Plan Sponsors Must Pay New Annual Health Plan Fee for 2012 and Beyond

This is part of our series of alerts intended to help guide employers and plan sponsors through their new obligations under the health care reform laws and related guidance.

On April 12, 2012, the IRS released proposed regulations regarding the implementation of the comparative effectiveness fee that is to be imposed on health insurance companies issuing accident or health insurance policies and plan sponsors of self-insured group health plans providing accident or health coverage. If you sponsor an insured group health plan, your insurer (not you) will be responsible for paying this fee. The fee will be used to fund the Patient-Centered Outcomes Research Trust Fund, a private, non-profit corporation that will collect, analyze and report on comparative clinical effectiveness research findings.

This alert focuses on the fee that will apply to private employers sponsoring self-insured group health plans.

Which of my plans are subject to the fee?

Plan sponsors of self-insured group health plans covering individuals residing in the U.S. must pay the fee. Governmental entities, including federally-recognized Indian tribal governments, must also pay the fee unless they operate certain exempt governmental programs.

The fee does not apply to the following plans:

• limited-scope dental and vision plans;
• other plans where substantially all of the coverage is for “excepted benefits” (“excepted benefits” include health care flexible spending accounts (FSAs) if the plan sponsor offers other group health care coverage and the maximum reimbursement in the FSA for any year does not exceed the greater of (i) two times the participant’s salary reduction contribution and (ii) the participant’s salary reduction contributions plus $500);
• employee assistance, disease management, or wellness programs that do not provide significant benefits in the nature of medical care or treatment;
• stop loss and indemnity reinsurance policies; and
• Archer Medical Savings Accounts (Archer MSAs) and Health Savings Accounts (HSAs).

Health Reimbursement Accounts (HRAs) and FSAs that are not excepted benefits are not exempt from the fee. If, however, your HRA is integrated with another self-insured plan that provides major medical coverage, the two plans may be treated as one plan for purposes of the fee.

The proposed regulations offer some relief to you if you offer multiple group health plans to the same individuals. If you sponsor more than one self-insured group health plan with the same plan year, they may be treated as one plan and only one fee applies. If, however, you sponsor a self-insured plan and a fully-insured group health plan, a separate fee will apply to you and to the insurer.

Interestingly, the proposed regulations provide that the fee applies to retiree-only group health plans, even though retiree-only plans are exempted from a number of other health care reform law requirements.

Who pays the fee?

If you are the plan sponsor of a self-insured group health plan, you must pay the fee. If your plan covers your employees and employees of related companies (e.g., controlled group members) but your plan does not clearly designate a plan sponsor, each entity will need to separately report and pay the fee. If your plan is sponsored by two or more benefited employers (e.g., a multiple employer welfare arrangement or MEWA) or by a voluntary employees’ beneficiary association (VEBA) or rural electric cooperative, the association committee joint board of trustees, or other similar group will be responsible for the fee. Under the proposed regulations, your third-party administrator will not be allowed to file the return or pay the fee on your behalf.

The proposed regulations note that the U.S. Department of Labor (DOL) is considering permissible funding sources for the payment of the fee (e.g., whether or not the fee may be paid from plan assets). Until the DOL approves the use of plan assets to pay the fee, plan sponsors should proceed cautiously and use their own funds to pay this fee.

When does the fee apply?

The fee applies for plan years ending on or after October 1, 2012 and before October 1, 2019. For calendar year plans, this means that the fee first applies to the 2012 year and will remain in effect through 2018.

How much do I have to pay?

The fee equals the “average number of lives” residing in the U.S. covered by the group health plan during the plan year multiplied by:

• for plan years ending before October 1, 2013, $1.
• for plan years ending on or after October 1, 2013 and before October 1, 2014, $2.
• for plan years ending on or after October 1, 2014 and before October 1, 2019, $2, indexed based on increases in projected per capita expenditures.

You may choose one of the following methods to calculate “average number of lives”:

• average count method: the sum of the lives covered for each day of the plan year divided by the number of days in the plan year.
• snapshot count method: the sum of the lives covered on one date in each quarter or an equal number of dates for each quarter, divided by the total number of dates on which the count was made.
• Form 5500 method: a formula based on the number of participants reported on the Form 5500 for the plan year. The formula varies depending on whether your plan provides self-only coverage or not (e.g., you may need to divide by 2 if you offer only single coverage or add together beginning of year and end of year numbers if you offer family coverage).

A special rule applies for the 2012 calendar year and for any other plan year that ends on or after October 1, 2012 and began before July 1, 2011. Under the rule, you may use any reasonable method to determine the “average number of lives.”

Note that you must count all lives covered by the plan, not just your employee participants. The proposed regulations allow you to presume that if the address in your files for the primary insured (e.g., your employee) is outside the U.S., the primary insured and his or her covered spouse and dependents do not reside in the U.S. and, presumably, to exclude them from the calculation of the fee. Another special rule allows you to count only the participating employee (not the covered spouse or dependents) in calculating the fee for your health FSA or HRA. This may impact how you track enrollment information within your various plans.

The method that you use to determine average number of lives must be consistent throughout the plan year, but you do not have to apply the same method from one plan year to the next.

How do I report and pay the fee?

You will need to file IRS Form 720 to report the fee and provide the required payment by July 31st for all plan years ending in the preceding calendar year. For plan years ending October 31, 2012; November 30, 2012; and calendar year plans, this means that your initial report and fees will be due by July 31, 2013.