Effective January 1, 2011, several payroll tax related provisions under the Internal Revenue Code (Code) have changed. Because the first payroll tax reporting deadline for many employers is quickly approaching, employers should be aware of the new requirements and implement the necessary changes to comply with the new laws.
Value of Employer Provided Health Coverage to be Reported on Form W-2
Section 9002 of the Patient Protection and Affordable Care Act2 (PPACA) added Code Section 6051(a)(14), which requires employers to report the total value of an individual employee’s health benefits on the employee’s W-2 form.3 The change is informational only and does not affect the income tax exclusion of the value of coverage provided to the employee. However, despite the mandatory reporting requirement of PPACA, in order to provide some transition relief to employers the IRS announced that reporting by employers is optional for Forms W-2 issued in 20114. Employers should consider adopting the optional disclosure and use 2011 as a test run for implementing changes to payroll systems that will be necessary to comply with the disclosure requirements in 2012.
Under the new provision, employers must determine and report the value of “applicable employer-sponsored coverage” provided to employees. “Applicable employer-sponsored coverage”5 means coverage under any group health plan made available to the employee by the employer that is excludable from the employee’s gross income under Code Section 1066 (or that would be excludable if it were considered employer-provided coverage under Code Section 106). Therefore, the term includes not only traditional medical care coverage, but also Medicare supplemental coverage, employer-provided Medicare Advantage plans, on-site medical clinic services, and health reimbursement accounts.
Certain types of coverage are specifically excluded from the reporting obligation. salary reduction contributions to health FSAs, life insurance or disability insurance, long-term care coverage, stand-alone dental and vision plans, workers’ compensation insurance, and hospital indemnity or other fixed indemnity insurance (if paid for with employee after-tax dollars) are specifically excluded from the new reporting requirements.
The employer must report the aggregate premium for the coverage (i.e. the employer’s and employee’s share of the premium).7 To calculate the reportable cost, the employer must use rules similar to the rules in Section 4980B(f)(4) that apply for purposes of determining COBRA continuation coverage premiums, including the special rules that apply for self-insured arrangements. In applying those rules, if the coverage plan provides for the same COBRA continuation coverage premium for both individual coverage and family coverage, the employer must calculate separate premiums for individual and family coverage for W-2 reporting purposes.8 Where the employer provides multiple health plan coverage, such as medical, dental and pharmacy coverage, only the aggregate value of all coverage is reported.9
ISO and ESPP Reporting Obligations
Although final regulations regarding new reporting requirements with respect to incentive stock options (ISOs)10 and employee stock purchase plans (ESPPs)11 were implemented in 2009, 2011 is the first year the new requirements will result in additional filing obligations. Under the regulations finalized in 2009, if an employee exercises an ISO or if employer stock under an ESPP is transferred during 2010, the employer must report such transfers to the IRS and the employee.12 Prior to implementation of the regulation, filing with the IRS was not required.
With respect to exercised ISOs, the disclosure must include: (i) the name, address, and employer identification number of the corporation transferring the stock; (ii) if different from the corporation identified in paragraph (i) of this section, the name, address and employer identification number of the corporation whose stock is being transferred; (iii) the name, address, and identifying number of the person to whom the share or shares of stock were transferred pursuant to the exercise of the option; (iv) the date the option was granted to the person; (v) the exercise price per share; (vi) the date the option was exercised by the person; (vii) the fair market value of a share of stock on the date the option was exercised by the person; and (viii) the number of shares of stock transferred to the person pursuant to the exercise of the option.13
With respect to stock transferred under an ESPP, the disclosure must include: (i) the name, address, and identifying number of the transferor; (ii) the name, address and employer identification number of the corporation whose stock is being transferred; (iii) the date the option was granted to the transferor; (iv) the fair market value of the stock on the date the option was granted; (v) the actual exercise price paid per share; (vi) the exercise price per share determined as if the option were exercised on the date the option was granted to the transferor (to be provided only if the exercise price per share is not fixed or determinable on the date the option was granted); (vii) the date the option was exercised by the transferor; (viii) the fair market value of the stock on the date the option was exercised by the transferor; (ix) the date the legal title of the shares was transferred by the transferor; and (x) the number of shares to which legal title was transferred by the transferor.14
