How To Calculate Benefits
We would advise the employer to contact their payroll vendor first to determine if the vendor already has a system in place to provide the calculations and reporting for employers. If the employer is providing the cost to the payroll vendor, the following information will assist them in calculating the cost to report.
The aggregate cost of coverage includes the portion of the cost paid by the employer and the portion of the cost paid by the employee (on either a pre-tax or after-tax basis). The cost of coverage is generally determined under the rules for determining COBRA premiums, and the same amount should be reported for employees electing each tier of coverage (for example, the same amount would be reported for all employees electing family coverage). The IRS requires employers to determine cost taking into account the actual period of coverage and any changes in coverage tier during the year.
Reporting is not required for individuals for whom a Form W-2 is not issued (such as retirees or independent contractors with no wages). Also, if an employee loses coverage during a calendar year and elects COBRA, an employer is not required to report the cost of the employee's COBRA coverage.
The regulations describe four methods that can be used for the calculation. The most common method will be to use the "Premium Charged Method", which is the premium charged by the insurer for the employee's coverage. This includes the employer and employee portions of the premium. The other methods are the "COBRA Applicable Premium Method", which is COBRA rate for the benefit; "Modified COBRA Premium Method", which can only be used by employers who subsidize the cost; and, the "Composite Rate", which can only be used by employers who charge the same rate to all employees regardless of number of individuals covered by the plan. If you fall into one of the other categories, we can provide additional information.