The IRS recently released Notice 2011-28 (the "Notice"), which provides interim guidance generally applicable beginning with the 2012 Forms W-2. Presented in a question and answer format, the guidance clarifies the health care reform requirement that employers provide their employees information on Form W-2 regarding the cost of the employee's employer-sponsored group health plan coverage. In 2010, the IRS announced it would provide relief from the Form W-2 reporting requirement until the end of 2011. The Notice further extends this general relief until 2012, and, for some employers and plans until additional guidance is released.

Employers must report the cost of coverage under all "applicable employer-sponsored coverage." Coverage under any group health plan is considered "applicable employer-sponsored coverage" if the coverage is made available to an employee and is excludable from the employee's gross income under §106 of the Internal Revenue Code or it would be so excludable if it were employer-provided coverage. Employers generally must report the full cost of coverage under all applicable employer-sponsored coverage, including:

• employer- and employee-paid costs (regardless of whether paid on a pre-tax or post-tax basis);
• the cost of coverage for any other person covered by the plan because of their relationship to the employee (e.g., dependent coverage);
• employer contributions to flexible spending arrangements (other than contributions made by the employee through a salary reduction election);
• the cost of coverage under dental and vision plans that do not qualify as stand-alone plans; and
• the cost of coverage under self-insured group health plans that are subject to federal continuation coverage requirements such as COBRA and ERISA. 

Employers need not report various other costs, including:

• the amount contributed to Archer MSAs or health savings accounts;
• the amount of any salary reduction contributions to flexible spending arrangements;
• the cost of insured coverage under stand-alone dental or vision plans;
• long-term care coverage;
• stand-alone coverage for a specified disease or illness (i.e., cancer coverage);
• accident and disability insurance, liability insurance, workers' compensation and other similar coverage;
• the cost of coverage with respect to an individual to whom the employer does not issue a W-2 (i.e., retirees); and
• the cost of coverage provided by most governmental plans.

The Notice grants additional transition relief from the 2012 reporting deadline for certain employers and with respect to certain types of coverage listed below. The reporting requirement will not apply for future years until the IRS publishes additional guidance. This transition relief applies to:

• employers filing fewer than 250 Forms W-2 for the previous calendar year;
• multiemployer plans;
• health reimbursement arrangements;
• stand-alone self-insured dental and vision plans;
• self-insured plans of employers not subject to COBRA continuation coverage or similar requirements; and
• employers furnishing Forms W-2 to employees who terminate before the end of a calendar year and request a Form W-2 before the end of that year.

Employers may calculate the cost of coverage by using three methods. One of the methods is similar to the way employers calculate the cost of COBRA premiums, minus the 2% administrative charge employers may impose under COBRA. The second method, applicable only to fully-insured plans, allows the reportable cost to be equal to the premium charged each period by the insurer for that employee's coverage. The third method is a modified COBRA premium method that may be used by employers who subsidize the cost of COBRA or charge an actual premium to COBRA participants that is equal to the COBRA applicable premium for each period in the prior year. Employers must determine the reportable cost on a calendar-year basis, regardless of whether the plan generally operates on a different plan year.

Employers may rely on the guidance provided in the Notice if they voluntarily choose to report the cost of coverage on 2011 Forms W-2, even though reporting is not required for 2011. The Notice is applicable until further guidance is issued; and any future guidance will only apply prospectively, and will not apply to any calendar year beginning within six months of the date the guidance is issued. The IRS is currently accepting comments on the Notice.

With the release of this Notice, employers should decide whether they want to undertake voluntary reporting on 2011 Forms W-2. Next, employers should coordinate with payroll providers to ensure that they will implement practices to comply with the required reporting by 2012.