The Affordable Care Act (ACA) imposes an annual, non-deductible fee on the health insurance sector, allocated across the industry according to market share. The fee, which is treated as an excise tax, is required to be paid by Sept. 30 of each calendar year beginning in 2014.
On March 1, 2013, the Internal Revenue Service (IRS) released proposed regulations that implement the ACA’s health insurance providers fee.
The health insurance providers fee applies to all “covered entities,” defined as any entity that provides health insurance for any United States health risk. The fee will be assessed on health insurers’ premium revenue above $25 million. Specifically, the fee applies to:
- Health insurers;
- Health maintenance organizations (HMOs);
- Providers of Medicare Advantage, Medicare Part D prescription drug coverage or Medicaid coverage; and
- Non-fully insured multiple employer welfare arrangements (MEWAs).
The term “health insurance” does not include coverage for specific diseases, accident or disability only, hospital indemnity or other fixed indemnity insurance. A “United States health risk” means the health risk of an individual who is a U.S. citizen, U.S. resident (whether or not located in the United States) or located in the United States, with respect to the period that the individual is located there.
The fee does not apply to companies whose net premiums written are $25 million or less. Additionally, the fee program specifically excludes all of the following entities:
- Self-insured employers;
- Governmental entities;
- Certain nonprofit entities; and
- Voluntary employees’ beneficiary associations (VEBAs).
Employers who provide retiree’s health care benefits under a self-insured arrangement generally would qualify for the exclusion for self-insured employers. The proposed regulations also clarify that a self-insured plan may use a third party, such as a commercial insurer, for administration and remain exempt from the fee, as long as there is no shifting of risk to the third party.
Although MEWAs that are not fully insured are subject to the fee, the proposed regulations note that a fully insured MEWA would not be subject to the fee even though it receives premiums, because it uses those premiums to pay an insurance company to provide the coverage being purchased. In this case, the insurance company is the covered entity because it, and not the MEWA, is providing health insurance.
Controlled Group Rule
To determine if a company is a “covered entity,” a controlled group rule applies for companies that are related or commonly owned. The proposed regulations define a “controlled group” as a group of two or more persons, including at least one person that is a covered entity, that are treated as a single employer under the Internal Revenue Code (Code) sections 52(a), 52(b), 414(m) or 414(o).
A controlled group is treated as a single covered entity for purposes of the health insurance providers fee. For those that leave or enter a controlled group, the proposed rules clarify that a person is treated as a member of the controlled group if it is a member of the group at the end of the day on Dec. 31 of the data year.
The proposed regulations require each controlled group to have a “designated entity” that will be responsible for filing and reporting the group’s net premiums written. For groups of entities filing consolidated returns, this will be the common parent of the group. In determining net premiums written of a controlled group, the controlled group generally must take into account the net premiums written for all members for the entire data year.
Although a single entity is responsible for the group’s filings and payment of the fee, all group members are jointly and severally liable for the final fee for a given fee year.
The aggregate annual fee for all covered entities (referred to as the “applicable amount”) is expected to be:
- $8 billion for calendar year 2014;
- $11.3 billion for calendar years 2015 and 2016;
- $13.9 billion for calendar year 2017; and
- $14.3 billion for calendar year 2018.
Beginning in 2019, the cost of the fee will increase based on the rate of premium growth. The applicable amount will be apportioned among the covered entities according to their respective market shares, as measured by net premiums written. This means that the IRS will assess a portion of the applicable amount to each covered entity based on the ratio of:
- The covered entity’s net premiums written during the preceding calendar year; to
- The aggregate net premiums of all covered entities during the preceding calendar year.
A covered entity’s net premiums written during the calendar year that are not more than $25 million are not taken into account when allocating the fee. With respect to a covered entity’s net premiums written that are more than $25 million but not more than $50 million, 50 percent are taken into account. One-hundred percent of net premiums written in excess of $50 million are taken into account.
Reporting Requirements and Penalties
A covered entity will be required to report to the IRS the amount of its net premiums written for health insurance of United States health risks by May 1 of each fee year, using Form 8963. A covered entity with net premiums written under the $25 million threshold is not liable for the fee, but still must report its net premiums written.
The IRS is considering making available to the public the information reported on Form 8963 (including the identity of the covered entity and the amount of its net premiums written) and invites comments on which information should be made publicly available.
Under the proposed regulations, the IRS will determine aggregate net premiums written for all covered entities based on reports submitted on Form 8963, and any other source of information available to the IRS. The IRS will send each covered entity a notice of preliminary fee calculation each fee year, and will allow for an error correction process prior to determining a covered entity’s final fee for a given fee year. The IRS will issue further guidance regarding the error correction process.
A penalty will apply to each covered entity for failure to timely file Form 8963, unless it is shown that the failure is due to reasonable cause. The penalty, which applies in addition to the fee amount, will be $10,000 plus the lesser of:
- $1,000 per day while the failure continues; or
- The amount of the fee imposed for which the report was required.
A penalty will also apply for underreporting of a covered entity’s net premiums written. The penalty is equal to the amount of the fee that should have been paid in the absence of an understatement over the amount of the fee determined based on the understatement.
Shifting the Cost of the fee
Some industry groups have raised concern over whether covered entities will try to shift the cost of the fee onto policyholders. The concern is that covered entities will try to recover a large portion of the fee from policyholders by raising insurance premiums by a corresponding amount.
The IRS acknowledged these concerns in the proposed rules, and will accept comments for 90 days following publication of the proposed rules.