HUMAN CAPITAL PRACTICE ALERT: HEALTH CARE REFORM BILL July 2012 www.willis.com IRS ISSUES PROPOSED REGULATIONS FOR COMPARATIVE EFFECTIVENESS RESEARCH FEES The Comparative Effectiveess Research (CER) fee is oe of the few provisios of the Patiet Protectio ad Affordable Care Act (PPACA) affectig group health plas which has a effective date earlier tha 2014. O April 17, 2012, the Iteral Reveue Service (IRS) issued proposed regulatios explaiig the ew fee imposed o health isurers ad self-isured plas. BACKGROUND PPACA icludes provisios that promote research to evaluate ad compare health outcomes ad the cliical effectiveess, risks ad beefits of medical treatmets, services, procedures, drugs ad other strategies that treat, maage, diagose or prevet illess or ijury. The Patiet- Cetered Outcomes Research Istitute was created uder PPACA to promote this research. The fudig source for the Istitute is a trust fiaced by fees paid by health isurers ad sposors of self-isured health plas. The proposed regulatios ca be foud here. The fee begis to apply to pla years edig o or after October 1, 2012 ad ceases to apply to pla years edig o or after October 1, 2019. Thus, caledar year plas are subject to the fee begiig this year, sice the pla year will ed December 31, 2012. Likewise, for caledar year plas, the fee will ot be applicable after the 2018 year, sice the pla year for 2019 will ed after October 1, 2019. Geerally, the fee is tiered, startig at $1, multiplied by the average umber of lives covered uder the pla for those pla years edig before October 1, 2013. For pla years ad policy years (fully isured groups) edig o or after October 1, 2013, the fee is $2 multiplied by the average umber of lives covered uder the pla. Pla or policy years edig o or after October 1, 2014 may see the $2 fee icreased for iflatio. Resposibility for calculatig ad payig the fee lies with the health isurer for a fully isured pla ad with the pla sposor for a self-isured pla. The remaider of this Alert will address the fee oly as it pertais to self-isured plas. However, employers are remided that Health Reimbursemet Arragemets (HRA), although sometimes used i cojuctio with a fully isured beefit, are self-isured group health plas ad thus subject to the CER requiremet. AFFECTED PLANS AND EXCEPTIONS Pla sposors of applicable self-isured health plas are subject to the fee. A applicable selfisured health pla is oe that provides accidet ad health coverage other tha through a isurace policy ad is established for the beefit of employees, former employees, members, former members or other eligible idividuals. Special attetio should be give to the fact that for purposes of the CER, plas for former employees are icluded. Thus, plas that provide for
retiree coverage are ot excepted from this PPACA provisio, as they have bee excepted from other PPACA health isurace market reforms. Self-isured govermetal plas (icludig federally recogized Idia tribal govermetal plas) are also applicable selfisured health plas subject to the fee as well as multiple employer welfare arragemets (MEWAs), multiemployer plas, rural electric cooperatives ad volutary employees beeficiary associatios (VEBAs). However, the regulatios outlie which plas or beefits are ot subject to the fee: Plas desiged ad issued specifically to cover primarily employees ot workig or residig i the Uited States (expatriate plas). For residetial clarificatio, the regulatios provide that if the address o file for the primary isured is outside of the Uited States, the the isurer or pla sposor may treat the primary isured, spouse, depedets or other beeficiaries as ot residig i the Uited States. Health flexible spedig accouts (FSA) that meet the defiitio of a excepted beefit. The fee will apply to a health FSA if (i) o other covetioal group health pla coverage is offered i additio to the health FSA, ad (ii) the health FSA is desiged so that the maximum beefit potetially payable to ay participat for a year could ot exceed the greater of two times the participat s salary reductio electio or $500 plus the participat s salary reductio electio. Employee Assistace Programs, disease maagemet or welless program as log as the program does ot provide for sigificat medical care or treatmet. A pla that provides beefits substatially all of which are excepted beefits, icludig limited-scope detal ad visio plas, accidet-oly or disability-oly plas, ad o-site cliics. A