1 What s News in Tax Analysis That Matters from Washington National Tax Health Insurance Companies and Employers: There s a New Fee to Consider A new fee may apply to issuers of health insurance policies and employers who sponsor self-funded health plans. As this article explains in more detail, the Affordable Care Act imposes a fee on certain health insurance policies and self-funded plans for policy and plan years ending in 2012, the first due date for the fee is July 31, KPMG LLP does not assist clients in designing, implementing, or amending employee benefit plans. Background and Effective Dates Monday, March 25, 2013 by Veena K. Murthy, Washington National Tax Veena K. Murthy is a director in WNT s Compensation and Benefits Technical Support group. Veena thanks Roger Bailey, a former intern, for his assistance with this article. The Patient Protection and Affordable Care Act of 2010 (the Affordable Care Act ) established the Patient Centered Outcomes Research Institute (the PCORI ) to assist patients, clinicians, purchasers, and policy-makers in making informed health decisions. 1 The Affordable Care Act also created the Patient Centered Outcomes Research Trust Fund to financially support the PCORI. To fund the trust, Congress enacted Code sections 4375 and 4376, which impose an annual fee on issuers of "specified health insurance policies" and plan sponsors of "applicable self-insured health plans," respectively. This means that employers with self-funded health and welfare arrangements, as well as health insurance companies, are subject to the fee unless otherwise excepted. The fee applies for policy years (insured plans) and plan years (self-insured plans) ending on dates falling on or between October 1, 2012, and September 30, Generally, the fee is a dollar multiplier ($1 for policy or plan years ending during the 2013 fiscal year) per person for the average number of lives covered. The dollar multiplier increases to $2 in the next fiscal year, and is indexed thereafter. Under current rules, the fee will no longer apply to policy and plan years ending after September 30, On December 6, 2012, the IRS and Treasury published final regulations to provide guidance on the applicability, liability, calculation, payment, and 1 Patient Protection and Affordable Care Act, Pub. L. No , 124 Stat. 728, sec. 6301, 1181(c), 728, (2010). KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative, a Swiss entity.
2 Health Insurance Companies and Employers: There s a New Fee to Consider page 2 reporting of the fee. The regulations indicate that the fee will be required to be paid and reported on Form 720, Quarterly Federal Excise Tax Return, once a year by July 31 of the calendar year immediately following the last day of the applicable policy or plan year. In other words, for calendar year plans ending December 31, 2012, the fee and filing is due July 31, Application of PCORI Fee to Insurers Section 4375 imposes the fee on each issuer of a specified health insurance policy, which is defined as any accident or health policy (including a policy under a group health plan) issued with respect to individuals residing in the United States. This includes prepaid health coverage arrangements in which fixed payments or premiums are received as consideration for any person s agreement to provide or arrange for the provision of accident or health coverage to residents of the United States. 2 The regulations clarify that these prepaid health coverage arrangements specifically include arrangements such as health maintenance organization (HMO) contracts as well as hospital and medical service certificates, policies, and plan contracts. 3 The regulations further clarify that a specified health insurance policy includes accident and health coverage to an active employee, former employee, or qualifying beneficiary, as continuation coverage required under the Consolidated Omnibus Reconciliation Act ( COBRA ) or similar continuation coverage under other federal or state law. 4 Section 4375 provides that a specified health insurance policy does not include any insurance if substantially all of its coverage is one of the following excepted benefits, described in section 9832(c): Accident or disability income insurance Coverage issued as a supplement to liability insurance Liability insurance (including general liability insurance and automobile liability insurance) Unless otherwise indicated, references to section or sections in this article are to the Internal Revenue Code of 1986 (the Code ), as most recently amended, or to the U.S. Treasury Department regulations (the regulations ), as most recently adopted or amended Workers' compensation Automobile medical payment insurance Section 4375(c). Section (b)(2). Section (b)(1)(ii).
