the reportable cost using the modified COBRA premium method (Q&A-27).
For employers that charge employees a composite rate (the same premium for
different types of coverage under a plan, for example, a premium for self-only
coverage versus family coverage), see Q&A-28.

The reportable cost for an employee
receiving coverage under the plan is the sum of the reportable costs for each
period (such as a month) during the year as determined under the method used by
the employer. An 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.

Q-25: How does an employer calculate the
reportable cost for a period under the COBRA applicable premium method?

A-25: Under the COBRA applicable premium
method, the reportable cost for a period equals the COBRA applicable premium
for that coverage for that period. If the employer applies this method, the
employer must calculate the COBRA applicable premium in a manner that satisfies
the requirements under § 4980B(f)(4). Under current guidance, the COBRA
applicable premium calculation would meet these requirements if the employer
made such calculation in good faith compliance with a reasonable interpretation
of the statutory requirements under § 4980B (see §54.4980B-1, Q&A-2).

Q-26: How does an employer calculate the
reportable cost for a period under the premium charged method?

A-26: The premium charged method may be
used to determine the reportable cost only for an employee covered by an
employer’s insured group health plan. In such a case, if the employer applies
this method, the employer must use the premium charged by the insurer for that
employee’s coverage (for example, for self-only coverage or for family
coverage, as applicable to the employee) for each period as the reportable cost
for that period.

Q-27: How does an employer calculate the
reportable cost for a period under the modified COBRA premium method?

A-27: An employer may use the modified
COBRA premium method with respect to a plan only where it subsidizes the cost
of COBRA (so that the premium charged to COBRA qualified beneficiaries is less
than the COBRA applicable premium) or where the actual premium charged by the
employer to COBRA qualified beneficiaries for each period in the current year
is equal to the COBRA applicable premium for each period in a prior year. If
the employer subsidizes the cost of COBRA, the employer may determine the
reportable cost for a period based upon a 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. If
the actual premium charged by the employer to COBRA qualified beneficiaries for
each period in the current year is equal to the COBRA applicable premium for
each period in a prior year, the employer may use the COBRA applicable premium
for each period in the prior year as the reportable cost for each period in the
current year.

Example 1: For the calendar year 2012, Employer A subsidizes
50% of a reasonable good faith estimate of the COBRA applicable premium.
Employer A’s reasonable good faith estimate of the COBRA applicable premium for
self-only coverage for each month in 2012 is $300. Accordingly, the actual
COBRA premium Employer A charges individuals eligible for COBRA continuation
coverage electing self-only coverage is $150 per month. Solely for purposes of
§ 6051(a)(14) reporting, if Employer A uses the modified COBRA premium method,
it must treat $300 per month (the reasonable good faith estimate of the COBRA
applicable premium) as the monthly reportable cost for self-only coverage for
the calendar year 2012.

Example 2: Employer B determined that the COBRA applicable
premium for each month in calendar year 2011 for individuals eligible for COBRA
continuation coverage electing self-only coverage would be $350 per month, and
charged an actual COBRA premium for such coverage of $357 per month ($350 x
102%). Employer B knows that the cost of coverage for 2012 is not less than the
COBRA applicable premium for 2011 and decides not to make a new determination
of the COBRA applicable premium for the calendar year 2012 but rather to
continue to charge an actual COBRA premium for self-only coverage of $357 per
month ($350 x 102%). Solely for purposes of § 6051(a)(14) reporting, if
Employer B uses the modified COBRA premium method, it must treat $350 per month
($357 charged – $7 increase permissible under COBRA) as the monthly reportable
cost for self-only coverage for the calendar year 2012.

Example 3: Employer C makes a good faith estimate of the
COBRA applicable premium for the calendar year 2012 for individuals eligible
for COBRA continuation coverage electing self-only coverage of $500 per month.
To ensure compliance with the COBRA requirements despite not calculating a precise
COBRA applicable premium, Employer C charges an actual COBRA premium of $350
per month for individuals eligible for COBRA coverage electing self-only
coverage. Solely for purposes of § 6051(a)(14) reporting, if Employer C uses
the modified COBRA premium method, it must treat $500 per month as the monthly
reportable cost for self-only coverage for the calendar year 2012.

Other
Issues Relating to Calculating the Cost of Coverage

Q-28: How may an employer charging an
employee a composite rate calculate the reportable cost for a period?

A-28: An employer is considered to
charge employees a composite rate if (1) there is a single coverage class under
the plan (that is, if an employee elects coverage, all individuals eligible for
coverage under the plan because of their relationship to the employee are
included in the elections and no greater amount is charged to the employee
regardless of whether the coverage will include only the employee or the
employee plus other such individuals), or (2) there are different types of
coverage under a plan (for example, self-only coverage and family coverage, or
self-plus-one coverage and family coverage) and employees are charged the same
premium for each type of coverage. In such a case, the employer using a
composite rate may calculate and use the same reportable cost for a period for
(1) the single class of coverage under the plan, or (2) all the different types
of coverage under the plan for which the same premium is charged to employees,
provided this method is applied to all types of coverage provided under the
plan.

For example, if a plan charges one
premium for either self-only coverage, or self-and-spouse coverage (the first
coverage group), and also charges one premium for family coverage regardless of
the number of family members covered (the second coverage group), an employer
may calculate and report the same reportable cost for all of the coverage
provided in the first coverage group, and the same reportable cost for all of
the coverage provided in the second coverage group. In such a case, the
reportable costs under the plan must be determined under one of the methods
described in Q&A-25 through Q&A-27 for which the employer is eligible.

If an employer is using a composite rate
for active employees, but is not using a composite rate for determining
applicable COBRA premiums for qualifying beneficiaries, the employer may use
either the composite rate or the applicable COBRA premium for determining the
aggregate cost of coverage, provided that the same method is used consistently
for all active employees and is used consistently for all qualifying
beneficiaries receiving COBRA coverage.

Q-29: If the reportable cost for a period
changes during the year, must the reportable cost under the plan for the year
for an employee reflect the increase or decrease?

