Certain plan sponsors of self-insured health plans (and heath care insurers) are required to pay a new fee by July 31, 2013. The fee, established by the Patient Protection and Affordable Care Act, as amended (the federal health care reform law), will fund the Patient-Centered Outcomes Research Institute (“PCORI”), which researches the risks and benefits of various medical procedures and reviews ways to diagnose, treat, and prevent illness. Affected plan sponsors (and insurers) must act quickly to collect the necessary information to determine the amount of fee that is due by the end of this month.
The PCORI fee is imposed based on the average number of covered lives for the plan year. For calendar year plan years ending on or after October 1, 2012 and before October 1, 2013, the fee is $1 multiplied by the average number of covered lives for that plan year. The fee then increases to $2 for plan years ending on or after October 1, 2013. The fee must be reported and paid by July 31 of the calendar year immediately following the last day of the plan year. Therefore, the fee due for plan years that ended between October 1 and December 31, 2012 must be paid by July 31, 2013. If the plan year ends on June 30, 2012, however, there is no PCORI fee due on July 31, 2013 because the plan does not end on or after October 1, 2012. However, a PCORI fee must be paid by July 31, 2014 at a rate of $1 per covered life. The fee must be reported and paid to the Internal Revenue Service (“IRS”) on a Form 720. The following provides general information detailing which plan sponsors are affected by the PCORI fee and what actions such sponsors must immediately take to avoid the late payment fees caused by missing the imminent July 31, 2013 deadline.
Health Plans Subject to PCORI Fee
The PCORI fee applies to both self-insured health plans and fully-insured plans. Self-insured health plans include plans established or maintained by one or more employers to provide health or accident coverage to employees by a means other than an insurance policy. The coverage may be paid by employee contributions, paid by the employer, or through a combination of both. For example, if a retiree-only plan is funded other than through an insurance policy, it is a self-insured health plan subject to the fee.
Health Flexible Spending Accounts and Dental and Vision Plans
Health flexible spending accounts (“FSAs”) are employer-established, tax-advantaged accounts funded by the employee to pay for qualified medical expenses with pre-tax dollars. If an FSA only holds amounts withheld from the employee’s wages, the FSA will not be subject to the PCORI fee. However, if the employer makes any contributions to the FSA, the PCORI fee must be reported and paid unless the arrangement constitutes an “excepted benefit” under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). A flexible spending arrangement qualifies as an “excepted benefit” if (1) other group health plan coverage is available to participants, and (2) the arrangements is structured so that the maximum benefit payable to any participant for a year cannot exceed two times the participant’s salary reduction election under the arrangement for the year, or, if greater, the amount of salary reduction plus $500. Stated another way, employee elective contribution only arrangements are not subject to the PCORI fee, and FSAs that do not provide more than $500 in employer matching or non-elective contributions are not subject to the PCORI fee.
Similarly, dental and vision plans provided to an employee are subject to the fee unless they qualify as an “excepted benefit” under HIPAA. Dental or vision plans only qualify as an “excepted benefit,” if they are (1) limited scope plans that are substantially all for the treatment of the mouth or eye and (2) are provided under a separate policy or certificate, or are otherwise not an integral part of a group health plan. Benefits are not considered an integral part of a group health plan provided that participants have the right to decline the coverage, and if the participant elects the coverage, the participant must pay an additional premium or contribution for that coverage. Other excepted benefits include worker’s compensation insurance, coverage for on-site medical clinics, and other similar insurance coverage under which medical care is secondary to other insurance benefits, such as disability income insurance.
Health Reimbursement Arrangements
A health reimbursement arrangement (“HRA”) is an employer-funded, tax-advantaged health benefit plan that reimburses an employee for out-of-pocket qualified medical expenses. An HRA differs from an FSA in that the employer contributes to an HRA while the employee funds an FSA. If the HRA is integrated with a fully-insured health insurance plan purchased by the employer from an insurance company, the employer must pay the PCORI fees in addition to the PCORI fee paid by the insurer. However, an HRA that is integrated with a self-insured health plan will not be subject to a separate PCORI fee if (1) the same employer sponsors both the self-insured health plan and the HRA, and (2) both the plan and the HRA have the same plan year. If an HRA is partially self-insured and partially insured, the employer must treat the non-insured portion as a self-insured plan for purposes of the PCORI fee.
Health Savings Accounts
In contrast to an HRA, a health savings account (“HSA”) is a tax-advantaged account owned by an individual enrolled in a high-deductible health plan that is used to pay for qualified medical expenses of the account holder, spouse, and/or dependents. Because the employer cannot control the account, HSAs are generally not considered employer-sponsored health plans and are therefore are not subject to the PCORI fee.
Some self-insured governmental programs are also subject to the PCORI fee. If the plan provides accident or health coverage to governmental employees and former employees, including state and local plans and the Federal Employee Health Insurance Plan, the plan must report and pay the PCORI fee. However, Medicare, Medicaid, Children’s Health Insurance Program (“CHIP”), and federal programs providing medical care other than through insurance policies to members of the armed forces, veterans, or members of Indian tribes are exempt from paying or reporting the fee.
