IRS Proposed Regulations Address Fees for Health Insurers and Self-insured Health Plans to Fund Patient-Centered Outcomes Research | Practical Law

IRS Proposed Regulations Address Fees for Health Insurers and Self-insured Health Plans to Fund Patient-Centered Outcomes Research | Practical Law

The Internal Revenue Service (IRS) issued proposed regulations on fees imposed on certain health plan insurers and self-insured health plan sponsors to fund the Patient-Centered Outcomes Research Trust Fund under the Affordable Care Act (ACA).

IRS Proposed Regulations Address Fees for Health Insurers and Self-insured Health Plans to Fund Patient-Centered Outcomes Research

by PLC Employee Benefits & Executive Compensation
Published on 13 Apr 2012 • USA (National/Federal)
The Internal Revenue Service (IRS) issued proposed regulations on fees imposed on certain health plan insurers and self-insured health plan sponsors to fund the Patient-Centered Outcomes Research Trust Fund under the Affordable Care Act (ACA).
On April 12, 2012, the IRS issued proposed regulations on fees imposed under the Affordable Care Act (ACA) on certain health insurers and plan sponsors of self-insured health plans. These fees will help finance the Patient-Centered Outcomes Research Institute, a private, nonprofit corporation established under the ACA to fund research of the clinical effectiveness of medical treatments, procedures and drugs. Specified insurers and plan sponsors will contribute $2 multiplied by the average number of covered lives under a policy or plan for each plan year ending on or after October 1, 2012, and before October 1, 2019 (for plan or policy years ending before October 1, 2013, the multiplier is $1). The proposed regulations clarify:
  • Which health insurers and plan sponsors are subject to the fees.
  • How health reimbursement arrangements (HRAs) and health flexible spending arrangements (health FSAs) will be treated under the fee rules.
  • How plan sponsors and insurers may calculate the average number of lives covered under plans.
The IRS released Notice 2011-35 in June 2011 requesting comments on the calculation of these fees and considered the resulting comments in drafting the proposed regulations. Insurers and plan sponsors may rely on the proposed regulations for guidance pending the issuance of final regulations.

Fees Do Not Apply to Excepted Benefits

The fees do not apply if substantially all of the coverage is of excepted benefits under IRC Section 9832(c) (for example, certain limited-scope dental and vision benefits).

Fees on Health Insurers

Under IRC Section 4375, a "specified health insurance policy" subject to the fee is any accident or health insurance policy issued with respect to individuals living in the US. This term does not include:
  • Primary insureds (and their spouses, dependents or other beneficiaries) whose address on file is outside of the US.
  • Expatriate policies (that is, group policies designed and issued to cover primarily employees who work and reside outside of the US).
  • Stop-loss or indemnity reinsurance policies.
Health insurers may use any one of four methods to determine the average number of lives covered under the insurers' policies. Two examples of these methods are:
  • The actual count method, where the insurer calculates the sum of lives covered for each day of the policy year and divides the sum by the number of days in the policy year.
  • The snapshot method, where the insurer adds the total number of lives covered on one date in each quarter of the policy year, or an equal number of dates for each quarter, and divides the total by the number of dates on which a count was made.
Insurers must use:
  • A single method to determine the average number of lives covered under the policy for the year.
  • The same method for all policies reported to the IRS on a single return.
Insurers that use the actual count or snapshot methods may change from one method to the other from one year to the next. The proposed regulations provide special rules for policy years already in progress.

Fees on Plan Sponsors of Self-insured Health Plans

Applicable Self-insured Health Plans

Under IRC Section 4376, plan sponsors of "applicable self-insured health plans" are responsible for paying the fees. In general, an applicable self-insured health plan is a plan that provides health or accident coverage, any portion of which is provided other than through an insurance policy. The definition includes retiree-only plans (that is, plans established or maintained solely for the benefit of former employees).
Rejecting the requests of some commenters, the proposed regulations do not exclude all HRAs and health FSAs from the definition of applicable self-insured health plan. However, multiple self-insured arrangements established and maintained by the same plan sponsor and having the same plan year are subject to a single fee. As a result, an HRA that is integrated with another applicable self-insured health plan providing major medical coverage will not incur a separate fee if the HRA and plan are established or maintained by the same plan sponsor. But for an HRA that is integrated with an insured group health plan, notwithstanding that the HRA and insured plan are maintained by the same plan sponsor:
  • The HRA is treated as an applicable self-insured health plan and its sponsor is subject to the fee for self-insured plans.
  • The insurer of the group insurance policy is subject to the fee for health insurers.
A health FSA is not an applicable self-insured health plan if it meets the requirements of an excepted benefit under IRC Section 9832(c). Health FSAs are otherwise subject to the fee for self-insured plans.
In addition, employee assistance programs (EAPs) and wellness programs are not applicable self-insured health plans if they do not provide significant benefits relating to medical care.

Calculating the Average Number of Lives

Plan sponsors of applicable self-insured health plans may use any of the following methods to calculate the average number of lives covered under the plans:
  • The actual count method, where the plan sponsor calculates the sum of the lives covered for each day of the plan year and divides the sum by the number of days in the plan year.
  • The snapshot method, where the plan sponsor adds the total number of lives covered on one date in each quarter of the plan year, or an equal number of dates for each quarter, and divides the total by the number of dates on which a count was made.
  • The Form 5500 method, where the plan sponsor uses a formula that includes the number of participants actually reported on the Form 5500 for the plan year. Additional rules apply depending on whether a plan provides only self-only coverage or additional options.
Plan sponsors must use only one method in each year, but do not have to use the same method from year to year. For plan years already in progress, plan sponsors may use any reasonable method to determine the average number of lives covered under the plan.

Practical Implications

The proposed regulations include a surprising amount of detail, particularly regarding the various methods for calculating the average number of lives covered. However, insurers and plans sponsors may find the examples illustrating these calculation methods to be helpful. The regulations also address the procedural rules for how insurers and self-insured plan sponsors will report and pay the required for fees, which:
  • Insurers must file by July 31 of the calendar year immediately following the last day of the policy year.
  • Plan sponsors of self-insured plans must file by July 31 of the immediately following calendar year.
For analysis of the ACA, see Practice Note, Affordable Care Act (ACA) Overview.