A-29: If the cost for a period changes
during the year (for example, under the COBRA applicable premium method because
the 12-month period for determining the COBRA applicable premium is not the
calendar year), the reportable cost under the plan for an employee for the year
must reflect the increase or decrease for the periods to which the increase or
decrease applies. For examples of the application of this rule, see Q&A-30.

Q-30: How is the reportable cost under a plan
calculated if an employee commences, changes or terminates coverage during the
year?

A-30: 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. If the change in coverage occurs during a
period (for example, in the middle of a month where costs are determined on a
monthly basis), an employer may use any reasonable method to determine the
reportable cost for such period, such as using the reportable cost at the
beginning of the period or at the end of the period, or averaging or prorating
the reportable costs, provided that the same method is used for all employees
with coverage under that plan. Similarly, if an employee commences coverage or
terminates coverage during a period, an employer may use any reasonable method
to calculate the reportable cost for that period, provided that the same method
is used for all employees with coverage under the plan.

The following examples illustrate the
principles set forth in Q&A-29 and Q&A-30:

Example 1: Employer determines that the monthly reportable
cost under a group health plan for self-only coverage for the calendar year
2012 is $500. Employee is employed by employer for the entire calendar year
2012, and had self-only coverage under the group health plan for the entire
year. For purposes of reporting for the 2012 calendar year, Employer must treat
the 2012 reportable cost under the plan for Employee as $6,000 ($500 x 12).

Example 2: Employer determines that the monthly reportable
cost under a group health plan for self-only coverage for the period October 1,
2011 through September 30, 2012 is $500, and that the monthly reportable cost
under a group health plan for self-only coverage for the period October 1, 2012
through September 30, 2013 is $520. Employee is employed by employer for the
entire calendar year 2012 and had self-only coverage under the group health
plan for the entire year. For purposes of reporting for the 2012 calendar year,
Employer must treat the 2012 reportable cost under the plan for Employee as
$6,060 (($500 x 9) + ($520 x 3)).

Example 3: Employer determines that the monthly reportable
cost under a group health plan for self-only coverage for the calendar year
2012 is $500, and that the monthly reportable cost under the same group health
plan for self-plus-spouse coverage for the calendar year 2012 is $1,000.
Employee is employed by Employer for the entire calendar year 2012. Employee
had self-only coverage under the group health plan from January 1, 2012 through
June 30, 2012, and then had self-plus-spouse coverage from July 1, 2012 through
December 31, 2012. For purposes of reporting for the 2012 calendar year,
Employer must treat the 2012 reportable cost under the plan for Employee as
$9,000 (($500 x 6) + ($1,000 x 6)).

Example 4: Employer determines that the monthly reportable
cost under a group health plan for self-only coverage for the calendar year
2012 is $500. Employee commences employment and self-only coverage under the
group health plan on March 14, 2012, and continues employment and self-only
coverage through the remainder of the calendar year. For purposes of reporting
for the 2012 calendar year, Employer treats the cost of coverage under the plan
for Employee for March 2012 as $250 ($500 x ½). Because Employer’s method of
calculating the reportable cost of under the plan for March 2012 by prorating
the reportable cost for March 2012 to reflect Employee’s date of commencement
of coverage is reasonable, Employer must treat the 2012 reportable cost under
the plan for Employee as $4,750 (($500 x ½) + ($500 x 9)).

Q-31: If an employer has used a 12-month
determination period that is not the calendar year for purposes of applying the
COBRA applicable premium under a plan, may the employer also use that 12-month
determination period for purposes of calculating the reportable cost for the
year under the plan?

A-31: No. The reportable cost under a
plan must be determined on a calendar year basis. For rules on translating the
COBRA applicable premium to a calendar year amount, see Q&A-29 and
Q&A-30.

Additional Issues

Q-32: Is the cost of coverage provided under
an employee assistance program (EAP), wellness program, or on-site medical
clinic required to be included in the aggregate reportable cost reported on
Form W-2?

A-32: Coverage provided under an EAP,
wellness program, or on-site medical clinic is only includible in the aggregate
reportable cost to the extent that the coverage is provided under a program
that is a group health plan for purposes of § 5000(b)(1). An employer is not
required to include the cost of coverage provided under an EAP, wellness program,
or on-site medical clinic that otherwise would be required to be included in
the aggregate reportable cost reported on Form W-2 because it constitutes
applicable employer-sponsored coverage, if that employer does not charge a
premium with respect to that type of coverage provided to a beneficiary
qualifying for coverage in accordance with any applicable federal continuation
coverage requirements. If an employer charges a premium with respect to that
type of coverage provided to a beneficiary qualifying for coverage in
accordance with any applicable federal continuation coverage requirements, that
employer is required to include the cost of that type of coverage provided. An
employer that is not subject to any federal continuation coverage requirements is
not required to include the cost of coverage provided under an EAP, wellness
program, or on-site medical clinic. For this purpose, federal continuation
coverage requirements include the COBRA requirements under the Code, the
Employee Retirement Income Security Act of 1974, or the Public Health Service
Act and the temporary continuation coverage requirement under the Federal
Employees Health Benefits Program.

Q-33: Are there circumstances in which an
employer may include in the aggregate reportable cost reported on Form W-2 the
cost of coverage that is not required to be included in the aggregate
reportable cost under applicable interim relief?

A-33: Yes. An employer may include in
the aggregate reportable cost the cost of coverage that is not required to be
included in the aggregate reportable cost under applicable interim relief, such
as the cost of coverage under a Health Reimbursement Account (HRA), a
multi-employer plan, an EAP, wellness program, or on-site medical clinic,
provided that the calculation of the cost of coverage otherwise meets the
requirements of Q&A-24 through Q&A-27, and provided that such coverage
constitutes applicable employer-sponsored coverage.

Q-34: How may an employer calculate the
reportable cost under a program providing benefits that constitute applicable
employer-sponsored coverage and other benefits that do not constitute
applicable employer-sponsored coverage, such as a long-term disability program
that also provides certain health care benefits?

A-34: For a program under which an
employee receives benefits that constitute applicable employer-sponsored
coverage and other benefits that do not constitute applicable
employer-sponsored coverage, an employer may use any reasonable allocation
method to determine the cost of the portion of the program providing applicable
employer-sponsored coverage.

