Recently, the Department of Treasury issued final regulations on the fees imposed to fund the Patient-Centered Outcomes Research Institute (“PCORI”), a private non-profit corporation that gathers research-based information to assist patients, practitioners and policy makers in making informed health care decisions. (Our discussion of the proposed regulations is here.) The fees, to be paid by issuers of health insurance policies and sponsors of self-insured health plans, were instituted as part of the Patient Protection and Affordable Care Act (“PPACA” or “Health Care Reform”). They apply to policy and plan years ending on or after October 1, 2012 and before October 1, 2019.
Although the fee applies to insured and self-insured plans, because the insurance issuer is responsible for paying the fee on insured plans, this post focuses on the fee as applied to self-insured employer-sponsored health plans.
The PCORI fee is $2 times the average number of covered lives during the plan year that ends before October 1, 2014 ($1 per covered life for plan years ending before October 1, 2013). After 2014, the fee will increase based on increases in the projected per capita amount of National Health Expenditures.
Which Self-Insured Plans Are Subject / Exempt?
The fee applies to lives covered under an “applicable self-insured health plan,” which is defined as any plan for providing accident or health coverage if any portion of the coverage is provided other than through an insurance policy, and the plan is established or maintained 1) by one or more employers for the benefit of their employees or former employees, 2) by one or more employee organizations for the benefit of their members or former members, 3) jointly by one or more employers and one or more employee organizations for the benefit of employees or former employees, 4) by a VEBA, 5) by any organization described in Code Section 501(c)(6), or (6) by a MEWA, rural electric cooperative or a rural telephone cooperative association.
Special rules or exemptions are mentioned below:
- Excepted benefit plans under Code Section 9832(c) – stand-alone dental and vision plans – are exempt from the fee, as are health flexible spending accounts (“health FSAs”) that are excepted benefits. A health FSA is an excepted benefit if: 1) the maximum benefit that is available to a participant in any given year is not more than two times his or her salary reduction (or, if greater, his or her salary reduction plus $500), and 2) major medical coverage is made available that same year to employees participating in the health FSA.
- Health Reimbursement Arrangements (“HRAs”) are not exempt. However, the rules provide that when covered lives are counted for purposes of determining the fee under an HRA or a non-exempted health FSA, only the covered employee (and not his or her dependents) must be counted.
- Employee assistance programs (“EAPs”), wellness programs and disease management programs are exempt if the program does not provide significant benefits in the nature of medical care or treatment. The regulations don’t define “significant benefits” for this purpose.
- Retiree-only medical plans are subject to the fee.
- Federal, State and local governmental health plans offered by employers must pay the fee. Medicare, Medicaid, CHIP, Federal armed forces or veteran care, and Federal care for Indian tribes are all exempt.
- Any group plan designed specifically to cover primarily employees working and residing outside the U.S. is exempt.
The plan sponsor pays the fee. In general, the plan sponsor is: (1) for a single-employer self-insured plan, the employer, (2) for a MEWA, the plan committee, (3) for a VEBA (other than a VEBA that is the funding vehicle for an employer-sponsored plan), the trustee.
A footnote in the regulations notes that the Department of Labor has advised that because the PCORI fee for self-insured plans is imposed on the plan sponsor instead of the plan, the fee is not a permissible plan expense under ERISA Title I. The Department of Labor is expected to provide guidance on its website in the future.
What are “Covered Lives”?
The PCORI fee is based on the average number of lives (employees, spouses and dependents) covered during the plan year. There is no general rule that the fee applies only once with respect to each covered life if a sponsor maintains multiple plans, although there are a few special rules that will help plan sponsors.
A health plan that provides health coverage through fully-insured options and self-insured options can disregard lives that are covered solely under the fully-insured options for purposes of calculating the fee for the self-insured options.
Two or more self-insured arrangements established or maintained by the same plan sponsor that have the same plan year may be treated as a single applicable self-insured health plan for purposes of calculating the fee. This is true even if the arrangements are considered to be two or more separate ERISA plans. If the plan sponsor uses the special rule for counting only employees covered under an HRA or non-exempted FSA (see the second bullet point above), it may not simply count employees as covered lives in the major medical plan that has the same year as the HRA or non-exempted FSA. In other words, the special rule for HRAs and non-exempted FSAs only applies to participants in the HRA or non-exempted FSA that do not also participate in the major medical plan.
Only individuals residing the U.S. must be counted. If the address on file for the primary covered individual is outside the U.S., the plan sponsor may presume that the spouse and dependents also do not reside in the U.S.
