What type of plans/policies are the fees imposed upon? The fee applies to any plan providing accident or health coverage to employees or former employees (including retirees) if any portion of the coverage is provided other than through an insurance policy, unless substantially all of its coverage is of "excepted benefits described in Internal Revenue Code Section 9832(c)." ("Excepted benefits" are things such as limited-scope dental and vision benefits, long-term care, accident or disability income coverage, etc.)

Health insurance policies subject to the fee are those which cover the same type of benefits described above, issued with respect to individuals residing in the United States. The fee does not apply to stop-loss and indemnity reinsurance policies.

Who must pay the fee? In the case of an insured plan, the fee is imposed upon the issuer of the policy. For self-insured plans, the fee is imposed upon the "sponsor." Sponsor is defined as the employer in the case of a plan established or maintained by a single employer. In the case of a plan established or maintained by multiple employers, a multiple employer welfare arrangement, or a VEBA, the fee is imposed upon the committee, board of trustees or similar group who establish or maintain the plan.

How much is the fee? The fee is equal to $1 per covered person for the first year and $2 per covered person for the second year. The fee increases each year thereafter in an amount equal to the increase in the projected per capita amount of the National Health Expenditures most recently released by the Department of Health and Human Services before each October 1.

How is the number of covered lives calculated? The fee is equal to the applicable fee for that year ($1, $2 or the increased amount in years three through seven), multiplied by the average number of lives covered under the policy or by the plan that year. The Regulations provide plan sponsors three different methods for determining the average number of lives covered under the plan for the plan year. (They provide four different methods by which insurance policy issuers could compute the number of lives covered in any particular policy year.)

Generally, the three methods available with respect to plans that offer coverage for dependents as well as participants, are: (1) actual count of total lives covered on each day of the plan year; (2) average of the total lives covered on one date in each quarter, using either actual headcount or the sum of the number of participants with self-only coverage on that date plus the product of the number of participants with coverage other than self-only multiplied by 2.35; or (3) number of participants reported on the Form 5500 for the plan at the beginning of the plan year plus the number reported at the end of the plan year.

What years does the fee apply to? The fee applies to plan years ending on or after October 1, 2012, and before October 1, 2019.

When must the fee be paid? The Regulations permit the fee to be paid annually, via IRS Form 720. The return will cover policy years (in the case of insurance policy issuers) and plan years (in the case of plan sponsors) that end during the preceding calendar year. Thus, for example, in the case of a plan with a calendar year, the first tax return and payment of fee would be due July 31, 2013, and would relate to the 2012 calendar year plan year.

What if the sponsor maintains multiple health plans? Multiple self-insured arrangements established and maintained by the same plan sponsor and with the same plan year are subject to a single fee. One open question is that even though an employer-sponsor may maintain a self-insured health plan and a health reimbursement arrangement (HRA) and they both have the same year end, the Regulations appear to require the HRA to be "integrated" with the health plan in order for the single fee to apply. It is unclear why it is necessary for the HRA to be integrated rather than merely being supplemental.

Miscellaneous issues and recommendations. The Regulations contain numerous additional rules. One such example is in the case where a single health plan provides coverage through one or more insurance policies and also provides "any portion of the coverage" other than through an insurance policy, the insurer(s) would owe fees with respect to each of the policies and the sponsor would owe a fee for the self-insured portion. Additionally, if an employer sponsors an insured major medical plan that is integrated with an HRA, the insurer would owe the fee due to the insurance policy, and the employer-sponsor would owe the fee on the self-insured portion (the HRA).

Comments on the proposed Regulations can be submitted to the IRS, and a hearing is scheduled for August 8, to address comments and requests for changes.

The Regulations are currently effective and plan sponsors and issuers may rely upon them pending the issuance of final Regulations. To the extent future guidance is more restrictive than the proposed Regulations, it will applied without retroactive effect.

For a copy of the proposed Regulations, click here.