If the portion of the program providing a benefit
that is applicable employer-sponsored coverage is only incidental in comparison
to the portion of the program providing other benefits, the employer is not
required to include either portion of the cost in the aggregate reportable
cost. Similarly, if the portion of the program providing a benefit that is not
applicable employer-sponsored coverage is only incidental to the portion of the
program providing a benefit that is applicable employer-sponsored coverage, the
employer may, at its option, include the benefit that is not applicable

For example, we have a client that has more than 100 employees; however, more than 70 are enrolled in a dental plan with a carrier written with one group number and more than 70 are enrolled in a dental plan with a carrier with another group number. Would the plan have to file a Form 5500 since they do not have more than 100 members in one particular option?

A: Welfare plans with 100 or more participants in the plan (not employees in the company) are required to file a
Form 5500.

If employees have choices among a number of health providers (as appears to be the case here),
these are considered options for one health care plan. If the number of
employees who may elect all the options totals 100 or more, then a Form 5500
will have to be completed.

For example, if there are 80 employees covered under the employer’s basic insured major medical
plan, 19 enrolled in a group practice HMO, and three in an IPA HMO, the total
of 102 will call for a Form 5500 to be filed, along with three Schedule As.

If the total number of participants in the basic plan and HMO(s) combined is less than 100,
a 5500 filing is not required.

In the example from the question, if the approximately 140 participants can choose either dental
plan, a Form 5500 would be required.

New York will operate its own exchange, rather than have the federal government operate one for the state, given the complexity and diversity of the insurance market in New York.

“This legislation would fulfill New York’s commitment to the federal government to set up a health benefit exchange that will enhance access to affordable quality health care for all New Yorkers,” Governor Cuomo said. “This is a dynamic and flexible proposal that will protect consumers and help bring down the cost of health care for families, businesses, and taxpayers.”

The purpose of this legislation is to establish a single Exchange in New York – a centralized, customer-service oriented marketplace where individuals and small groups will be able to purchase qualified health plans, receive eligibility and subsidy determinations, and be enrolled in a range of coverage options, including public health coverage programs.

The Exchange will be established as a public benefit corporation managed by a Board of Directors. Four of the seven members of the Board will have expertise in relevant areas, including individual health care coverage, small employer health care coverage, health benefits administration, health care finance, public or private health care delivery systems, and purchasing health plan coverage. The Superintendent of Insurance (or after October 3, 2011, the Superintendent of the Department of Financial Services), the Commissioner of Health, and the State Medicaid Director will serve as ex officio members of the board.

The Board will consult with an Advisory Committee, comprised of 18 representatives of stakeholders and sectors that will be impacted by the operation of the Exchange, including health care consumers, small businesses, the medical community, and insurers. The Committee’s advice to the Board will reflect findings about regional variations regarding the availability of health insurance coverage and other issues deemed necessary by the Committee and the Board.

The Exchange will make available health plans, including certain qualified dental plans, to individuals and employers beginning on or before January 1, 2014. Under this legislation, the Exchange will establish the minimum requirements an insurer shall meet to be considered for participation in the Exchange and will implement procedures for the certification, recertification, and decertification of health plans as qualified health plans. The Exchange will also assign ratings to qualified health plans offered through the Exchange on the basis of relative quality and price, in accordance with the ACA.

The bill also provides critical protections meant to assist individuals in using the Exchange. For example, the bill provides that the Exchange will operate a toll-free telephone line to assist consumers and an Internet website containing standardized comparative information on qualified health plans. The website will also feature a calculator allowing individuals to determine the actual cost of coverage. The bill also requires the Exchange to establish a program to award grants to entities to serve as “navigators” to help educate consumers and facilitate enrollment.

In addition, the Exchange will include a Small Business Health Options Program (SHOP), which will assist small employers in facilitating the enrollment of their employees in qualified health plans offered in the group market.

While the ACA requires each Exchange to be “self-sustaining” by January 1, 2015, federal funds will support the planning, implementation, and operation of the Exchange through December 2014. New York has already been selected to receive funding under an Early Innovator Grant ($27 million) and an Exchange Planning Grant ($1 million).

In June, the New York State Department of Health expects to apply for a Level 1 Establishment Grant, which makes a year’s worth of funding available to states that have made some progress under their Exchange Planning Grant. With the enactment of this legislation, assuming other applicable criteria are met, New York will qualify to apply for additional federal funding to support Exchange planning and establishment through December 31, 2014.

Source: State of New York, Office of the Governor, Press Release, June 13, 2011).

A: Your Health Savings Account (HSA) is your account; the HSA dollars are your dollars. Since you are the account holder or HSA beneficiary, you manage your HSA account. You may choose when to use your HSA dollars or when not to use your HSA dollars. HSA dollars pay for any eligible expense. Most commonly, the HSA account holder will use HSA dollars to pay the out-of-pocket expenses (i.e., deductible and coinsurance) associated with their high deductible health plan.   

 Q: What expenses are eligible for reimbursement from my HSA?

A: HSA dollars may be used for qualified medical expenses incurred by the account holder and his or her spouse and dependents. Qualified medical expenses are outlined within IRS Section 213(d). In summary the IRS Section 213(d) states that “the expense has to be primarily for the prevention or alleviation of a physical or mental defect or illness.” 

In addition to qualified medical expenses, the following insurance premiums may be reimbursed from an HSA:

-    COBRA premiums

-    Health insurance premiums while receiving unemployment benefits

-    Qualified long-term care premiums*

-    Any health insurance premiums paid, other than for a Medicare supplemental policy, by individuals ages 65 and over

Q:Are dental and vision care qualified medical expenses under an HSA?
A: Yes, as long as these are deductible under the current rules. For example, cosmetic procedures, like cosmetic dentistry, would not be considered qualified medical expenses.

 Q:What expenses are NOT eligible for reimbursement from my HSA?

A:The following expenses may not be reimbursed from an HSA:

-    Premiums for Medicare supplemental policies

-    Expenses covered by another insurance plan

-    Expenses incurred prior to the date the HSA was established

-    Over-the-counter drugs purchased without a prescription (except insulin)

Q:What is a coverage gap?

