In April 2012, the U.S. Treasury Department and the Internal Revenue Service (IRS) issued a proposed rule implementing a tax added by the Patient Protection and Affordable Care Act (ACA). The comparative effectiveness research fees are to be paid by health insurance issuers and sponsors of self-insured group health plans, who should prepare for these new plan expenses.
Comments on the proposed rule are being accepted through July 16, 2012, and the IRS will hold a public hearing on the proposal on Aug. 8, 2012. Plan sponsors may rely on the proposed rule pending the issuance of final regulations. While final regulations will be effective as of April 17, 2012 (the date the proposal was published in the Federal Register), to the extent that the final regulations are more restrictive than the proposed rule, they will be applied only prospectively.
Purpose of the Comparative Effectiveness Research Fees
The ACA created a Patient-Centered Outcomes Research Institute (PCORI) to conduct research evaluating and comparing health outcomes and the clinical effectiveness, risks and benefits of medical treatments. The PCORI’s work will be paid for by a Patient-Centered Outcomes Research Trust Fund, which will be funded in part through the comparative effectiveness research fees.
Entities Paying the Fees
Two new sections in the Internal Revenue Code (IRC) require insurers and self-insured plans to pay the comparative effectiveness research fees: IRC section 4375 applies to health insurance policies with the fees paid by the issuers of the policies, while IRC section 4376 applies to self-insured health plans with the fees paid by the plan sponsor.
For self-insured plans, the plan sponsor is the employer or the union, and for multiemployer plans, the board of trustees. The proposed rule notes that commentators requested that the guidance clarify that, in the case of a self-insured plan that is established or maintained by a board of trustees, plan assets could be used to pay the fee. The proposal states that the U.S. Department of Labor is considering permissible funding sources for these fee payments by plan sponsors that are subject to the fiduciary provisions of the Employee Retirement Income Security Act (ERISA).
Effective Date and Payment Date
Calendar-year plans will pay the fees for the 2012 through 2018 plan years (for a total of seven years). For plans that do not operate on a calendar-year basis, the fee would apply to the first plan year that ends on or after Oct. 1, 2012 (for example, a plan year beginning on Nov. 1, 2011). The fees do not apply to plan years ending after Sept. 30, 2019.
Under the proposed rule:
• Plan sponsors must file a Form 720 “Quarterly Federal Excise Tax Return” annually stating their fee liability.
• The fees will be paid annually by July 31 of the calendar year immediately following the last day of the plan year.
• For a calendar-year plan, the first return and the first annual payment will be due July 31, 2013.
Calculations Based on Average Number of Covered Persons
Regarding the dollar amount of the fee:
• In the first year it applies, the fee will be $1 multiplied by the average number of persons covered under the plan (including dependents).
• In subsequent years, the multiplier is $2 times the average number of covered persons, but this number will be reviewed annually and could change.
Under the proposed rule, plan sponsors would have three options for calculating the average number of covered persons. Plan sponsors must use one method for the entire plan year but may use different methods in different plan years. The methods permit an actual count, a snapshot approach and (for ERISA plan sponsors only) an approach using the Form 5500. Special rules allow flexibility in the counting method for the first year of the fee.
Types of Coverage Not Subject to the Fees
The fee will not be assessed in connection with benefits that are “excepted benefits” under the Health Insurance Portability and Accountability Act (HIPAA). For example, dental and vision benefits that are insured separately would not be subject to the fee. Self-insured dental and vision benefits would be exempt only if they are “limited-scope” benefits (that is, participants elect this coverage separately from the medical benefit and pay an additional premium if they elect the coverage).
In addition, employee assistance programs, disease management programs and wellness benefits that do not provide significant benefits in the nature of medical care are not subject to the fees under the proposed rule.
Retiree Coverage Is Subject to the Fees
Although retiree-only plans do not have to comply with many provisions in the ACA (for example, the group health plan standards such as continuing coverage for dependent children to age 26), under the proposed rule retirees and their families count as covered persons whether they are in a plan with active employees or are covered under a retiree-only plan.
Approach to Account-Based Plans
Health Reimbursement Arrangements (HRAs) generally will be subject to the fees. If a plan consists of insured coverage (such as an insured medical benefit) plus an HRA, the plan sponsor of the HRA and the issuer of the medical benefit will pay the fees—even if the persons covered under both are the same. The HRA’s plan sponsor may count only the HRA’s participants as covered persons (thus ignoring any covered dependents).
Plan sponsors that provide self-insured health coverage and a self-insured HRA would pay the fee once for each individual enrolled in the plan. The self-insured coverage is not counted separately from the HRA.
Role of Third-Party Administrators
Under the proposed rule, third-party administrators (TPAs) will not be allowed to act for plan sponsors by filing the return or paying the fees. However, plan sponsors might need to obtain information about the number of covered lives from their TPAs in order to prepare the return and pay the fees.
Implications for Plan Sponsors
Plan sponsors should include an estimate of these fees in their budget projections and should review the options for counting covered persons to determine the most suitable for their plan.
Sibson Consulting, a division of Segal, provides strategic human resources solutions to corporate and nonprofit employers. Sibson's services include benefits, compensation, talent and performance management, communications, sales force effectiveness and change management.
As with all issues involving the interpretation or application of laws and regulations, sponsors of group health plans should rely on their legal counsel for authoritative advice on the interpretation and application of the ACA and related regulations.
This article was originally published in Sibson's Capital Checkup newsletter on April 25, 2012, and is republished with permission.
© 2012 by The Segal Group, Inc., parent of The Segal Company and its Sibson Consulting Division. All rights reserved.
Guidance Issued on Fees for Research, Employee Benefit News, July 2012
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