The information is filed on Form 3921 for ISOs and Form 3922 for ESPPs. The forms should be delivered to the employee by January 31 and filed with the IRS by either February 28 (paper filing) or March 31 (electronic filing), in each case following the year in which the triggering event occurred.15
Increased Penalties for Late or Missing Forms W-2
In addition to the new payroll related filing requirements, recent legislation increased the penalties applicable to taxpayers who fail to comply with those (and existing) filing requirements. As amended, Code Section 6721, which provides penalties for failure to file informational returns, now provides for penalties of (i) $30 per return, up to a maximum annual penalty of $250,000, for failures corrected within 30 days (first tier), (ii) $60 per return, up to a maximum annual penalty of $500,000, for failures corrected before August 1 of the required filing year (second tier), (iii) $100 per return, up to a maximum annual penalty of $1,500,000 (third tier), for other unintentional failures, and (iv) $250 per return with no maximum for intentional failures. The lower annual maximum penalty amounts applicable to small businesses (less than $5,000,000 in average annual gross receipts for most recent three years) were also increased, with the maximum amounts now $75,000 (first tier), $200,000 (second tier), and $500,000 (third tier).16
Electronic Payment of Payroll Tax Deposits Required
Finally, effective as of January 1, 2011, the IRS discontinued accepting federal tax deposits made with Form 8109. Federal taxes must be paid via Electronic Federal Tax Payment System unless the taxpayer owes $2,500 or less with its quarterly Form 941 or annual Form(s) 943 or 944.17
1. Jon Seawright is an attorney in the Jackson, MS office of Baker Donelson and focuses his practice on health care and tax matters. Profile available at www.bakerdonelson.com/jon-d-seawright.
2. Pub. L. No. 111-148, 124 Stat. 119 (2010), as amended by the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, 124 Stat. 1029 (2010). As of the date of publication, many plaintiffs have filed suits challenging the constitutionality of all or parts of PPACA. Two district courts have upheld PPACA and two district courts have struck down all or parts of PPACA. Most recently, on January 31, 2011, United States District Court for the Northern District of Florida struck down PPACA as unconstitutional. The court’s order is available at http://www.flnd.uscourts.gov/announcements/documents/10cv91doc150.pdf. See also, Virginia v. Sebelius, 728 F. Supp. 2d 768 (E.D. Va. 2010) (holding PPACA violates the commerce clause); contra Liberty Univ., Inc. v. Geithner, 2010 WL 4860299 (W.D. Va. Nov. 30, 2010) (holding PPACA was a proper exercise of constitutional authority) and Thomas More Law Center v. Obama, 720 F. Supp. 2d 882 (E.D. Mich. 2010) (holding PPACA constitutional). All opinions and rulings are available at www.pacer.gov.
3. Code Section 6051(a)(14).
4. Notice 2010-69, 2010-44 IRB 576 (10/12/2010), available at www.irs.gov/irb/2010-44_IRB/ar13.html.
5. The term is defined in Code Section 6051(a)(14) by cross reference to the definition in Code Section 4980I(d)(1).
6. Code Section 106 generally provides that gross income of an employee does not include employer-provided coverage under an accident or health plan.
7. Technical Explanation Of The Revenue Provisions Of The “Reconciliation Act Of 2010,” As Amended, In Combination With The “Patient Protection And Affordable Care Act, ” Joint Committee on Taxation Report (JCX-18-10) (March 21, 2010), available at www.jct.gov/publications.html?func=startdown&id=3673.
10. An ISO is a grant to an employee by an employer corporation (or its parent or sub) to buy stock or ownership interests in one of those corporations that satisfies certain statutory requirements. Treas. Reg. § 1.421-1. To qualify as an ISO, the requirements of Code Section 422 must be met. If those requirements are met, there are no regular income tax consequences when an ISO is granted or exercised and the employee has capital gain when the stock is sold at a gain. Code Section 421(a).
11. ESPPs are options issued to employees under an employer plan to buy stock in the employer and which satisfy the statutory requirements of Code Section 423. The employee pays no tax on the option or the stock acquired pursuant to an ESPP until he disposes of the stock. Code Section 421(a). If the option price is at least equal to the stock’s fair market value (FMV) at grant, the gain upon disposition of the stock is capital gain. But gain is ordinary compensation income (to the extent of the spread between option price and FMV of stock when option is exercised) if the stock is sold within two years after the option was granted or within one year after its exercise. Treas. Reg § 1.423-2.
12. Treas. Reg. § 1.6039-1.
13. Treas. Reg. § 1.6039-1(a).
14. Treas. Reg. § 1.6039-1(b).
15. See instructions included with Form 3921 and Form 3922, available at www.irs.gov.
16. Code Section 6721(d).
17. Treas. Reg. § 31.6302-1(h)(2)(iii).