A:This is the gap between total out-of-pocket expenses associated with your high-deductible health plan and your HSA dollars. For example, assume that you have a $2,000 deductible, a $4,000 maximum out-of-pocket, and either you or your employer has contributed $2,000 to your HSA account. If your medical costs incurred exceed $4,000 for the year, then you are financially obligated to pay the difference between your total maximum out-of-pocket ($4,000) and your HSA balance ($2,000) – ($4,000 – $2,000 = $2,000).* 

Q:What happens when my HSA funds run out?

A:You may be financially responsible for any eligible medical expenses that fall within the coverage gap.

Q:Can I use my HSA dollars for non-eligible expenses?

A:Money withdrawn from an HSA account to reimburse non-eligible medical expenses is taxable income to the account holder and is subject to a 20 percent tax penalty – unless over age 65, disabled or upon death of the account holder. 

Q: When can I start using my HSA dollars?

A:You can use your HSA dollars immediately following your HSA account activation and once contributions have been made.

Q: When do I contribute to my HSA account, and how often can I?

A: You, your employer or others can contribute to your HSA account through payroll deductions or as a lump sum deposit.* You can contribute as often as you like, provided your (and your employer’s) total annual contributions do not exceed these 2010/2011 limits:

-    $3,050 for individual coverage

-    $6,150 for family coverage

Individuals that are age 55 or older may be eligible to make “catch-up” contributions up to $1,000.

Q: How do I pay my physician or network facility at time of service with my HSA dollars?

A: You may request that the network provider submit your claim to your health plan. You should make sure that your provider has your most up-to-date insurance information. Once the medical claim has been processed, if applicable, out-of-pocket expenses will be billed.  At this time you may choose to use your HSA debit card or HSA check* to pay for any out-of-pocket expenses, or you may choose to pay with your own money and receive reimbursement at a later date. You should always ask that your medical claim be submitted to the health plan before you seek reimbursement from your HSA. This procedure will ensure that provider discounts are applied. Also, remember to keep all medical receipts and Explanation of Benefits (EOBs).

Q: What if I have HSA dollars left in my account at year-end?

A: The money is yours to keep. It will continue to earn interest and will be available for you and your health care costs next year. 

Q: How do my remaining HSA dollars rollover at year-end?

A: Any dollars left in your HSA account at year-end will automatically roll over into next year’s HSA account.*

Q: What happens to my HSA dollars if I leave my employer?

A: The funds are yours to keep. You may elect one of the following options:

-    Leave your funds in the current HSA account

-    Transfer your funds to an HSA with your new employer

-    Transfer your funds to another qualifying account within 60 days

Q: Can my HSA dollars be used for retirement health care costs?

A: Yes, only for expenses eligible for reimbursement.

Q: Can I use the money in my account to pay for my dependents’ medical expenses?

A: You can use the money in the account to pay for medical expenses of yourself, your spouse or your dependent children. You can pay for expenses of your spouse and dependent children even if they are not covered by your HDHP.

Q: Can couples establish a “joint” account and both make contributions to the account, including “catch-up” contributions?

 
A:“Joint” HSA accounts are not permitted. Each spouse should consider establishing an account in their own name. This allows you to both make catch-up contributions when each spouse is 55 or older.

Q: My employer offers an FSA – can I have both an FSA and an HSA?

A: You can have both types of accounts, but only under certain circumstances. General Flexible Spending Accounts (FSAs) will probably make you ineligible for an HSA. If your employer offers a “limited purpose” (limited to dental, vision or preventive care) or “post-deductible” (pay for medical expenses after the plan deductible is met) FSA, then you can still be eligible for an HSA.

Q: Can I shift my IRA funds to my HSA?

A: Owners of individual retirement accounts that are enrolled in a high-deductible health plan can shift IRA funds to an HSA without facing a tax penalty. The IRS allows a one-time transfer that does not exceed your maximum HSA contribution limit.

Q: Can I borrow against the money in my HSA?
A: No. You may not borrow against it or pledge the funds in it. For more information on prohibited activities, see Section 4975 of the Internal Revenue Code.

Q: Can the funds in an HSA be invested?

 
A: Yes, you can invest the funds in your HSA. The same types of investments permitted for IRAs are allowed for HSAs, including stocks, bonds, mutual funds and certificates of deposit.

 * May vary depending on HSA plan design and benefit plan design.  Refer to your Summary Plan Description or HR administrator for specifics pertaining to your plan.

This Benefit Management Solutions Inc. Legislative Brief provides answers to commonly-asked questions regarding administration of the FMLA’s rules.

Can an employee take leave as intermittent or reduced leave under the FMLA?

Yes. Under the FMLA, employees may take leave in several ways. Continuous leave, such as several weeks in a row, may be the most common type of leave taken by employees. In certain circumstances, however, leave can be taken intermittently or on a fixed schedule. Intermittent leave is taken in separate blocks (for example, from an hour up to several weeks) rather than continuously. A reduced leave schedule reduces the usual number of hours per workweek or hours per workday of an employee. In general, intermittent leave or a reduced leave schedule can be taken for the birth, adoption, or foster placement of an employee’s child only if the employer agrees.

Intermittent or reduced leave can also be used to care for a spouse, child, parent, for the employee’s own serious health condition or for a covered servicemember if it is medically necessary and such medical need can be best accommodated through an intermittent or reduced leave schedule. If an employee requests intermittent leave or a reduced leave schedule that is foreseeable based on planned medical treatment, an employer may require an employee to transfer temporarily to an available alternative position. The employee must be qualified for the alternative position; the position must provide equivalent pay and benefits (though not equivalent duties); and the position must better accommodate recurring periods of leave than the employee’s regular position.

Intermittent or reduced leave can also be used because of any qualifying exigency which arises as a result of an employee’s spouse, son, daughter or parent serving on covered active military duty.

