ACA Fees and Taxes – Understand the Liability, be Prepared to Pay

Posted June 16, 2014 Company News

Overview of the New Fees and Taxes for 2014

Calendar year 2014 is a big year for Affordable Care Act (ACA) health plan fees and taxes. We have been encouraging our clients to plan carefully because the impact of these ACA expenses on overall health plan cost for many employers is measurable. One of the new expenses, the Health Insurance Industry Tax, will impact our fully-insured clients’ health, dental and vision plan expenses indefinitely. This insurance tax, which has already been added to premiums for 2014 coverage months, is expected to rise over the next few years. Another fee, the Transitional Reinsurance fee, is designed to be a temporary charge that should go away after 2016. This annual fee at $63 per member for 2014, impacts all major medical coverage, regardless of how the plan is funded. The new Patient Centered Outcomes Research Institute Fee, often referred to as the “PCORI” or “PCOR” fee, is a modest annual fee that is also intended to be temporary, going away entirely after 2019.

Revisiting the Affordable Care Act Insurer Taxes

The annual fee on health insurance providers, also called the Health Insurance Industry Tax, applies to any entity which provides health insurance for any United States health risk. Each insurer’s share is based on its net premiums written over a certain threshold for the previous calendar year. The tax is designed to fund premium tax subsidies in the public Exchange.

The ACA offers no explicit definition of the term “health insurance,” only a list of things that are not considered health insurance. Major medical coverage for active employees and retirees, dental and vision benefits (including “limited-scope” plans) are subject to the insurance industry tax. This fee does not apply to self-insured group health plans within the meaning of Code § 105(h) but in some cases will apply to a self-insured multiple employer welfare arrangement (MEWA)*. Plan sponsors that offer insured benefits have felt the pinch for quite some time because the ACA insurer tax has already been built into the premiums charged for 2014 coverage.

Insurers began adding the new tax back in 2013 to address the 2014 liability. Fiscal year plan sponsors saw a portion of this new tax hit in their 2013 renewal; calendar year plan sponsors saw twelve months of this new expense added this past January. The health insurance industry’s liability for 2014 was set at approximately eight billion and is expected to increase to $11.3 billion for 2015 and 2016. Be prepared to see the insurance tax increase from 2.3% of billed premiums to approximately 4% for 2015 and 2016.

Revisiting the PCORI fee

This fee is imposed on issuers of specified health insurance policies (i.e., major medical coverage, many Health Reimbursement Arrangements, etc.). Insurers pay this fee for insurance policies; plan sponsors remit the fee for their self-insured plans. Just like the insurer tax summarized above, the PCORI fee is a new factor in an insurer’s renewal calculation, and the cost, similar to many other ACA expenses, is another component of the overall insurance premiums billed.

Self-insured health plans sponsors have an obligation to calculate and remit the tax to the IRS directly. Some of our clients paid their first PCORI fee last year in July, but a large percentage, generally those with fiscal year plans, are preparing to pay their first fee by July 31, 2014. Payers must use the second quarter 2014 Form 720.

It is important to understand that the fee is based on when the plan year ENDS, not when it begins. See the chart below for reporting details.

Reporting Years:

Plan Year End Date

Employers that have not paid their first PCORI fee last July may want to revisit the regulations so that they are prepared to pay by July 31, 2014 this year. Although there are three different ways employers may count members, those that sponsor self-insured major medical coverage will likely prefer to use the Snapshot method. This fairly simple method involves running four reports that reflect all covered members, roughly on the same day of the month (within 3 days) in each plan year quarter, divided by four to get the average total member count. Employees, spouses and dependents must be counted when employers are remitting their fee for self-insured major medical coverage. Refer to our previous Expert Update for details on the counting methods available.

Health Flexible Spending Accounts Subject to the PCORI fee

Health Flexible Spending Accounts (health FSAs) are group health plans that generally provide only “excepted” benefits. As communicated in a previous update, guidance has indicated that certain Affordable Care Act Market Reforms, including the PCORI fee, do not apply to benefit plans that provide only excepted benefits. In order for a health FSA to be deemed “excepted” and therefore exempt from the PCORI fee, it must meet the following two excepted benefit conditions:

1. Maximum Benefit Condition is met if:

  • The Health FSA is funded entirely by participant contributions (i.e., employee salary reductions), or
  • For any participant in the class, the Health FSA funded in part by employer contributions does not include a maximum benefit payable that exceeds two times the employee’s salary reduction election for the year, or if greater, the maximum benefit payable does not exceed the employee’s salary reduction election for the FSA for the year, plus $500.

