The Patient Protection and Affordable Care Act of 2010, as amended by the Health Care and Education Reconciliation Act of 2010 (PPACA) established the Patient-Centered Outcomes Research Institute (the Institute) to assist the health care community in making informed health decisions by advancing the quality and relevance of evidence-based medicine. PPACA added a new section to the Internal Revenue Code (the Code) to establish the Patient-Centered Outcomes Research Trust Fund (the Fund), which is the Institute’s funding source. PPACA also added Code Sections 4375 and 4376 to finance the Fund and to impose fees on issuers of certain types of health coverage and on plan sponsors, with respect to self-insured health plans.
On April 17, 2012, the U.S. Department of Treasury published proposed regulations that (1) provide guidance on what health insurance policies and self-insured plans are subject to the fee, (2) clarify the methodology for determining the average number of lives covered under a policy or plan and (3) amend the excise tax provisions of the Code to require annual reporting and payment of fees. The fees will apply for each policy or plan year ending on or after October 1, 2012, and before October 1, 2019 (which for a calendar year plan is January 1, 2012).
Health Insurance Policies and Self-Insured Plans Subject to the Fee
Health Insurance Policy
The proposed regulations define a health insurance policy that is subject to the fee as any accident or health insurance policy (including a policy under a group health plan) issued with respect to individuals residing in the United States, including certain prepaid health coverage arrangements (including a hospital or medical service policy or certificate, hospital or medical service plan contract, or health maintenance organization contract). Residing in the United States includes residing in American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, the Virgin Islands and any other possession of the United States. To determine residence, an issuer may rely on the most recent address on file and may treat the primary insured’s spouse, dependents or other beneficiaries covered by the policy as having the same place of residence.
Health insurance policies that are not subject to the fee include:
- Any insurance policy if substantially all of its coverage is of excepted benefits (e.g., accident- or disability-only plans or limited-scope dental or vision plans)
- Any group policy issued to an employer specifically to cover employees who are primarily working and residing outside of the United States (e.g., an expatriate health plan or policy), which is determined on a facts and circumstances basis
- Stop loss and indemnity reinsurance policies
Self-Insured Health Plans
The proposed regulations define a self-insured health plan that is subject to the fee as a plan that provides for accident or health coverage if any portion of the coverage is provided other than through an insurance policy, and the plan is established or maintained by a plan sponsor for the benefit of employees or former employees, members or former members, or other eligible individuals. A plan sponsor includes a single employer, employee organization, two or more employers, a voluntary employees’ beneficiary association (VEBA) or a multiple employer welfare arrangement (MEWA).
Self-insured health plans that are not subject to the fee include:
- A self-insured plan if substantially all of its coverage is of excepted benefits (e.g., accident- or disability-only plans or limited scope dental or vision plans). Note: The proposed regulations explain where a health flexible spending arrangement (FSA) is set up as an excepted benefit, it is not subject to the fee. However, if a health FSA is not set up as an excepted benefit, that FSA is subject to the fee.
- An employee assistance program, disease management program or wellness program, if the program does not provide significant benefits in the nature of medical care or treatment.
Multiple Self-Insured Arrangements Established or Maintained by the Same Plan Sponsor
For purposes of calculating the fee, two or more arrangements that meet the definition of a health plan subject to the fee, which have the same plan year and are established or maintained by the same plan sponsor, may be treated as one self-insured health plan.
Example 1. If a plan sponsor maintains one self-insured arrangement providing for medical benefits and another self-insured arrangement providing for prescription drug benefits, and both have the same plan year, the two arrangements may be treated as one self-insured health plan.
Example 2. If a plan sponsor maintains a health reimbursement arrangement (HRA) that is integrated with another self-insured health plan that provides for medical coverage, and both have the same plan year, the HRA and medical plan may be treated as one self-insured health plan. Note: If the HRA is integrated with an insured group health plan, both would be subject to separate fees.
Definition of Plan Sponsor
The proposed regulations provide detailed rules regarding how to identify the plan sponsor of a self-insured health plan. In the case of a plan established or maintained by a single employer, the plan sponsor is the employer. If a plan is maintained by two or more employers, the plan sponsor is the employer identified as such in the plan’s documents (e.g., the plan document or summary plan description). The designated employer must consent to such designation no later than the due date of the return for such plan year. If no identification or designation of a plan sponsor has been made, then each plan sponsor that maintains the plan is responsible for the portion of the fee that is attributable to such employer’s own employees.
Retiree-Only Plans, Archer Medical Savings Accounts and Health Savings Accounts
The preamble to the proposed regulations notes that retiree-only medical plans may be subject to the fees imposed under Code Sections 4375 and 4376. Unlike other provisions of the PPACA that exclude group health plans with less than two active participants, the applicable Code Sections, 4375 and 4376, are found in a different Chapter of the Code, and thus may not exempt a retiree-only plan that contains less than two active participants.
The proposed regulations also clarify Archer medical savings accounts and health savings accounts (HSAs) are not subject to the fees.
Calculation of the Fee for Health Insurance Policies and Sponsors of Self-Insured Health Plans
A fee is imposed for policy or plan years ending on or after October 1, 2012, and before October 1, 2019. The amount of a fee for a policy or plan year is equal to:
Average Number of Lives Covered x Applicable Dollar Amount
The applicable dollar amount is $1 for policy or plan years ending on or after October 1, 2012, and before October 1, 2013. The applicable dollar amount is $2 for policy or plan years ending on or after October 1, 2012, and before October 1, 2013. For policy or plan years beginning on or after October 1, 2013 the applicable dollar amount will be increased by an amount that will depend on the percentage increase in the projected per capita amount of the National Health Expenditures most recently released by the Department of Health and Human Services.
