IRS Proposes New Benefit Fees on Employer Health Plans

April 26, 2012 – 4:50 pm | By Todd Leeuwenburgh |

About a year from now, employers and plan administrators will be preparing to pay a fee to fund the Patient Centered Outcomes Research Institute (PCORI). The IRS on April 17 (77 Fed. Reg. 22691) issued proposed regulations on the fee.

The Patient Protection and Affordable Care Act (PPACA) created the PCORI fee to promote research to evaluate and compare health outcomes and the clinical effectiveness. It will apply to some, but not all, health plans with years ending on or after Sept. 30, 2012. The excise tax will be $1 times the average number of covered lives for the plan year. The tax increases to $2 per covered life for plan years ending on or after Oct. 1, 2013; and will be indexed for inflation for years thereafter. The government will cease collecting the tax after Sept. 30, 2019.

What Will Be Taxed

The tax will be imposed on the employer’s primary medical bill-paying vehicle:

•   fully insured health plans and individual policies (to be paid by the insurer);

•   self-insured health plans (to be paid by the plan sponsor)

Self-insured plan sponsors are defined to include employers, labor unions, Taft-Hartley multiemployer plan trusts, voluntary employees’ beneficiary associations (VEBAs) and multiple employer welfare arrangements (MEWAs). They will all be subject to the tax.

What Will Not Be Taxed

The following kinds of coverage will not have to pay the tax.

  • stop-loss insurance;
  • employee assistance, disease management and wellness programs, provided they do not pay significant medical bills;
  • group health plans for expatriate workers;
  • health flexible spending accounts (FSAs) that are excepted under HIPAA, and the employer contribution is either zero or less than $500 per year;
  • specialty coverage (hospital-only or disease specific) that is offered independently and not coordinated with the general health plan;
  • Medicare and Medicaid supplemental policies;
  • limited scope dental of vision benefits; and
  • health reimbursement arrangements (HRAs) integrated with a self-insured health plan that’s already being taxed.

Stand-alone HRAs Can Be Taxed

HRAs that are not integrated with a health plan that provides major medical coverage and HRAs that are being run by a separate plan sponsor from whoever’s running their major medical coverage will be assessed the fee.

In response to comments, however, the rules would subject plan sponsors that run several self-insured arrangements the same plan year to a single fee. The proposed rule builds on IRS Notice 11-35.

Plans liable for this fee will pay it by filing Form 720. The IRS says it plans to revise the form.

How the Fees Are Calculated

For the first year, the fee is $1, multiplied by the average number of covered lives. The proposed rule lets payers choose from one of four approaches when calculating this average.

  • Actual Count. The payer may calculate an average number of covered lives for a policy year by multiplying the number of covered lives for each day of the policy year and dividing that sum by the number of days in the policy year.
  • Snapshot Method. The payer may calculate the average number of lives for a policy year by adding 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 dividing the total by the number of dates on which a count was made (the snapshot method).
  • Member Month Method. Issuers of individual policies may calculate the number of lives subscribed to each individual policy during a given month, add together member counts for all months over the calendar year, then divide by 12, to determine the average number of lives.
  • Form 5500 Method. Self-insured health plans may add the total participants covered at the beginning and the end of the plan year, as reported on the Form 5500. If the plan covers employees and not dependents, the sum of the numbers is divided by two. If the plan offers dependent coverage, the sum of the numbers must be reported.

The fee will no longer apply for plan years ending on or after Oct. 1, 2019. The agency will accept comments until July 12.