The Patient Protection and Affordable Care Act (the “Act”) includes provisions that promote research to evaluate and compare health outcomes and the clinical effectiveness, risks and benefits of medical treatments, services, procedures, drugs and other strategies or items that treat, manage, diagnose or prevent illness or injury (“clinical effectiveness research” or CER). One such provision relates to the establishment of the Patient-Centered Outcomes Research Institute (the “Institute”), a private, nonprofit corporation. The Institute is funded through the Patient-Centered Outcomes Research Trust Fund (the “Trust”). The Trust, in turn, is funded through fees imposed on certain insurers and self-funded plan sponsors (the “CER Fees” or “PCORI Fees”).

The rules governing the amount of the CER Fees and the entities to which the CER Fees apply were added to the Internal Revenue Code (the “Code”) by Section 6301 of the Act, which added new Code Sections 4375, 4376 and 4377. Section 4375 applies to insurance policies, Section 4376 applies to self-insured plans and Section 4377 provides definitions and special rules applicable to the other sections.

Guidance Background

In the spring of 2011, the IRS issued its initial guidance regarding the PCORI Fees in the form of Notice 2011-35. On April 17, 2012, the IRS issued proposed regulations that provided greater detail. Finally, on December 6, 2012, IRS issued final regulations.1

This article follows up on our September 2012 advisory on this topic, which described the rules under the proposed regulations. This updated advisory includes changes and clarification made in the final regulations.

What policies and plans are subject to the CER Fees?

Section 4375 imposes a fee on an issuer of a “specified health insurance policy” and Section 4376 imposes a fee on a plan sponsor of an “applicable self-insured plan” for each policy or plan year ending on or after October 1, 2012, but before October 1, 2019.

A “specified health insurance policy” is defined as any accident or health insurance policy issued with respect to individuals residing in the United States. The United States, for this purpose, includes American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, the Virgin Islands and any other possessions of the United States. Policies issued primarily to cover employees who are working and residing outside the United States (i.e., expatriate policies) are not considered to be specified health insurance policies. In addition, stop-loss and indemnity reinsurance policies also are not specified health insurance policies. Finally, specified health insurance policies do not include certain excepted benefits under Code Section 9832(c), such as disability benefits, general liability policies, automobile liability coverage, workers’ compensation coverage, limited scope dental or vision coverage, long-term care coverage, specified disease or illness (e.g., cancer) coverage, hospital indemnity coverage, on-site medical clinics, employee assistance programs (EAPs) and disease management and wellness programs.

An “applicable self-insured plan” is defined as any plan providing “accident or health coverage” if any portion of the coverage is provided other than through an insurance policy, and the plan is established and maintained for the benefit of employees, former employees, (or members and former members) or other eligible individuals. “Accident or health coverage” is defined as any coverage that, if provided by an insurance policy, would cause the policy to be a specified health insurance policy.

Practice Pointer: Retiree-only plans, while exempt from many other provisions of the Act, are considered applicable self-insured plans subject to the CER Fee.

Like a specified health insurance policy, an applicable self-insured plan does not include certain excepted benefits under Section 9832(c), such as disability benefits, general liability policies, automobile liability coverage, workers’ compensation coverage, limited scope dental or vision coverage, long-term care coverage, specified disease or illness coverage, hospital indemnity or fixed indemnity insurance and on-site medical clinics. Finally, EAPs, as well as disease management and wellness programs, are not considered to be applicable self-insured plans if the programs do not provide significant benefits in the nature of medical care or treatment.

Practice Pointer: Most, but not all, health FSAs will qualify as excepted benefits. Health FSAs are excepted benefits if (1) other group health plan coverage (e.g., medical coverage) is made available to the eligible participants; and (2) the arrangement is structured so that the maximum benefit payable to any eligible participant cannot exceed two times the participant’s salary reduction election (or, if greater, $500 plus the amount of the salary reduction election). If you’re not sure about your FSA, you should consult outside legal counsel for a determination.