detal or visio pla will be deemed to be excepted if participats may declie coverage ad participats must pay a additioal cotributio to elect the coverage. Health Savigs Accouts. Medicare, Medicaid ad CHIP programs are exempt from the fee. Stop loss coverage. PLAN SPONSOR PLAN DOCUMENT Because the pla sposor is resposible for paymet of the fee, it is importat to uderstad the umber of plas which a employer sposors. I the istace of a pla maitaied by a sigle employer, the employer is the pla sposor. If a employer participates i a pla maitaied by a sigle employee orgaizatio, the employee orgaizatio is the pla sposor. Geerally, whe a self-isured pla covers employees of more tha oe related employers, they are deemed to be uder commo cotrol of oe employer ad oe pla sposor. However, the regulatios for the CER fee do ot cotai rules that would treat related etities as a sigle employer. Thus, i this situatio, the regulatios provide that the pla sposor (ad etity resposible for the fee) will be the perso idetified i the terms of the pla documet that govers the pla. I additio to beig amed i the pla documet as the pla sposor, the etity must also coset to the desigatio by o later tha the due date for payig the fee. 2 Willis North America 07/12
If a pla sposor is ot desigated i the terms of the pla documet the the pla sposor is each employer who has employees covered uder the pla. Thus, each employer would be resposible for payig ay applicable fee ad ay filig requiremet. This provisio agai emphasizes the importace of a employer esurig its pla is established ad govered by a pla documet. MULTIPLE SELF-INSURED ARRANGEMENTS OF THE SAME PLAN SPONSOR It is ot out of the ordiary for a employer to sposor more tha oe group health pla. For example, a employer may have oe arragemet for medical beefits ad aother for prescriptio drugs. Likewise, a employer may have a high deductible health pla (HDHP) ad a HRA. As it relates to the CER fee the issue is whether all arragemets are selfisured or a combiatio of self ad fully isured. The proposed regulatios provide that if a pla sposor has two or more arragemets that are all self-isured with the same pla year, the for purposes of calculatig the fee, they may be treated as a sigle applicable self-isured health pla. Coversely, if a pla sposor has a self-isured arragemet ad a fully isured arragemet, the the pla sposor will be resposible for the fee for the self-isured arragemet ad the health isurer will be resposible for the fee for the fully isured arragemet. The followig scearios help to clarify this. Pla sposor has a HRA that is itegrated with aother applicable self- isured health pla that provides major medical coverage ad both have a caledar pla year. Sice both arragemets are self-isured with the same pla year, the pla sposor will have oly to pay ad report a sigle fee. If the pla sposor is i a situatio where the HRA ad major medical coverage have differet pla years, i order to avoid payig duplicative fees, the employer may wat to address with its cousel the ability to amed the HRA to coform its pla year to the medical pla year, or cosolidatig the two programs uder a wrap pla. Pla sposor has a fully isured HDHP with a pla year of Jauary 1 through December 31. To assist employees with the deductible it also has a self-isured HRA with the same caledar pla year. I this istace, the health isurer is resposible for payig ad reportig the CER for the fully isured HDHP, while the pla sposor is resposible for payig ad reportig the fee for the HRA. FEE HEADCOUNT The fee imposed o a pla sposor of a applicable health pla is based o the average umber of lives (employees ad depedets) covered uder the pla. The proposed regulatios provide pla sposors a choice of three methods for calculatig the average umber of lives. To be cosistet, a pla sposor must use the same method for the duratio of the pla year; however, a differet method may be used from oe pla year to the ext. 3 Willis North America 07/12