When an employee takes FMLA leave on an intermittent or reduced leave schedule basis, the employer must account for the leave using an increment no greater than the shortest period of time that the employer uses to account for use of other forms of leave. However, this period cannot be greater than one hour and an employee’s FMLA leave entitlement may not be reduced by more than the amount of leave actually taken. Nonetheless, where it is physically impossible for an employee using intermittent leave or working a reduced leave schedule to commence or end work mid-way through a shift (such as a flight attendant), the entire period that the employee is forced to be absent is designated as FMLA leave and counts against the employee’s FMLA entitlement.

Are employers responsible for designating FMLA leave?

Yes. Employers are responsible for designating any leave taken as FMLA leave and for notifying an employee of the designation. This should take place within five business days of an employer’s learning that the leave is being taken for an FMLA purpose, absent extenuating circumstances. The designation notice to the employee must be in writing.  A prototype designation notice may be obtained from local offices of the DOL Wage and Hour Division or online at www.wagehour.dol.gov. Only one notice is required in the case of intermittent leave or leave on a reduced schedule for each FMLA-qualifying reason per applicable 12-month period.

When an employer wants to substitute an employee’s paid leave for unpaid FMLA leave or count paid leave under an existing leave plan as FMLA leave, the decision must be made within five business days of the time an employee gives notice of a need for leave, unless the employer does not have sufficient information to determine that the paid leave qualifies as FMLA leave. If the employer learns that leave is for an FMLA purpose after leave has begun, the paid leave may be retroactively counted to the extent it qualifies as FMLA leave, provided that the employer’s failure to timely designate leave does not cause harm or injury to the employee. In all cases where leave would qualify for FMLA protections, an employer and an employee can mutually agree that leave be retroactively designated as FMLA leave.

Any dispute over whether paid leave qualifies as FMLA leave should be resolved through discussions between the employer and the employee. Documentation of those discussions and the decision is required by the FMLA.

How do temporary disability plans fit within the FMLA?

Employees who are absent and receiving benefits under a temporary disability plan or are out on workers’ compensation are not on unpaid leave and, therefore, the FMLA substitution of paid leave rules do not apply. Nevertheless, such absences which qualify as serious health conditions may be designated as FMLA leave. The leave would be counted as running concurrently for purposes of the benefit plan, workers’ compensation and FMLA. However, employers and employees may agree, where state law permits, to have paid leave supplement the disability plan or workers’ compensation benefits, such as in the case where a plan only provides replacement income for two-thirds of an employee’s salary.

Does “light duty” affect an employee’s right to FMLA leave?

If an employee is certified as able to return to work in a light duty job, but is unable to return to the same or equivalent job, the employee has the option of declining to return and remaining on unpaid FMLA leave until the 12 week FMLA entitlement period is exhausted. This decision may result in the loss of workers’ compensation benefits, at which point the provision for substitution of paid leave becomes applicable.  Either the employer may require or the employee may elect the use of accrued paid leave.

Voluntary offering and acceptance of light duty does not count against the employee’s FMLA entitlement and does not reduce an employee’s right to restoration to the same or an equivalent position. The right to restoration is held in abeyance during the period of time the employee performs a light-duty assignment. That right is not unlimited and ceases at the end of the applicable 12-month FLMA leave year.  Restoration is dependent on the employee’s ability to perform the essential functions of the same or equivalent position at the end of FMLA leave.

Under the FMLA, must an employer keep track of an employee’s hours of service?

If a covered employer fails to keep accurate records of the hours an employee works, the employer has the burden of clearly demonstrating the employee has not worked the requisite hours, or the employee will be presumed to have worked the necessary 1,250 hours for purposes of FMLA eligibility.

Does the age of a child being adopted or placed for foster care affect an employee’s right to FMLA leave?

When leave is for placement for adoption or foster care, the child must be under age 18 or, if older, incapable of self-care because of a mental or physical disability at the time the FMLA leave begins.

 Is psychological care an appropriate reason for an employee to take FMLA leave?

Leave taken to care for a child, spouse, parent or covered service member who has a serious health condition can include the giving of psychological comfort and reassurance which would be beneficial if that person is receiving either inpatient or home care.

What are secondary employers’ job restoration responsibilities under the FMLA?

As secondary employers, clients of agencies providing temporary help are under an explicit duty to accept an employee returning from FMLA leave in place of the replacement employee if the client continues to utilize the agencies’ employees. A client is also responsible for compliance with the prohibited acts provisions of the FMLA (e.g., prohibits interfering with employee’s exercise of rights under the FMLA, etc.) with respect to its jointly employed employees, whether or not the agency is covered by the FMLA.

Do holidays and temporary closings subtract from FMLA leave?

A week that contains a holiday has no effect on counting FMLA leave usage – it is counted as a week of FMLA leave. However, if an employee is using FMLA leave in increments of less than one week, the holiday will not count against the employee’s FMLA entitlement unless the employee was otherwise scheduled and expected to work during the holiday. Similarly, when an employer’s business activities temporarily cease, such as a plant closing for repairs or a school closing for summer vacation, and employees are generally not expected to report for work for one or more weeks, that time cannot be counted against an employee’s FMLA leave entitlement.

Does the FMLA affect public employees’ compensatory time?

Under the Fair Labor Standards Act (FLSA), an employer always has the right to cash out an employee’s compensatory time or to require the employee to use the time. Thus, if an employee requests and is permitted to use accrued compensatory time to receive pay for time taken off for an FMLA reason, or if the employer requires such use pursuant to the FLSA, the time taken may be counted against the employee’s FMLA leave entitlement.

Must an employer maintain an employee’s health benefits while the employee is on FMLA leave?

A covered employer is required to maintain group health insurance coverage for an employee on FMLA leave on the same terms as if the employee had continued to work. However, an employee may choose not to retain group health plan coverage while on FMLA leave.  When the employee returns from leave, though, the employee is entitled to be reinstated on the same terms as prior to taking the leave. The employee cannot be required to re-qualify or meet any other conditions prior to being reinstated to the group health plan.

Must an employer restore an employee to his/her job after FMLA leave?

