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CARES Act Expands Usages for HSAs, FSAs, and HRAs

March 30 - Posted at 10:35 AM Tagged: , , , , ,

The Coronavirus Aid, Relief, and Economic Security Act (CARES ACT) was signed into law by the President on Friday.

There are three direct inclusions that immediately expand the usage of health savings accounts (HSA), flexible spending accounts (FSA), and health reimbursement arrangements (HRA) for employees.

1. Telehealth services can now be covered pre-deductible under a High Deductible Health Plan. The end date of this provision is Dec 21, 2021.

2. Over the counter (OTC) drugs and medicines are now eligible for reimbursement from an HSA, FSA or HRA. This is a permanent change.

3. Menstrual products are now eligible for reimbursement from an HSA, FSA or HRA. This is a permanent change.

What Employers Need To Know (And Avoid) About HRAs

September 03 - Posted at 2:44 PM Tagged: , , , , , , , ,

Health Reimbursement Arrangements (HRAs) are account-based health plans funded with employer contributions to reimburse eligible participants and dependents for medical expenses. Prior to the Affordable Care Act, HRAs were not uncommon. 

After the ACA, however, HRAs – which were classified as group health plans (GHPs) – had to satisfy the ACA’s market reform requirements, such as the prohibition against annual limits. Thus, unless an HRA was integrated with a GHP, HRAs usually could not satisfy these requirements alone.

Recent Developments

On June 13, the Departments of Treasury, Labor, and Health and Human Services issued final regulations regarding HRAs, which will be effective on January 1, 2020. The regulations discuss two types of HRAs: (1) the individual coverage HRA (ICHRA); and (2) the expected benefit HRA.

An ICHRA can satisfy GHP requirements by integrating the HRA with individual market coverage or Medicare. The expected benefit HRA permits an employee to obtain excepted benefits like dental, vision, or short-term limited-duration insurance with an HRA. This article will focus on ICHRAs.

General ICHRA Requirements

In order to offer an ICHRA, employers must ensure that a number of requirements are satisfied. For example, all individuals covered by the HRA need to be enrolled in individual health insurance or Medicare. Additionally, before any reimbursements are made, the employer must substantiate such enrollment with documentation from a third party or the participant’s attestation. An attestation, however, must be disregarded, if the employer has actual knowledge that the individual is not enrolled in eligible coverage.

Additionally, HRA coverage must be offered uniformly on the same terms and conditions to all employees in the class. Classes will be discussed in more detail below, but the regulations permit an employer to increase the maximum benefit for (1) older participants if that increase applies to all similarly aged participants in that class, and (2) participants with more dependents. 

Further, being covered by an ICHRA will make an individual ineligible for a Premium Tax Credit (PTC). For this reason, the regulations have numerous notice requirements. First, employers must provide notice to eligible ICHRA employees 90 days before the beginning of a plan year that their participation in the ICHRA will make them ineligible for a PTC. For newly eligible employees, the notice must be provided no later than the date they are first eligible to participate. Moreover, there must be an opt-out provision at least annually and upon termination.

Defining A Class

The ICHRA regulations make it possible for employers to offer an HRA to a certain class of employees and a traditional GHP to another class. It is important to note that an employer may not offer the same class of employees the option of an ICHRA or a traditional GHP. 

The regulations also provide strict rules regarding how to define classes. The classes must be of a minimum size based on the number of employees the employer has: 

  • If the employer has fewer than 100 employees, the minimum class size is 10;
  • If the employer has over 100 employees but fewer than 200, the minimum class size is 10% of the total number of employees; and
  • If the employer has over 200 employees, the minimum class size is 20 employees.

Additionally, the classes must be based on named classes in the regulations which are based on objective criteria:

  • full-time;
  • part-time;
  • salaried;
  • non-salaried;
  • employees whose primary site of employment is in the same rating area;
  • seasonal employees;
  • employees covered by the same collective bargaining agreement sponsored by the employer;
  • employees who have not satisfied a waiting period;
  • non-resident aliens with no US-based income;
  • employees hired by a staffing firm; and
  • any group of participants that fit into two or more of the above classes.

The regulations also clarify that employers may still offer retiree-only HRAs and they will not be subject to the ICHRA rules.

Conclusion

Given that there is a notice requirement and that open enrollment for plans that begin January 1, 2020 will generally begin in the fall, employers that would like to implement an ICHRA would likely have to start making plan design decisions soon. Even though the concept of an HRA may be familiar to many employers, these new regulations are nuanced, and employers will likely need assistance to navigate them.

New Rule Will Let Employees Use HRAs to Buy Health Insurance in 2020

June 14 - Posted at 4:33 PM Tagged: , , , , , , , , , ,

Advocates claim a newly issued regulation could transform how employers pay for employee health care coverage.

