IRS issues proposed regulations on excise tax imposed on sponsors of health plans
It has been just over two years since Congress passed the controversial Patient Protection and Affordable Care Act (PPACA), more commonly known as Health Care Reform. PPACA celebrated its second birthday while preparing to have the constitutionality of some of its key provisions—including the individual health coverage mandate—challenged before the U.S. Supreme Court. We won’t know the outcome of that challenge until June. Meanwhile, an undeterred Obama Administration continues to publish regulations and extra-regulatory guidance to implement PPACA’s provisions.
The most recent release, published in Tuesday’s Federal Register, was the publication of proposed regulations implementing a health plan excise tax to fund a new government think tank known as the Patient-Centered Outcomes Research Institute (PCORI). PCORI was created by the Health Care Reform law as a non-profit, nongovernmental organization chartered with assisting patients, clinicians, purchasers, and policy-makers in making informed health decisions by advancing the quality and relevance of evidence about how to prevent, diagnose, treat, monitor, and manage diseases, disorders, and other health conditions.
The institute is to be funded in part by an excise tax to be paid by all “specified health insurance policies” and “applicable self-insured health plans.” Most employer-sponsored group medical plans are affected.
Beginning with plan years ending after September 30, 2012, affected plans will have to pay an excise tax equal to $1 times the average number of covered lives for the plan year. The tax is increased to $2 per covered life for plan years ending on or after October 1, 2013, and indexed for inflation for subsequent years. The tax is temporary and will cease for plan years ending after September 30, 2019. For fully-insured plans, the tax will be imposed on the insurers, but will presumably be funded by cost-shifting through employer premium increases. For self-insured plans, the tax will be imposed on the plan sponsor.
The proposed regulations finally flesh the detail we had been waiting for regarding which plans are subject to the tax, and the logistics of how it will be paid. A “specified health insurance policy” is defined as any accident or health insurance policy (including a policy under a group health plan) issued with respect to individuals residing in the United States. An “applicable self-insured health plan” is any plan that would be a specified health insurance policy if issued by an insurer, but where any portion of the coverage is provided through self-insurance and is established or maintained by one of the following plan sponsors:
- Employers, for the benefit of their employees or former employees;
- Labor unions, for the benefit of their members or former members;
- Taft-Hartley multiemployer plan trusts;
- Voluntary Employees’ Beneficiary Associations (VEBAs);
- Organizations described in Section 501(c)(6) of the Internal Revenue Code (i.e., business leagues, chambers of commerce, real estate boards, boards of trade, and professional football leagues);
- Multiple Employer Welfare Arrangements (MEWAs); or
- Certain rural electric and telephone cooperative associations.
However, like many of PPACA’s provisions, the definition of covered health plans is further narrowed by a long list of exclusions. The list of excluded plans and coverage includes the following (even if they pay some benefits for medical care):
- Stop-loss and indemnity reinsurance;
- An employee assistance program (EAP), disease management program, or wellness program if the program does not provide significant benefits in the nature of medical care or treatment;
- Group health policies designed and issued to cover primarily expatriate employees working outside of the United States;
- Health Flexible Spending Arrangements (FSAs) that are excepted benefits under Health Insurance Portability and Accountability Act (HIPAA) portability rules (generally those FSAs are excepted benefits where the employer contribution, if any, is less than $500, but only with respect to those employees who are also eligible for medical insurance);
- On-site medical clinics;
- Coverage only for a specified disease or illness if offered as an independent benefit not coordinated with a medical plan;
- Hospital indemnity or other fixed indemnity insurance if offered as an independent benefit not coordinated with a medical plan;
- Medicare, Medicaid, Child Health Insurance Program (CHIP), and TRICARE policies;
- Medicare or TRICARE supplemental health insurance if offered through a separate insurance policy;
- Limited scope dental or vision benefits (provided under a separate policy or certificate of insurance from the applicable medical plan, or where individuals make a separate election and are charged a separate premium for dental or vision coverage).
The tax does apply, however, to retiree-only medical plans (except to the extent coverage is delivered through one of the excluded benefits listed above).