Practice Pointer: Self-funded medical coverage and a self-funded HRA may be treated as a single plan when determining the CER Fee. However, if the medical coverage is fully insured and the HRA is self-insured, they may not be treated as a single plan when calculating the CER Fees, and separate payment would be due under Code Sections 4375 and 4376, respectively.

How much is the CER Fee?

The fee is $1 multiplied by the average number of lives covered under the policy or self-insured plan for policy years ending before October 1, 2013. Thereafter, the fee is $2 multiplied by the average number of lives covered. Thus, for calendar year plans, the CER Fee is $1 in 2012 and $2 in 2013. For policy years ending after October 1, 2014, the $2 fee is increased based on increases in the projected per capita amount of National Health Expenditures.

The CER Fee is calculated based on the average number of lives covered. However, when making that determination, multiple self-insured plans established and maintained by the same plan sponsor and with the same plan year are subject to a single fee. For example, an HRA would not be subject to a separate fee if the HRA is integrated with another applicable self-insured plan that provides major medical coverage. If the medical coverage is fully insured, however, the insurer and plan sponsor must each pay a separate CER Fee for the HRA and medical policy, respectively.

Who is responsible for paying the CER Fee?

The fee due under Section 4375 for insured plans is imposed on the issuer of the specified health insurance policy (i.e., the insurer).

For self-insured plans, the fee due under Section 4376 is imposed on the “plan sponsor” of an applicable self-insured plan. The “plan sponsor” is the employer designated as such in the plan document, in the case of a plan established or maintained by a single employer; the employee organization, in the case of an applicable self-insured plan established and maintained by an employee organization; the joint board of trustees, in the case of a multi-employer plan; the committee, in the case of a multiple employer welfare arrangement (MEWA); or the trustee, in the case of a plan established and maintained by a voluntary employees’ beneficiary organization (VEBA). Governmental employers are generally considered plan sponsors, but governmental entities sponsoring Medicare, Medicaid, Children’s Health Insurance Program (CHIP), coverage for members of the Armed Forces of the United States and coverage for members of Indian tribes are specifically excluded.

Practice Pointer: The reporting and payment of the CER Fees must be performed by the plan sponsor, and may not be delegated to a third party. In contrast, the transitional reinsurance contribution, which is calculated using similar rules to those for the CER Fee (and which is sometimes confused with the CER Fee) will be paid and reported by the plan’s TPA.

Practice Pointer: Where the plan sponsor of a self-funded plan is a trustee or a board of trustees that exists solely for the purpose of sponsoring and administering the plan and that has no source of funding independent of plan assets, (e.g., a MEWA or VEBA), the CER Fees may be paid from plan assets. However, this rule does not apply to employers whose plans are funded through a VEBA when the employer holds any assets of its own outside the plan.

How is the CER Fee calculated?

As mentioned above, the CER Fee is a dollar amount multiplied by the number of covered lives in the policy or plan. Generally, covered lives include both participants and dependents, but a special rule applies for nonexempt FSAs and HRAs. Insurers and plan sponsors have several methods available for determining covered lives for purposes of the CER Fee. Any of the methods discussed below may be used; however, the issuer or plan sponsor must apply a single method for any given year. In addition, issuers must use the same method of counting lives for all policies reported on a single return. Issuers and plan sponsors may change the method used from year to year.

1. Insurer Issuing Specified Health Insurance Policies

The IRS has provided four different methods to calculate the average number of covered lives under a specified health insurance policy.

  • Actual Count Method: The actual count method formula is the sum of actual covered lives2 each day during the policy year divided by the total number of days in the policy year.
  • Snapshot Method: The snapshot method formula is the sum of covered lives on one or more dates in each quarter divided by the applicable number of dates used. So, for example, if you use the first day of each quarter as your benchmark, then you will add the total number of lives on the first day of each quarter and then divide that number by four.

The final regulations require the benchmark dates for the second, third and fourth quarters to be within three days of the date used in the first quarter. For example, if January 7 is the benchmark date for the first quarter, the second quarter benchmark date must be between April 4 and April 10 (inclusive).