How are Covered Lives Counted?
Self-insured plans may use one of three alternate methods:
1) The Actual Count Method
The plan sponsor adds the total number of covered lives covered for each day and divides that total by the number of days in the plan year.
2) The Snapshot Method
Covered lives are counted on at least one date in each quarter of each plan year. The date or dates used for the second, third and fourth quarters must be within 3 days of the date or dates in that quarter that correspond to the date used for the first quarter, and all dates used must fall within the same plan year. For example, assume that a plan with a calendar year plan year uses January 7, 2013 as the counting date for the first quarter. The plan sponsor may use any date beginning with April 4, 2013 and ending with April 10, 2013 as the counting date for the second quarter. The plan sponsor adds all of the counts for each quarter and divides this total by the number of dates on which a count was made.
To count the number of lives covered on a designated date, the plan sponsor uses either the snapshot factor method or the snapshot count method.
a) Snapshot factor method – Count the number of participants with self-only coverage on that date plus the number of participants with coverage other than self-only coverage on that date multiplied by 2.35. (This is the method for those who do not wish to count dependents.)
b) Snapshot count method – Count the actual number of covered lives on the designated date.
3) Form 5500 Method
This method may only be used if the Form 5500 or Form 5500-SF is filed no later than the due date, without extensions, for the fee imposed for that plan year. For example, calendar year plans generally must file the Form 5500 by July 31 (also the due date for the fee for calendar year plans); the Form 5500 method may not be used if the plan does not file its 5500 by that date.
If the plan offers only self-coverage (no dependents), the plan sponsor adds the total participants covered at the beginning and the end of the plan year and divides by two. If the plan offers self-only coverage and coverage other than self-only coverage, the plan sponsor adds the number of participants on the first day of the plan year to the number on the last day of the plan year and does not divide by two. (That is because for the Form 5500, one does not count covered dependents.)
A plan sponsor must use the same method of calculating the average number of covered lives consistently for the duration of the plan year, but may use a different method from one plan year to the next.
The regulations permit a plan sponsor to use any reasonable method to determine the average number of lives covered under an applicable self-insured health plan for a plan year beginning before July 11, 2012 and ending on or after October 1, 2012. Details about what constitutes “any reasonable method” are not available.
How Does a Plan Sponsor Report and Pay the Fee?
Plan sponsors must report and pay the fee no later than July 31 of the calendar year following the last day of the plan year. For example, a return that reports liability for the fee for the plan year ending on January 31, 2013, must be filed by July 31, 2014. The fee must be reported and paid on the Form 720, “Quarterly Federal Excise Tax Return.” The regulations themselves don’t address corrections. However, issuers and plan sponsors may use From 720-X, “Amended Quarterly Federal Excise Tax Return” to make adjustments to liabilities reported on a previously filed Form 720. There are penalties related to late filing of the applicable form or late payment of the fee, which may be waived or abated if the plan sponsor has reasonable cause and the failure was not due to willful neglect.
The final rules do not permit or include rules for third-party reporting or payment of the PCORI fee.
If you’re reading this, it must mean the Mayans were wrong, so since the world is continuing, why not check out our list of recent News & Notes items?
- A recent study by the International Foundation of Employee Benefit Plans found that 84% of employers plan to keep offering coverage in 2014.
- But even if its offered, an Employee Benefits Research Institute study found some employees might not take it if it Congress decides to tax insurance as part of the fiscal cliff negotiations (if you can call them that).
- The Commonwealth Fund has put together an interactive map, and additional information, about various States’ decisions on implementing the PPACA exchanges.
- Since we have so often talked about Hurricane Sandy relief in this column, we would be remiss if we did not point out the additional chart and FAQs that the IRS has released. These are included, among other items, in the most recent IRS Retirement News for Employers, as well.
- We have noted that employers are considering private exchanges and some of the issues around that. This Employee Benefits News guest post suggests that a private exchange might not make the best economic sense. Do you agree?
- Finally, in honor of the holiday season, we all know that co-workers sometimes push the boundaries of appropriate gift-giving. We promise not to give you a harpoon. Merry Christmas and Happy Holidays!
By now, most plan sponsors have probably managed to pick themselves up off the floor after hearing about the $63/year/covered life transitional reinsurance fee that they will either pay (if self-funded) or have passed on to them (if they are insured). We were on top of this months ago, and the most recent guidance from a couple of weeks ago doesn’t change the landscape too much, but there are a few items to note:
- The fee is based on the anticipated need to collect $10 billion from health plans in 2014. Under current law, that number will go down to $6 billion in 2015 and $4 billion in 2016. Presumably, the fees will also go down in those years. The “need” arises in order to subsidize health insurance coverage for those unable to afford it.
- Retiree plans are subject to the fee. However, CMS proposed that all plans (retiree or not) only need to pay for enrollees for which the plan is primary to Medicare as, of course, most are. No reinsurance fee is due with respect to participants for whom Medicare is primary.
- The good news is that the IRS has confirmed already that the fee is deductible, and it reports that the DOL has advised the IRS that the fee is a permissible plan expense.
- States can set up “supplemental” reinsurance programs and charge separate fees, but these fees may not be levied against self-funded plans.
- As with the health exchanges, states can choose whether to operate their own reinsurance programs or have HHS operate them. However, the rate of fees will be a nationally-determined rate with nationally-determined levels of reimbursements for health insurance issuers. It seems that if the rate is nationally determined, and the reimbursements are nationally determined, then a state has little incentive to set up its own program (unless it intends to collect supplemental contributions).
- As with the early retiree reinsurance program that was initially adopted as part of PPACA, there will be a reimbursement of claims floor and ceiling to issuers. For 2014, the reimbursements will start at $60,000 in claims and stop at $250,000 in claims. If the experience with the early retiree reinsurance program is a guide, it may take more than the $10 billion HHS is budgeting to pay these claims.
- Fees collected will be dispersed based on need, rather than based on the states from which they were collected.
A while back, we posted some of our thoughts about compliance obligations that employers should consider before jumping into a private corporate health exchange. Since that time, we have had a chance to hear and research a few more details about how some of these private corporate health exchanges would work and recognize that some of the concerns we expressed are mitigated by the structure.
As we understand it, the policies offered through these exchanges will not be individual policies, but will be group policies issued in the name of the sponsoring employer. This alleviates concerns we had that employers might believe incorrectly that they were not sponsoring an ERISA plan and it limits the number of Schedule A filings an employer would have to make. It also addresses our concern about multi-state insurance requirements, since the insurance contracts would presumably be governed by the state in which they are delivered (most likely, the state of the employer’s primary office).
The exchanges we’ve heard about would offer specific, non-negotiable plan designs set up by the exchange provider, but with a broader selection of insurers than most employers typically obtain themselves. The broad array of insurers would allow employees to select the insurer with the most favorable network in his or her area, which is a feature an individual employer may not be able to secure on its own.
However, contrary to what many employers believe, the group policy for a particular employer would still be underwritten based on that employer’s experience; the experience would not be combined with other employers in the pool. To counterbalance that, the insurance products are rated on a regional basis, so that employers can take advantage of insurer efficiencies in regional markets.
On the flip side, the exchange provider is responsible for insuring the plans meet the necessary actuarial value thresholds to keep employers out of the “play or pay” penalties under health care reform due to the minimum value requirements. However, whether the products are ultimately affordable will depend on the level of employer subsidy provided.
The bottom line in all of this, at least from what we have heard so far, is that employers will essentially be giving up control of plan design in exchange for ease of administration. Whether that trade makes sense for any particular employer is a question each has to answer on its own. If you’re considering a private exchange, or if you have thoughts to share about private exchanges, let us know your thoughts!
Below is our most recent list of News & Notes from the week that was. Let us know what you think. Should we continue this feature?
- New York City is considering using the city’s public pension funds to finance housing for those displaced by Hurricane Sandy.
- A recent New York Life study confirms our thinking that, when it comes to retirement saving, people tend to take the path of least resistance.
- Continuing with our unplanned New York theme, the New York Times recently reported how some non-traditional medical practitioners were lobbying to be included as “essential health benefits” under health care reform. Is acupuncture essential?
- Going completely to the other coast, CBS Los Angeles reported that LA County officials were scrambling to retain “paying patients” ahead of 2014.
- Apparently, defined contribution plan fees were at a record low in 2012. Do you think fee disclosure had anything to do with that?
- Finally, can you imagine buying health insurance at the grocery store? That may happen in the future, says this Kaiser Health News report. Seeing the premium quotes might make us think twice about some of our purchases (Twinkies are healthy, right?).
In this post on Forbes.com, Jeffrey Brown points out (we think, correctly) that the employer tax subsidy plays a key role in the offering of retirement plans. We agree.
However, we think there is at least one point that Mr. Brown doesn’t really address. As he notes, the recent study reported in the New York Times economics blog that supposedly demonstrates that retirement tax incentives do not increase savings for high-income earners misses a big piece of the picture. The policy implications for the 401(k) deduction go beyond high-income earners.
