IRS ISSUES FINAL REGULATIONS
FOR COMPARATIVE EFFECTIVENESS
Final regulations on the fee to fund the Patient Centered Outcomes Research Institute (PCORI), known as the Comparative Eﬀectiveness Research (CER) fee, were issued by the Department of the Treasury on December 6, 2012.
The Patient Protection and Aﬀordable Care Act (PPACA) includes a provision that promotes research to evaluate and compare health outcomes and the clinical eﬀectiveness, risks and beneﬁts of medical treatments, services, procedures, drugs and other strategies that treat, manage, diagnose or prevent illness or injury. The PCORI was created under PPACA to promote this research. The funding source for the Institute is a trust ﬁnanced by fees paid by health insurers and sponsors of self-insured health plans. The ﬁnal regulations can be foundhere. The fee began to apply to plan years ending on or after October 1, 2012 and ceases to apply to plan years ending on or after October 1, 2019. Thus, calendar year plans were subject to the fee for 2012. Furthermore, for calendar year plans, the fee will not be applicable after the 2018 year, since the plan for 2019 will end after October 1, 2019.
Generally, the fee is tiered, starting at $1, multiplied by the average number of lives covered under the plan for those plans ending before October 1, 2013. For plan years and policy years (fully insured groups) ending on or after October 1, 2013, the fee is $2 multiplied by the average number of lives covered under the plan. Plan or policy years ending on or after October 1, 2014 may see the $2 fee increased for inﬂation.
Responsibility for calculating and paying the fee lies with the health insurer for a fully insured plan and with the plan sponsor for a self-insured plan. The remainder of thisAlertwill address the fee only as it pertains to self-insured plans.
AFFECTED PLANS AND EXCEPTIONS
Plan sponsors of applicable insured health plans are subject to the fee. An applicable self-insured health plan is one that provides accident and health coverage other than through an insurance policy and is established for the beneﬁt of employees, former employees, members, former members or other eligible individuals. Special attention should be given to the fact that for purposes of the CER fee, plans for “former employees” are included. Thus, plans that provide for retiree coverage are not excepted from this PPACA provision, as they have been excepted from other PPACA health insurance market reforms. Self-insured governmental plans are also “applicable self-insured health plans” subject to the fee as well as multiple employer welfare
HUMAN CAPITAL PRACTICE
HEALTH CARE REFORM BILL
arrangements (MEWAs), multiemployer plans, rural electric cooperatives and voluntary employees’ beneﬁciary associations (VEBAs).
However, the regulations outline which plans or beneﬁts are not subject to the fee:
Plans designed and issued speciﬁcally to cover primarily employees not working and residing in the United States (expatriate plans). For residential clariﬁcation, the regulations provide that if the address on ﬁle for the primary insured is outside of the United States, then the insurer or plan sponsor may treat the primary insured, spouse, dependents or other beneﬁciaries as not residing in the United States.
Health ﬂexible spending accounts (FSA) that meet the deﬁnition of an excepted beneﬁt. A health FSA is an excepted beneﬁt if (i) the maximum beneﬁt that is available to a participant in any given year is not more than two times his or her salary reduction (or, if greater, his or her salary reduction plus $500) and (ii) major medical coverage is made available that same year to employees participating in the health FSA.
Employee assistance programs, disease management or wellness programs as long as the program does not provide for signiﬁcant medical care or treatment.
A plan that provides beneﬁts substantially all of which are excepted beneﬁts, including limited-scope dental and vision plans, accident-only or disability-only plans, and on-site clinics. A dental or vision plan will be deemed excepted if participants may decline coverage, and participants must pay an additional contribution to elect the coverage.
Health savings accounts.
Medicare, Medicaid, CHIP programs and federal care for the armed forces, veterans, and Indian tribes are exempt from the fee.
Stop loss coverage.
PLAN SPONSOR – PLAN DOCUMENT
Because the plan sponsor is responsible for payment of the fee, it is important to understand the number of plans which an employer sponsors. In the instance of a plan maintained by a single employer, the employer is the plan sponsor. If an employer participates in a plan maintained by a single employee organization, the employee organization is the plan sponsor.
Generally, when a self-insured plan covers employees of more than one related employer, they are deemed to be under common control of one employer and one plan sponsor. However, the regulations for the CER fee do not contain rules that would treat related entities as a single employer. Thus, in this situation, the regulations provide that the plan sponsor (and entity responsible for the fee) will be the person identiﬁed in the terms of the plan document that governs the plan. In addition to being named in the plan document as the plan sponsor, the entity must also consent to the designation by no later than the due date for paying the fee.
If a plan sponsor is not designated in the terms of the plan document, then the plan sponsor is each employer who has employees covered under the plan. Thus, each employer would be responsible for paying any applicable fee and any ﬁling requirement. This provision again
emphasizes the importance of an employer ensuring its plan is established and governed by a plan document.
