On April 17, 2012, the Internal Revenue Service issued proposed regulations implementing the annual fee imposed by the Patient Protection and Affordable Care Act of 2010 (“PPACA”) on health insurance issuers and plan sponsors to fund the Patient-Centered Outcomes Research Trust Fund(the “PCOR Fund”). According to the proposed regulations, health insurance issuers and sponsors of certain self-funded health plans will be responsible for paying an annual fee based on the average number of lives covered by the policy or plan, as applicable, for each of the next seven years (i.e., the plan years ending on or after October 1, 2012, and before October 1, 2019) to finance the PCOR Fund. For calendar year plans, the first fee will be payable for the 2012 plan year by July 31, 2013.
What Is the PCOR Fund?
PPACA created a private, non-profit corporation called the Patient-Centered Outcomes Research Institute (the “Institute”) to conduct research to evaluate and compare health outcomes and the clinical effectiveness, risks, and benefits of medical treatments. To finance the Institute, PPACA provided for the establishment of the PCOR Fund. For the first seven years, the PCOR Fund will be financed in part by fees that are payable by health insurance issuers and the plan sponsors of self-funded health plans.
Although the regulations are still in proposed form, they provide helpful guidance on identifying the plans that are subject to the fee and how the fee is calculated.
Which Plans Are Subject to the Fee?
Generally, all self-funded health plans, including single employer, multiemployer and multiple employer plans, and insured plans covering employees, former employees, retirees, or both, are subject to the fee. This means that retiree-only plans are subject to the fee. If a group of individuals is covered under more than one plan sponsored by the same plan sponsor, the proposed regulations clarify that the fee will be imposed only once per group of covered lives, provided the plans have the same plan year.
The following plans are EXEMPT from the fee:
- Plans that provide so-called “excepted benefits” such as limited scope dental plans and vision plans, accident only plans and disability benefit plans
- Group policies that cover employees who are primarily working and residing outside of the United States
- Stop loss and indemnity reinsurance polices
- Employee assistance programs (“EAPs”), disease management programs, and wellness programs, as long as they do not provide significant benefits in the nature of medical care or treatment
- Health flexible spending accounts (“health FSAs”), as long as they only provide “excepted benefits”; (e.g., health FSAs that consist of salary reduction contributions only)
- Health reimbursement accounts (“HRAs”), if integrated with another plan that is subject to the fee, such as a major medical plan
Who Pays the Fee?
For insured benefits, the issuer pays the fee and the plan sponsor has no responsibility to the PCOR Fund. For self funded health plans, the plan sponsor must pay the fee. The proposed regulations define the “plan sponsor” as the employer in the case of a plan established or maintained by a single employer, or the employee organization in the case of a plan established or maintained by an employee organization. For plans established and maintained by two or more employers, such as a multiemployer plan or multiple employer plan, the plan sponsor is the association, committee, joint board of trustees, or other similar entity representing the parties who establish or maintain the plan. At this time, it is unclear whether boards of trustees of multiemployer plans may pay the fee from the multiemployer trust’s assets, but comments have been submitted to the IRS seeking such clarification.
How Much Is the Fee?
Under the proposed regulations, the fee is to be calculated as follows:
- For the policy and plan year that ends before October 1, 2013 (for calendar year plans, the January 1, 2012 — December 31, 2012, plan year), the fee is $1.00 multiplied by the average number of lives covered by the policy or plan.
- For policy or plan years ending on or after October 1, 2013, and before October 1, 2014 (for calendar year plans, the January 1, 2013, through December 31, 2013, plan year), the fee is $2.00 multiplied by the average number of lives covered by the policy or plan during the year.
- For policy and plan years ending on or after October 1, 2014, and before October 1, 2019 (for calendar year plans, these are the plan years commencing, January 1, 2014, January 1, 2015, January 1, 2016, January 1, 2017, and January 1, 2018), the “applicable dollar amount” is multiplied by the average number of lives covered by the plan or policy during the year. The “applicable dollar amount” for a given year will be set by the government, and will be derived from a formula that takes into consideration the percentage increase in the projected per capita amount of “National Health Expenditures” that is released by the Department of Health and Human Services at the beginning of the fiscal year.
For self-funded plans, when calculating the fee at the end of given year, plan sponsors will be able to choose among the following three methods to calculate the “average number of lives” (the examples are derived from the proposed regulations):
Actual Count Method: Under this method, the “average number of lives” is determined by adding the total number of lives covered for each day of the plan year and dividing that total by the number of days in the plan year. For example, if the total number of lives in a self-insured health plan for each day of the plan year ending December 31, 2013, was 3,285,000, then the average number of lives for the plan year would be 9,000 (3,285,000/365 = 9,000).
To calculate the fee, multiply the average number of lives by the applicable dollar amount (in this case, $2.00 because the plan year ends after October 1, 2013, and before October 1, 2014), for a total of $18,000 ($2.00 x 9,000 = $18,000).
