December Focus Newsletter

The HealthSmart Focus Newsletter provides information on legislative, legal and regulatory changes affecting the healthcare industry. Focus is researched and written by Sarah A. Bittner, Associate General Counsel for HealthSmart Holdings, Inc., and is published for the benefit of our clients, partners and other interested parties. This newsletter is designed to communicate general information regarding employee benefit matters. Nothing in this newsletter shall be deemed to constitute legal opinions or legal advice.

In this issue...

Final Regulations Issued for New Fees on Self-Funded Plans

The Patient Protection and Affordable Care Act (PPACA) created the Patient-Centered Outcomes Research Institute, a non-profit corporation to support clinical effectiveness research. The research will be funded partially by fees (PCORI fees) paid by certain health insurers and applicable self-funded employee health plans. On December 5, 2012, the IRS released final regulations on the PCORI fees.

Under the final regulations, PCORI fees apply to plan years ending on or after October 1, 2012; however, the fee will end for plan years ending after September 30, 2019. The fee is calculated by multiplying the applicable dollar amount by the average number of lives (participants and dependents) covered under the plan.

  • For plan years ending on or after October 1, 2012 and before October 1, 2013, the dollar amount is $1.00.
  • For plan years ending on or after October 1, 2013 and before October 1, 2014, the dollar amount is $2.00.
  • For plan years ending on or after October 1, 2014, the dollar amount will be indexed based on increases in the projected per capita amount of National Health Expenditures.

Self-funded plans have a choice to use any of the three methods below, provided that the plan sponsor must use the same method of calculating the fees throughout the plan year. A plan sponsor is permitted to use a different method from one plan year to the next.

  • Actual Count Method  – The average number of covered lives can be calculated under the plan for the plan year by calculating the sum of the lives covered for each day of the plan year and dividing that sum by the number of days in the plan year.
  • Snapshot Method  – The average number of covered lives is calculated by adding the totals of lives covered on one date in each quarter, or an equal number of dates for each quarter, and dividing the total by the number of dates on which a count was made.  Plans that do not track the number of dependents are permitted to use the Snapshot Factor Method. Under the Snapshot Factor Method, the number of lives covered on a date is equal to the sum of the number of participants with self-only coverage on that date, plus the product of the number of participants with coverage other than self-only coverage on that date and 2.35.
  • Form 5500 Method  – Plans may determine the average number of covered lives for the plan year based on the number of participants reported on the Form 5500 as long as the Form 5500 is filed no later than the PCORI Fee due date. 

    a. Plans Offering Self-Only Coverage - The average number of lives covered under the plan for the plan year for a plan offering self-only coverage equals the sum of the total participants covered at the beginning and the end of the plan year (as reported on the 5500) divided by 2.

    b. Plans Offering Self-Only and Family Coverage - The average number of lives for plan offering self-only coverage as well as family coverage equals the sum of total participants covered at the beginning and at the end of the plan year.

Health plans that are subject to the fee include:

  • Self-insured health and accident plans, including Multiple Employer Welfare Arrangements (MEWAs)
  • Fully-insured health and accident policies (including a policy under a group health plan)
  • Governmental entities, except for exempt government programs
  • Retiree-only plans

The following are not subject to the fee:

  • Stop-loss policies
  • Dental and vision plans that are “excepted benefits” (i.e., they are provided under a separate policy, certificate or contract of insurance, or are otherwise not an integral part of the plan)
  • Health Savings Accounts and Archer MSAs (Note: A high deductible health plan that is paired with a Health Savings Account is subject to the fee)
  • EAPs, disease management programs and wellness programs that do not provide significant medical care
  • Plans designed to cover employees who are working and residing outside of the United States

With respect to Flexible Spending Accounts (FSAs), they will not be subject to the fee if the FSA is considered an “excepted benefit.”  If the only plan maintained by the employer is a FSA that does not meet the definition of an “excepted benefit,” the plan may treat each participant’s FSA as covering a single covered life for purposes of the fee calculation. Therefore, the plan would not be required to include any dependents as covered lives.

With respect to Health Reimbursement Accounts (HRAs), the following special rules apply:

  • Fully-Insured Plans – If the plan provides a HRA and a fully-insured plan, the HRA is subject to the fee, as well as the insurer of the group health plan (even though the HRA and the insured plan are maintained by the same plan sponsor).  Thus, the plan sponsor would be required to treat both plans separately for purposes of the fee.
  • Self-Funded Plans – If the plan provides a HRA and a major medical self-funded plan that have the same plan year, the HRA and the medical plan may be treated as one plan for purposes of the fee.  Thus, the plan sponsor would not have to pay a separate fee for the HRA.
  • Standalone HRA – If the only plan maintained by the plan sponsor is a HRA, the plan may treat each participant’s HRA as covering a single life.  Therefore, the plan would not be required to include dependents in its calculation of covered lives.

Fees are to be reported and paid once a year on Form 720 (Quarterly Excise Tax Return).  Despite being called a quarterly return, plans that file a Form 720 solely to report PCORI fees will not be required to file the form at other times during the year. 

The fee is payable when the information return is due. An information return that reports liability for the fee must be filed by July 31st of the calendar year following the last day of the plan year. For example, if the plan year ends on December 31, 2012, the return must be filed by July 31, 2013.  However, if the plan year ends on January 31, 2013, the return must be filed by July 31, 2014.

For more information, please review the Final Regulations in the Federal Register, Vol. 77, No. 235, page 72721.