3 Health Insurance Companies and Employers: There s a New Fee to Consider page 3 Credit-only insurance Coverage for on-site medical clinics Similar insurance coverage under which benefits for medical care are secondary or incidental to other insurance benefits If offered separately: limited scope dental or vision benefits, long-term care, nursing home care, home health care, community-based care If offered as an independent, non-coordinated benefit: coverage for a specified disease or illness, hospital indemnity or other fixed indemnity insurance If offered as a separate insurance policy: Medicare supplemental health insurance, coverage supplemental to military medical and dental coverage under 10 U.S.C. 55, and similar supplemental coverage In addition to the above list, the regulations clarify that the fee does not apply to group policies issued primarily for employees working and residing outside of the United States, stop-loss policies, and indemnity reinsurance policies. 5 Application of PCORI Fee to Sponsors of Self-Insured Plans The fee also applies to sponsors of applicable self-insured health plans (also commonly referred to as self-funded plans) under section Selfinsured plans include any plan offering health or accident coverage that is not provided by an insurance company, is funded by employer and/or employee contributions and payments, and is established and maintained for the benefit of current or former employees by: One or more employers One or more employee organizations One or more employers and employee organizations jointly A voluntary employees beneficiary association ( VEBA ) under section 501(c)(9) 5 Section (b)(1).
4 Health Insurance Companies and Employers: There s a New Fee to Consider page 4 A multiple-employer welfare arrangement, rural electric cooperative, or rural telephone cooperative association, or An organization described in section 501(c)(6) (certain nonprofit organizations that are business leagues, chambers of commerce, realestate boards, boards of trade, or professional football leagues) 6 Because of the variety of self-insured plans, the term plan sponsor can refer to a single employer or employee organization that establishes or maintains a plan, or in the case of an arrangement with more than one establishing party the joint board of trustees or similar group of the parties representatives. 7 Note that retiree-only plans, health reimbursement arrangements ( HRAs ), and health flexible spending arrangements ( FSAs ) that do not fall under section 9832(c) are nevertheless treated as self-insured plans for this purpose. 8 However, self-insured plans do not include: FSAs that are excepted benefits under section 9832(c) and related regulations Employee assistance, disease management, and wellness programs that do not provide significant benefits in the nature of medical care or treatment Plans established and designed specifically to primarily cover employees who are working and residing outside the United States Determining the Plan Sponsor Responsible for the Fee The regulations provide general information on determining the plan sponsor responsible for the fee. Generally, this is the entity within an employer organization that established and maintains the plan. When the plan covers employees of entities within a controlled group, the plan sponsor is the person identified as such by the terms of the plan document, provided the designation is made in writing and the person has consented to the designation in writing no later than the due date for the return in which the PCORI fee must be paid. If the plan sponsor is not Sections 4376(c)(2) and (b)(1)(i). Section 4376(b)(2). Sections (b)(1)(ii) and (iii); see Preamble Section II to the final regulations regarding retiree plans.
5 Health Insurance Companies and Employers: There s a New Fee to Consider page 5 identified in writing, each employer that establishes or maintains the plan with respect to its employees must separately file a Form 720 and pay the fee based on the covered lives attributable to that employer s employees (including spouses, dependents, and other beneficiaries). 9 Note also that the trustee of a VEBA is considered a plan sponsor for this purpose. VEBAs are generally tax-exempt trusts for self-funded health and welfare plans and are often implemented by employers with retiree medical plans, FSAs, dependent care savings arrangements, or other eligible health and welfare plans. However, a VEBA that is merely serving as a funding vehicle for a plan that is established and maintained by an employer is not a plan sponsor, and instead the employing entity is considered the plan sponsor for purposes of the fee. 10 Residence of Participants The regulations provide guidance for determining the residence of individuals covered under plans and policies. This is helpful because a specified health insurance policy does not include one issued with respect to individuals not residing in the United States, and an applicable self-insured plan does not include a self-funded expatriate plan if the facts and circumstances support that the plan was designed specifically to cover primarily employees who are working and residing outside of the United States. A U.S. resident is a person who has a place of abode in the United States (including U.S. possessions). 11 To determine a plan participant s place of abode, the issuer or sponsor may use its most recent address on file for the primary insured participant (the individual eligible for coverage other than due to his or her status as a spouse, dependent, or other beneficiary of another insured individual). Other individuals receiving coverage via the primary insured participant may be treated as sharing the same abode as the primary insured participant. Reporting Taxpayers subject to sections 4375 and 4376 must report the fees on Form 720 on an annual basis. Although most Form 720 excise taxes are Sections (b)(2)(i)(G) and (H). Section (b)(2)((i)(F). Section (a)(2).
