On December 5, 2012, the Treasury Department published final regulations under the provisions of the Patient Protection and Affordable Care Act (the “Affordable Care Act”) that impose temporary fees on plan sponsors of self-insured health plans and issuers of certain accident and health insurance policies to finance, in part, a trust established by the Treasury Department to fund the Patient-Centered Outcomes Research Institute (the “Institute”). The Institute is a private, nonprofit corporation, established under the Affordable Care Act to assist clinicians, patients and policymakers in making informed health decisions by advancing the quality and relevance of evidence-based medicine.
The fee applies for each plan year or policy year ending on or after October 1, 2012 and before October 1, 2019. Thus, for example, the fee is payable for the years 2012 through 2018 for calendar year plans. The fee is equal to $2.00 ($1.00 for years ending before October 1, 2013) times the average number of lives covered under the plan or policy. For years ending on or after October 1, 2014, the fee will be increased based upon the percentage increase in the projected per capita national health expenditures as most recently published by the Department of Health and Human Services.
Only individuals who reside in the Untied States are taken into account in calculating the fee. An individual is considered to be residing in the United States if he or she has a place of abode in the United States. The preamble to the final regulations states that the determination of an individual’s place of abode is based upon the individual’s most recent address on file with the plan sponsor or insurer. In addition, the plan sponsor or insurer needs to determine only where the “primary insured” resides. Generally, the primary insured is the individual who is the employee of the plan sponsor. The primary insured’s spouse, dependents and others whom he or she enrolls in the plan or policy are deemed to reside in the same country as the primary insured.
The preamble to the final regulations states that the fee does not apply to:
expatriate plans and policies, provided that the expatriate plan or policy was designed or issued specifically and primarily to cover employees working outside of the United States. Thus, the fee is not payable in respect of individuals residing in the United States who are covered under such expatriate plans or policies;
plans and policies that solely provide “excepted benefits,” such as workers compensation, accident or disability-only coverage and automobile medical insurance; and
employee assistance programs (“EAPs”), disease management programs or wellness programs, either self-insured or insured, but only if such programs do not provide significant medical care or treatment benefits. There is no discussion of what would be considered a significant medical care or treatment benefit.
The preamble provides few other exceptions to the fee payment requirement and emphasizes the regulation’s broad application. For example, the preamble states that the fee applies to retiree-only plans and policies, even though they are exempt from some other requirements that apply to group health plans, such as the portability and non-discrimination requirements. Also, individuals receiving group health continuation coverage under federal law (“COBRA”) or state law are included in determining the average number of lives covered under a plan or policy. In addition, individuals covered under employer-sponsored health reimbursement accounts (“HRAs”) and flexible spending accounts (“FSAs”) are taken into account.
Two or more arrangements established or maintained by the same plan sponsor that provide accident and health coverage other than through an insurance policy and that have the same plan year may be treated as a single plan for purposes of calculating the fee. Thus, plan sponsors of such arrangements will pay only one fee for each covered individual, even though the individual may be covered under several arrangements.
There are situations, however, when the same individual must be taken into account more than once in calculating the fee. When the same individual is covered under a health insurance policy and a self-insured health plan, he or she is taken into account in calculating the amount of the fee payable both by the insurer and by the plan sponsor. For example, an individual is counted twice if he or she is covered by (i) a major medical insurance policy and a self-insured prescription drug program, or (ii) a group health insurance policy and an HRA. The rationale for this treatment is that there are two statutory provisions requiring the payment of these fees, section 4376 of the Internal Revenue Code of 1986, as amended (the “Code”), which applies the fee to self-insured health plans, and section 4375, which applies the fee to specified health insurance policies.
