HRB 60 - Final Regulations Issued: Patient-Centered Outcomes Research Fees and Medical Device Tax
Released December 11, 2012 I Download as a PDF December 11, 2012 --
Patient-Centered Outcomes Research Fees: Final Regulations Issued
The Affordable Care Act (ACA) imposes a research fee 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.
The Internal Revenue Service (IRS) issued proposed regulations in April of this year relating to the imposition of this fee (see CBIZ Health Reform Bulletin, Fees on Health Insurance Policies & Self-Insured Plans: Patient-Centered Outcome Research Trust Fund), followed by the issuance of final regulations on December 6, 2012. These final regulations follow, in large part, the proposed regulations with certain modifications. These regulations are effective December 6, 2012 and apply to policy and plan years ending on or after October 1, 2012, and before October 1, 2019.
Plans Subject to the Fees
Virtually, all health plans, whether insured or self-funded are subject to the fees. This includes plans sponsored by single employers, as well as multiple employer plans and multi-employer plans.
Individuals to be counted include those who have coverage under the plan by virtue of current employment status, as well as those who have coverage by virtue of prior employment; this would include individuals on both state and federal (COBRA) continuation coverage, as well as retirees and any affected dependents of any of these individuals.
The types of benefit plans not subject to the fees include:
- HIPAA-excepted benefit plans 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 (however, foreign nationals working in the US are counted in the calculation of the fee); and
- Stop loss and indemnity reinsurance policies.
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.
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. Because the law provides that the fees are to be paid by the plan sponsor, at least for plans subject to ERISA, it cannot be paid from plan assets. The DOL’s Employee Benefit Security Administration is expected to take a position on this issue, at some point.
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.
Determining the Average Number of Covered Lives
For insured plans, with the exception of the snapshot method, the final regulations keep the proposed methodologies for determining the average number of covered lives; they are:
- 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.
- A “snapshot method”. Under the proposed regulations, this method would have been computed based on 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. The final regulations made some changes to this method in an effort to ensure that the “snapshot” accurately reflects plan coverage. Specifically, the counts will be based on a date during the first, second, or third month of each quarter. The date used for the second, third, and fourth quarters must be within three days of the date in that quarter that corresponds to the date used for the first quarter, and all dates used must fall within the same policy/plan year.
- 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.
- 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, a plan sponsor can choose the actual count method or snapshot method, as above; or the Form 5500 method which 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.
Chart for Determining Patient-Centered Outcome Research Fees
Type of Plan
Plan Sponsor Obligation
Insured health plan
$x per average covered life
$x per average covered life
Multiple integrated self-funded health plans, such as comprehensive plans, HRA, FSA, self-funded prescription drug plan, etc.
$x per average covered life
Note: Count a life once for integrated plans
Non-integrated self-funded health plan(s)
$x per covered life per plan
Insured health plan plus HIPAA-excepted FSA or HRA
Note: No fee assessed if the HRA or FSA is HIPAA-excepted benefit (see definition below)
$x per average covered life under insured plan only
Insured health plan plus non-HIPAA-excepted HRA or FSA
$x per employee participating in the non-excepted HRA or FSA
Note: Count only employees; not dependents
$x per average covered life in the insured plan
Notes about this chart:
An integrated health plan refers to plan design wherein 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. For integrated plans, the number of individuals participating in both plans need only be counted once for purposes of the fee.
With regard to HIPAA-excepted benefit plans, FSAs are excepted from HIPAA when the employer offers other group health plan coverage, and the maximum benefit payable to a participant under the health FSA is less or equal to the greater of:
$500 (plus any participant contribution, if applicable) or
Two times the participant's salary reduction election for the year.
Also excepted from HIPAA are FSAs or HRAs that only reimburse excepted benefits, such as dental-only or vision-only benefits.
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.
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.
What Should a Plan Sponsor Do?
- Determine which plans are subject to the fee.
- For insured plans, the insurer is responsible for paying the fee; though, be aware that this cost could ultimately affect premium.
- For self-funded plans, be prepared to pay the fee on the Form 720 due by July 31st of the year following the close of the plan year.
- If multiple self-funded health plans exist, consider integrating them to reduce liability for the fee.
Fees on Pharmaceutical Manufacturers and Importers: Final Regulations
The ACA imposes an annual nondeductible fee on pharmaceutical manufacturers and importers of certain branded prescription drugs or biologics offered for sale in the U.S. The tax is imposed on the sale of a taxable medical device at the rate of 2.3% of the price for which the device is sold.
On December 7, 2012, the IRS issued final regulations relating to these fees. According to these regulations, a taxable medical device is one that is intended for humans and defined in accordance with the Federal Food, Drug, and Cosmetic Act (FFDCA) and by the Food and Drug Administration (FDA).
The term taxable medical device does not include:
- Eyeglasses, contact lenses, and hearing aids.
- Any device purchased by the general public at retail pharmacies, grocery stores, cosmetic supply stores and similar businesses for individual consumer use (the “retail exemption”). Examples include items available over-the-counter (OTC), i.e., without a prescription or without professional medical administration or oversight, such as OTC lab tests and devices, and durable medical equipment, prosthetics, orthotics, and supplies. The regulations provide examples of items that fall within this retail exemption, such as adhesive bandages, absorbent tipped applicators, denture adhesives, and snake bite kits.
Additional information and FAQs are available on the IRS’ Medical Device Excise Tax webpage.
The tax applies to the sales of taxable medical devices on and after January 1, 2013.
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.