ACTUAL COUNT METHOD The average umber of lives covered uder the pla for the pla year ca be determied by addig the total umber of lives covered for each day of the pla year ad dividig that total by the umber of days i the pla year. EXAMPLE: Employer is the pla sposor of a self-isured health pla with a pla year of Jauary 1, 2013 through December 31, 2013. Employer determies the sum of the lives covered for each day of the pla year edig o December 31, 2013 as 3,285,000. The average umber of lives covered uder the pla will be determied by dividig 3,285,000 by 365 days (the umber of days i the caledar pla year): 9,000. SNAPSHOT METHODS Usig this method, a pla sposor ca determie the average umber of lives covered for a pla year by addig the totals of lives covered o oe date i each quarter (a pla sposor ca use more dates if desired, as log as a equal umber of dates are used for each quarter) the dividig the total by the umber of dates o which the cout was made. The date or dates for each quarter must be the same, such as the first day of the quarter or the last day of the quarter. Whe usig the sapshot method, the proposed regulatios provide two methods by which the umber of lives covered o a desigated date may be determied. The two methods are the sapshot factor ad sapshot cout. SNAPSHOT FACTOR METHOD: The umber of lives covered with self-oly coverage o that date, plus 2.35 times the umber of lives covered with other tha self-oly coverage EXAMPLE: Employer has a self-isured health pla providig coverage for employee, employee plus oe ad family which has a caledar pla year. Employer desigates the first day of each quarter for determiig covered lives. O Jauary 1 there is employee-oly coverage for 600 participats, ad 800 for other tha employee-oly coverage. O April 1 there is employee-oly coverage for 608 lives ad 800 for other tha employee-oly coverage. O July 1 ad October 1 the pla provides employee-oly coverage for 610 lives ad for other tha employee-oly coverage 809 lives. The average umber of lives covered uder the pla for the pla year is 2,497. [((600 + (2.35 X 800) + ((608+(2.35 x 800) + ((610 + (2.35 x 809) + ((610 +2.35 x 809)) divided by four] SNAPSHOT FACTOR METHOD: The actual umber of lives covered o each date. EXAMPLE: Employer has a self-isured health pla providig coverage for employee, employee plus oe ad family which has a caledar pla year. Employer desigates the first day of each quarter of the pla for coutig covered lives uder the pla. O Jauary 1, there are 2,000 covered lives, April 1 there are 2,100 covered lives, July 1 there are 2,050 covered lives ad o October 1, 2,050 covered lives. The average umber of lives covered uder the pla for this pla year is 2, 050. ((2,000 + 2,100 + 2,050 + 2,050) divided by four). FORM 5500 METHOD The average umber of lives is determied o the basis of iformatio i the ERISA Form 5500 filigs. For plas providig coverage to employees ad depedets, the umber of lives is the sum of the umber of participats o Form 5500 at the begiig ad ed of the pla year. Plas providig self-oly coverage calculate the umber of lives by addig the umber of participats reported o the Form 5500 at the begiig ad ed of the pla year, divided by two. EXAMPLE: Employer has a self-isured health pla with a pla year of August 1, 2012 through July 31, 2013 offerig employee, employee plus oe ad family coverage. O Form 5500 the employer reports 4,000 participats o the first day of the pla year ad 4,200 participats o the last day of the pla year. The pla sposor determies the average umber of lives covered by addig 4,000 ad 4,200 (8,200). EXAMPLE: Employer has a self-isured health pla with a pla year of August 1, 2012 through July 31, 2013 offerig employee-oly coverage. O Form 5500 the employer reports 4,000 participats o the first day of the pla year ad 4,200 participats o the last day of the pla year. The pla sposor determies the average umber of lives covered by addig 4,000 ad 4, 200 (8,200) divided by two (4,100). Two special rules are also cotaied i the proposed regulatios for pla sposors. Health FSAs ad HRAs: If a pla sposor does ot maitai a applicable selfisured health pla other tha a health FSA or HRA, the pla sposor may treat each participat s health FSA or HRA as 4 Willis North America 07/12
