Fifth in a Series
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[authors: Denise L. Atwood and Eva N. Merz]

Now that the Supreme Court has upheld the constitutionality of the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “Act”), employers must move forward with implementation. This series of newsletter articles focuses on the changes that most immediately affect employer group health plans and may require immediate attention, especially for employers who have taken a wait-and-see approach in hopes that the Act would be invalidated.

This alert, the fifth in a series, discusses the annual fees that will be imposed on health insurance issuers and plan sponsors of self-funded plans to help support clinical effectiveness research. The fees must be reported on Form 720, Quarterly Federal Excise Tax Return, and paid for plan or policy years ending on or after October 1, 2012 and before October 1, 2019. For health insurance issuers and plan sponsors of self-funded plans with calendar-year policy or plan years, the first Form 720 and payment is due July 31, 2013.

Background
The Act established the Patient-Centered Outcomes Research Institute (“PCORI” or the “Institute”) to conduct research to provide information about the best available evidence to help patients and their health care providers make more informed decisions. The Institute is funded, in part, by fees to be paid by health insurance issuers and sponsors of self-funded health plans (“PCORI Fees”).

On April 17, 2012, the IRS issued proposed regulations, which provide guidance on how to calculate, to report and to pay the PCORI Fees. The regulations apply to policy and plan years ending on or after October 1, 2012 and before October 1, 2019. For a calendar-year plan or policy, the PCORI Fees apply for the 2012-2018 plan or policy years. Plan sponsors and issuers may rely on the proposed regulations until final regulations are issued.

Who is Responsible for Reporting and Paying the PCORI Fees?
For insured policies, health insurance issuers are responsible for reporting and paying the PCORI Fees. For self-funded plans, plan sponsors are responsible for reporting and paying the PCORI Fees.

For self-funded plans maintained by two or more employers that are part of the same controlled group or affiliated service group, each participating employer is responsible for reporting and paying the PCORI Fees with respect to its own employees unless, prior to the date the fees must be reported and paid, (1) the governing plan documents designate one of the participating employers as the plan sponsor (or as the plan sponsor for purposes of reporting and paying the PCORI Fees), and (2) such employer has consented to the designation.

Plans Subject to the PCORI Fees
PCORI Fees apply to the following types of plans:

• Major medical plans;
• Retiree-only plans;
• Health reimbursement arrangements (HRAs);
• Dental and vision plans, unless they satisfy the requirements of a “limited scope dental or vision benefit” under the Health Insurance Portability and Accountability Act of 1996 (HIPAA);
• Health flexible spending accounts (health FSAs), unless they satisfy the requirements of an “excepted benefit” under HIPAA; and
• Employee assistance plans, disease-management programs, or wellness programs if the program provides significant benefits in the nature of medical care or treatment.

The proposed regulations clarify that the PCORI Fees do not apply to coverage that is considered an “excepted benefit” under HIPAA, expatriate insurance policies (it is unclear if the exception applies to self-funded expatriate plans), and stop loss or indemnity reinsurance policies.

Calculating PCORI Fees
The PCORI Fee for a plan or policy year is equal to the average number of lives covered under the plan or policy multiplied by an applicable dollar amount. For plan or policy years ending before October 1, 2013, the amount is $1. The amount increases to $2 for plan or policy years ending before October 1, 2014. For plan or policy years ending on or after October 1, 2014, increases are based on increases in the projected per capita amount of National Health Expenditures released by the Department of Health and Human Services.

Covered lives include the insured or covered employee and all covered dependents. A special rule applies to health FSAs and HRAs, where only covered employees are counted.

Multiple Plans Maintained by One Plan Sponsor
If a plan sponsor maintains multiple self-funded plans with the same plan year, the plans may be treated as a single plan so that the same life covered under each plan would only count as one covered life under the combined plan. For example, if a plan sponsor maintains separate self-funded major medical and prescription drug plans with the same plan year, the two plans may be combined and an individual who is covered under both plans would only be counted once. Likewise, if a plan sponsor maintains an HRA that is integrated with a self-funded major medical plan, the plans can be combined and an employee who is covered under the HRA and the self-funded major medical plan would only be counted once.

Insured and self-funded plans maintained by the same plan sponsor cannot be combined for purposes of calculating the PCORI Fees. For example, if an HRA is integrated with an insured major medical policy, the plans may not be combined. The plan sponsor remains responsible for reporting and paying the PCORI Fees for covered employees under the HRA and the issuer remains responsible for paying the PCORI Fees for covered employees and their covered dependents under the major medical policy.

Determining Covered Lives
Plan sponsors of self-funded plans have three alternatives for calculating the number of covered lives.

• Actual Count Method. Plan sponsors can add the total lives covered for each day of the plan year and divide the total by the number of days in the plan year.

• Snapshot Methods. Plan sponsors can add the total lives covered on one date in each quarter (or more dates if an equal number of dates are used for each quarter) and divide that total by the number of dates on which a count is made. Plan sponsors must use the same date or dates for each quarter. The number of covered lives can be determined by either: (1) actually counting the number of lives (snapshot count method); or (2) adding the number of participants with self-only coverage to the number of participants with other than self-only coverage multiplied by 2.35 (snapshot factor method).

• Form 5500 Method. For plans that offer self-only coverage, plan sponsors can add the total participants covered at the beginning and the end of the plan year, as reported on the Form 5500, and divide the total by two. For plans that offer more than just self-only coverage, plan sponsors can add the total participants covered at the beginning and the end of the plan year, as reported on the Form 5500.

Plan sponsors must use the same method for the duration of the plan year, but can use different methods each plan year.

There is also a special rule for the first reporting year. For plan years beginning before July 11, 2012 and ending on or after October 1, 2012, plan sponsors may determine the average number of lives using any reasonable method.

Issuers have four alternatives for calculating the number of lives. The first two are the same methods that are available to sponsors of self-funded plans – the actual count method and the snapshot count method. Issuers also have the option of relying on amounts reported on the National Association of Insurance Commissioners (NAIC) Supplemental Health Care Exhibit or a state equivalent. Issuers must use the same method for the duration of the policy year and for all policies reported on Form 720 and can only change methods if they are using the actual count and snapshot count methods.

Reporting and Payment of the PCORI Fees
PCORI Fees are assessed, collected and enforced in the same manner as other taxes under the Internal Revenue Code. The PCORI Fees must be reported on Form 720, Quarterly Federal Excise Tax Return, and paid by July 31 of the calendar year immediately following the last day of the plan or policy year to which the fee relates, with a limited exception for issuers that are relying on the NAIC Supplemental Exhibit or a state equivalent. For example, if a plan has a calendar year plan year, the fees for the 2012 plan year must be reported and paid by July 31, 2013. If a plan has a February 1 – January 31 plan year, fees for the plan year ending on January 31, 2013 must be reported and paid by July 31, 2014.

Action Items
To comply with this new requirement, employers should consider taking the following actions:

• Determine which plans are subject to the PCORI Fees and who is responsible for paying the PCORI Fees – the employer or the insurance carrier.

• For those plans for which the employer is responsible for paying the PCORI Fees (i.e., self-funded plans), ensure that the plan documents designate a plan sponsor (or a plan sponsor for purposes of paying the PCORI Fees) if the PCORI Fees will be reported and paid by one member of the controlled or affiliated service group.

• Select a method for calculating the number of “covered lives” under the plan and calculate the PCORI Fees.

• Report and pay the PCORI Fees by July 31 of the calendar year immediately following the last day of the plan year to which the PCORI Fees relate.