MULTIPLE SELF-INSURED ARRANGEMENTS
OF THE SAME PLAN SPONSOR
It is not out of the ordinary for an employer to sponsor more than one group health plan. For example, an employer may have one
arrangement for medical beneﬁts and another for prescription drugs. Likewise, an employer may have a high deductible health plan (HDHP) and a health reimbursement arrangement (HRA). As it relates to the CER fee the issue is whether all arrangements are self-insured or a combination of self- and fully self-insured. The ﬁnal regulations provide that if a plan sponsor has two or more
arrangements that are all self-insured with the same plan year, then for purposes of calculating the fee, they may be treated as a single applicable self-insured health plan. Conversely, if a plan sponsor has a self-insured arrangement and a fully insured arrangement, then the plan sponsor will be responsible for the fee for the self-insured arrangement and the health insurer will be responsible for the fee for the fully insured arrangement. The rules provide that when covered lives are counted for purposes of determining the fee under an HRA or a non-exempted health FSA, only the employee and not his or her dependents must be counted. This special rule for HRAs and non-exempted FSAs only applies to participants in the account plan that do not also participate in the major medical plan. The following scenarios help to clarify this.
Plan sponsor has a HRA that is integrated with another applicable self- insured health plan providing major medical coverage, and both have a calendar plan year. In order to
participate in the HRA, an employee must also be enrolled in the major medical coverage. Since both arrangements are self-insured with the same plan year, the plan sponsor will have only to pay and report a single fee. If the plan sponsor is in a situation where the HRA and major medical coverage have diﬀerent plan years, in order to avoid paying duplicate fees, the employer may want to address with its counsel amending the HRA to conform its plan year to the medical plan year or consolidating the two programs under a “wrap plan.”
Plan sponsor has a fully insured HDHP with a plan year of January 1 through December 31. To assist employees with the deductible it also has a self-insured HRA with the same calendar plan year. In this instance, the health insurer is responsible for
paying and reporting the CER fee for the fully insured HDHP, while the plan sponsor is responsible for paying and reporting the fee for the HRA.
The fee imposed on a plan sponsor of an applicable health plan is based on the average number of lives (employees and dependents) covered under the plan. The proposed regulations provide plan sponsors a choice of three methods for calculating the average number of lives. To be consistent, a plan sponsor must use the same method for the duration of the plan year; however, a diﬀerent method may be used from one plan year to the next.
ACTUAL COUNT METHOD
The average number of lives covered under the plan for the plan year can be determined by adding the total number of lives covered for each day of the plan year and dividing that total by the number of days in the plan year.
EXAMPLE: Employer is the plan sponsor of a self-insured health plan with a plan year of January 1, 2013 through December 31, 2013. Employer determines the sum of the lives covered for each day of the plan year ending on December 31, 2013 as 3,285,000. The average number of lives covered under the plan will be determined by dividing 3,285,000 by 365 days (the number of days in the calendar plan year): 9,000.
Using this method, a plan sponsor can determine the average number of lives covered for a plan year by adding the totals of lives covered on one date in each quarter (a plan sponsor can use more dates if desired, as long as an equal number of dates are used for each quarter) and then dividing the total by
the number of dates on which the count was made. The ﬁnal regulations made a slight change as to considering the dates when using the snapshot method. Previously, the proposed regulations provided that the date or dates for each quarter must be the same, such as the ﬁrst day of the quarter or the last day of the quarter. However, the ﬁnal regulations provide that when counting lives under the snap shot method, the date or dates used for the second, third and fourth quarters must be within three days of the date or dates in that quarter that correspond to the date used for the ﬁrst quarter. All dates used must be within the same plan year. The 30thand 31stday of a month are treated
as the last day of the month for purposes of determining the corresponding date for any month that has fewer than 31 days.
EXAMPLE: Employer has a calendar plan year and uses January 7, 2013 as the counting date for the ﬁrst quarter. The plan sponsor may use any date beginning with the 4th and ending with the 10thas the counting date for the second
(April 4-10), third (July 4-10) and fourth quarter (October 4-10).
When using the snapshot method, the ﬁnal regulations provide two ways the number of lives covered on a
designated date may be determined. They are the snapshot factor and snapshot count.
SNAPSHOT FACTOR METHOD:The number of lives covered with self-only coverage on that date, plus 2.35 times the number of lives covered with other than self-only coverage.
EXAMPLE:Employer has a self-insured health plan providing coverage for employee, employee plus one and family, which has a calendar plan year. Employer designates the ﬁrst day of each quarter for determining covered lives. On January 1 there is employee-only coverage for 600 participants, and 800 for other than only coverage. On April 1 there is employee-only coverage for 608 lives and 800 for other than employee-only coverage. On July 1 and October 1 the plan provides employee-only coverage for 610 lives and for other than employee-only coverage 809 lives. The average number of lives covered under the plan for the plan year is 2,497. [((600 +(2.35x800)+
((608+(2.35x800) +((610+(2.35x809) +((610+2.35x809)) divided by four]
SNAPSHOT COUNT METHOD:The actual number of lives covered on each date.
