The Internal Revenue Service (IRS) has issued a revised Form 720 (Quarterly Federal Excise Tax Return) which is the form to be used to report and pay certain fees with respect to health insurance plans. The fees were added by the Patient Protection and Affordable Care Act (the Affordable Care Act or ACA) to fund the Patient-Centered Outcomes Research Trust Fund. The fee that is now due is $1 multiplied by the average number of lives and affects both issuers of health insurance policies and plan sponsors of self-insured health plans.

Action Needed Now: Plan sponsors with plan years ending in 2012 should prepare to file the form and make payment, which is due by July 31, 2013.

Background and Overview

The ACA includes provisions that promote research to evaluate and compare health outcomes. One such provision established the Patient-Centered Outcomes Research Institute (PCORI), which is to assist (through research) patients, clinicians, purchasers, and policy-makers in making informed health decisions by advancing the quality and relevance of evidence-based medicine. The funding source for PCORI is the Patient-Centered Outcomes Research Trust Fund.

The ACA added section 4376 to the Internal Revenue Code. Section 4376 imposes a fee on each "applicable self-insured health plan" of $2 ($1 in the case of plan years ending before October 1, 2013) multiplied by the average number of lives covered under the plan. The fees apply for plan years ending after September 30, 2012, and do not apply to plan years ending after September 30, 2019.

The fees are to be paid by the plan sponsor. Final regulations were issued in December 2012. The regulations define a plan subject to the fees as an "applicable self-insured health plan¹," define who is considered the plan sponsor², provide alternative methodologies for determining the average number of lives covered under the plan, and provide the time and manner of paying the fees.

Time and Method for Payment

The average number of covered lives and the resulting fees are to be reported using IRS Form 720, "Quarterly Federal Excise Tax Return," which now has been modified to include payment of the fees. The fees are to be paid only once per calendar year, starting in 2013, and the due date is July 31 of the calendar year immediately following the last day of the plan year. Thus, for a plan year ending January 31, 2013, the fees are due by July 31, 2014, but for a plan with a calendar plan year, the fees for 2012 are due by July 31, 2013.

If the fees will be paid by check or money order, then the plan sponsor needs to complete Form 720-V (which is a payment voucher) and send it with the payment. The check or money order is to be made payable to the "United States Treasury."

Counting Lives

The regulations provide alternative methods to determine the average number of covered lives (which includes dependents). The same method must be used consistently for a plan year, but a plan sponsor may use a different method from one plan year to the next. There is also a transition rule that is discussed below.

Actual Count Method - Add the total number of lives covered under the plan for each day of a plan year and dividing by the number of days in the plan year.

Snapshot Method - Add the totals of lives covered under the plan on a date during the first, second, or third month of each quarter of the plan year (or more dates if an equal number of dates is used in each quarter), and dividing by the number of dates. Each date used during the second, third, and fourth quarter must be within three days of the date in that quarter that corresponds to the date used for the first quarter, and all dates must fall with the same plan year. The 30^th and 31^st of a month are treated as the last day of the month for purposes of determining the corresponding date for any month that has fewer than 31 days.

There are two alternative ways to determine the number of covered lives on a date under the Snapshot Method. Under the Snapshot Factor Method, the number of covered lives is equal to the sum of the number of plan participants with self-only coverage on that date, plus the number of participants with other than self-only coverage (i.e., self plus dependent coverage) multiplied by 2.35. Under the Snapshot Count Method, the number of covered lives is the actual number of covered lives on the designated date.

Form 5500 Method - The average number of covered lives for a plan year is based on the number of participants reported on the Form 5500 that is filed for the plan year, provided the Form 5500 is filed before the July 31 due date for the fee. If the plan provides self-only coverage, the average number of covered lives is the sum of the total participants covered at the beginning and end of the plan year, as reported on the Form 5500, divided by 2. If the plan provides for other than self-only coverage (i.e., self plus dependent coverage), the average number of covered lives is the sum of the total participants covered at the beginning and end of the plan year, as reported on the Form 5500.

Cheiron Observations: Because only the number of participants, i.e., subscribers, are reported on the Form 5500, the regulations provide a method that estimates the number of participants plus dependents; that is adding the number of participants at beginning and end of year. Also, a government plan does not file Form 5500 so it cannot make use of the Form 5500 method.

In counting the number of lives covered, the regulations allow the plan sponsor to disregard lives that are covered solely under fully-insured options. Thus, if a participant or dependent is covered partly by a self-insured arrangement and partly by an insured arrangement, the self-insured plan and the insurer will each pay a fee with respect to that person.

As a transition rule for the first year the fee is in effect, for a plan year that begins before July 11, 2012, and that ends on or after October 1, 2012 (which includes a calendar plan year), the regulations provide that a plan sponsor may determine the average number of lives covered under the plan for the plan year using any reasonable method.

Cheiron Observation: If a plan sponsor has not yet implemented a system to count the number of lives and cannot file the Form 5500 for the 2012 plan year by July 31, 2013, then the only practical option is to use the transition rule to determine the number of covered lives. Of course, the plan sponsor should be prepared to justify the reasonableness of the method used.

Multiple Self-Insured Health Plans

An applicable self-insured health plan is defined as any plan that provides accident or health coverage if any portion of the coverage is provided other than through an insurance policy.

The preamble to the regulations makes it clear retiree-only plans are included as plans subject to the fees. Additionally, the regulations and preamble are clear that health flexible spending accounts (health FSAs) and health reimbursement accounts (HRAs) are self-insured health plans subject to the fees.

The regulations contain a rule that allows two or more self-insured plans established or maintained by the same plan sponsor and that have the same plan year to be treated as a single self-insured health plan for purposes of calculating the fees. Thus, an employer that provides a self-insured medical plan and a separate self-insured prescription drug plan for its employees may treat the two arrangements as one self-insured plan (if they have the same plan year). Similarly, an HRA that is integrated with another self-insured health plan that provides major medical coverage can be regarded as a single self-insured health plan.

Again, if a participant or dependent is covered partly by a self-insured arrangement and partly by an insured arrangement, the self-insured plan and the insurer will each pay a fee with respect to that person.

Cheiron Observation: Employers that combine an HRA with an insured high deductible health plan will have one self-insured health plan subject to the fees, and the insurer will pay fees on the average number of employees covered by the health insurance policy. Also, it appears that a plan that is a secondary payor to Medicare or any other plan is not exempt from the payment of the fees (Medicare and certain other programs established by Federal law are exempt).

What Should Plan Sponsors Do Immediately

Plan sponsors should review their data and see that they have determined the average number of covered lives for the 2012 plan year. If additional work needs to be performed to determine the number of covered lives, there is little time to make the changes and gather the information. Alternatively, the plan sponsor should determine the number of lives covered using a reasonable method.

Cheiron consultants can assist in completing the form and determining the amount of fees that are to be paid.

Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Therefore, we do not provide legal services or tax advice.