On April 12, 2012 the IRS released proposed regulations regarding the collection of the fee for the Patient-Centered Outcomes Research Trust Fund (the “Fund”) under the Patient Protection and Affordable Care Act (“PPACA”). The Fund will be used to pay for the Patient-Centered Outcomes Research Institute which has the goal of helping health care providers and consumers make informed health decision by synthesizing research comparing the outcome effectiveness of various treatments.

Applicable Plans. The fee will be collected from insurers, self-insured health plans, multiemployer plans, state and local governmental plans, stand-alone VEBAs and other health plans. This alert focuses on the rules as they apply to private employer plans, but many of the rules apply similarly to other types of plans.

Amount of the Fee. Initially, the fee is $1 per covered life. The first fees will be collected for plan or policy years ending between October 1, 2012 and October 1, 2013. After October 1, 2013, the fee increase to $2 per covered life until October 1, 2014. After that, it is indexed based on projected increases in per capita medical expenditures. The fee is set to expire on October 1, 2019. The tax return to pay the fee is generally due by the end of July following the end of the applicable plan or policy year.  

Overview. Generally, the proposed regulations provide that the fee applies to policies or plans that provide medical coverage. Insurers pay the fee on behalf of insured plans, although plan sponsors of insured plans will likely see this cost passed along to them in the form of higher premiums. The plan sponsor generally pays the fee on behalf of self-funded plans.  

Self-funded plans may use the following simplifying assumptions to determine the number of covered lives. The four methods a self-funded plan can use to determine covered lives are:

  • an average, daily covered lives calculation,
  • the average number of covered lives for a single day (or multiple days) in each calendar quarter,
  • the average of (1) the number of covered employees with self-only coverage, plus (2) the number of employees with non-self-only coverage multiplied by 2.35 each measured on a single day (or multiple days) in each calendar quarter, or
  • the average of the number of participants at the beginning and the end of the plan year (as reported on the Form 5500 for that year) (if a plan only offers self-only coverage, that number can be divided by 2).

Self-funded plans may use the following simplifying assumptions to determine the number of covered lives:

  • an average, daily covered lives calculation,
  • the average number of covered lives for a single day (or multiple days) in each calendar quarter,
  • the average of (1) number of covered employees with self-only coverage, plus (2) the number of employees with non-self-only coverage multiplied by 2.35 each measured on a single day (or multiple days) in each calendar quarter, or
  • the average of the number of participants at the beginning and the end of the plan year (as reported on the Form 5500 for that year) (if a plan only offers self-only coverage, that number can be divided by 2).

Insurers and self-funded plan sponsors must use the same method consistently for an entire reporting year, but may change methods from year to year. The regulations also provide special rules for determining this fee for the first and last years of the program.

Unique Rules. Within the rules, there are several nuances and surprises, such as:  

  • Retiree-only plans are subject to the fee.
  • Insurance policies that are designed and issued primarily to cover employees outside the US (e.g., expatriate policies) are excluded.
  • “Excepted benefits” are exempt (for example, separate vision and dental policies, or vision and dental coverage that requires a separate election and separate premium), including health FSAs so long as the sponsor has other group health coverage and the maximum reimbursement for any year does not exceed the greater of (1) two times the participant’s salary reduction or (2) the amount of the participant’s salary reduction plus $500.
  • Health FSAs that are not excepted benefits because they do not meet the requirements described above, and all HRAs, are subject to the fee with the following modifications:
    • If the plan sponsor offers other self-insured coverage, it can treat the HRA or health FSA as a single, integrated self-insured plan with its major medical self-insured coverage for purposes of the fee.
    • However, if an employer has an insured medical plan with an HRA or non-exempt health FSA, then the employer, as plan sponsor, has to pay the fee for employees covered by the health FSA or HRA, but there will be only one fee for any employee who participates in both.
    • Plan sponsors may assume only one covered life per participant in these plans. (The fee is generally based on covered lives, which would include participants and dependents, but the IRS was sympathetic to the idea that plan sponsors may not know how many dependents are having expenses reimbursed from these plans.)
  • A self-insured plan sponsored by multiple members of a controlled group is not considered a single-employer plan for this purpose. However, this should have little practical impact. For this purpose the “plan sponsor” for a self-insured plan is generally the entity designated as such in the plan documents. If the plan document does not designate a plan sponsor, then each member of the controlled group has to file separately. Employers can avoid this by making sure their documents specify a plan sponsor by the deadline for filing the tax return.

Conclusion. The rules provide helpful guidance on the life counting requirement for determining the amount of the fee, especially given the short time frame for compliance. However, some of the nuances are sufficiently subtle to create potential compliance pitfalls. Plan sponsors should consult with experienced tax advisors to make sure they are reporting fees correctly.