On June 13, the U.S. Departments of Health and Human Services, Labor and the Treasury issued a final rule allowing employers of all sizes that do not offer a group coverage plan to fund a new kind of health reimbursement arrangement (HRA), known as an individual coverage HRA (ICHRA). The departments also posted FAQs on the new rule.

Starting Jan. 1, 2020, employees will be able to use employer-funded ICHRAs to buy individual-market insurance, including insurance purchased on the public exchanges formed under the Affordable Care Act (ACA).

Under IRS guidance from the Obama administration (IRS Notice 2013-54), employers were effectively prevented from offering stand-alone HRAs that allow employees to purchase coverage on the individual market.

“Using an individual coverage HRA, employers will be able to provide their workers and their workers’ families with tax-preferred funds to pay all or a portion of the cost of coverage that workers purchase in the individual market,” said Joe Grogan, director of the White House Domestic Policy Council. “The departments estimate that once employers fully adjust to the new rules, roughly 800,000 employers will offer individual coverage HRAs to pay for insurance for more than 11 million employees and their family members, providing them with more options for selecting health insurance coverage that better meets their needs.”

The new rule “is primarily about increasing employer flexibility and worker choice of coverage,” said Brian Blase, special assistant to the president for health care policy. “We expect this rule to particularly benefit small employers and make it easier for them to compete with larger businesses by creating another option for financing worker health insurance coverage.”

The final rule is in response to the Trump administration’s October 2017 executive order on health care choice and competition, which resulted in an earlier final rule on association health plans that is now being challenged in the courts, and a final rule allowing low-cost short-term insurance that provides less coverage than a standard ACA plan.

New Types of HRAs

Existing HRAs are employer-funded accounts that employees can use to pay out-of-pocket health care expenses but may not use to pay insurance premiums. Unlike health savings accounts (HSAs), all HRAs, including the new ICHRA, are exclusively employer-funded, and, when employees leave the organization, their HRA funds go back to the employer. This differs from HSAs, which are employee-owned and portable when employees leave.

The proposed regulations keep the kinds of HRAs currently permitted (such as HRAs integrated with group health plans and retiree-only HRAs) and would recognize two new types of HRAs:

  • Individual coverage HRAs. Employers would be allowed to fund ICHRAs only for employees not offered a group health plan. 
  • Excepted-benefit HRAs. These would be limited to paying premiums for vision and dental coverage or similar benefits exempt from ACA and other legal requirements. These HRAs are only permitted if employees are offered coverage under a group health plan sponsored by the employer.

What ICHRAs Can Do

Under the new HRA rule:

  • Employers may either offer an ICHRA or a traditional group health plan but may not offer employees a choice between the two.
  • Employers can create classes of employees around certain employment distinctions, such as salaried workers versus hourly workers, full-time workers versus part-time workers, and workers in certain geographic areas, and then offer an ICHRA on a class by class basis.
  • Employers that offer an ICHRA must do so on the same terms for all employees in a class of employees, but they may increase the ICHRA amount for older workers and for workers with more dependents.
  • Employers can maintain their traditional group health plan for existing enrollees, with new hires offered only an ICHRA.

The rule also includes a disclosure provision to help ensure that employees understand the type of HRA being offered by their employer and how the ICHRA offer may make them ineligible for a premium tax credit or subsidy when buying an ACA exchange-based plan. To help satisfy the notice requirements, the IRS issued an Individual Coverage HRA Model Notice.

QSEHRAs and ICHRAs

Currently, qualified small-employer HRAs (QSEHRAs), created by Congress in December 2016, allow small businesses with fewer than 50 full-time employees to use pretax dollars to reimburse employees who buy nongroup health coverage. The new rule goes farther and:

  • Allows all employers, regardless of size, to pay premiums for individual policies through a premium-reimbursement ICHRA.
  • Clarifies that when employers fund an ICHRA or a QSEHRA paired with individual-market insurance, this will not cause the individual-market coverage to become part of an Employee Retirement Income Security Act (ERISA) plan if certain requirements are met (for instance, employers may not select or endorse a particular individual-market plan).
  • Creates a special enrollment period in the ACA’s individual market for those who gain access to an ICHRA or a QSEHRA to purchase individual-market health insurance coverage.

The legislation creating QSEHRAs set a maximum annual contribution limit with inflation-based adjustments. In 2019, annual employer contributions to QSEHRAs are capped at $5,150 for a single employee and $10,450 for an employee with a family.

The new rule, however, doesn’t cap contributions for ICHRAs.

As a result, employers with fewer than 50 full-time employees will have two choices—QSEHRAs or ICHRAs—with some regulatory differences between the two. For example:

  • QSEHRA participants who obtain health insurance from an ACA exchange and who are eligible for a tax credit/subsidy must report to the exchange that they are participants in a QSEHRA. The amount of the tax credit/subsidy is reduced by the available QSEHRA benefit.
  • ICHRA participants, however, will not be able to receive any premium tax credit/subsidy for exchange-based coverage.