Self-Insured Health Plans
Plan sponsors may use any one of the following three methods for determining the average number of lives covered for the year: (i) the actual count method, (ii) the snapshot method or (iii) the Form 5500 method. Under the actual count method, the total number of lives covered for each day of the year are added together and that the aggregate number is divided by the number of days in the year. Under the snapshot method, the total number of lives covered on any date during the first, second or third month of each quarter of the year are added together and that aggregate number is divided by the number of snapshot days. The date used for each quarter must fall within three days of the date used for the other quarters of the same year (this three-day leeway is provided to allow for weekends and holidays). A plan sponsor may elect to use more than one date in each calendar quarter, provided that the dates used in one calendar quarter fall within three days of the dates used in the other quarters of the year.
Under the Form 5500 method, the average number of lives for a year is determined based on the number of participants reported on the Form 5500. The number of participants reported on the Form 5500 is the sum of the number of participants covered at the beginning of the year and the number covered at the end of the year, divided by two. However, this method is available only if the plan sponsor files the Form 5500 no later than the due date for filing the tax return remitting the fee. The tax return must be filed by July 31 of the calendar year immediately following the last day of the plan year. Thus, a plan sponsor with a calendar year plan cannot use the Form 5500 method if the plan sponsor uses the automatic 2½ month extension or other extension for filing the Form 5500.
There is an exception for employees participating in HRAs and health FSAs, but only if the employees do not participate in any other self-insured plan sponsored by their employers. Under this exception, only the employees participating in the HRA or the health FSA are taken into account in calculating the fee, not their other family members who may also benefit under the HRA or health FSA.
Health Insurance Policies
The fee is imposed on accident and health insurance policies, including policies under group health plans, that are issued with respect to individuals residing in the United States (these policies are referred to as “specified health insurance policies”). The fee does not apply to any stop loss policy, provided that the plan sponsor of the self-insured plan retains its liability and contractual relationship to the individuals covered by the plan. Similarly, the fee does not apply to any indemnity reinsurance policy, provided that the health insurance issuer retains its liability and contractual relationship to the individuals covered by the health insurance policy.
The actual count and the snapshot methods for calculating the amount of fees payable by a plan sponsor of a self-insured health plan are also available to insurers. These methods count lives covered on a policy-by-policy basis for each policy having a policy year ending within the calendar year being reported. In addition, insurers may use either the “members months method” or the “state form method.” Under the “members months method,” the insurer would calculate the fee by determining the average number of lives covered under all its specified health insurance policies in force for a calendar year based on “member months,” which is an amount that equals the sum of the total lives covered on pre-specified days in each month of the calendar year, as reported on the National Association of Insurance Commissioners (“NAIC”) Supplemental Health Care Exhibit to the insurer’s annual financial statement filed for such year. The number of member months reported is divided by 12 to determine the average number of lives covered in the year.
The “state form method” is available to insurers that are not required to file NAIC annual financial statements. This method is similar to the “members months method,” but is based upon a form attached to the insurer’s annual financial statement filed with the insurer’s state of domicile. This alternative is available only if the form reports the number of lives covered in the same manner as the member months are reported on the NAIC Supplemental Health Care Exhibit.
Tax Treatment of Fees
The fees imposed under sections 4375 and 4376 of the Code are excise taxes. Although the final regulations do not address whether these fees are deductible by plan sponsors and insurers for federal tax purposes, it appears that the fees would be deductible under section 162 as ordinary and necessary business expenses. Section 4377 provides that these excise taxes are to be treated as taxes for purposes of subtitle F of Code, and thus these taxes are subject to tax information and return reporting, collection, penalties and certain procedures. The fee is to be remitted to the Internal Revenue Service annually on Form 720. The due date for the return is July 31st of the year following the calendar year in which the policy year or plan year to which the fee applies ends.
Because the fee is payable by plan sponsors and health insurance issuers, the fee may not be paid with plan assets. The Department of Labor intends to post further guidance on this restriction on its website, www.dol.gov/ebsa.
The Employee Benefits Practice of Sidley Austin LLP
Our Employee Benefits group is one of the largest practices of its kind in the United States. Since its establishment in the 1920s, our lawyers have handled virtually every type of issue involving employee benefits.
To receive Sidley updates via email, please click here.
This Sidley update has been prepared by Sidley Austin LLP for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers.