Already-weary sponsors of group health plans must now prepare to calculate and pay yet another significant fee resulting from health care reform. On Dec. 7, 2012, the Department of Health and Human Services (HHS) published in the Federal Register proposed regulations regarding the “transitional reinsurance program” under the Patient Protection and Affordable Care Act (PPACA).
This program, designed to help stabilize premiums in the individual health insurance market for those with pre-existing conditions, will be effective from 2014 through 2016. Health insurance issuers and third party administrators will pay the assessment to fund state nonprofit reinsurance entities, which will establish high-risk pools for the individual market.
Proposed Fee Amounts
Fees to support this transitional reinsurance program will be assessed against both insured and self-funded group health plans. The total amount of fees to be collected over the three-year period is $25 billion. Of this amount, $20 billion will fund the reinsurance program, while the other $5 billion will be paid to the U.S. Treasury.
The guidance explains that the $5 billion payable to the Treasury equals the amount appropriated by the PPACA to fund the Early Retiree Reinsurance Program, which began in 2010. That program exhausted its $5 billion appropriation well before its scheduled end date of January 1, 2014.
The $25 billion contribution amount is significantly frontloaded. The goal is to raise $12 billion for the transitional reinsurance program during calendar-year 2014. Reaching this goal will require an estimated annual contribution of $63 per covered life. HHS will likely finalize this contribution rate near the end of the 2014 calendar year, when it can better estimate the number of covered lives for the year.
The annual contribution amounts for 2015 and 2016 decline to $8 billion and $5 billion, respectively. The annual per-covered-life contribution rates for the final two years of the program should therefore reflect similar decreases. Even so, these amounts are significantly higher than the Patient-Centered Outcomes Research Institute (PCORI) fees (also known as “comparative effectiveness” fees). Those PCORI fees start at only $1 per covered life per year. (The IRS also issued final regulations regarding the PCORI fees in December 2012.)
Tax and ERISA Treatment
In conjunction with the proposed regulations, the IRS also issued FAQs confirming that the reinsurance program fees are tax-deductible by plan sponsors as ordinary and necessary business expenses. And unlike the PCORI fees, the Department of Labor has indicated that these reinsurance program fees are permissible plan expenses under ERISA. This is welcome news for sponsors of self-funded health plans.
Sponsors of self-funded plans may choose from three different methods to determine the average number of covered lives. These “Actual Count,” “Snapshot,” and “Form 5500” methods were summarized in Spencer Fane's May 2012 article discussing the PCORI fees payable by self-funded plans. Insurers of fully insured plans may choose from four different methods.
The PPACA provides that health insurers and third-party administrators (TPAs)—designated as “contributing entities”—are responsible for paying the transitional reinsurance program fees on behalf of insured and self-funded plans, respectively. The proposed regulations clarify, however, that a self-funded, self-administered plan—with no TPA—will pay this fee directly.
Payment of Fees
HHS will collect the reinsurance fees on an annual basis. By November 15 of each year, the contributing entity must submit the number of covered lives subject to the fee for that calendar year. HHS will notify the contributing entity of the total fee to be paid within 15 days of the submission, or by December 15, if later. The contributing entity must then submit its payment to HHS within 30 days of receiving notice of the amount due.
The proposed regulations clarify that the reinsurance fees apply only to major medical coverage, and not to “excepted benefits” (as defined under the HIPAA rules). Stand-alone dental and vision coverage, along with most health flexible spending accounts, are therefore exempt from these fees. Additionally, the guidance notes that health savings accounts (HSAs), health reimbursement arrangements (HRAs) that are integrated with major medical plans, and hospital indemnity coverage are exempt from the fees. The same is true for employee assistance plans, wellness programs, and disease management programs—but only if they do not provide major medical benefits. In the case of both HSAs and HRAs, however, the fees will generally be payable by the related health plan.
Also of note, the proposed regulations state that a group health plan will be considered major medical coverage – and therefore subject to the fees—only if the plan pays primary to Medicare. Consequently, if a plan is secondary to Medicare with respect to an individual, that individual need not be counted as a covered life for purposes of calculating the reinsurance fees.
Comments on the proposed regulations must be received on or before Dec. 31, 2012.
Chadron J. Patton is an associate at law firm Spencer Fane Britt & Browne LLP and a member of the firm's Employee Benefits Group. His recent presentation topics include retirement plan fee disclosure rules, health FSAs overview, Summary of Benefits and Coverage disclosure rules, the interaction between Medicare and employer health plans, HIPAA and HITECH, taxation of dependent coverage after health care reform, grandfathered health plans under the Affordable Care Act, and employer rights and responsibilities for health savings accounts. © 2012 Spencer Fane Britt & Browne LLP. All rights reserved. Republished with permission.
Final Rule on Comparative Evidence "PCORI" Fees, SHRM Online Benefits, December 2012
Proposed Rules Issued on Guaranteed Coverage, Essential Benefits and Wellness Incentives, SHRM Online Benefits, December 2012
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SHRM Online Health Care Reform Resource Page