“QSEHRAs have a special rule that allows employees to qualify for both their employer’s subsidy and the difference between that amount and any premium tax credit for which they’re eligible,” said John Barkett, director of policy affairs at consultancy Willis Towers Watson.

While the ability of employees to couple QSEHRAs with a premium tax credit is appealing, the downside is QSEHRA’s annual contribution limits, Barkett said. “QSEHRA’s are limited in their ability to fully subsidize coverage for older employees and employees with families, because employers could run through those caps fairly quickly,” he noted.

For older employees, the least expensive plan available on the individual market could easily cost $700 a month or $8,400 a year, Barkett pointed out, and “with a QSEHRA, an employer could only put in around $429 per month to stay under the $5,150 annual limit for self-only coverage.”

Similarly, for employees with many dependents, premiums could easily exceed the QSEHRA’s family coverage maximum of $10,450, whereas “all those dollars could be contributed pretax through an ICHRA,” Barkett said.

An Excepted-Benefit HRA

In addition to allowing ICHRAs, the final rule creates a new excepted-benefit HRA that lets employers that offer traditional group health plans provide an additional pretax $1,800 per year (indexed to inflation after 2020) to reimburse employees for certain qualified medical expenses, including premiums for vision, dental, and short-term, limited-duration insurance.

The new excepted-benefit HRAs can be used by employees whether or not they enroll in a traditional group health plan, and can be used to reimburse employees’ COBRA continuation coverage premiums and short-term insurance coverage plan premiums.

Safe Harbor Coming

With ICHRAs, employers still must satisfy the ACA’s affordability and minimum value requirements, just as they must do when offering a group health plan. However, “the IRS has signaled it will come out with a safe harbor that should make it straightforward for employers to determine whether their ICHRA offering would comply with ACA coverage requirements,” Barkett said.

Last year, the IRS issued Notice 2018-88, which outlined proposed safe harbor methods for determining whether individual coverage HRAs meet the ACA’s affordability threshold for employees, and which stated that ICHRAs that meet the affordability standard will be deemed to offer at least minimum value.

The IRS indicated that further rulemaking on these safe harbor methods is on its agenda for later this year.

Proposal Announced To Expand Access to Affordable Health Coverage

October 23 - Posted at 7:21 PM Tagged: , , , , , , , , ,

The Trump administration announced a proposed rule today that would allow businesses to give employees money to purchase health insurance on the individual marketplace, a move senior officials say will expand choices for employees that work at small businesses.

The proposed rule, issued by the Department of Health and Human Services (HHS), the Department of Labor (DOL) and the Department of Treasury, would restructure Obama-era regulations that limited the use of employer-funded accounts known as health reimbursement arrangements (HRA). The proposal is part of President Donald Trump’s “Promoting Healthcare Choice and Competition” executive order issued last year, which tasked the agencies with expanding the use of HRAs.

Senior administration officials said the proposed change would bring more competition to the individual marketplace by giving employees the chance to purchase health coverage on their own. The rule includes “carefully constructed guardrails” to prevent employers from keeping healthy employees on their company plans and incentivizing high-cost employees to seek coverage elsewhere.

That issue was a primary concern under the Obama administration, which barred the use of HRAs for premium assistance. The 21st Century Cures Act established Qualified Small Employer Health Reimbursement Accounts (QSEHRA), but those are subject to stringent limitations.

Under the new rule, HRA money would remain exempt from federal and payroll income taxes for employers and employees. Additionally, employers with traditional coverage would be permitted to reserve $1,800 for supplemental benefits like vision, dental and short-term health plans.

Officials estimate 10 million people would purchase insurance through HRAs, including 1 million people that were not previously insured. Most of those people would be concentrated in small and mid-sized businesses.

The proposed change would “unleash consumerism” and “spur innovation among providers and insurers that directly compete for consumer dollars,” one senior official said. Officials expect 7 million people will be added to the individual marketplace over the next 10 years.

The rule does not change the Affordable Care Act’s employer mandate, which requires employers with 50 or more employees to offer coverage to 95% of full-time employees. Administration officials expect the proposal will have the biggest impact on small businesses with less than 50 employees.

However, the rule could scale back the use of premium subsidies. If the HRA is considered “affordable” based on the amount provided by the employer, the employee would not be eligible for a premium tax credit. If the HRA fails to meet those minimum requirements, the employee could choose between a premium tax credit and the HRA.

Overall, the rule will “create a greater degree of value in healthcare and the health benefits marketplace than we would otherwise see,” one official said.

The regulation, if finalized, is proposed to be effective for plan years beginning on and after January 1, 2020.