Upon return from FMLA leave, an employee must be restored to the employee’s original job, or to an equivalent job with equivalent pay, benefits, and other terms and conditions of employment. Under specified and limited circumstances where restoration to employment will cause substantial and grievous economic injury to its operations, an employer may refuse to reinstate certain highly paid “key” employees after using FMLA leave during which health coverage was maintained. In order to do so, the employer must:

• Notify the employee in writing of his/her status as a “key” employee in response to the employee’s notice of intent to take FMLA leave, or when FMLA leave commences, if earlier;
• Notify the employee in writing in person or by certified mail as soon as the employer decides it will deny job restoration, and explain the reasons for this decision;
• Offer the employee a reasonable opportunity to return to work from FMLA leave after this notice; and
• Make a final determination as to whether reinstatement will be denied if the employee requests restoration at the end of the leave period, and notify the employee in writing in person or by certified mail of the determination.

A “key” employee is a salaried “FMLA eligible” employee who is among the highest paid ten percent within 75 miles of the worksite.

A predecessor employer’s employee who begins FMLA leave before a successor employer takes over must be restored to employment by the successor. Additionally, secondary employers, including clients of temporary agencies, must accept the same temporary employee upon the employee’s return from FMLA leave if the secondary employer continues to utilize an employee from the temporary agency and the temporary agency still provides the employee to the employer.

Who enforces the FMLA?

The Wage and Hour Division of the U.S. Department of Labor investigates FMLA complaints.  If violations cannot be satisfactorily resolved, the U.S. Department of Labor may bring an action in court to compel compliance.  Individuals may also bring a separate private civil action against an employer for violations. Complaints or actions can be filed within two years of the last violation or within three years if the violation was willful.

Under the FMLA, can an employer cancel an employee’s health insurance for lack of premium payment?

Employers must notify an employee on FMLA leave before health care coverage is dropped for lack of premium payments. Generally, an employer must provide written notice to the employee at least 15 days before coverage is to cease, that the payment has not been received and that coverage will be dropped on a date that is at least 15 days after the date of the letter unless payment has been received by that date. Nonetheless, upon the employee’s return from FMLA leave, the employer must still unconditionally restore the employee to the same coverage and benefits the employee would have had if leave had not been taken and the employee’s share of the premium payments had not been missed. Thus, if the employer pays the employee’s share in order to maintain health coverage, an employer may generally recover the employee’s share of any premium payments which the employer paid while the employee was on FMLA leave.

Does a COBRA qualifying event occur if an employee does not return from FMLA leave?

The taking of leave under the FMLA is not a qualifying event under COBRA.  However, a qualifying event occurs if an employee (or the employee’s spouse or dependent child) is covered on the day before the first day of FMLA leave (or becomes covered during the FMLA leave) under a group health plan of the employee’s employer, the employee does not return to work at the end of the FMLA leave, and the employee (or the employee’s spouse or dependent child) would, in the absence of COBRA continuation coverage, lose coverage under the group health plan before the end of the maximum coverage period (generally 18 months).  The COBRA qualifying event occurs on the last day of FMLA leave.  In general, the maximum coverage period is measured from the last day of FMLA leave.

A COBRA qualifying event also occurs on the date an employee, either before starting FMLA leave or while currently on FMLA leave, notifies the employer that s/he will not be returning to work.  Additionally, if coverage under a group health plan is lost at a later date and the plan provides for the extension of the required periods, COBRA coverage begins on the date when group health coverage is actually lost.

Must an employer grant pay increases and bonuses to an employee on FMLA leave?

Employees are entitled to any unconditional pay increases (cost of living) that occur during FMLA leave. Pay increases conditioned on seniority, length of service, or work performed are subject to the employer’s policies or practices for other employees on an equivalent leave status for a reason that does not qualify as FMLA leave.

Further, if a bonus or other payment is based on the achievement of a specified goal, such as hours worked, products sold or perfect attendance, and the employee has not met the goal due to FMLA leave, then the payment may be denied, unless otherwise paid to employees on an equivalent leave status for a reason that does not qualify as FMLA leave. For example, if an employee who used paid vacation leave for a non-FMLA purpose would receive the payment, then the employee who used paid vacation leave for an FMLA-protected purpose also must receive the payment.

Is an employee entitled to other benefits while on FMLA leave?

An employee may, but is not entitled to accrue any additional benefits or seniority during unpaid FMLA leave.  An employee’s entitlement to benefits such as holiday pay is to be determined by the employer’s established policy for providing such benefits when an employee is on other forms of leave, such as paid or unpaid, as appropriate.  However, at the end of an employee’s FMLA leave, benefits must be resumed in the same manner and at the same levels as provided when the leave began, though the employee is subject to any changes in benefit levels that may have taken place during the period of FMLA leave affecting the entire workforce.  Upon return from FMLA leave, the employee cannot be required to re-qualify for any benefits the employee enjoyed before the leave began.

How is servicemember family leave limited in a single 12-month period?

During a single 12-month period, an eligible employee may only take a combined total of 26 workweeks of leave for the birth/adoption/foster care of a son or daughter, to care for a family member with a serious health condition, because of the serious health condition of an employee, any qualifying exigency, and to care for a covered servicemember. The 12-month period to be used for purposes of tracking this leave begins when the employee starts using his or her leave. An employee is not entitled to more than 26 weeks of FMLA leave during the 12-month period that begins with the need for leave. Nonetheless, an employee may take 26 weeks of leave in consecutive 12-month periods for family members covered by the provision since it is applied on a per-covered-servicemember, per-injury basis.

More than half of U.S. employers have made the switch to self-insuring as a way to reduce costs and improve service. Self-insuring or self-funding is not right for every organization. Employers considering a switch from fully-funded to self-funded health plans should analyze the advantages and disadvantages before making the switch. This article describes self-insured plans, including the pros and cons of such plans, and helps you decide if self-insurance is the right choice for your health care benefits.

 About Self-Insurance

 What is self-insurance?

