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April 18, 2012

HRB 49 - Fees on Health Insurance Policies and Self-Insured Plans

Released April 18, 2012I Download as a PDF

April 18, 2012 -- As part of the Affordable Care Act (ACA), a research fee is to be imposed on both insured and self-funded health plans.  The purpose of these fees is to fund a Patient-Centered Outcome Research Trust Fund.  This Trust Fund, in turn, supports a Patient-Centered Outcomes Research Institute to assist patients, clinicians, purchasers, and policymakers in making informed health decisions by advancing comparative clinical effectiveness research.

On April 17, 2012, the Internal Revenue Service issued proposed regulations relating to the imposition of this fee.  While these regulations are proposed, they do give some guidance of how the government is working on the issue, and it may be the only guidance available at the time the first fee is imposed.  The guidance indicates that if any significant changes are made to these proposed regulations, the changes would be prospective in nature.

Plans Subject to the Fees

In general, the fees apply to accident and health insurance policies, including insured and self-funded group health plans and HMO contracts, covering individuals residing in the United States.  The fees will be assessed on the insurer of an insured plan; the plan sponsor will be required to pay the fee on behalf of a self-funded plan. 

The proposed regulations make retiree-only plans subject to these fees.  This is a bit of a departure from the ACA provision that excludes retiree-only plans from the market reform provisions of the law. 

The types of benefit plans not subject to the fees include:

  • Excepted benefits such as limited scope dental and vision plans;
  • Employee assistance programs, disease management programs, and wellness programs if the program does not provide significant benefits in the nature of medical care or treatment;
  • Expatriate group health plans primarily covering employees who work and reside outside the United States; and
  • Stop loss and indemnity reinsurance policies.

Reimbursement-type plans

With regard to reimbursement type plans, health reimbursement arrangements (HRA) and medical flexible spending account (FSA) plans are subject to these fees.  However, FSA plans that qualify as HIPAA-excepted plans are not subject to these fees.

If an employer offers multiple self-funded plans, such as a comprehensive health plan and an HRA in which both plans are established and maintained by the same plan sponsor with the same plan year, then the number of individuals participating in both plans need only be counted once.  For example, if an individual, we’ll call him “Joe”, participates in both components of the self-funded plan (comprehensive health plan and HRA), then Joe need only be counted once.  Conversely, if an HRA is coordinated with an insured plan, then double payment of the fees would be required.  In other words, the insurer would pay for Joe’s participation in its calculation of the fee for the insured plan; and the plan sponsor would count Joe in its calculation for the HRA.

Calculating the Fee

The fee is calculated based on the average number of covered lives under the plan.  The initial fee will be $1 per covered life.  For policy/plan years ending after October 1, 2013, the fee will be $2 per covered life (indexed).  This fee will cease to be assessed for policy/plan years ending after September 30, 2019.  For a calendar year plan, this would be the 2018 plan year. 

The fee is based on the number of covered lives under the plan. 

For insured plans, the proposed regulations set forth four methods of determining the average number of covered lives; they are:

  1. An “actual count method” which is calculated by the sum of covered lives for each day of the policy/plan year and dividing the sum by the number of days in the policy/plan year.
  2. A “snapshot method” whereby the average number of covered lives is computed by adding the total number of covered lives on one date in each quarter of the policy year, or an equal number of dates for each quarter, and dividing the total by the number of dates on which the count was made.
  3. A “member months method” whereby an insurer would determine the average number of covered lives under all individual policies in effect for a calendar year divided by 12.
  4. A “state form method” could be used by certain insurers.  The calculation is derived by data the insurer annually files with the relevant state licensure department, such as a state insurance department.

For self-funded plans, the plan sponsor can choose one of three methods for determining the average number of covered lives.  The plan sponsor can use the actual count method or the snapshot method, as described above; or, the Form 5500 method.  The Form 5500 method is based on the average number of covered participants at the beginning and end of the plan year, as reported on the relevant Form 5500 for the applicable plan year.

Whatever method is chosen for calculating the average number of covered lives, the insurer or plan sponsor must consistently use that same method in its calculation for all policies or plans reported on a single return. The actual count method or snapshot method could be changed from one policy or plan year to the next. 

Collection of the Fee

The fee is to be paid once a year in connection with IRS Form 720, Quarterly Federal Excise Tax Return.  For insured plans, the Form 720 is due by July 31st following the close of the policy year.  For self-funded plans, the Form 720 is due by July 31st of the calendar year following the plan year end.

Effective Date

The fee applies to policy/plan years ending on or after October 1, 2012.  For a calendar year plan, the fee will first be applicable for the 2012 plan year. 

These proposed regulations are reliance regulations, i.e., insurers and plan sponsors may rely on this guidance until final regulations are issued.  Comments about these proposed regulations will be accepted by the IRS through July 16, 2012.  The IRS is planning a public hearing on these regulations on August 8, 2012.


Plan sponsors will want to begin indentifying the plans that are subject to the fees.  In an effort to minimize the impact of these fees, consideration should be given to making certain that excepted benefits, such as limited scope dental and vision coverage, are kept independent of the health plan.  Multiple self-funded plans, on the other hand, might be wrapped together to minimize the impact of the fees.



About the Author:  Karen R. McLeese is Vice President of Employee Benefit Regulatory Affairs for CBIZ Benefits & Insurance Services, Inc., a division of CBIZ, Inc.  She serves as in-house counsel, with particular emphasis on monitoring and interpreting state and federal employee benefits law.  Ms. McLeese is based in the CBIZ Leawood, Kansas office.


The information contained herein is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations. The information contained herein is provided as general guidance and may be affected by changes in law or regulation.

The information contained herein is not intended to replace or substitute for accounting or other professional advice. Attorneys or tax advisors must be consulted for assistance in specific situations. This information is provided as-is, with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.

As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained herein is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.


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