 

New Indexed PCORI Fee Issued

November 01 - Posted at 8:33 AM Tagged: , , , , , , , , , , ,

Under the Affordable Care Act, (ACA) a fund for a new nonprofit corporation to assist in clinical effectiveness research was created. To aid in the financial support for this endeavor, certain health insurance carriers and health plan sponsors are required to pay fees based on the average number of lives covered by welfare benefits plans. These fees are referred to as either Patient-Centered Outcome Research Institute (PCORI) or Clinical Effectiveness Research (CER) fees.

The applicable fee was $2.26 for plan years ending on or after October 1, 2016 and before October 1, 2017.  For plan years ending on or after October 1, 2017 and before October 1, 2018, the fee is $2.39.  Indexed each year, the fee amount is determined by the value of national health expenditures. The fee phases out and will not apply to plan years ending after September 30, 2019.

As a reminder, fees are required for all group health plans including Health Reimbursement Arrangements (HRAs), but are not required for health flexible spending accounts (FSAs) that are considered excepted benefits. To be an excepted benefit, health FSA participants must be eligible for their employer’s group health insurance plan and may include employer contributions in addition to employee salary reductions. However, the employer contributions may only be $500 per participant or up to a dollar for dollar match of each participant’s election.

HRAs exempt from other regulations would be subject to the CER fee. For instance, an HRA that only covered retirees would be subject to this fee, but those covering dental or vision expenses only would not be, nor would employee  EAPs, disease management programs and wellness programs be required to pay CER fees.

A New Employer Healthcare Plan: Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

March 02 - Posted at 3:00 PM Tagged: , , , , , , , , , , , , , , , , , , ,

Until very recently, employers were at risk of receiving steep fines if they reimbursed employees for non-employer sponsored medical care – the Affordable Care Act (ACA) included fines of up to $36,500 a year per employee for such an action. Late in 2016, however, President Obama signed the 21st Century Cures Act and established Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs). As of January 1, 2017, small employers can offer these tax-free medical care reimbursements to eligible employees.


How Do QSEHRAs Work?


If an employee incurs a medical care expense, such as health insurance premiums or eligible medical expenses under IRC Section 213(d), the employer can reimburse the employee up to $4,950 for single coverage or $10,000 for family coverage. Employees may not make any contributions or salary deferrals to QSEHRAs.


The maximum amount must be prorated for those not eligible for an entire year. For example, an employer offering the maximum reimbursement amount should only reimburse up to $2,475 to an employee who has been working for the company for six months. For a complete list of medical expenses covered under IRC 213(d), see https://www.irs.gov/pub/irs-pdf/p502.pdf. Employers may tailor which expenses they will reimburse to a certain extent, and do not have to reimburse employees for all eligible medical expenses.


Much like other healthcare reimbursement arrangements, employees may have to provide substantiation before reimbursement. The IRS has discretion to establish requirements regarding this process, but has not yet done so. Although reimbursements may be provided tax-free, they must be reported on the employee’s W-2 in Box 12 using the code “FF.”


Which Employers Can Offer QSEHRAs?


To offer QSEHRAs, an employer cannot be an applicable large employer (ALE) under the ACA. Only employers with fewer than 50 full-time equivalent employees can offer this benefit. Further, a group cannot offer group health plans to any employees to qualify.

Which Employees Are Eligible For QSEHRAs?


Typically, an employer that chooses to offer a QSEHRA must offer it to all employees who have completed at least 90 days of work. The few exceptions to this rule include part-time or seasonal employees, non-resident aliens, employees under the age of 25, and employees covered by a collective bargaining agreement.


Employers may offer differing reimbursement amounts based on employee age or family size. However, such variances must be based on the cost of premiums of a reference policy on the individual market. It is currently unclear which reference policy will be selected or how permitted discrepancies will be calculated.


To be eligible for a tax-free reimbursement, employees must have proof of minimum essential coverage. It is uncertain how closely employers will have to scrutinize such proof, although guidance will hopefully be available soon.


Interaction Between QSEHRAs And Health Exchanges


Eligible employees must disclose to health exchanges the amount of QSEHRA benefits available to them. The exchanges will account for the reported amount, even if the employee does not utilize it, and will likely reduce the amount of the subsidies available. Employers should take this into account before adopting a QSEHRA.


Other Administrative Issues


In order to establish a QSEHRA, employers will have to set up and administer a plan. Group health plan requirements, such as ACA reporting and COBRA requirements, do not apply to QSEHRAs. But in order to properly provide reimbursements to employees, employers will likely have to establish reimbursement procedures.


Additionally, any eligible employees must be notified of the arrangements in writing at least 90 days before the first day they will be eligible to participate. For the current year, the IRS is giving employers who implement QSEHRAs an extension until March 13, 2017 to provide a notice. The notice must provide the amount of the maximum benefit, and that eligible employees inform health insurance exchanges this benefit is available to them. It also must inform eligible employees they may be subject to the individual ACA penalties if they do not have minimum essential coverage.

Congress Passes 21st Century Cures Act with HRA Provisions

December 15 - Posted at 4:20 PM Tagged: , , , , , , , , , , , , , , , , , ,

Earlier this week, President Obama signed the 21st Century Cures Act (“Act”). This Act contains provisions for “Qualified Small Business Health Reimbursement Arrangements” (“HRA”). This new HRA would allow eligible small employers to offer a health reimbursement arrangement funded solely by the employer that would reimburse employees for qualified medical expenses including health insurance premiums. 


The maximum reimbursement that can be provided under the plan is $4,950 or $10,000 if the HRA provided for family members of the employee.  An employer is eligible to establish a small employer health reimbursement arrangement if that employer (i) is not subject to the employer mandate under the Affordable Care Act (i.e., less than 50 full-time employees) and (ii) does not offer a group health plan to any employees. 


To be a qualified small employer HRA, the arrangement must be provided on the same terms to all eligible employees, although the Act allows benefits under the HRA to vary based on age and family-size variations in the price of an insurance policy in the relevant individual health insurance market.


Employers must report contributions to a reimbursement arrangement on their employees’ W-2 each year and notify each participant of the amount of benefit provided under the HRA each year at least 90 days before the beginning of each year.


This new provision also provides that employees that are covered by this HRA will not be eligible for subsidies for health insurance purchased under an exchange during the months that they are covered by the employer’s HRA. 

Such HRAs are not considered “group health plans” for most purposes under the Code, ERISA and the Public Health Service Act and are not subject to COBRA.


This new provision also overturns guidance issued by the Internal Revenue Service and the Department of Labor that stated that these arrangements violated the Affordable Care Act insurance market reforms and were subject to a penalty for providing such arrangements.  


The previous IRS and DOL guidance would still prohibit these arrangements for larger employers. The provision is effective for plan years beginning after December 31, 2016.  (There was transition relief for plans offering these benefits that ends December 31, 2016 and extends the relief given in IRS Notice 2015-17.)

Congress and the IRS were busy changing laws governing employee benefit plans and issuing new guidance under the ACA in late 2015. Some of the results of that year-end governmental activity include the following:


Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”)

The PATH Act, enacted by Congress and signed into law on December 18, 2015, made some the following changes to federal statutory laws governing employee benefit plans:

  • The ACA’s 40% excise tax (aka “Cadillac Tax”) on excess benefits under applicable employer sponsored coverage — so called “Cadillac Plans,” due to the perceived richness of such coverage — is  delayed from 2018 to 2020.


  • Formerly a nondeductible excise tax, any Cadillac Tax  paid by employers will now be deductible as a business expense.


  • Beginning with plan years after November 2, 2015,  employers with 200+ employees will not be required to automatically enroll new or current     employees in group health plan coverage, as originally required under the ACA.


  • After December 31, 2015, individual taxpayers who purchase private health insurance via the Healthcare Exchange will not be eligible to claim a Health Care Tax Credit on their tax returns.

IRS Notice 2015-87

On December 16, 2015, the IRS issued Notice 2015-87, providing guidance on employee accident and health plans and employer shared-responsibility obligations under the ACA. Guidance provided under Notice 2015-87 applies to plan years that begin after the Notice’s publication date (December 16th), but employers may rely upon the guidance provided by the Notice for periods prior to that date.


Notice 2015-87 covers a wide-range of topics from employer reporting obligations under the ACA to the application of Health Savings Account rules to rules for identifying individuals who are eligible for benefits under plans administered by the Department of Veterans Affairs. Following are some of the highlights from Notice 2015-87, with a focus on provisions that are most likely to impact non-governmental employers.


  • Under the ACA, an HRA may only reimburse medical expenses of those individuals (employee, spouse, and/or dependents) who are also covered by the employer’s group health plan providing minimum      essential coverage (“MEC”) that is integrated with the HRA.
  • Employer opt-out payments (i.e., wages paid to an employee solely for waiving employer-provided coverage) may, in the view of Treasury and the IRS, effectively raise the contribution cost for employees who desire to participate in a MEC plan. Treasury and the IRS intend to issue      regulations on these arrangements and the impact of the opt-out payment on the employee’s cost of coverage. Employers are put on notice that if an opt-out payment plan is adopted after December 16, 2015, the amount of the offered opt-out payment will likely be included in the employee’s cost of coverage for purposes of determining ACA affordability.
  • Treasury and the IRS will begin to adjust the affordability safe harbors to conform with the annual adjustments for inflation applicable to the “9.5% of household income” analysis under the ACA. For plan years beginning in 2015, employers may rely upon 9.56% for one or more of the affordability safe harbors identified in regulations under the ACA, and 9.66% for plan years beginning in 2016. For example, in a plan year beginning in 2016, an employer’s MEC plan will meet affordability standards if the employee’s contribution for lowest cost, self-only coverage does not exceed 9.66% of the employee’s W-2 wages (Box      1).
  • To determine which employees are “full-time” under the ACA, “hours of service” are intended to include those hours an employee works and is entitled to be paid, and those hours for which the employee is entitled to be paid but has not worked, such as sick leave, paid vacation, or periods of legally protected leaves of absence, such as FMLA  or USERRA leave.
  • The Treasury and IRS remind applicable large employers that they will provide relief from penalties for failing to properly complete and submit Forms 1094-C and 1095-C if the employers are able to show that they made good faith efforts to comply with their reporting obligations.