COBRA continuation coverage or similar continuation coverage under state or other federal law must be taken into account in determining the PCORI fee, unless the arrangement is otherwise excluded. This means that participants and qualified beneficiaries electing and continuing to participate in a health plan through COBRA coverage generally will give rise to the PCORI fee.
Stop Loss Insurance or Indemnity Reinsurance Policy
The PCORI fee does not apply to any stop loss insurance, where the insurer is liable for all losses in excess of a specified amount and where the plan sponsor retains its liability for losses. Therefore, the self-insured plan is subject to the fee, but only until the stop-loss provision of the plan comes into effect. In addition, indemnity reinsurance policies are not subject to the fee, provided that the reinsuring company agrees to accept and indemnify the issuing company for all or part of the risk of loss under policies specified in the agreement, and the issuing company retains its liability to the applicable lives covered.
Payment of PCORI Fee
Amount of Fee
The amount of the PCORI fee is determined by multiplying the applicable dollar amount for the year by the average number of covered lives during the plan year. The applicable dollar amount varies with inflation from year-to-year. For calendar year plan years ending on or after October 1, 2012 and before October 1, 2013, the fee is $1 multiplied by the average number of covered lives for that plan year. The fee then increases to $2 for plan years ending on or after October 1, 2013. For any year ending on or after October 1, 014, the fee will be indexed to the national health expenditures.
Employers who sponsor self-insured health plans subject to the PCORI fee may choose among three methods to count the average number of covered lives. Under the actual count method, the employer adds the number of lives covered on each day of the plan year and divides by 365. The snapshot method enables the employer to choose a date in each quarter in which the employer adds the number of lives covered on each date and divides by the number of total dates. Finally, the Form 5500 method is calculated by adding the total number of reported participants at the end of the plan year and dividing by 2. However, the final regulations permit a self-insured health plan that provides coverage through both fully-insured and self-insured options to disregard the lives that are covered solely under the fully-insured option. Once a method is elected, it must be used consistently for the duration of the year.
Person/Entity Responsible for Fee Payment
The person or entity responsible for paying the PCORI fee depends on whether the health plan is fully-insured or self-insured. For a fully-insured health plan, the fee is paid by the policy insurer. In this case, the issuer files the forms, and fees will be built into annual premiums.
However, for self-insured plans, the plan sponsor is liable for the PCORI fee. In the case of a single employer plan, the plan sponsor is usually the employer; however the plan sponsor can be the employee organization in the case of a plan maintained by that organization. If the employer offers multiple self-insured plans, the employer pays only one PCORI fee per covered life, not per self-insured plan. For example, if a plan sponsor has an HRA or an FSA with a self-insured medical plan, then any covered life that was already counted for the medical health care plan will not need to be counted and paid again for the FSA or HRA plan. However, if the self-insured medical plan is not on the same plan year as the FSA or HRA plan, then any covered life that was already counted for the medical health care plan will need to be counted again and paid again for the FSA or HRA plan.
Method of Reporting and Paying
The PCORI must be reported and paid by July 31 of the calendar year immediately following the last day of the plan year. As a result, the fee due for plan years that ended between October 1 and December 31, 2012 must be paid by July 31, 2013.
Issuers and plan sponsors must use Form 720 (Quarterly Federal Excise Tax Return) to report and pay the fee by July 31. Late payment of the fee will result in penalties. The fee is also a deductible business expense under Internal Revenue Code Section 162.
Necessary Action Steps
In order to comply with the new PCORI fee requirements, plan sponsors should firstidentify self-insured plans that are subject to the PCORI fee. Then, the plan sponsor should ensure that the plan document identifies the plan sponsor who will be responsible for payment of the fee. Third, the plan sponsor should select a method for calculated the number of “covered lives” under the plan and use such method to calculate the PCORI fee due. Finally, plan sponsors should report and pay the PCORI fees on IRS Form 720 no later than July 31.
Fraser Stryker is a leader in tax and employee benefits law. Attorneys in the Firm’s Taxation and Employee Benefits Practice Groups advise individuals, business entities, governments, and nonprofit/tax-exempt organizations on a wide variety of tax and employee benefits matters and transactions.
Fraser Stryker works with employers to implement and maintain employee benefit plans that help attract and retain top talent. Attorneys on the Firm’s Patient Protection and Affordable Care Act & Health Care Reform Response Team advise businesses, political subdivisions and other governmental entities, health care organizations, and tax-exempt entities on all aspects of health care reform implementation and compliance. For more information on the PCORI fee or other health care reform questions, please contact Nicole R. Konen, Emily Wischnowski, or Kevin Tracy.
Formed in 1898, Fraser Stryker has grown to become a nationally recognized law firm that represents local, national, and multinational clients in complex business transactions and litigation matters. Fraser Stryker attorneys participate actively in a wide array of community organizations. Visit our home page for more information about us.
This article is provided by Fraser Stryker for general informational purposes and is not intended to be and should not be construed as legal advice on any specific facts or circumstances.
Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.