According to the Self-Insurance Institute of America, Inc., “a self-insured group health plan (or a self-funded plan as it is also called) is one in which the employer assumes the financial risk for providing health care benefits to its employees. In practical terms, self-insured employers pay for each out-of-pocket as they are incurred instead of paying a fixed premium to an insurance carrier, which is known as a fully-insured plan. Typically, a self-insured employer will set up a special trust fund to earmark money (corporate and employee contributions) to pay incurred claims.” Employers can be partially or fully self-insured. Employers that choose to partially self-fund, may decide, for example, to continue third-party coverage of mental health or prescription benefits, but self-fund all other medical claims.

 Self-insured group health plans are governed by all federal laws including, but not limited to: ERISA, HIPAA, COBRA, the U.S. tax code and federal anti-discrimination laws such as the ADA.

 Is self-insurance common?

According to the 2009 Kaiser Family Foundation Employer Health Benefits Survey, 57 percent of all U.S. companies partially or completely self–fund their health care plans. Eighty-eight percent of employers with 5,000 or more workers self-fund or partially self-fund their health benefits plan. Self-insurance for employers with under 200 employees is also prevalent (15 percent according to the Kaiser survey), but these employers usually require greater stop-loss insurance protection than the larger employers.

 What benefits can I self-insure?

-Health care (indemnity, PPO, POS, and HMO only if large enough group)

-Dental

-Short-term disability (STD)

-Prescription drugs

-Vision care

 What benefits should not be self-insured?

-Any life insurance benefits, including AD&D and travel accident

-Long-term disability (LTD) –unless coverage is for a very large group

 Advantages of self-insurance

The primary reasons employers site for self-insuring are:

1. Reduced insurance overhead costs. Carriers assess a risk charge for insured policies (approximately 2 percent annually), but self-insurance removes this charge.

2. Reduced state premium taxes. Self-insured programs, unlike insured policies, are not subject to state premium taxes. The premium tax savings is about 2-3 percent of the premium dollar value.

3.  Avoidance of state-mandated benefits. Although both insured and self-insured plans are governed by Federal law (predominantly ERISA), self-insured plans are exempt from state insurance laws. State benefit mandates can add to the cost of insured employer benefit programs. For multi-state employers, self-funding can help create national consistency by elimination of the need for state-by-state compliance.

4. Employer control. Employers who want to revise insured benefits and the levels of coverage are free from state regulations that may mandate coverage and the carrier negotiation typically required with changes in coverage. By self-funding, employers are able to design their own customized health benefit packages.

5. Employers see improved cash flow since they do not have to pre-pay for coverage.  There is also a cash flow advantage in the year of adoption when “run-out” claims are being covered by the prior insurance policy. Employers pay for claims rather than premiums and earn interest income on any unclaimed reserves. Payments made by employees for their coverage are made through payroll deduction and held by the employer until claims become due and payable or put into a tax-free, employer-controlled trust if the being used as reserves.

6. Choice of claim administrator.  An insured policy can be administered only by the insurance carrier. A self-insured plan can be administered by the company, an insurance company or independent third party administrator (TPA), which gives the employer greater choice and flexibility. When selecting a TPA, employers should consider whether the TPA efficiently handles claims, has contacts with stop-loss carriers, has a strong reputation, cost management skills, and negotiating clout, has medical expertise on staff, and whether the TPA provides excellent customer service and claims administration.

 Disadvantages of self-insurance

The primary disadvantage of self-insurance is the assumption of greater risk. A year that brings large unexpected medical claims requires that the company has the financial resources to meet its obligations. This unpredictability puts greater demands on budgeting and cash flow. Budgeting is more difficult because health care expenses will vary from year to year, whereas with a fully insured plan, employers know how much they will pay in premiums in a given year.

 Self-insured plans also require strong administrative skills. Self-insured employers can either administer claims in-house, or subcontract the administrative obligations to a third-party administrator. TPAs can help employers set up their self-insured group health plans and coordinate stop-loss coverage, provider network contracts and utilization review services. Some of the additional administrative duties associated with self-insurance may include: monitoring the plan; determining premium rate equivalents for budgeting purposes; administering employee contributions; filing annual reports, day-to-day administration of the plan; establishing a trust to fund the group insurance plan; and setting up cash reserves to offset claim run-out liability.

 Making the Decision

 When deciding if self-funding is right for your organization, make sure that you consider the following best practices to ensure that your self-funding strategy is appropriate and effective.

 1. Evaluate Stop-Loss Coverage  Most self-insured employers purchase stop-loss insurance on their self-insured health care benefit plans to reduce the risk of large individual claims or high claims for the entire plan.  The employer self-insures claims up to the stop-loss attachment point, which is the dollar amount above which claims will be reimbursed by the stop-loss carrier. Obtain stop-loss quotes at several different levels. There are two types of stop-loss insurance: individual/specific and aggregate.

 Individual/Specific Stop-Loss Insurance

This type of stop-loss coverage shifts responsibility for a claim to the insurer once it exceeds a certain dollar amount. Specific stop-loss protects the employer against large, individual health care claims.

 Example: $25,000/plan participant per year attachment point.

The attachment point is reapplied each year, like a benefit plan annual deductible.  Specific stop-loss attachment points can run from $5,000 to $500,000, depending on the employer’s size and risk tolerance.

 Aggregate Stop-Loss Insurance

The insurer assumes responsibility once the total amount of claims for all employees reaches a specific threshold. Aggregate stop-loss insurance protects the employer against high total claims for the health care plan.

Example: 125 percent of expected total annual claims attachment point. The attachment point is recalculated each year and is expressed on a per employee basis to compensate for any change in the number of covered employees.

Example: $4,500/employee attachment point.

Aggregate stop-loss typically is carried at 125 percent of expected annual claims, but can range from 105 percent to 150 percent of expected annual claims.

 2. Understand the volume and nature of your employee health claims for the past five years Knowing facts such as whether your workforce is mostly young or old, whether the majority of claims were due to chronic illnesses or one-time incidents, and the total dollar amount of claims will help you budget for claims in the future. Self-funding should be viewed as a long-term strategy in which good and bad years average out in the employer’s favor.

 3. Cash flow analysis Self-insured plans work best for companies that have a strong cash flow or reserves. Understand what your cash needs are, so you have money available to make timely claim payments.

