Update on Affordable Care Act

The Affordable Care Act imposes a little-known new fee on certain employers and health insurance companies. The first payments are due on or before July 31, 2013.

The Patient-Centered Outcomes Research Institute (PCORI) fee may take some employers by surprise. While many organizations are focused on the healthcare law’s “employer mandate” which was just delayed until 2015, they may have overlooked the PCORI fee.

Background

Authorized by Congress as part of the healthcare law, the Patient-Centered Outcomes Research Institute performs medical research. The idea behind the research (and the fees funding it) is that it will help patients, doctors and others make better health choices, which will eventually lower healthcare costs.

The PCORI fee is imposed on:

  1. Issuers of certain health insurance policies, and
  2. Plan sponsors of self-insured health plans, including health reimbursement arrangements and health flexible spending arrangements.

Health insurance providers are responsible for the fee on their policies. In addition, individual employers and plan sponsors are responsible for the fee on their self-insured plans. The fee is imposed for plan years ending after September 30, 2012. It expires October 1, 2019.

A self-insured plan subject to the fee is a plan that provides accident or health coverage other than through an insurance policy and the plan is established by:

  • An employer for current or former employees,
  • One or more employer organizations for current or former employees, or
  • A voluntary employees’ beneficiary association (VEBA)

Other organizations, such as a multiple employer welfare arrangement, are also subject to the fee. The party responsible for the plan is the employer in a single employer situation. In a multi-employer arrangement or VEBA, the sponsor is the association, committee, etc. who established or maintained the plan.

For years ending before October 1, 2013 the fee is $1, multiplied by the average number of lives covered under the plan for that year. For subsequent years the fee increases to $2 per life covered, adjusted for inflation.

Generally, plan sponsors of self-insured plans must use one of the following methods to determine the average number of lives covered for the plan year:

  • Actual count method
  • Snapshot method
  • Form 5500 method

However, for plan years beginning before July 11, 2012 and ending on or after October 1, 2012, plan sponsors may determine the average number or lives covered using any reasonable method.

Plan sponsors subject to the tax will report and pay the fee on Form 720, Quarterly Federal Excise Tax Return, which the IRS revised to provide for the reporting and payment of the PCORI fee. Form 720 and the fee are due annually no later than July 31 of the calendar year immediately following the last day of the policy or plan year. That means the first report and payment is due at the end of July 2013.

Exclusions and “Double Counting”

An employer may think that its employees are covered by the issuer of a health insurance policy so it does not have to pay the PCORI fee again as the sponsor of a self-funded HRA; however, this is usually not the case. Sometimes referred to as “double counting,” the IRS states the plan sponsor and the insurance company generally both have to pay the fee.

However, there are special rules that provide some relief to employers with two or more applicable self-insured health plans. In those cases, the plans can be combined and treated as a single applicable self-insured health plan for purposes of calculating the PCORI fee but only if the plans have the same plan sponsor and same plan year.

If your organization sponsors a self-insured health plan, consult with your tax and employee benefits advisors at D’Arcangelo & Co., LLP about paying the PCORI fee and filing IRS form 720.

Below is a chart from the IRS summarizing which types of insurance coverage or arrangements are subject to the PCORI fee:

Type of insurance coverage or arrangement

Subject to PCORI fee?

Person responsible for paying and reporting the fee

Accident and health coverage or major medical insurance coverage Yes   The issuer if insured

  Plan sponsor if self-insured

Retiree-only health or major medical coverage Yes   The issuer if insured

  Plan sponsor if self-insured

Health or major medical coverage under multiple policies or plans Yes   Each issuer or plan sponsor

  Special rules for coverage under multiple applicable self-insured health plans

COBRA coverage Yes   The issuer if insured

  Plan sponsor if self-insured

Health Reimbursement Arrangement (HRA), including a premium-only HRA Yes, unless the arrangement satisfies the requirements for being treated as an excepted benefit   The plan sponsor

  Special rules for coverage under multiple applicable self-insured health plans and special counting rules for HRAs

Flexible Spending Arrangement (FSA) Yes, unless arrangement satisfies requirements for being treated as excepted benefit   Plan sponsor

  Special counting rules for FSAs

State & local government health or major medical plans for employees and/or retirees Yes   The issuer if insured

  Plan sponsor if self-insured

Stand-alone dental or vision coverage No  
Group insurance policy designed and issued specifically to cover primarily employees working and residing outside the U.S. No  
Self-insured health plan designed specifically to cover primarily employees who are working/ residing outside the U.S. No  
Medicare No  
Medicaid No  
Children’s Health Insurance Program (CHIP) No  
Military health plans (established by federal law to provide medical care (other than through insurance policies) to individuals (spouses or dependents) by reason of the individual being (or having been) a member of the Armed Forces of the U.S. No  
Certain Indian tribal government health plans (programs established by federal law to provide medical care (other than through insurance policies). No  
Health Savings Arrangements (HSAs) No  
Archer Medical Savings Accounts (MSAs) No  
Hospital indemnity or specified illness benefits No  
Stop-loss or indemnity reinsurance No  
Employee assistance programs, disease management programs, or wellness programs No, if the program doesn’t provide significant benefits in the nature of medical care or treatment  
Accident-only coverage (including accidental death and dismemberment) No  
Disability income coverage No  
Automobile medical payment coverage No  
Workers’ compensation or similar coverage No  
On-site medical clinic No