Legal Alert: Untangling Healthcare Reform Form W-2 Reporting Requirements for PEOs

[author: Gordon M. Berger and Scott V. Wagner]

Executive Summary:  With the re-election of President Obama and the Supreme Court's recent decision upholding portions of the Affordable Care Act (the "ACA"), health care reform is here to stay for the foreseeable future.  Though limited challenges to the law are still pending, employers must prepare to comply with the many ACA requirements of 2013 and beyond.

An imminent compliance issue is ACA's Form W-2 reporting requirements, which begin for certain employers in 2013.  Generally, the ACA requires employers to report the aggregate cost of applicable employer sponsored health coverage on their employee's Forms W-2.[1]  To facilitate the transition to the new requirements, employers that filed fewer than 250 Forms W-2 for the previous tax year need not report applicable employer sponsored health coverage for 2012.[2]  

Unfortunately, the IRS has not yet addressed how the ACA Form W-2 reporting requirements apply to Professional Employer Organizations ("PEOs").  Specifically, where health care is offered at the PEO-level and at the client-level, it's not clear which entity has the obligation to report, and how many employees to be counted to determine whether the IRS transitional rule applies.

Based the guidance and interim regulations available, we believe the conservative approach for PEOs is as follows: 

• Where the PEO offers applicable employer sponsored health coverage to its own employees, the PEO should interpret the ACA Form W-2 report rules as if the PEO was any other employer.  That is, the PEO should determine whether it offers applicable employer sponsored coverage, and whether it filed fewer than 250 Forms W-2 for its common-law employees in the previous tax year.  If so, the PEO should report the cost of coverage on its employees' Forms W-2.
• Where the client offers applicable employer sponsored health coverage to its leased employees, or where the client and the PEO both offer applicable employer sponsored health coverage, (either jointly through a Multiple Employer Welfare Arrangement, or independently), the PEO should collect information regarding applicable employer sponsored health care provided by its clients to their leased employees and report it on the Forms W-2 the PEO prepares for those employees.  Determining whether the transitional exemption rule applies should be done at the client-level.

This approach effectively applies the ACA Form W-2 reporting rules at the client-level, which is consistent with other employment laws, such as FMLA and Title VII.  Indeed, some legal commentators and consultants believe that subsequent ACA Form W-2 regulations will model the FMLA and Title VII approach.  But these laws, while similar in subject matter, are not controlling, and though they may give some insight into how the regulations will approach ACA Form W-2 reporting for PEOs, they should not be the basis of compliance. 

The ACA Form W-2 reporting rules provide that employers providing applicable health plan coverage must report the aggregate coverage of applicable employer sponsored health care.  The IRS has traditionally taken the position that the "employer" is determined by asking which entity is the common-law employer.  That is, which entity controls "what will be done and how it will be done."[3]

Client is the common-law employer.  Where the client is the common-law employer, the leased employees likely must be considered by the client at the client-level to determine whether or not the withholding requirements apply to the client.  Current guidance suggests that where an employer uses an agent for withholding or reporting purposes, the Forms W-2 filed by the agent on the employer's behalf must be counted in determining whether the employer is subject to the ACA reporting requirements.[4]

Since PEOs reduce the reporting and filing burden of their clients, PEOs filing Forms W-2 for their clients may want to include the amount required by the client to report.  The alternative is, of course, having the client issue their own Forms W-2, which is counter-productive and may be contrary to the PEO's service agreement.  PEOs reporting the cost of health care likely must rely on their clients' representations of the total cost of coverage.  PEOs in this position may want to ask their clients to certify the reporting amount, and if possible, agree to indemnify the PEO should liability ever arise.[5]  

PEO is the common-law employer.  Where the PEO is the common-law employer, the PEO cannot be an agent under IRC § 3504, and the client should probably not take leased employees into consideration for determining whether the employer is subject to the ACA reporting requirements.  In addition, leased employees receiving coverage at the client-level will effectively receive coverage from an entity that is not the employee's employer.  Accordingly, the PEO would probably not be required to report the cost of coverage provided to its employees by a client.

However, the PEO may need to report the aggregate cost of applicable-employer coverage at the PEO-level if the PEO provides its employees with applicable employer coverage.  Stated another way, if the PEO is considered to be the employer, and it filed at least 250 Forms W-2 in 2011 for its own employees, and it offers applicable employer sponsored health coverage to those employees, then the PEO must comply like any other employer with the ACA Form W-2 requirements.

Joint employment relationships.  It is possible that the client and the PEO may be considered joint employers.  This is especially likely if both the PEO and the client are acting as the employer, i.e., both have relative control of the employee, both provide health benefits, and so on.  In this situation, both entities likely have the obligation to report coverage on the Forms W-2 filed.  

For the PEO, the determination of which employees to count for purposes of ACA Form W-2 reporting would likely be limited to its common-law employees, and probably would not include the non-leased employees of the PEO's clients. 

The Bottom Line:

This analysis is intended to provide a background of the issues that may arise in complying with the ACA reporting requirements in the PEO context.  Each situation may be different.  Please note that this analysis is based on interim guidance, and may be subject to change once subsequent guidance or final regulations have been released.

FordHarrison attorneys have extensive experience in PEO and tax and employee benefits matters, and can assist you or your clients in determining which entity has the obligation to report under the ACA or which coverage costs must be reported as applicable employer sponsored health coverage, as well as the preparation of any required documentation.  If you have any questions regarding this Alert, please contact the authors, Gordon Berger, gberger@fordharrison.com, or Scott Wagner, swagner@fordharrison.com, both of whom are attorneys in our Atlanta office.