Last week, the Internal Revenue Service issued proposed regulations on the fees imposed on specified health insurance issuers and plan sponsors of self-funded health plans under the Affordable Care Act to help fund the Patient-Centered Outcomes Research Institute. The purpose of the Institute is to advance “the quality and relevance of evidence-based medicine through the synthesis and dissemination of comparative clinical effectiveness research findings.” The Affordable Care Act added Code Sections 4375, 4376 and 4377 to provide a funding source for the Institute, as described in more detail below. These fees are commonly referred to as the “PCOR Fees.”
The Service drafted the proposed regulations in light of public comments received by the Service last year. This firm submitted comments on behalf of various clients, and we are pleased to report that the Service adopted a number of our suggestions, as explained more fully below. (For a copy of our prior comments, see www.kilpatricktownsend.com, Knowledge Center, Publications, Other Publications.)
Overview of the PCOR Fee Assessed on Plan Sponsors and Health Insurance Issuers
Insurers (including state-licensed HMOs) are responsible for paying the PCOR Fee relating to their own policies, while plan sponsors are responsible for paying the PCOR Fee for their self-insured arrangements. For plan/policy years ending on or after October 1, 2012 and before October 1, 2013, the fee is one dollar ($1) multiplied by the average number of covered lives (including dependents). The fee is increased to two dollars ($2) for plan years ending on or after October 1, 2013 and may be further increased on or after October 1, 2014.
Most government plans are also subject to the PCOR Fee, except “exempt governmental programs” (such as Medicare, Medicaid, CHIP, programs established by federal law to provide medical care to current or former members of the Armed Forces or to members of Indian tribes).
Importantly, although retiree-only plans are exempt from many aspects of the Affordable Care Act, they are subject to the PCOR Fee. The PCOR Fee does not apply to –
- Excepted benefits (such as certain dental and vision plans/policies);
- Stop-loss insurance;
- HRAs integrated with another self-insured health plan that provides major medical coverage, if the HRA and the other plan are maintained by the same plan sponsor; and
- Flexible spending accounts that qualify as “excepted benefits” (this exempts most flexible spending accounts from the fee).
In addition, two items that our firm submitted comments on related to EAPs and non-U.S. residents who have coverage through a self-insured health plan. We suggested that the PCOR Fees were not intended to cover incidental coverage, such as EAPs, or non-U.S. residents that have coverage under a self-insured health plan, such as ex-patriates. We are pleased to report that the proposed regulations exclude EAPs, disease management programs and wellness programs, if those programs do not provide significant medical care benefits or treatment. The proposed regulations also exclude non-U.S. residents from the PCOR Fee calculation based on the residence address of the individual.
Special Rules for Controlled Groups and Multiple Arrangements
Our prior comments to the Service also highlighted the fact that the way the statute is worded sets up the very real possibility for double counting covered lives. Fortunately, the proposed regulations reduce this possibility by providing special rules for controlled groups and multiple arrangements.
In a controlled group setting, the proposed regulations allow the controlled group to designate one employer as being responsible for calculating and paying the PCOR Fee with respect to all the employees in the controlled group. This designation must be made in the plan document, and plan sponsors are encouraged to review and update their plan documents as necessary to take advantage of these rules.
In addition, the proposed regulations allow a plan sponsor to treat two or more self-insured arrangements (such as separate PPO options, or a separate PPO and prescription drug option) as one self-insured arrangement, assuming they both have the same plan year. This eliminates the possibility of double counting between all of a plan sponsor’s self-insured arrangements.
Determining the Number of Covered Lives
To pay the PCOR Fee, issuers and plan sponsors must determine the average number of lives covered under the applicable plan or policy and file the return (Form 720) with the assessed tax. The return is due by July 31 of the calendar year following the last day of the policy year or plan year, as applicable. This means that for plan years ending December 31, 2012, the return and related tax is due by July 31, 2013.
For self-insured arrangements, plan sponsors are provided various options, including methods which allow them to approximate the number of covered dependents by using a factor provided under the regulations. Three separate calculation methods and one special method for 2012 are allowed –
- Actual Count Method: Calculate the sum of lives covered for each day of the plan year and divide by the total number of days in the plan year.
Snapshot Method: Add the total number of lives covered on one date in each quarter (or an equal number of dates for each quarter) and divide by 4 (or the number of dates used). The number of lives covered is equal to either –
- The sum of the number of participants with self-only coverage on that date, plus the product of the number of participants covering at least one dependent and 2.35; or
- The actual number of lives covered on the designated date.
- Form 5500 Method: This method allows a plan to use Form 5500 participant counts, after certain modifications. However, because most self-insured health arrangements are bundled with other insured coverages and even other benefits for Form 5500 filing purposes, this method will likely produce an inflated covered life count for a substantial number of plan sponsors. For that reason, we do not see this method being used by most self-insured plan sponsors.
- Special Rule for 2012: A special rule applies for plan years beginning before July 11, 2012 and ending on or after October 1, 2012 (e.g., the 2012 plan year, for plan years that are calendar years). Under this special rule, a plan sponsor may determine the average number of covered lives for the plan year using any reasonable method.
Plan sponsors can change the calculation method used for different plan years, but must use the same method within the same plan year.