One of the ways the 2010 Affordable Care Act (“ACA”) was designed to slow the growth of health care costs is through an emphasis on quality of care. For instance, the ACA created a “Patient-Centered Outcomes Research Institute,” which is charged with advancing research into comparative clinical effectiveness. To fund this Institute, the ACA imposes a fee on both insured and self-funded health plans for the seven-year period from 2012 through 2019.
The fees payable by health insurers are described in a new Section 4375 of the Tax Code, while a new Section 4376 describes the fees imposed on sponsors of self-funded health plans. Regulations recently proposed by the IRS would apply substantially similar rules under both of these provisions. This article will therefore focus on the fees payable by self-funded plans.
Plans Subject to This Fee
Virtually all employer-sponsored, self-funded health plans will be subject to this new fee. These include plans sponsored by most governmental employers. Retiree-only plans, although generally exempt from the other ACA mandates, are subject to this new fee.
Among the few exceptions to this fee are “excepted benefits,” health savings accounts, and employee assistance or wellness programs that do not provide “significant” medical benefits. “Excepted benefits” include stand-alone dental or vision plans, as well as any health flexible spending account (“FSA”) maintained by an employer that also sponsors a major medical plan and that contributes no more than $500 to an employee’s FSA.
Calculating the Fee
For the first year to which this new fee applies (the first plan year ending on or after October 1, 2012), the fee is $1.00 per covered life. The fee is $2.00 per covered life during the second plan year, and will then be adjusted for inflation during the following five years.
Although this fee is generally calculated separately for each plan, this rule is significantly eased by a provision in the regulations allowing an employer to aggregate all self-funded plans having the same plan year. For instance, if an employer sponsors both a self-funded medical plan and a self-funded prescription drug plan, both of which operate on the same plan year, only a single fee must be paid for any individual who is covered under both plans.
Liability for the Fee
In the case of a self-funded plan, the party responsible for paying the fee is the plan’s “sponsor.” Typically, this is the employer whose employees participate in the plan. The proposed regulations do address other situations, however. For instance, the sponsor of a multiemployer (“Taft-Hartley”) plan is the plan’s joint board of trustees, and the sponsor of a free-standing voluntary employees’ beneficiary association (a “VEBA”) is the trustee of that VEBA. (If a VEBA is simply a funding vehicle for an employer’s plan, the employer will be the plan’s sponsor for this purpose.)
The preamble to these proposed regulations notes that commenters had asked for assurance that, in the case of either a multiemployer plan or a plan maintained by a free-standing VEBA, the fee could be paid out of plan assets, rather than by the members of the board of trustees or the VEBA’s trustee. The IRS noted that this question is beyond its jurisdiction, but that the Department of Labor intends to issue guidance on this point. Because this fee is in the nature of a tax, rather than a penalty, it seems likely that the DOL will eventually conclude that it may be paid out of plan assets. Nonetheless, this is an issue that will merit monitoring in the months to come.
The proposed regulations also note that, contrary to the typical employee benefit provision, Section 4376 does not incorporate the Tax Code’s “controlled group” rules. Accordingly, if employees of related employers participate in the same plan, each employer may be viewed as the “sponsor” of the plan with respect to its own employees. Each such employer would then be required to report and pay its proportionate share of the fee. Fortunately, this result may be avoided simply by designating a “sponsor” in the plan document. If this is done – even if only for purposes of this fee – the designated sponsor may report and pay the fee on behalf of all participating employers.
Counting the Number of Covered Lives
As noted above, this fee is to be calculated on the basis of “covered lives.” This would include not only the employees or retirees who are covered as participants, but also their dependents. The proposed regulations describe the following three methods by which a self-funded plan may determine its number of covered lives:
- Actual Count Method – the actual number of lives covered under the plan for each day of the plan year, divided by the number of days in that plan year.
- Snapshot Method – the average number of lives covered under the plan, determined on a quarterly (or more frequent) basis.
- Form 5500 Method – for plans that file a Form 5500, the average of (i) the number of participants reported for the first day of the plan year, and (ii) the number of participants reported for the last day of the plan year (subject to the adjustment described below, if the plan offers dependent coverage).
Under the Snapshot Method, the sponsor may use either an actual count on each quarterly (or more frequent) date or a mathematical conversion specified in the regulations. Under this latter option, the number of covered lives on any snapshot date would be equal to the number of participants with single-only coverage plus 2.35 times the number of participants with any other level of coverage (such as employee-plus-spouse or family). In essence, any participant with other than single-only coverage is deemed to have 1.35 dependents.
A different adjustment would be required for any plan using the Form 5500 Method. Because the participant counts shown on a Form 5500 do not differentiate between single-only and other coverage levels, the regulations call for multiplying the average number of participants by 2.0. (This is lower than 2.35 because some of these participants will have single-only coverage.) As a result, any plan using the Form 5500 Method (and offering any dependent coverage) may simply multiply the annual dollar amount (e.g., $1.00) by the sum of the participants reported for the first day of the plan year and the number reported for the last day.
A sponsor must use the same method of calculating covered lives for all plans to be reported for the same year. However, the sponsor may change between calculation methods from year to year. The proposed regulations also note that, because the first reporting year is already under way, sponsors may use “any reasonable method” to calculate covered lives during this first year.
Special Rules for HRAs (and Certain FSAs)
Health reimbursement arrangements (along with health FSAs that are not “excepted benefits”) are subject to this new fee. However, the proposed regulations provide certain special rules for these individual account plans.
For instance, as with any self-funded plan, an HRA or FSA that operates on the same plan year as the employer’s self-funded major medical plan may be aggregated with that major medical plan when calculating the number of covered lives. Thus, if the plans cover the same group of participants, there would be no additional fee attributable to the HRA or FSA.
A different rule, however, applies to an HRA or FSA maintained by an employer that sponsors an insured major medical plan. In that case, no aggregation would be allowed. Instead, the insurer would pay the fee for the covered lives attributable to the major medical plan, while the employer would pay the fee for all participants in the HRA or FSA. The only relief in this case is that the employer may pay the fee for only the actual number of participants in the HRA or FSA – disregarding any dependents whose expenses might be reimbursable from the account.
Reporting and Paying the Fee
This new fee is to be reported and paid using IRS Form 720. Although this form is captioned “Quarterly Federal Excise Tax Return,” the Form would be filed only annually in connection with this new fee. It would be due by July 31 of the calendar year beginning after the last day of the plan year to which it relates. Thus, the first filing will be due on July 31, 2013.
A plan sponsor will be allowed to file this Form 720 electronically, but it will not be required to do so. The sponsor of a self-funded plan will not be able to delegate to any other entity – such as a third-party administrator – the obligation either to file the Form 720 or to pay the associated fee. Nonetheless, most third-party administrators will probably assist sponsors in calculating and reporting this fee.
Employer Action Steps
At this point, sponsors of self-funded health plans should proceed as follows:
- Identify all health plans that are subject to this new fee.
- Select a method for calculating each plan’s number of covered lives (using the same method for all plans during the same plan year).
- Coordinate the necessary exchange of data with each plan’s third-party administrator or other recordkeeper.
- Budget the amount of money needed to pay this new fee and to make the necessary calculations.