Often times, those individuals have other uses for their money that the prescriptive investment and distribution rules of a 401(k) plan make it difficult for them to use the money as they intend. Even if those rules are not an impediment, nondiscrimination rules and existing legal limits may prevent them from saving sufficiently inside a plan, which is probably part of why, for them, employer-sponsored retirement plans may not necessarily increase their savings rate.
But all of that aside, some suggestions for lowering the 401(k) contribution limit (like the Simpson-Bowles report we’ve talked about previously) are likely to have a disproportionate impact on moderate income workers, not just the high earners. Capping contributions at 20% of pay (or $20,000, if less) is likely to hit almost everyone, not just the high rollers.
Interestingly, the authors of that study noted that most people are passive savers and are likely to take the path of least resistance. The infographic on SaveMy401k.com agrees, showing that over 70% of people offered an employer plan will save on a tax-deferred basis, compared to less than 5% without. So if, in fact, we have a retirement crisis in this country, and if we know that people will generally take the path of least resistance, why would Congress make the path to saving for retirement harder?
Related Links (Last Updated Dec. 27, 2012)
AARP recently released survey results where plan participants were asked whether they preferred paper or electronic retirement plan disclosures. AARP is touting this as proof positive that plan participants prefer paper over electronic disclosures.
In a prior life, I (Chris) used to help analyze test results, including those from self-report surveys. Anyone who has done that work knows that how you ask the question matters greatly. One of the key findings the AARP cites as strong evidence that participants pine for papyrus is this:
If forced to choose only one method for receiving retirement plan documents, three quarters (75%) of all respondents ages 25+ prefer paper over online.
Sure, except that question assumes a false dichotomy. Even though many plan sponsors and many in the retirement plan industry have a strong preference for electronic disclosure (which, by the way, helps participants retirement savings accumulation in the form of reduced fees), no rational person is suggesting that we make everyone get their plan communications online or via email. There are too many older participants who are unfamiliar with technology or those of low income who have insufficient access to electronic delivery methods. They deserve as much disclosure as the iPhone-toting technology native in her 20’s who has never picked up a newspaper.
The more telling statistic to us is this one:
Only one-fifth of respondents (including just 27% of the younger age group), believed that a default in favor of electronic delivery should be the rule.
That, to us at least, is surprising. We would have thought the number much higher, especially for the younger age group.
Nevertheless, one can explain the results in part by saying that people frequently have a preference for the status quo (as long as it works). Inertia controls, and human nature falls victim to it. Currently, a majority of participants receive paper disclosures because the electronic delivery rules can be onerous for employers to navigate successfully. Participants feel that something isn’t broken, so why fix it? If the current default was electronic delivery with an option for paper, then the survey results might have cut in the other direction, at least for the younger group.
Interestingly, the survey asked about home computer access, but did not ask about work-related computer access (which is the touchstone the Department of Labor uses in its electronic delivery safe harbor). That probably would not have changed the results at all, but the disconnect between the question and the rules is interesting (if only for ERISA nerds).
Of course, the more critical question is what happens to all that paper when it’s delivered? Is it read and understood or is it likely to be stuffed in the circular file along with the third class mail? Because there are so many notices sent under the current disclosure regime, one might logically conclude that landfills are a primary situs for the paper disclosures (or perhaps recycling centers, for the more eco-minded). If the disclosures came electronically instead, would there be a greater chance of them being read or would the delete icon work overtime? We suspect the answer relates back to human nature. If you are tech savvy and read what comes across your screen, odds are better that you would read it if were provided electronically than if it were mailed to you. And, if you are one of those folks who still relishes the morning newspaper and the feel of newsprint on your fingers, you might be more inclined to read your mail.
The results of the AARP survey, while informative and surprising in some ways, cannot necessarily be read to say that there shouldn’t be liberalized rules for electronic delivery. Additionally, there does not necessarily need to be an all-or-nothing approach. Why not have an electronic default for some communications, but paper for others? Or liberalize the consent requirements, particularly for frequent, repeated disclosures? As the amount and frequency of required disclosures increases (and it seems always to be heading in that direction), consideration needs to be given to how the disclosures can be better packaged and delivered. Consolidating and (truly) simplifying disclosures and delivery methods is of benefit to plan sponsors because it reduces their administrative burden and to participants because it makes the amount of information they receive less overwhelming, allowing many of the important matters to be sufficiently prominent.