coverig a sigle covered life. Thus, the pla sposor is ot required to iclude i its headcout for the pla the lives of spouses, depedets or ay other beeficiary of the idividual participat. Trasitio Rule: As the proposed regulatios were just recetly issued, plas begiig before July 11, 2012 ad edig after October 1, 2012 may determie the average umber of lives covered uder the pla usig ay reasoable method. Although the IRS ecourages electroic filig of Form 720, it may also be filed via hard copy. Filig electroically requires a pla sposor to submit the form through a approved trasmitter software developer. Additioal iformatio o electroic filig ca be foud at: http://www.irs.gov/efile/lists/0,,id=17615 2,00.html. PAYMENT OF FEES AND FILING OF RETURNS The CER fee falls uder the excise tax provisios of the Iteral Reveue Code. Thus, as a excise tax, there are regulatios which cotai rules for depositig, payig ad retur filig; pla sposors will pay ad report the tax o Form 720, Quarterly Federal Excise Tax Retur. However, do t let the ame of the form fool you. Although etitled a quarterly retur, Form 720 for CER purposes is oly filed oce a year. Pla sposors must report ad pay the fee for a pla year by July 31 of the caledar year that immediately follows the year i which the pla year eded. Plas, other tha caledar pla years, that ed o or after October 1, 2012 must pay the fee ad report by July 31, 2013. Caledar pla years begiig Jauary 1, 2012 must pay ad report the fee by July 31, 2013. Pla years that bega after Jauary 1, 2012 but before October 1, 2012 will eed to pay the fee ad report by July 31, 2014. The preamble to the proposed regulatios provides that third parties will ot be permitted to report or pay the CER o behalf of pla sposors. Furthermore, where a ERISA pla maitais a trust fud from which it pays beefits, it is ot clear whether the fee may be paid from the trust. Additioal guidace o this issue is expected from the Departmet of Labor i the ear future. CONCLUSION Recetly published proposed regulatios for the CER fee clarify the amout of fee, whe ad how it is to be paid, ad how to calculate the umber of average lives upo which the fee is based. Sposors of self-isured plas, particularly those whose pla years ed betwee October 1, 2012 ad December 31, 2012, should begi to determie how they will calculate the average umber of lives, as well as if they will file the required IRS Form 720 electroically or i hard copy. Ay further regulatios or guidace issued o the CER fee will be addressed as eeded. 5 Willis North America 07/12
KEY CONTACTS U.S. HUMAN CAPITAL PRACTICE OFFICE LOCATIONS NEW ENGLAND Aubur, ME 207 783 2211 Bagor, ME 207 942 4671 Bosto, MA 617 437 6900 Burligto, VT 802 264 9536 Hartford, CT 860 756 7365 Machester, NH 603 627 9583 Portlad, ME 207 553 2131 Shelto, CT 203 924 2994 NORTHEAST Buffalo, NY 716 856 1100 Morristow, NJ 973 539 1923 Mt. Laurel, NJ 856 914 4600 New York, NY 212 915 8802 Norwalk, CT 203 523 0501 Rador, PA 610 254 7289 Wilmigto, DE 302 397 0171 ATLANTIC Baltimore, MD 410 584 7528 Koxville, TN 865 588 8101 Memphis, TN 901 248 3103 Metro DC 301 581 4262 Nashville, TN 615 872 3716 Norfolk, VA 757 628 2303 Resto, VA 703 435 7078 Richmod, VA 804 527 2343 Rockville, MD 301 692 3025 SOUTHEAST Atlata, GA 404 224 5000 Birmigham, AL 205 871 3300 Charlotte, NC 704 344 4856 Gaiesville, FL 352 378 2511 Greeville, SC 704 344 4856 Jacksoville, FL 904 355 4600 Marietta, GA 770 425 6700 Miami, FL 305 421 6208 Mobile, AL 251 544 0212 Orlado, FL 407 562 2493 Raleigh, NC 704 344 4856 Savaah, GA 912 239 9047 Tallahassee, FL 850 385 3636 Tampa, FL 813 490 6808 813 289 7996 Vero Beach, FL 772 469 2842 MIDWEST Appleto, WI 800 236 3311 Chicago, IL 312 288 7700 312 348 7700 Clevelad, OH 216 861 9100 Columbus, OH 614 326 4722 Detroit, MI 248 539 6600 Grad Rapids, MI 616 957 2020 Willis North America 06/12
Milwaukee, WI 414 203 5248 414 259 8837 Mieapolis, MN 763 302 7131 763 302 7209 Molie, IL 309 764 9666 Pittsburgh, PA 412 645 8506 Schaumburg, IL 847 517 3469 SOUTH CENTRAL Amarillo, TX 806 376 4761 Austi, TX 512 651 1660 Dallas, TX 972 715 2194 972 715 6272 Dever, CO 303 765 1564 303 773 1373 Housto, TX 713 625 1017 713 625 1082 McAlle, TX 956 682 9423 Mills, WY 307 266 6568 New Orleas, LA 504 581 6151 Oklahoma City, OK 405 232 0651 Overlad Park, KS 913 339 0800 Wichita, KS 316 263 3211 WESTERN Freso, CA 559 256 6212 Irvie, CA 949 885 1200 Las Vegas, NV 602 787 6235 602 787 6078 Los Ageles, CA 213 607 6300 Novato, CA 415 493 5210 Phoeix, AZ 602 787 6235 602 787 6078 Portlad, OR 503 274 6224 Racho/Irvie, CA 562 435 2259 Sa Diego, CA 858 678 2000 858 678 2132 Sa Fracisco, CA 415 291 1567 Sa Jose, CA 408 436 7000 Seattle, WA 800 456 1415 The iformatio cotaied i this publicatio is ot iteded to represet legal or tax advice ad has bee prepared solely for educatioal purposes. You may wish to cosult your attorey or tax adviser regardig issues raised i this publicatio. Sa Atoio, TX 210 979 7470 Willis North America 06/12