Interesting COBRA Implications, and Silver Lining, Are in New W-2 Reporting Guidance

Lynda Noggle, Esq. of Proskauer Rose LLP

New guidance on a group health coverage reporting requirement raises some important issues regarding COBRA coverage and provides a silver lining for employers, who should be able to use their current COBRA premiums to determine the reportable cost of health coverage — making the new burden of this requirement a little easier to bear, according to Lynda M. Noggle, Esq, an associate in the Washington, D.C. law office of Proskauer Rose LLP.

In January, the IRS issued updated and expanded guidance on the health reform requirement that employers report on employees’ W-2s the cost of group health coverage (IRS Notice 2012-9). Following are two of several issues involving COBRA coverage that can be found in the guidance. First, most employers that provide group health coverage during a year are subject to the reporting requirement, although there are some exceptions. Notably, employers that are not required to provide COBRA coverage are still subject to the reporting requirement as long as they provide group health coverage. However, the following employers are exempt: (1) those that are required to file fewer than 250 Form W-2s for the preceding calendar year; and (2) those that provide only self-insured group health coverage that is not subject to COBRA’s coverage rules.

If an employer maintains more than one type of group health coverage, then the reporting requirement still does not apply to any coverage provided under a self-insured group health plan that is not subject to COBRA. The requirement may apply; however, to the other types of group health coverage maintained by the employer.

As a result, employers that are not subject to COBRA need to consider whether they may be subject to the reporting requirement. Nevertheless, it seems likely that most smaller employers not subject to COBRA will also be exempt from the rule.

Second, the cost of health coverage that is to be reported on Form W-2s is the aggregate cost of that coverage, which is determined under rules similar to those for determining the COBRA “applicable premium.” The new guidance actually provides three methods for calculating the reportable cost of coverage:

1. The premium charged method is available only to employers with insured group health plans, and does not refer to COBRA premiums. Under this method, employers use the actual premium charged by the insurer for each employee’s coverage.
2. The COBRA applicable premium method provides that the reportable cost for a period (for example, a coverage month) equals the COBRA applicable premium for that plan and coverage level for that period. An employer using this method must calculate the COBRA applicable premium in good faith compliance with a reasonable interpretation of COBRA’s statutory requirements — a view endorsed by the reporting guidance. As a result, employers can breathe a sigh of relief that the status quo for COBRA premium calculations continues, and they can use the same calculations for the Form W-2 reporting requirement.
3. The modified COBRA premium method is an alternative the guidance says can be used for calculating the reportable costof group health coverage — but only if: (a) an employer subsidizes the cost of COBRA coverage; or (b) 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.

It is refreshing that the guidance recognizes that, in the 25+ years since COBRA’s enactment, employers have figured out how to calculate COBRA premiums and such calculations are good enough to be used for the reporting requirement. Employers should use this as an opportunity to ensure that their COBRA premium calculations meet the good faith compliance standard. Even employers that are not subject to COBRA but are subject to the reporting requirement should be able to calculate the reportable cost, because the COBRA methods are so familiar to health plan administrators by now.

Noggle explains more about the COBRA implications of the guidance in Mandated Health Benefits — The COBRA Guide. Noggle, along with Paul M. Hamburger, Esq., is a contributing editor of the Guide. More coverage on the guidance can also be found here.