April 25, 2012
Proposed Rule on the Affordable Care Act’s Comparative Effectiveness Research Fees
The Treasury Department and the Internal Revenue Service (IRS) recently issued a proposed rule implementing a new tax added by the Affordable Care Act1: the comparative effectiveness research fees.2 As discussed in more detail below, these fees will be paid by health insurance issuers and sponsors of self-insured group health plans. This Capital Checkup focuses on the fees that must be paid by sponsors of self-insured group health plans and provides information on how to prepare for these new plan expenses.
Comments on the proposed rule must be submitted by July 16, 2012. The IRS will hold a public hearing on the proposal on August 8, 2012. Anyone wishing to testify must submit a request and outline of topics to be addressed by July 30, 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 officially published), to the extent the final regulations are more restrictive than the proposed rule, they will be applied only prospectively.
Purpose of the Comparative Effectiveness Research Fees
The Affordable Care Act created a new 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 new Patient-Centered Outcomes Research Trust Fund, which will be funded in part through the comparative effectiveness research fees.
Entities that Pay the Fees
Two new sections in the Internal Revenue Code (IRC) require insurers and self-insured plans to pay the comparative effectiveness research fees.3 One section applies to health insurance policies, with the fees paid by the issuers of the policies. The other section 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, or 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 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 & 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 October 1, 2012 (e.g., a plan year beginning on November 1, 2011). The fees do not apply to plan years ending after September 30, 2019.
Under the proposed rule, plan sponsors must annually file a Form 720 “Quarterly Federal Excise Tax Return” 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 by July 31, 2013.
Calculated Based on Average Number of Covered Lives
In the first year it applies, the fee will be $1 multiplied by the average number of lives covered under the plan (including dependents). In subsequent years, the multiplier is $2 times the average number of covered lives, but this number will be reviewed annually and could change.
Under the proposed rule, plan sponsors will have three options for calculating the average number of covered lives. Plan sponsors must use one method for the entire plan year but may use different methods in different plan years. The methods permit either an actual count, a snapshot approach or (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 separately insured would not be subject to the fee. Self-insured dental and vision benefits would be exempt only if they are “limited-scope” benefits (i.e., participants elect this coverage separately from the medical benefit and pay an additional premium if they elect the coverage).
In addition, under the proposed rule, employee assistance programs (EAPs), disease management programs, and wellness benefits that do not provide significant benefits in the nature of medical care are not subject to the fees.
Retiree Coverage Is Subject to the Fees
Although retiree-only plans do not have to comply with many provisions in the Affordable Care Act (e.g., 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 lives whether they are in a plan with actives or are covered under a retiree-only plan.
Approach to Account-Based Plans
Under the proposed rule, Health Flexible Spending Arrangements (FSAs) that qualify as excepted benefits under HIPAA are exempt from the fees. Under HIPAA, FSAs are excepted if the plan provides other health coverage and the maximum payable to a participant does not exceed two times the salary reduction (or, if greater, $500 plus the amount of the salary reduction). Under this standard, most FSAs qualify as an excepted benefit and would not be subject to the fees. An FSA that does not qualify as an excepted benefit is subject to the same rule outlined below for Health Reimbursement Arrangements (HRAs).
Health Savings Accounts (HSAs) are not subject to the fees.
HRAs will generally be subject to the fees. If a plan consists of insured coverage (such as an insured medical benefit) plus an HRA, both the plan sponsor of the HRA and the issuer of the medical benefit will pay the fees, even if the lives covered under both are the same. The HRA’s plan sponsor may count only the HRA’s participants as covered lives (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 parties such as third-party administrators will not be allowed to act for plan sponsors by filing the return or paying the fees. However, plan sponsors may need to obtain information about the number of covered lives from their third-party administrators 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 lives to determine the most suitable for their plan.
Plan sponsors that want to provide input on the proposed rule must submit their comments no later than July 16, 2012.
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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 Affordable Care Act and related regulations. Sibson can be retained to work with plan sponsors and their attorneys on compliance issues.
- The Affordable Care Act is the shorthand name for the Patient Protection and Affordable Care Act (PPACA), Public Law No. 111-48, as modified by the subsequently enacted Health Care and Education Reconciliation Act (HCERA), Public Law No. 111-152. (Return to the Capital Checkup.)
- The proposed rule is available in the April 17, 2012 Federal Register. (Return to the Capital Checkup.)
- See new IRC §4375 and §4376, created by §6301 of the Affordable Care Act. New IRC §4377 contains relevant definitions. (Return to the Capital Checkup.)
Capital Checkup is Sibson Consulting's periodic electronic newsletter summarizing activity in Washington with respect to health care and related subjects. Capital Checkup is for informational purposes only and should not be construed as legal advice. It is not intended to provide guidance on current laws or pending legislation. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.