The Internal Revenue Service (IRS) published final regulations on December 6, 2012, concerning the calculation and reporting of fees with respect to health insurance plans. The fees were added by the Patient Protection and Affordable Care Act (the Affordable Care Act or ACA) to fund the Patient-Centered Outcomes Research Institute (PCORI). The fees are $2 ($1 for plan years ending prior to October 1, 2013) multiplied by the average number of lives and affect both issuers of health insurance policies and plan sponsors of self-insured health plans. This alert will focus on the application of the proposed regulations to self-insured health plans.

Action Needed: Plan sponsors should carefully review the final regulations and decide which method they will use to determine the average number of covered lives. The due date for the first payment of the fees is July 31, 2013.

Cheiron Observation: This fee is in addition to the contributions that will be required to fund the Transitional Reinsurance Program. See our separate alert from last week.

Background and Overview

The ACA includes provisions that promote research to evaluate and compare health outcomes. One such provision established the PCORI, which is to assist (through research) patients, clinicians, purchasers, and policy-makers in making informed health decisions by advancing the quality and relevance of evidence-based medicine. The funding source for the PCORI is a fee on all insured and self-insured covered lives.

The ACA added section 4376 to the Internal Revenue Code. Section 4376 imposes a fee on each "applicable self-insured health plan" of $2 ($1 in the case of plan years ending before October 1, 2013) multiplied by the average number of lives covered under the plan. The fees are to be paid by the plan sponsor. Self-insured plan sponsors must complete and file their own Form 720. The regulations explain the time and manner of paying the fees, define "applicable self-insured health plan," and provide alternative methodologies for determining the average number of lives covered under the plan.

Time and Manner for Paying the Fees

The average number of covered lives, and the resulting fees, will be reported using a modified IRS Form 720 which will include payment of the fees. The fees will be paid only once per calendar year, starting in 2013, and the due date is July 31 of the calendar year. The fees apply for each plan year ending after September 30, 2012 and do not apply to plan years ending after September 30, 2019.

Applicable Self-Insured Health Plan

An applicable self-insured health plan is defined as any plan that provides accident or health coverage if any portion of the coverage is provided other than through an insurance policy and the plan is established or maintained by

(a) One or more employers for the benefit of their employees or former employees;
(b) One or more employee organizations for the benefit of their members or former members;
(c) Jointly by one or more employers and one or more employee organizations for the benefit of employees or former employees;
(d) A voluntary employees beneficiary association (VEBA) as described in Code section 501(c)(9);
(e) An organization described in Code section 501(c)(6); or
(f) A multiple employer welfare arrangement (MEWA), a rural electric cooperative, or a rural cooperative association (as these are defined in section 3(40) of the Employee Retirement Income Security Act of 1974 (ERISA)).

Cheiron Observation: The first item (a) will generally cover single-employer or multiple employer plans. The second item (b) will certainly cover unions that provide health plans for their members. The third item (c) will cover multiemployer plans.

The term applicable health plan does not include any of the following:

• A plan that provides benefits substantially all of which are excepted benefits as defined in Code section 9832(c)1; or
• An employee assistance program, disease management program, or wellness program if the program does not provide significant benefits in the nature of medical care or treatment.

The preamble to the regulations makes it clear retiree-only plans are included as plans subject to the fees. Additionally, the regulations and preamble are clear that health flexible spending accounts (health FSAs and health reimbursement accounts (HRAs)) are self-insured health plans subject to the fees. Health savings accounts (HSAs) themselves are not subject to the fees.

The regulations contain a rule that allows two or more self-insured plans established or maintained by the same plan sponsor and that have the same plan year to be treated as a single self-insured health plan for purposes of calculating the fees. Thus, an employer that provides a self-insured medical plan and a separate self-insured prescription drug plan for its employees may treat the two arrangements as one self-insured plan (if they have the same plan year). Similarly, an HRA that is integrated with another self-insured health plan that provides major medical coverage can be regarded as a single self-insured health plan.

Cheiron Observation: Employers that combine an HRA with an insured high deductible health plan will have one self-insured health plan (the HRA) subject to the fees, and the insurer will pay fees on the average number of employees covered by the health insurance policy.

Methods to Determine Number of Covered Lives

The regulations provide alternative methods to determine the average number of covered lives (which includes dependents). The same method must be used consistently for a plan year, but a plan sponsor may use a different method from one plan year to the next.

Actual Count Method: Add the total number of lives covered under the plan for each day of a plan year and divide by the number of days in the plan year.

Snapshot Methods (either Factor or Count): Add the totals of lives covered under the plan on a date during the first, second, or third month of each quarter of the plan year (or more dates if an equal number of dates is used in each quarter), and divide by the number of dates. Each date used during the second, third, and fourth quarter must be within three days of the date in that quarter that corresponds to the date used for the first quarter, and all dates must fall with the same plan year. The 30^th and 31^st of a month are treated as the last day of the month for purposes of determining the corresponding date for any month that has fewer than 31 days.

Cheiron Observation: The rule allowing dates within three days of the corresponding date in the first quarter helps when the date would otherwise fall on a holiday or weekend.

Form 5500 Method: The average number of covered lives for a plan year is based on the number of participants reported on the Form 5500 that is filed for the plan year, provided the Form 5500 is filed before the July 31 due date for the fee. If the plan provides self-only coverage, the average number of covered lives is the sum of the total participants covered at the beginning and end of the plan year, as reported on the Form 5500, divided by 2. If the plan provides for other than self-only coverage (i.e., self plus dependent coverage), the average number of covered lives is the sum of the total participants covered at the beginning and end of the plan year, as reported on the Form 5500.

Cheiron Observations: Because only the number of participants/subscribers is reported on the Form 5500, the regulations provide a method that estimates the number of participants plus dependents; that is adding the number of participants at beginning and end of year. Also, a government plan does not file Form 5500 so it cannot make use of the Form 5500 method.

The regulation provides a special rule for health FSAs and HRAs. Under the special rule, if a plan sponsor does not establish or maintain an applicable self-insured health plan other than a health FSA or HRA, the plan sponsor may treat each participant's health FSA or HRA as covering a single life. Therefore, the plan sponsor is not required to include as covered lives any spouse, dependents, or other beneficiary.

What Should Plan Sponsors Do

Plan sponsors should review their data systems and resulting fees to see what method they want to use to determine the average number of covered lives for the 2012 plan year. If system changes are needed to determine the number of covered lives, there are approximately eight months to make the changes and gather the information.

Cheiron consultants can assist in determining what method makes sense for a plan sponsor.

Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Therefore, we do not provide legal services or tax advice.

¹ Generally, coverage only for accident or disability income insurance, supplemental liability insurance, liability insurance, workers' compensation, automobile medical payment insurance, credit insurance, or coverage for on-site medical clinics.