The Affordable Care Act (“ACA”), introduced in 2014  the Transitional Reinsurance Fee (“Fee”) in an effort to fund reinsurance payments to health insurance issuers that cover high-risk individuals in the individual market and to stabilize insurance premiums in the market for the 2014 through 2016 years. The Fee has also been instituted to pay administrative costs related to the Early Retiree Reinsurance Program.


BACKGROUND ON TRANSITIONAL REINSURANCE PROGRAM

The ACA established a transitional reinsurance program to provide payments to health insurance issuers that cover high risk individuals in an attempt to evenly spread the financial risk of issuers. The program is designed to provide issuers with greater payment stability as insurance market reforms are implemented and the state-based health insurance exchanges/marketplaces facilitate increased enrollment. It is expected that the program will reduce the uncertainty of insurance risk in the individual market by partially offsetting issuers’ risk associated with high-cost enrollees. In an effort to fund the program, the ACA created the Fee which is a temporary fee that is assessed on health insurance issuers and plan sponsors of self-funded health plans. The Fee is applicable for the 2014, 2015 and 2016 years and is deductible as an ordinary and necessary business expense.

The Fee is generally applicable to all health insurance plans providing major medical coverage including sponsors of self-insured group health plans. Major medical coverage is defined as health coverage for a broad range of services and treatments, including diagnostic and preventive services, as well as medical and surgical conditions in inpatient, outpatient and emergency room settings. Since COBRA continuation coverage generally qualifies as major medical coverage, the Fee will also apply in this instance. It does not, however, apply to employer provided major medical coverage that is secondary to Medicare.


The Fee, as currently structured, does not apply to various other types of plans including (but not limited to) health savings accounts (H.S.A.s), employee assistance plans (EAP) or wellness programs that do not provide major medical coverage, health reimbursement arrangements integrated with a group health plan (HRA), health flexible spending accounts (FSA) and coverage that consists of only excepted benefits (e.g. stand-alone dental and vision).


AMOUNT OF THE FEE

The Fee for the 2015 benefit year is equal to $44 per covered life. It is expected that the Fee for the 2015 benefit year will generate approximately $8 billion in revenue. The Fee for the 2016 year is expected to be $27 per covered life and will raise approximately $5 billion in revenue. Thereafter, the Fee is set to expire and no longer be applicable. The fee for 2014 was $63 per covered life.


REPORTING THE NUMBER OF COVERED LIVES AND PAYING THE FEE

The 2015 ACA Transitional Reinsurance Program Annual Enrollment and Contributions Submission Form will be available on www.pay.gov on October 1, 2015. The form for 2014 is also available on this website. Please note there is a separate form for each benefit year. For the 2015 year, the number of covered lives must be reported to the Department no later than November 16, 2015. The Department will then notify reporting organizations no later than December 15, 2015 the amount of the fee that will be due and payable.


As with the 2014 benefit year, the Department of Health and Human Services has given contributing entities two different options to make the payment. Under the first option, the first portion of the Fee ($33 per covered life) is due and payable no later than January 15, 2016 (30 days after issuance of the notice from the Department). This portion of the Fee will cover reinsurance payments and administrative expenses. The second portion of the Fee ($11 per covered life) will cover Treasury’s administrative costs associated with the Early Retiree Reinsurance Program and will be due no later than November 15, 2016.


Under the second payment option, contributing entities can opt to pay the full amount ($44 per covered life) by January 15, 2016.


As the number of covered lives is due to be reported no later than November 16th of this year, employers should review their types of health coverage and determine which plans are subject to the Fee. Employers that have fully insured plans should be on the lookout for potential increased premiums as the insurance carrier is responsible to report and pay the Fee on behalf of the plan in these instances. Those with self funded medical coverage need to be sure to report and pay the fe

The Affordable Care Act added a patient-centered outcomes research (PCOR) fee on health plans to support clinical effectiveness research. The PCOR fee applies to plan years ending on or after Oct. 1, 2012, and before Oct. 1, 2019. The PCOR fee is due by July 31 of the calendar year following the close of the plan year. For plan years ending in 2014, the fee is due by July 31, 2015.