6 Health Insurance Companies and Employers: There s a New Fee to Consider page 6 deposited semiannually and reported quarterly, for purposes of the fees outlined in sections 4375 and 4376, the taxpayer is only required to report and pay the PCORI fee once a year by July 31. Calculation of the Fee The general fee formula is essentially the same for specified health insurance policies and applicable self-insured health plans. For plan or policy years ending on or before September 30, 2013, the taxpayer must pay $1 per person for the average number of lives covered. The dollar multiplier increases to $2 per person for the plan or policy year ending after September 30, For plan years ending after September 30, 2014, and until September 30, 2019, the fee will increase based on increases in the projected per capita amount of the National Health Expenditures released by the Department of Health and Human Services ( HHS ) before the beginning of the applicable fiscal year. 12 The fee will therefore be an adjustable amount based on the HHS evaluation of healthcare costs. Determination of Average Number of Lives Covered Insurance policies The regulations provide four methods that issuers can use to determine the average number of lives covered under a given policy: 1. Actual Count Method: The issuer calculates a simple average by adding the total number of lives covered for each day during the policy year, and dividing this sum by the number of days in the policy year. 2. Snapshot Method: The issuer counts the total number of lives covered on one or more days each quarter (so long as the count is made on the same number of days each quarter). The days on which the counts are made must be consistent (e.g., the count is always on the first day of the quarter, last day of the month, or some similar pattern, provided that for each quarter the date or dates used are within three days of the date or dates used in the first quarter). These snapshot 12 Sections 4375(d) and 4376(d).
7 Health Insurance Companies and Employers: There s a New Fee to Consider page 7 counts are then added together and divided by the number of days on which a count was taken, producing an average. 3. Member Months Method: The issuer uses the member months reported on the National Association of Insurance Commissioners ( NAIC ) Supplemental Health Care Exhibit filed for the calendar year in question. The total number of lives reported as member months for a given year is divided by 12 to produce an average number of lives covered. 4. State Form Method: If the issuer is not required to file an NAIC financial statement, the issuer may instead use a state form that reports member lives in the same manner as membership months, and that is filed in the issuer s state of domicile. Calculations for this method are identical to those for the Member Months Method. Self-insured plans The regulations also provide four methods that plan sponsors can use to calculate the average number of lives covered under a self-insured plan: 1. Actual Count Method: The same Actual Count Method described above for policy issuers (based on the plan year rather than policy year). 2. Snapshot Count Method: The same as the Snapshot Method described above for policy issuers (based on the plan year rather than policy year). 3. Snapshot Factor Method: The same as the Snapshot Method described above for policy issuers (based on the plan year rather than policy year), except that the number of lives covered on a given day is equal to the sum of the number of participants with self-only coverage on that date, plus the product of 2.35 and the number of participants who have other covered beneficiaries. Example: A sponsor counts a plan s participants on the first day of every quarter. At the beginning of the first quarter, there are 1,000 self-only participants, and 500 other participants. The count for this specific snapshot would then be 1,000 + (500 x 2.35), or 2,175 participants. This computation would be repeated for all
8 Health Insurance Companies and Employers: There s a New Fee to Consider page 8 additional counts, and the results would be averaged together at the end of the plan year. 4. Form 5500 Method: The sponsor calculates lives based on the number of participants reported on Form 5500 (Annual Return/Report of Employee Benefit Plan) that is filed for the applicable self-insured health plan for that plan year, provided the Form 5500 is filed no later than the due date for the fee imposed by section 4376 for that plan year (i.e., July 31, 2013, for a calendar year plan ending December 31, 2012). For a plan offering self-only coverage, the average number of covered lives is equal to the sum of the total participants reported as covered at the beginning and end of the plan year, divided by two. For a plan offering self-only coverage and coverage other than self-only coverage, the average number of lives equals the sum of total participants reported as covered at the beginning and end of the plan year. 13 The regulations require consistency in use of a method. Generally, policy issuers and plan sponsors must use the same method consistently during a policy or plan year. However, a plan sponsor may use a different method from one plan year to the next. Overlapping Policies and Plans When accident and health coverage is provided to one individual through more than one policy or self-insured arrangement, the regulations clarify how the fee applies. The fee imposed on the issuer of a specified health insurance policy under section 4375 is separate from the fee imposed on the plan sponsor of an applicable self-insured plan, and each fee is based on the average number of lives covered under the policy or plan during the policy or plan year. Multiple self-insured arrangements established and maintained by the same plan sponsor and with the same plan year are subject to a single fee. For example, if an employee is covered under an HRA which is integrated with another self-insured health plan of the plan sponsor under which the employee is also covered, the sponsor pays a single fee with respect to that employee for both plans. This may also apply to an 13 Section (c)(2)(v).