2. Availability Condition is met if:

  • Other non-excepted group health coverage, like a major medical plan, is made available for the year to all Health FSA participants. Employers will find themselves owing the PCORI fee for their Health FSA if they offer the health FSA to a particular class of employees (for example part-time employees), while excluding this same class of employees from their non-excepted major medical plan.

Health Reimbursement Arrangements (HRAs) Subject to the PCORI fee

An HRA (or MERP) that is designed to reimburse employees for certain out-of-pocket health plan expenses, like deductibles, coinsurance, co-pays, etc. consists of a promise by an employer to reimburse qualified medical expenses. As a result of this commitment to reimburse health expenses, this type of reimbursement plan is subject to the PCORI fee. If you offer an HRA as described above along with a fully insured health plan (i.e., integrated HRA) you will find yourself faced with calculating and remitting the fee for the HRA plan – the insurer will calculate and remit the fee for your health insurance plan.

Plans sponsors that offer a Health Reimbursement Arrangement (HRA) that is integrated with a fully insured major medical plan will want to follow the “one life per participant” rule to count members for the fee. This means only employee participants need to be counted, not spouses and dependents. We are encouraging our clients to follow the snapshot method when determining the average number of employee participants for the plan year. Refer to previous Expert Update for details on the Snapshot Method.

Revisiting the Transitional Reinsurance

The Transitional Reinsurance Program that will be in operation from 2014 through 2016 is designed to shift the cost of covering high risk individuals enrolled in individual market coverage from the primary insurer to a reinsurer. This fee, which impacts major medical plans regardless of funding, was designed to help stabilize the market by spreading financial risk across all insurers. The annual per covered life contribution rate for 2014 is $63, or $5.25 per month. The published rate for 2015 is $44, or $3.67 per month. Just like the PCORI fee, insurers will remit the fee for insured group health plans; self-insured plan sponsors will need to calculate and remit the fee on their own (or can request that their TPA assist with the calculation and remittance of the fee). The fee applies to COBRA coverage and retiree-only plans unless the coverage offered is not major medical coverage or major medical coverage that does not meet minimum value standards.

Plans exempt from the Fee:

  • Coverage under contract to provide Medicare, Medicaid, or CHIP benefits;
  • An HRA integrated with a self-insured plan;
  • An HSA or health FSA;
  • An EAP, disease-management program, or wellness program that does not provide major medical coverage;
  • A stop-loss or indemnity reinsurance policy;
  • TRICARE or other military health benefits;
  • Certain coverage provided by an Indian Tribe to Tribal members and dependents; and
  • A self-insured group health plan or insurance coverage that consists solely of benefits for prescription drugs.

According to the proposed reinsurance fee schedule, a contributing entity will need to submit its enrollment count by November 15th of this year for the 2014 fee. The payment schedule is bifurcated, with the majority of the payment due the first of the year following the applicable benefit year. A reinsurance contribution payment of $52.50 per covered life will be invoiced by HHS in December, payable in January, 2015. Another reinsurance contribution payment of $10.50 per covered life will be invoiced in the fourth quarter of 2015, payable late in the fourth quarter of 2015.

Calculating Contributions and Maintenance of Records Requirement

Transitional Reinsurance contributions must be made for all subscribers covered by the plan, as well as dependents. Just like the PCORI fee, health insurers will be permitted to select from one of three methods when they calculate the fees for insured coverage. Self-insured plan sponsors will use the actual method, snapshot method, or Form 5500 method when determining their responsibility and as mentioned previously with respect to the PCORI fee, most will find the Snapshot method the easiest approach for counting members. HHS has indicated that insurers and self-insured sponsors will not have to use the same counting method for the reinsurance calculation that is used for purposes of the PCORI fee.

We will provide additional details when more information becomes available for reporting and remitting this new fee.

* The fee will apply to a multiple employer welfare arrangement (MEWA), within the meaning of section 3(40) of ERISA, to the extent not fully insured, provided that for this purpose a covered entity does not include a MEWA that with respect to the plan year ending with or within the section 9010 data year satisfies the requirements to be exempt from reporting under 29 CFR 2520.101-2(c)(2)(ii)(A), (B), or (C).

Please note that the information contained in this document is designed to provide authoritative and accurate information, in regard to the subject matter covered. However, it is not provided as legal or tax advice and no representation is made as to the sufficiency for your specific company’s needs. This document should be reviewed by your legal counsel or tax consultant before use.

Additionally, the messages and content within the Pittsburgh Health Care Reform group do not reflect the advisory services of Henderson Brothers, Inc.


Contributing EXPERT: Shari Herrle