  • Member Months Method: The member months method formula is the number of member months reported on the National Association of Insurance Commissioners (NAIC) Supplemental Health Care Exhibit (the “Exhibit”)3 divided by 12.
  • State Form Method: The state form method is the number of covered lives reported on a state form that reports lives covered in the same manner as member months reported on the Exhibit. Covered lives include individuals who are extended coverage through COBRA continuation.

The actual count and snapshot methods count lives covered on a policy-by-policy basis for each policy having a policy year that ends in the reporting period (i.e., calendar year), while the member months and state form methods count all lives covered during the calendar year for all policies in effect during the calendar year, irrespective of when actual policy years end.

The taxes due apply only to policy years ending after October 1, 2012, and before October 1, 2019.

Practice Pointer: Plans with a calendar year policy year will file for each year beginning with 2012 and ending in 2018, since the 2019 policy year ends after October 1, 2019.

2. Self-Funded Health Plan and Plan Sponsors

The IRS has provided four different methods to calculate the average number of covered lives under a self- insured plan. NOTE: The IRS has provided a special rule for HRAs/Health FSAs. In the case of HRAs/FSAs, you will consider only participants in your calculation of covered lives. This appears to be the rule even if your HRA offers self-only and other-than-self-only coverage.

  • Actual Count Method: This is a simple formula in theory—perhaps not simple in application. The actual count method formula is the sum of actual covered lives each day during the plan year divided by the total number of days in the plan year.
  • Snapshot Method #1: The snapshot method #1 formula is the sum of covered lives on one or more dates in each quarter divided by the applicable number of dates used. For example, if you use the first day of each quarter as your benchmark, then you will add the total number of lives on the first day of each quarter and then divide that number by four.
  • Snapshot Method #2: This is the same as #1, except that the number of covered lives on your benchmark date(s) in a quarter is the sum of participants with self-only coverage and (participants with other than self-only multiplied by 2.35). You would not likely use this to determine HRA/FSA fees.

The final regulations require the benchmark dates for the second, third and fourth quarters to be within three days of the date used in the first quarter. For example, if January 7 is the benchmark date for the first quarter, the second quarter benchmark date must be between April 4 and April 10 (inclusive).

  • Form 5500 Method: The Form 5500 method formula for a self-insured plan that offers only self-only coverage is the sum of total participants identified on Form 5500 at the beginning of the plan year and total participants identified on Form 5500 at end of the plan year divided by two. The Form 5500 method formula for a self-insured plan that offers both self-only and other-than-self-only is simply the sum of the total participants identified on Form 5500 at the beginning of the plan year and the total participants identified on Form 5500 at the end of the plan year.

Practice Pointer: The Form 5500 Method will not be available to calendar year plans that file an extension for the plan’s 5500 filing. The filing is due on July 31 without extension, and therefore, coincides with the CER Fee filing date. If the plan requests a filing extension, there will be no Form 5500 on which to base the count.

Covered lives include individuals who are extended coverage through COBRA continuation.

Self-insured plans that provide coverage through fully-insured and self-insured options may disregard lives that are covered solely under the fully insured option(s) under the Actual Count, Snapshot and Form 5500 Methods.

As mentioned above, the taxes due apply only to plan years ending after October 1, 2012, and before October 1, 2019. Plan sponsors may use any reasonable method to determine the average number of lives covered under the plan for purposes of calculating the fee under Code Section 4376 for the 2012 plan year.

Practice Pointer: Plans with a calendar year plan year will file for each year beginning with 2012 and ending in 2018, since the 2019 plan year ends after October 1, 2019.

When is payment of the CER Fee due?

The CER Fee is calculated for each calendar year, even if the policy or plan operates under a fiscal year. The CER Fee is paid by filing IRS Form 720. For purposes of paying the applicable CER Fee, the IRS has suggested that the IRS Form 720 may not be required to be filed quarterly. Only an annual filing may be necessary. The filing is due by the July 31 immediately following the end of the policy/plan year. For example, the CER Fee for the 2013 calendar year would be due no later than July 31, 2014.

Practice Pointer: The first CER Fee for the 2012 calendar year is due by July 31, 2013. IRS is expected to update Form 720 to accommodate CER Fees in the near future.