PCOR fees are required to be reported annually on Form 720, Quarterly Federal Excise Tax Return, for the second quarter of the calendar year. The due date of the return is July 31. Plan sponsors and insurers subject to PCOR fees but not other types of excise taxes should file Form 720 only for the second quarter, and no filings are needed for the other quarters. The PCOR fee can be paid electronically or mailed to the IRS with the Form 720 using a Form 720-V payment voucher for the second quarter. According to the IRS, the fee is tax-deductible as a business expense.


The PCOR fee is assessed based on the number of employees, spouses and dependents that are covered by the plan. The fee is $1 per covered life for plan years ending before Oct. 1, 2013, and $2 per covered life thereafter, subject to adjustment by the government. For plan years ending between Oct. 1, 2014, and Sept. 30, 2015, the fee is $2.08. The Form 720 instructions are expected to be updated soon to reflect this increased fee.

This chart summarizes the fee schedule based on the plan year end and shows the Form 720 due date. It also contains the quarter ending date that should be reported on the first page of the Form 720 (month and year only per IRS instructions). The plan year end date is not reported on the Form 720.

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Who pays the fee

For insured plans, the insurance company is responsible for filing Form 720 and paying the PCOR fee. Therefore, employers with only fully- insured health plans have no filing requirement.


If an employer sponsors a self-insured health plan, the employer must file Form 720 and pay the PCOR fee. For self-insured plans with multiple employers, the named plan sponsor is generally required to file Form 720. A self-insured health plan is any plan providing accident or health coverage if any portion of such coverage is provided other than through an insurance policy.


Since the fee is a tax assessed against the plan sponsor and not the plan, most funded plans subject to ERISA must not pay the fee using plan assets since doing so would be considered a prohibited transaction by the U.S. Department of Labor (DOL). The DOL has provided some limited exceptions to this rule for plans with multiple employers if the plan sponsor exists solely for the purpose of sponsoring and administering the plan and has no source of funding independent of plan assets.


Plans subject to the fee

Plans sponsored by all types of employers, including tax-exempt organizations and governmental entities, are subject to the PCOR fee. Most health plans, including major medical plans, prescription drug plans and retiree-only plans, are subject to the PCOR fee, regardless of the number of plan participants. The special rules that apply to Health Reimbursement Accounts (HRAs) and Health Flexible Spending Accounts (FSAs) are discussed below.


Plans exempt from the fee include:

  • A dental or vision plan with a separate insurance policy or employee election
  • An employee assistance program (EAP), disease management program, or wellness program if the program does not provide significant medical care or treatment
  • Plans that primarily cover individuals working outside the United States
  • Health Savings Accounts (HSAs)
  • Certain HRAs and FSAs


If a plan sponsor maintains more than one self-insured plan, the plans can be treated as a single plan if they have the same plan year. For example, if an employer has a self-insured medical plan and a separate self-insured prescription drug plan with the same plan year, each employee, spouse and dependent covered under both plans is only counted once for purposes of the PCOR fee.


The IRS has created a helpful chart showing how the PCOR fee applies to common types of health plans.


Special rules for Health Reimbursement and Health Flexible Spending Accounts

Health Reimbursement Accounts (HRAs) - Nearly all HRAs are subject to the PCOR fee because they do not meet the conditions for exemption. An HRA will be exempt from the PCOR fee if it provides benefits only for dental or vision expenses, or it meets the following three conditions:


  1. Other group health plan coverage is offered to HRA participants
  2. The maximum benefit payable under the HRA to any participant for a year does not exceed $500
  3. The maximum reimbursement available under the HRA is less than 500 percent of the value of the HRA coverage


Health Flexible Spending Accounts (FSAs) - A health FSA is exempt from the PCOR fee if it satisfies an availability condition and a maximum benefit condition.


  • Availability condition . The availability condition will be met if other group health plan coverage, such as major medical, is offered to FSA participants. It is unclear whether the eligibility requirements and the entry dates for the health FSA and the other group health plan must be exactly the same in order to meet the availability condition. Thus, professional assistance should be obtained if they are different.


  • Maximum benefit condition . The maximum benefit condition is met if the maximum benefit payable under the health FSA to any participant for a year does not exceed the greater of (1) two times the participant’s annual salary reduction election, or (2) the amount of the participant’s salary reduction election plus $500.