EXAMPLE:Employer has a self-insured health plan providing coverage for employee, employee plus one
and family which has a calendar plan year. Employer designates the ﬁrst day of each quarter of the plan for counting covered lives under the plan. On January 1, there are 2,000 covered lives, April 1 there are 2,100 covered lives, July 1 there are 2,050 covered lives and on October 1, 2,050 covered lives. The average number of lives covered under the plan for this plan year is 2, 050. ((2,000+2,100+2,050 +2,050) divided by four)
FORM 5500 METHOD
The average number of lives is determined on the basis of information in the ERISA Form 5500 ﬁlings. For plans providing coverage to employees and dependents, the number of lives is the sum of the number of participants on Form 5500 at the beginning and end of the plan year. Plans providing self-only coverage calculate the number of lives by adding the number of participants reported on the Form 5500 at the beginning and end of the plan year, divided by two.
The Form 5500 method may only be used if the required 5500 ﬁling is ﬁled no later than the due date, without extensions, for the fee imposed for that plan year. Thus, since calendar plan years generally must ﬁle Form 5500 by July 31, which is also the date for payment of the CER fee, the Form 5500 method may not be used if the plan does not ﬁle its 5500 by that date.
EXAMPLE: Employer has a self-insured health plan with a plan year of August 1, 2012 through July 31, 2013 oﬀering employee, employee plus one and family coverage. On Form 5500 the employer reports 4,000 participants on the ﬁrst day of the plan year and 4,200 participants on the last day of the plan year. The plan sponsor determines the average number of lives covered by adding 4,000 and 4,200 (8,200).
EXAMPLE: Employer has a self-insured health plan with a calendar plan year of January 1, 2013 through December 31, 2013 oﬀering employee-only coverage. In order to use the Form 550 method, employer must ﬁle its Form 5500 by July 31, 2014. On Form 5500 the employer reports 4,000 participants on
the ﬁrst day of the plan year and 4,200 participants on the last day of the plan year. The plan sponsor determines the average number of lives covered by adding 4,000 and 4, 200 (8,200) divided by two (4,100).
Two special rules are also contained in the ﬁnal regulations for plan sponsors.
Health FSAs and HRAs:If a plan sponsor does not maintain an
applicable self-insured health plan other than a health FSA or HRA, the plan sponsor may treat each participant’s health FSA or HRA as covering a single covered life. Thus, the plan sponsor is not required to include in its headcount for the plan the lives of spouses, dependents or any other beneﬁciary of the individual participant.
First Year of CER Fee: Any reasonable method may be used by a
plan sponsor to determine the average number of lives covered under an applicable self-insured health plan for a plan year beginning before July 11, 2012 and ending on or after October 1, 2012.
PAYMENT OF FEES AND FILING
The CER fee falls under the excise tax provisions of the Internal Revenue Code. Thus, as an excise tax, there are regulations which contain rules for depositing, paying and return ﬁling; plan sponsors will pay and report the tax on Form 720, “Quarterly Federal Excise Tax Return.”
However, don’t let the name of the form fool you. Although entitled a “quarterly” return, Form 720 for CER fee purposes is only ﬁled once a year. Plan sponsors must report and pay the fee for a plan year by July 31 of the calendar year immediately following the last day of the plan year. The ﬁrst CER fee applies to the ﬁrst plan year ending on or after October 1, 2012. For example, a calendar year plan (with a plan
year ending on December 31, 2012) must report and pay its ﬁrst CER fee by July 31, 2013. For a plan with a plan year ending on January 31, 2013, the fee must be reported and paid by July 31, 2014.
Although the IRS encourages electronic ﬁling of Form 720, it may also be ﬁled via hard copy. Filing electronically requires a plan sponsor to submit the form through an approved transmitter software developer. Additional information on electronic ﬁling can be foundhere.
The ﬁnal regulations conﬁrm that third parties will not be permitted to report or pay the CER fee on behalf of plan sponsors. Furthermore, the preamble to the ﬁnal regulations emphasizes that the CER fee must be paid by the plan sponsor and generally cannot be paid out of plan assets since they are not a plan expense.
Published ﬁnal regulations for the CER fee clarify the amount of fee, when and how it is to be paid, and how to calculate the number of average lives upon which the fee is based. Sponsors of self-insured plans, particularly for those whose plan years ended between October 1, 2012 and December 31, 2012, should begin to determine how they will calculate the average number of lives, as well as if they will ﬁle the required IRS Form 720 electronically or in hard copy.
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The information contained in this publication is not intended to represent legal or tax advice and has been prepared solely for educational purposes. You may wish to consult your attorney or tax adviser regarding issues raised in this publication.