Average Number of Lives for a Covered Health Insurance Policy
Issuers are provided four different methods to determine the average number of lives covered under the policies it issues. Issuers must use the same method to determine the average number of lives covered under the policy for the year. The same method must also be used for all polices reported on a single Form 720, Quarterly Federal Excise Tax Form.
The four alternatives are as follows.
Policy Year-Based Methods
- Actual Count: Determined by adding the total number of lives covered for each day of the policy year and dividing the total by the number of days in the policy year.
- Snapshot: Determined by adding the total number of lives covered on one date in each quarter of the policy year (or more dates if an equal number of dates are used for each quarter) and dividing the total by the number of dates on which a count was made. The date or dates for each quarter must be the same (e.g., first day of the quarter, last day of the quarter or first day of each month).
Issuers using the Actual Count or Snapshot methods are permitted to change to or from methods from one policy year to the next. Issuers using the Actual Count method may begin counting lives using data from the period beginning on May 14, 2012, rather than the first day of the policy year. Issuers using the Snapshot method may calculate the average number of lives covered using dates from the quarters remaining in the policy year beginning on or after on or after May 14, 2012. If a short year is used, the issuer should divide by the number of days from May 14, 2012, through the end of the policy year (Actual Count) or the number of days on which a count was made (Snapshot).
Calendar Year-Based Methods
- Member Months: Determined based on “member months” (an amount that equals the sum of the total lives covered on pre-specified days in each month of the reporting period) reported on the National Association of Insurance Commissioners (NAIC) Supplemental Health Care Exhibit for that calendar year, divided by 12.
- State Form: If an issuer is not required to file NAIC annual financial statements, the issuer may determine the number of lives by using information from a form that is filed with the issuer’s state or domicile, and a method similar to the Member Months method.
Issuers using the Member Months or State Form methods must apply the same method for all policies for all years during which the fee applies. Because the Member Months and State Form methods rely on data reported on a calendar-year basis, the proposed regulations include a pro-rata adjustment to calculate the average number of lives covered for the short reporting periods ending in 2012 and 2019.
Average Number of Lives for a Covered Self-Insured Health Plan
Plan sponsors are provided three different methods to calculate the average number of lives covered under the plan. A plan sponsor must use a single method to determine the average number of lives covered under the plan for the entire plan year. However, a plan sponsor is allowed to apply a different method from one plan year to the next. The proposed regulations outline the three alternatives are as follows.
- Actual Count: Same as above, except “plan year” is substituted for “policy year.”
- Snapshot: Determined by adding the total number of lives covered on one date in each quarter of the plan year (or more dates if an equal number of dates are used for each quarter) and dividing the total by the number of dates on which a count was made. The date or dates for each quarter must be the same (e.g., first day of the quarter, last day of the quarter, or first day of each month). When applying the Snapshot method, the number of lives covered on a date may equal the sum of the actual number of lives covered on the designated date (the snapshot count method) or the sum of the number of participants with self-only coverage on the designated date, plus the product of the number of participants with coverage other than self-only coverage on the date and 2.35 (the snapshot factor method).
- Form 5500: Determined based on the number of reportable participants for the Form 5500, Annual Return/Report of Employee Benefit Plan, that is filed for the plan for that plan year.
If a plan’s coverage is limited to self-only coverage, the average number of lives equals the sum of total participants covered at the beginning plus the total participants covered at the end of the plan year, divided by 2. For plans providing coverage that is not limited to self-only coverage, the Form 5500 does not identify whether the coverage is self-only or family (or some other non-self-only coverage). Therefore, the number of participants reported on the Form 5500 generally is converted to covered lives by multiplying the number of participants on each date by a factor of 2.0.
There is also a special rule for FSAs (see above) and HRAs. If a plan sponsor does not maintain a covered self-insured health plan other than an FSA, which is not an excepted benefit, or an HRA, then the plan sponsor may assume one covered life for each employee with an HRA or FSA. The plan sponsor is not required to include any spouse, dependent or other beneficiary of the participant.
Notwithstanding the foregoing, the proposed regulations provide that a plan sponsor may use any reasonable method to determine the average number of lives covered under the plan for the plan year that begins before July 11, 2012, and ends on or after October 1, 2012.
Procedural Rules for Payment of Fee
Plan sponsors and issuers must report the fees under Code Sections 4375 and 4376 on Form 720, Quarterly Federal Excise Tax Return. Generally, excise taxes are reported and paid quarterly on Form 720. However, the proposed regulations state that issuers and plan sponsors may report and pay the fees under Code Sections 4375 and 4376 once per year, on July 31, in accordance with the instructions for Form 720. No semimonthly deposits are required. The Internal Revenue Service will be revising the current Form 720 and related instructions to reflect these fees. Form 720 may also be filed electronically. For more information, visit www.irs.gov.
Plan sponsors and issuers must determine whether Code Sections 4375 and 4376 will apply to them and, if applicable, must determine which method to use in order to calculate the “average number of lives covered” portion of the fees. To learn more about determining whether the fee applies or how to calculate the fees, please contact your regular McDermott lawyer.