The proposed regulations provide several options for insurance issuers and plan sponsors to determine the average number of covered lives during the plan or policy year. Those options include:
- The Actual Count Method: adding the total of covered lives (including employee participants and any covered dependents) covered for each day of the plan year, divided by the number of days in the plan year;
- The Snapshot Method: adding the totals of lives covered on one date in each quarter, or more dates if an equal number of dates are used for each quarter, and dividing that total by the number of days on which a count was made. The date or dates for each quarter must be consistent (e.g., the first day of each quarter, the last day of each quarter, the first day of each month, etc.). The regulations provide an optional variation for applicable self-insured health plans called the “snapshot factor method,” whereby the plan can assume all participants with dependent coverage are covering 2.35 dependents. This method will be most useful where an applicable self-insured health plan does not know the number of lives covered on a date because it lacks complete data on covered dependents.
- The 5500 Method: Applicable self-insured health plans can also use the Form 5500 method, which involves adding the total participants covered at the beginning and the end of the plan year, as reported on the Form 5500. If the plan only covers employees and not their dependents, the total of those two numbers is divided by two; if the plan offers dependent coverage, the total of those two numbers is reported.
Insurance issuers have two alternative calculation methods available to them, which involve using the covered life counts they submit on the National Association of Insurance Commissioners (NAIC) annual financial statements, or the state equivalents of those statements.
The insurer or plan sponsor must report and remit the tax annually using IRS Form 720 “Quarterly Federal Excise Tax Return.” Normally, Form 720 is filed by the end of the month following the calendar quarter for which it is filed. The proposed regulations amend this rule to require annual reporting of the excise tax by July 31 of each year (with respect to any plan year or policy year that ended in the preceding calendar year). Most excise taxes reported on Form 720 are required to be deposited semimonthly. However, the proposed regulations provide that the excise tax will be due annually on the same date the form filing is due. The IRS will revise Form 720 to reflect these requirements. The proposed regulations do not provide for any system of third-party reporting on the plan sponsor’s behalf.
The proposed regulations provide an aggregation rule for self-insured plans. They indicate that multiple self-insured arrangements established and maintained by the same plan sponsor and with the same plan year are subject to a single fee. Accordingly, an HRA will not be subject to a separate fee if the HRA is integrated with a major medical plan, provided that both plans are self-insured, maintained by the same plan sponsor, and have the same plan year. However, where an HRA is integrated with a fully-insured major medical plan, the plan sponsor must pay the tax with respect to the HRA, and the insurer must pay the tax with respect to the major medical coverage. In other words, the plan sponsor may end up paying the tax twice for the same participants covered by the same integrated plans, once through increased medical premiums for the major medical coverage, and again with a direct tax on the HRA.
The proposed regulations also contain a special rule for counting “covered lives” for an FSA (that is not an excepted benefit under HIPAA) or an HRA. That rule permits the plan sponsor to assume one covered life for each employee with an HRA or FSA, even though in practice, each employee could use the account to claim reimbursement of medical expenses of a spouse, qualifying child, or other tax dependent. If the plan sponsor maintains other self-insured plans in addition to the FSA or HRA and aggregates its plans for reporting purposes, then the special counting rule applies only for purposes of the participants in the FSA or HRA that do not participate in the other applicable self-insured health plans.
Plan sponsors will need to carefully examine whether their FSAs are subject to the excise tax. While it is uncommon for an FSA to lose its status as a HIPAA excepted benefit due to excessive employer contributions, it is far more common for an employer to unwittingly lose that status with respect to employees who participate in the FSA but are not also eligible for major medical coverage (this frequently happens in the case of part-time employees). In that case, the FSA may become subject to the excise tax, at least with respect to the class of employees who are eligible for the FSA but not for major medical coverage.
For self-insured plans, the tax is imposed on the plan sponsor. For single employer plans, the plan sponsor is generally the employer. Because the tax is imposed on the employer, it is not clear that the tax could be paid from a VEBA or trust that has been established for the plan. Things get trickier for multiemployer plans. The plan sponsor of a multiemployer health plan is typically the management and labor trustees who are responsible for the plan. The federal regulators recognize the awkwardness of making individual trustees responsible for the tax and are considering possible solutions.
The regulations are proposed to apply to plan and policy years ending on or after October 1, 2012, and before October 1, 2019. Insurers and plan sponsors may rely on the proposed regulations for guidance pending the issuance of final regulations.