Self-Insured Plans Impacted by Proposed Regulations
to Establish Reinsurance Contributions

The Department of Health and Human Services (HHS) published a proposed rule that expands upon standards previously set forth by CMS related to the establishment of Affordable Insurance Exchanges.  The rule proposed by HHS further clarifies policies such as the risk adjustment, reinsurance, and risk corridors programs. Of interest to plan sponsors and insurers, however, are the new annual contribution requirements to the reinsurance programs to help stabilize premiums in the individual market. 

The transitional reinsurance program is a three-year program designed to reduce medical risk for issuers and stabilize premiums for enrollees in the individual market. The statute sets a fixed, national amount for the reinsurance program of $12 billion for 2014. To raise this amount, HHS is proposing a national, uniform contribution rate of $63 per covered life per year, payable annually. The proposed regulations specifically require insurance issuers and self-insured group health plans to pay these contribution fees. HHS proposes to collect reinsurance contributions on behalf of all states from both health insurance issuers and self-insured group health plans in the aggregate, and will disburse reinsurance payments based on a state’s need for reinsurance payments, not based on where the contributions were collected.

The contribution requirement would apply to major medical coverage, which is defined by HHS to include a broad range of services and treatment including diagnostic and preventive services, as well as medical and surgical conditions provided in various settings, including inpatient, outpatient, and emergency room settings. However, contributions would not be required for FSAs, EAPs, or wellness programs that do not provide major medical coverage, or for coverage that consists solely of excepted benefits. HSAs and HRAs integrated with a group health plan are also not required to pay contributions. 

Beginning in 2014, the contributing entity must report covered lives to HHS by November 15th.  HHS will then notify the contributing entity of its contribution amount by December 15th, and payment will be due within 30 days after the contributing entity receives the contribution notice.

Comments to the proposed regulations must be submitted on or before December 31, 2012. 

Proposed Rules on Wellness Programs Released

The Departments of Health and Human Services, Labor and the Treasury jointly released proposed rules on wellness programs to reflect the changes to existing wellness rules made by PPACA. The proposed rules primarily address standard-based wellness programs, which require individuals to meet certain standards related to their health to obtain a reward.

Notably, the proposed rules implement changes in the Affordable Care Act that increase the maximum permissible reward under a standard-based wellness program from 20% to 30% of the cost of health coverage. The reward may increase to as much as 50% for programs designed to prevent or reduce tobacco use.  If more than one family member participates in the program, the reward cannot exceed 30% (or 50%, if applicable) of the total cost of coverage in which the employee and any dependents are enrolled.

With respect to standard-based wellness programs, the proposed rules would require the following:

  • Standard-based programs must be reasonably designed to promote health or prevent disease. This means the program must offer a different, reasonable means of qualifying for the reward to any individual that fails to meet the standard based on the measurement, test or screening.  These programs cannot be overly burdensome for individuals, and must have a reasonable chance of improving health or preventing disease.
  • Reasonable alternative means of qualifying for the reward must be available to individuals whose medical conditions make it unreasonably difficult, or for whom it is medically inadvisable, to meet the specified health-related standard.
  • Individuals must be given notice of the opportunity to qualify for the same reward through alternative means. The proposed rules provide model language for this purpose.

The proposed rules would be effective for plan years beginning on or after January 1, 2014.  Comments to the proposed rules are due on or before January 25, 2013.

HHS Issues Proposed Rules on Essential Health Benefits

HHS issued proposed rules detailing standards for health insurance issuers and Exchanges related to coverage of essential health benefits (EHB). Beginning in 2014, non-grandfathered health insurance coverage in the individual and small group markets, Medicaid benchmark and benchmark-equivalent plans, and Basic Health Programs will be required to cover EHBs, which include items and services in 10 benefit categories. In addition, these plans must meet specific actuarial values (AVs): 60% for a bronze plan, 70% for a silver plan, 80% for a gold plan, and 90% for a platinum plan.

The EHB package is a benchmark plan designated by each state based on the largest insurance products sold in that state. The proposed regulations outline a process for states to designate their benchmarks and how insurers can incorporate the state’s benchmark plan into a compliant EHB package.  While there is no requirement for employer-sponsored self-insured and insured large group health plans to offer an EHB package, the proposed regulations address issues that impact self-insured plans. 

With respect to annual cost-sharing, the Affordable Care Act places limitations on the amounts that a group health plan can impose under the plan (i.e., caps on deductibles and out-of-pocket maximums). The proposed regulations clarify that deductible limitations only apply to plans and issuers in the small group market and do not apply to self-insured plans or health insurance issuers offering insurance in the large group market. The proposed regulations do not, however, address out-of-pocket maximums.

In addition, under the Affordable Care Act, large employers may be subject to a penalty (“play or pay penalty”) for failing to offer full-time employees coverage that provides minimum value. A group health plan provides minimum value (MV) if the percentage of total allowed costs of benefits provided under the plan is no less than 60%.  For purposes of determining a plan’s MV, the proposed regulations provide that the percentage of the total allowed cost of benefits will be determined using an MV calculator or a safe harbor checklist that will be made available by HHS and the IRS. If the plan contains non-standard features that are not suitable for the calculator and do not fit the safe harbor checklists, the plan would be permitted to determine MV through certification by an actuary. 

The proposed rules also state that MV for employer-sponsored self-insured plans and insured large group health plans will be determined using a standard population that is based upon large self-insured group health plans. Employer contributions to an HSA and amounts newly made available under an HRA will be taken into account in determining MV.

Comments to the proposed regulations must be received on or before December 26, 2012.

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