Additional special rules for HRAs and FSAs . Once an employer determines that its HRA or FSA is subject to the PCOR fee, the employer should consider the following special rules:


  1. The PCOR fee for an HRA or FSA is based only on the average number of employees. Spouses and dependents are ignored.
  2. A “stand-alone” HRA or FSA that is not paired with a major medical plan will be subject to the PCOR fee based on the average number of employees participating in the HRA or FSA during the HRA or FSA plan year.
  3. If a major medical plan paired with the HRA or FSA is insured, the insurance company pays a PCOR fee on the major medical plan but the employer pays the PCOR fee on the HRA or FSA. The insurance company will pay the fee based on the average number of employees, spouses and dependents in the insured major medical plan. However, the fee for the HRA or FSA is only based on the number of employees (spouses and dependents are ignored). The government receives a PCOR fee on the employees twice - once under the major medical plan, and once under the HRA or FSA.
  4. If a major medical plan paired with the HRA or FSA is self-insured, the employer is responsible for paying the PCOR fee on each plan. If the major medical plan and the HRA or FSA have different plan years, the fee is calculated on each plan separately. The PCOR fee for the major medical plan is based on the average number of employees, spouses and dependents in the major medical plan. However, the fee for the HRA or FSA is only based on the average number of employees (spouses and dependents are ignored).
  5. If a major medical plan paired with the HRA or FSA is self-insured and has the same plan year as the HRA or FSA, then the major medical plan and the HRA or FSA are treated as a single plan. In this case, the fee is based on the number of employees, spouses and dependents under the major medical plan, plus the number of employees (but not spouses or dependents) who are in the HRA or FSA but are not in the major medical plan (if any).


Determining the covered lives

The IRS provides different rules for determining the average number of covered lives (i.e., employees, spouses and dependents) under insured plans versus self-insured plans. The same method must be used consistently for the duration of any policy or plan year. However, the insurer or sponsor is not required to use the same method from one year to the next.



A plan sponsor of a self-insured plan may use any of the following three methods to determine the number of covered lives for a plan year:


1.       Actual count method. Count the covered lives on each day of the plan year and divide by the number of days in the plan year.



Example: An employer has 900 covered lives on Jan. 1, 901 on Jan. 2, 890 on Jan. 3, etc., and the sum of the lives covered under the plan on each day of the plan year is 328,500. The average number of covered lives is 900 (328,500 ÷ 365 days).


2.       Snapshot method. Count the covered lives on a single day in each quarter (or more than one day) and divide the total by the number of dates on which a count was made. The date or dates must be consistent for each quarter. For example, if the last day of the first quarter is chosen, then the last day of the second, third and fourth quarters should be used as well.



Example: An employer has 900 covered lives on Jan. 15, 910 on April 15, 890 on July 15, and 880 on Oct. 15. The average number of covered lives is 895 [(900 + 910+ 890+ 880) ÷ 4 days].



As an alternative to counting actual lives, an employer can count the number of employees with self-only coverage on the designated dates, plus the number of employees with other than self-only coverage multiplied by 2.35. 



3.       Form 5500 method. If a Form 5500 for a plan is filed before the due date of the Form 720 for that year, the plan sponsor can determine the number of covered lives based on the Form 5500. If the plan offers just self-only coverage, the plan sponsor adds the participant counts at the beginning and end of the year (lines 5 and 6d on Form 5500) and divides by 2. If the plan also offers family or dependent coverage, the plan sponsor adds the participant counts at the beginning and end of the year (lines 5 and 6d on Form 5500) without dividing by 2.



Example: An employer offers single and family coverage with a plan year ending on Dec. 31. The 2013 Form 5500 is filed on June 5, 2014, and reports 132 participants on line 5 and 148 participants on line 6d. The number of covered lives is 280 (132 + 148).


Action steps

To evaluate liability for PCOR fees, plan sponsors should identify all of their plans that provide medical benefits and determine if each plan is insured or self-insured. If any plan is self-insured, the plan sponsor should take the following actions:

  1. Determine the type of plan (major medical, HRA, FSA, etc.) and the plan year end
  2. Determine if any of the plans are exempt from the PCOR fee
  3. Determine if any plans can be aggregated for purposes of counting covered lives because they have the same plan year end
  4. Decide which method for counting covered lives will be used
  5. Count the number of covered lives under each plan (remember to apply the “employee only” counting rule for HRAs and FSAs)
  6. Access Form 720 and the related instructions on the IRS website
  7. Review the Form 720 instructions, including the PCOR fee discussion on pages 8 and 9
  8. Complete Form 720 to reflect the plan sponsor’s name, address and EIN and the quarter ending date (June 2015) in the heading and to report the average number of covered lives under all self-insured plans in Part II (line IRS No. 133(b), Applicable self-insured health plans)
  9. Calculate the fee based on the plan year end
  10. Complete a Form 720-V payment voucher for the second quarter if paying by check or money order
  11. File Form 720 (and Form 720-V if needed) and pay the fee by July 31, 2015
  12. Keep a copy of the Form 720 and supporting documentation for at least four years from the date of filing
  13. Review the IRS PCOR webpage for more information
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