Legal Update

May 9, 2012

Issue 39: Calculating and Paying the Comparative Effectiveness Research Fee

Click for PDF

This is the thirty-ninth issue in our health care reform series of alerts for employers on selected topics in health care reform. (Our general summary of health care reform and other issues in this series can be accessed by clicking here.) This series of Health Care Reform Management Alerts is designed to provide a more in-depth analysis of certain aspects of health care reform and how it will impact your employer-sponsored plans.

[√] Applies to grandfathered plans

[√] Applies to new health plans and plans that lose grandfathered status

The Affordable Care Act imposes a “comparative effectiveness fee,” on all insurers and sponsors of group health plans, for plan years ending on or after October 1, 2012 (meaning calendar year plans are subject to the fee starting in 2012). The fee, which is intended to pay for governmental research comparing the clinical effectiveness of various medical treatments, amounts to $1 per covered life in the first year, and $2 per covered life in each subsequent year. (The fee sunsets in 2018). Recently proposed IRS regulations clarify how to determine what types of coverage trigger the fee, how to calculate covered lives, and how to pay the fee. While the fee is assessed against insurers (for fully-insured plans) and plan sponsors (for self-funded plans), this alert focuses on the latter.

Fee Assessed Against “Group Health Plan” Sponsors

The regulations clarify that the fee will be assessed for “group health plan” coverage, but not for HIPAA excepted benefits. This means there will be no fee assessed for stand-alone dental and vision benefits, or for most health flexible spending accounts (FSAs)* (this list is not exhaustive). In addition, employee assistance, disease management and wellness programs are specifically exempted unless they provide “significant benefits in the nature of medical care or treatment”. On the other hand, the fee will be assessed for coverage provided to former employees, including coverage provided under a retiree-only plan, despite the fact that retiree-only plans are exempt from most of the Affordable Care Act mandates.

Sponsors rarely offer these ancillary benefits in stand-alone form though -- they are usually paired with major medical coverage. To address this, the regulations provide that a plan sponsor offering multiple arrangements providing health coverage (i.e. two or more self-insured health plans or programs that have the same plan year) may treat them as a single plan for purposes of calculating the fee. For example, if a self-insured arrangement providing major medical benefits is paired with a self-insured prescription drug program or a health reimbursement arrangement (HRA), the plan sponsor may treat the arrangement as one and pay one fee. On the other hand, if a insured arrangement is paired with a self-funded HRA, there will be two fees assessed for one covered life - one fee against the insurer and the other against the plan sponsor of the HRA.

Calculating Covered Lives

The amount of the fee is equal to the average number of lives covered under the plan for the plan year, times the applicable dollar amount ($1 for the plan year ending on or after October 1, 2012 and before October 1, 2013, and $2 thereafter). Self-funded plan sponsors can choose among any of three methods to calculate the average number of covered lives:

  1. Actual Count. The sponsor may calculate the average lives for the plan year by adding the covered lives (participants plus dependents) for each day of the plan year and dividing by the number of days in the plan year.
  2. Snapshot Count. The sponsor may instead add the total lives for one day in each quarter (or an equal number of days for each quarter), and divide by the number of days used (minimum of four). With this method, the plan sponsor may look to actual lives covered (employees, spouses and dependents), or it can add the number of individuals with self-only coverage, to the product of the number of participants with coverage other than self-only multiplied by 2.35.
    [(self-only) + (other than self-only x 2.35)] (The IRS determined that the average non-self-only election covers 2.35 participants.)
  3. Form 5500. Finally, the sponsor may look to the participants reported on the Form 5500. The Form 5500 does not report dependents though -- only employees. So, for plans with dependent coverage, the plan sponsor must add together the number of reported participants on the first and last day of the plan year (while this seems like over-counting, the regulations clarify that this inflated count is intended to reflect those dependents not reported on the Form). For plans without dependent coverage, the plan sponsor can simply add the two numbers, then divide by two.

The regulations contain a special rule for HRAs and FSAs. If a plan sponsor does not maintain another self-insured health plan, the plan sponsor may treat each FSA or HRA as covering a single covered life. If the plan sponsor maintains multiple arrangements, they may be treated as a single plan, as explained above.

Plan sponsors may only choose one counting method in any given plan year, but the sponsor can change methods from year to year. The IRS released the proposed regulations on the fee after the start of the first applicable plan year, meaning many sponsors may have missed the opportunity to capture the information necessary to use approach #1 or #2 above. To account for this, the IRS is allowing sponsors in this situation to use any reasonable counting method for the first plan year.

Paying the Fee

The tax is assessed on plan sponsors of self-funded plans. For most plans, this means the employer. For multiemployer plans, this means the joint board of trustees. The IRS declined to comment on whether the fee could be paid out of a trust (in the multiemployer context and for single employers maintaining a VEBA). Instead, the IRS deferred to the DOL, which is the agency responsible for issuing guidance relating to fiduciary standards and use of plan assets. The preamble to the regulations suggested the DOL will issue guidance in the near future.

Sponsors must pay the fee annually using IRS Form 720. (Despite the Form being entitled Quarterly Federal Excise Tax Return, a plan sponsor that files a Form 720 only to report the fee is not required to file a Form 720 at other times during the year.) The form and payment in full will be due by July 31 of each year, beginning July 31, 2013, for most plan sponsors.


* Benefits provided under health FSAs are excepted benefits if (i) there is other nonexcepted group health plan coverage available by reason of employment, and (ii) the maximum benefit payable to any participant for the year cannot exceed two times the employee’s salary reduction election under the health FSA for the year (or, if greater, the amount of the employee’s salary reduction election for the health FSA for the year, plus $500).