4. Administration Decide whether it makes sense to administrate the plan internally or through a TPA. If you decide that it is best for your organization to use a TPA, make sure you factor TPA fees into your decision to self-insure. Obtain several different TPA quotes. Your TPA should offer a strong plan for monitoring the plan.

5. Coverage goals Decide on such things as eligibility, benefit coverage, exclusions, cost-sharing, policy limits and retiree benefits. Weigh the self-insured plan advantages of flexibility and lower average cost versus the increased risk and administrative responsibilities.

Q. How are the rules changing for reimbursing the cost of over-the-counter medicines and drugs from health flexible spending arrangements (health FSAs) and health reimbursement arrangements (HRAs)?A. Section 9003 of the Affordable Care Act established a new uniform standard for medical expenses. Effective Jan. 1, 2011, distributions from health FSAs and HRAs will be allowed to reimburse the cost of over-the-counter medicines or drugs only if they are purchased with a prescription. This new rule does not apply to reimbursements for the cost of insulin, which will continue to be permitted without a prescription.

Q. How are the rules changing for distributions from health savings accounts (HSAs) and Archer Medical Savings Accounts (Archer MSAs) that are used to reimburse the cost of over-the-counter medicines and drugs?A. In accordance with Section 9003 of the Affordable Care Act, only prescribed medicines or drugs (including over-the-counter medicines and drugs that are prescribed) and insulin (even if purchased without a prescription) will be considered qualifying medical expenses and subject to preferred tax treatment.

Q. When will the changes become effective?A. The changes are effective for purchases of over-the-counter medicines and drugs without a prescription after Dec. 31, 2010. The changes do not affect purchases of over-the-counter medicines and drugs in 2010, even if they are reimbursed after Dec. 31, 2010.

Q. How do I prove that I have purchased an over-the-counter medicine or drug with a prescription so that I can get reimbursed from my employer’s health FSA or an HRA?A. If your employer’s health FSA or HRA reimburses these expenses, you would provide the prescription (or a copy of the prescription or another item showing that a prescription for the item has been issued) and the customer receipt (or similar third-party documentation showing the date of the sale and the amount of the charge). For example, documentation could consist of a customer receipt issued by a pharmacy that reflects the date of sale and the amount of the charge, along with a copy of the prescription; or it could consist of a customer receipt that identifies the name of the purchaser (or the person for whom the prescription applies), the date and amount of the purchase, and an Rx number.

Q. How does this change affect over-the-counter medical devices and supplies?A. The new rule does not apply to items for medical care that are not medicines or drugs. Thus, equipment such as crutches, supplies such as bandages, and diagnostic devices such as blood sugar test kits will still qualify for reimbursement by a health FSA or HRA if purchased after Dec. 31, 2010, and a distribution from an HSA or Archer MSA for the cost of such items will still be tax-free, even without a prescription.

Q. Will I need a prescription to use my health FSA, HRA, HSA or Archer MSA funds for insulin purchases after Dec. 31, 2010?A. No. You can continue to use your health FSA, HRA, HSA or Archer MSA funds to purchase insulin without a prescription after Dec. 31, 2010.

Q. I use health FSA funds for my copays and deductibles. Will I still be able to reimburse those expenses with health FSA funds after Dec. 31, 2010?A. Yes. Copays and deductibles continue to be reimbursable from a health FSA after Dec. 31, 2010. Similarly, funds from an HRA can continue to be used for these expenses and a distribution from an HSA or Archer MSA for these purposes will be tax-free.

Q. My company gives me two extra months beyond the end of the year to submit claims for health FSA expenses incurred during the year. What happens if I purchase over-the-counter medicines or drugs without a prescription in 2010 but do not submit the claim for those expenses until January 2011? Will they qualify for reimbursement?A. Yes. The new restriction on plan reimbursements for the cost of over-the-counter drugs without a prescription applies only to purchases that are made after 2010.

Q. My company’s health FSA includes a provision for a grace period, so that if I don’t spend all of the money in my health FSA by Dec. 31, I can still use the amount left at the end of the year to reimburse expenses I incur during the first 2 ½ months of the following year. If I buy over-the-counter medicines or drugs without a prescription during the 2 ½ month grace period of 2011, can I still use the amount left in my health FSA from 2010 to reimburse those expenses?A. No. The change applies to any purchases made on or after Jan. 1, 2011. Thus, even if your employer’s plan includes the 2 ½ month grace period provision, the cost of over-the-counter medicines and drugs purchased without a prescription during that grace period in 2011 will not be eligible to be reimbursed by a health FSA.

Q. If my health FSA or HRA issues a debit card that I use to pay for over-the-counter medicines or drugs, will I still be able to use the card to purchase over-the-counter medicines or drugs after Dec. 31, 2010?A. Generally, yes, if you have a prescription for the medicine or drug. For expenses incurred in 2010, you may continue to use an FSA or HRA debit card to purchase over-the-counter medicines or drugs (whether or not you have a prescription) at pharmacies and from mail order and web-based vendors that sell prescription drugs. Starting after Jan. 15, 2011, you may continue to use an FSA or HRA debit card to purchase over-the-counter medicines or drugs at these vendors, so long as you obtain a prescription for the medicine or drug, the prescription is presented to the pharmacist, and the medication is dispensed by the pharmacist and given an Rx number.

For further information, including guidance on purchases of over-the-counter medicines and drugs from health care providers other than pharmacies and mail order and web-based vendors (such as physicians or hospitals), see IRS Notice 2011-5. For guidance on debit card purchases at “90 percent pharmacies,” see IRS Notice 2010-59.

Q. If I use HSA or Archer MSA funds to reimburse the cost of over-the-counter medicines or drugs purchased after Dec. 31, 2010, without a prescription, what taxes will I incur?A. If you have an HSA or Archer MSA, the amount of the distribution for expenses that are not qualifying medical expenses will be includable in your gross income and subject to an additional tax of 20 percent.

There is a trend among American businesses to shift costs from employers to employees, by increasing copayments, coinsurance, and deductibles. Many Americans are already distracted by financial strains, which are affecting their work performance and overall health. To combat this reaction, companies are offering extensive wellness programs aiming to decrease health risks, increase productivity and job satisfaction.