9 Health Insurance Companies and Employers: There s a New Fee to Consider page 9 umbrella cafeteria plan that includes various self-insured arrangements. However, note that a single fee does not apply if the arrangements or plans have different plan years or different plan sponsors. However, because sections 4375 and 4376 are separate sections, the fee applies under each statute in cases when a healthcare arrangement can simultaneously be considered a self-insured plan and a specified health insurance policy. For example, if an employee is covered by both a group insurance policy and an HRA, the group insurance policy falls within the definition of a specified health insurance policy to which section 4375 applies a fee to the issuer, and the HRA falls within the definition of an applicable self-insured health plan to which section 4375 applies a fee to the plan sponsor. 14 Key Clarifications from the Final Regulations The fee applies to retiree-only specified health insurance policies and applicable self-insured plans that provide accident and health coverage, even though such plans may be exempted from other requirements under the Affordable Care Act. The fee applies to COBRA continuation coverage that provides accident and health coverage, regardless of how it is provided (through the individual market, to an active employee as part of a group health plan, or as continuation coverage to an active employee, former employee, or otherwise qualifying beneficiary). An exception from the fee applies to any insurance policy or selfinsured plan that provides for an employee assistance program, disease management program, or wellness program that does not provide significant benefits in the nature of medical care or treatment. An exception from the fee applies to any group insurance policy or self-insured plan if the facts and circumstances show that the policy or plan was designed (and issued in the case of policies) specifically to cover primarily employees who are working and residing outside of the United States. 14 Section (b)(iii); see Preamble Sections IV, V, and VI to final regulations.
10 Health Insurance Companies and Employers: There s a New Fee to Consider page 10 If an employee is covered by both a group insurance policy and an HRA, a separate fee applies under sections 4375 and 4376, since one plan is insured and one plan is self-funded. Similarly, if an employee is covered by both a group insurance policy and an FSA, a separate fee applies under sections 4375 and Calendar year self-insured plan sponsors subject to the fee can only use the Form 5500 method to determine the applicable covered lives subject to the fee if the Form 5500 is filed on or before July 31 following the plan year. That is, the Form 5500 method for counting lives cannot be used if the Form 5500 filing deadline is extended beyond July 31 following the end of the plan year, because this would result in the Form 5500 being filed after the date that the Form 720 filing and PCORI fee are due. Next Steps As described in this article, the PCORI fee applies to policy and plan years ending after September 30, 2012, and must be paid and reported by July 31 of the calendar year immediately following the last day of the applicable policy or plan year. Therefore, the first due date for the fee is July 31, The regulations do not permit or include rules for third-party reporting or payment of the PCORI fee. Employers that maintain self-funded plans and insurance policy issuers to whom the fee applies should begin to address any procedures and administration needed to ensure proper and timely payment and Form 720 reporting. In early April 2013, the IRS is expected to release a revised Form 720 and related instructions to address the reporting of the PCORI fee. Looking Ahead: Transitional Reinsurance Fee On December 7, 2012, HHS issued proposed regulations regarding the transitional reinsurance program under the Affordable Care Act. The program is designed to stabilize premiums in the individual health market, and is effective from 2014 through To support the program, a fee currently estimated at $63 per covered life will be assessed against insured and self-insured group health plans.
11 Health Insurance Companies and Employers: There s a New Fee to Consider page 11 Under the proposed regulations, the methodologies described for the PCORI fee to determine covered lives also apply to determine the covered lives for purposes of the transitional reinsurance fee. The transitional reinsurance fee will be collected annually by HHS, and determined based on the covered lives count, which is required to be submitted by November 15 of each year. The first due date for this count is November 15, 2014, with the fee payable afterwards. This additional fee underscores the importance of accurately measuring covered lives under group health plans and policies, as this affects employers and health insurers with respect to more than just the PCORI fee. The IRS also issued frequently asked questions confirming that the transitional reinsurance fee is tax deductible by plan sponsors as an ordinary and necessary business expense. In addition, the Department of Labor has indicated that these fees are permissible plan expenses under the Employee Retirement Income Security Act (ERISA) (which it has not indicated for the PCORI fee). KPMG s What's News in Tax is a publication from Washington National Tax that contains thoughtful analysis of new developments and practical, relevant discussions of existing rules and recurring tax issues. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the author or authors only, and does not necessarily represent the views or professional advice of KPMG LLP.
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