Snapshot Method: This method takes a “snapshot” of the number of covered lives on a certain day or days in each quarter, which is then divided by the number of dates on which the count was made. The day or days in each quarter must be the same (e.g., the first day of the quarter or the last day of the quarter). When taking a “snapshot” on the specified day, the number of lives covered on that date can either equal the actual number of covered lives on that date (the “snapshot count method”) or the number of lives covered on the specified day can equal the sum of the number of participants with self-only coverage on that date, plus the number of participants with other coverage, such as family coverage, on that date multiplied by 2.35 (the “snapshot factor method”).
Example 1 (“Snapshot Count Method”): Assume ABC Company is the plan sponsor of a calendar year self insured health plan. ABC has designated the first day of each quarter of the calendar year for the plan year ending December 31, 2013, to be the date that ABC Company counts the number of covered lives. The number of lives on the first day of each quarter is as follows (for each quarter, the number of lives includes employees, retirees and dependents, as applicable):
- January 1, 2013: 2,000
- April 1, 2013: 2,100
- July 1, 2013: 2,050
- October 1, 2013: 2,050
To calculate the average number of lives, ABC Company must add the number of covered lives for all four quarters and divide by 4, the number of dates on which the count was made. Therefore, the average number of covered lives is 2,050 (2,000 + 2,100 + 2,050 + 2,050 = 8,200/4 = 2,050). For the plan year ending December 31, 2013, the applicable dollar amount is $2.00, for a total fee of $4,100 (2,050 x $2.00 = $4,100).
Example 2 (“Snapshot Factor Method”): XYZ Company is the plan sponsor of a calendar year self-insured health plan. XYZ has designated the first day of each quarter of the calendar year for the plan year ending December 31, 2013, to be the date that XYZ counts the number of covered lives using the snapshot factor method. On the first day of each quarter the number of participants with self only coverage and the number of participants with other coverage, such as family coverage and/or employee + spouse coverage, are as follows:
|
|
|
| January 1, 2013: |
600
|
800
|
| April 1, 2013: |
608
|
800
|
| July 1, 2013: |
609
|
809
|
| October 1, 2013: |
609
|
809
|
To calculate the average number of lives for the year:
- First, the sum of the number of participants with self-only coverage on the first day of each quarter, plus the number of participants with other coverage on the date multiplied by 2.35, is added together for each quarter, as follows:Quarter 1: 600 + (800 x 2.35) = 2,480
Quarter 2: 608 + (800 x 2.35) = 2,488
Quarter 3: 609 + (809 x 2.35) = 2,510
Quarter 4: 609 + (809 x 2.35) = 2,510
- Next, add the sums from each of the 4 quarters and divide by 4: 2,480 + 2,488 + 2,510 + 2,510 = 9,988/4 = 2,497.For the plan year ending December 31, 2013, the applicable dollar amount is $2.00, for a total fee of $4,994 (2,497 x $2.00 = $4,994).
Form 5500 Method: This method bases the average number of lives for a year on the plan’s Form 5500. If the plan provides only self-only coverage, the plan sponsor may treat the average number of covered lives as the sum of the total participants at the beginning and the end of the plan year (as reported on the plan’s Form 5500), divided by two. If the plan provides other coverages in addition to self-only coverage, such as family coverage, the average number of covered lives for the plan year is equal to the sum of the number of participants reported at the beginning of the plan year and the number reported at the end of the plan year. For example, if the Form 5500 for a self-funded health plan that only provides self-only coverage showed 4,000 participants at the beginning of the year and 4,200 participants at the end of the year, the average number of covered lives for the year is 4,100 (4,000 + 4,200 = 8,200/2 = 4,100). If the plan provided self-only coverage plus family coverage, the average number of lives for the year would be 8,200 (4,000 + 4,200).
Health Insurance Issuers
Health insurance issuers may use either the Actual Count or Snapshot methods (discussed above), or one of two alternative methods based on certain governmental filings by insurance companies.
When Is the Fee Due?
The fee is payable on an annual basis. To pay the fee, plan sponsors or issuers must report the fee on the Form 720, “Quarterly Federal Excise Tax Return.” The form and the fee are due by July 31 of the calendar year immediately following the last day of the policy or plan year for which the fee applies (if a health insurance issuer uses one of the alternative methods, mentioned above, for determining the average number of lives, then the calendar year is used rather than the policy or plan year). For example, for a calendar year plan with a plan year ending December 31, the fee is due on the immediately following July 31 (for the first year, the fee is due July 31, 2013, for the 2012 plan year). For a plan with a non-calendar year “plan year”, the fee is due on the July 31st of the calendar year that immediately follows the end of the plan year (e.g., for a plan year ending April 30, 2013, the fee is due July 31, 2014.
The preamble to the proposed regulations provides that the IRS will be amending Form 720 to reflect the PCOR Fund fees. As of the date of publication of this newsletter, Form 720 had not yet been amended.
What Should Plan Sponsors Be Doing to Prepare?
While the regulations are still in proposed form, plan sponsors and health insurance issuers should begin to look at their plans and determine whether any are subject to the fee. Once the plans that are subject to the fee have been identified, the plan sponsor and health insurance issuers may wish to begin considering which of the three methods for calculating the average number of lives will be the most cost effective and easiest to administer for each of the applicable plans. If you have any questions, contact the attorney with whom you normally work or the author of this article.
