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Treasury, IRS Release Proposed Rule Regarding Annual Health Insurer Fee

Mar.05.2013

In the March 4, 2013 Federal Register, the Department of the Treasury and the Internal Revenue Service (IRS) published a Notice of Proposed Rulemaking (Proposed Rule) regarding the annual health insurer fee (Fee) under section 9010 of the Affordable Care Act (ACA), which generally imposes an annual fee on "covered entities" engaged in the business of providing "health insurance" with respect to "United States health risks, effective for calendar years beginning after December 31, 2013." The Proposed Rule provides helpful guidance with respect to numerous open issues relating to the Fee.  Comments are due June 3, 2013, and a hearing will be held on June 21, 2013. The full rule is available here

Definition of Covered Entity

ACA section 9010 imposes the Fee on "covered entities" that provide "health insurance" for any "United States health risks" during the calendar year in which the Fee is due, with certain specified exceptions. The Proposed Rule adds additional gloss to this definition, providing specifically that the term "covered entity" includes:

  • an Internal Revenue Code (Code) section 9832(b)(2) "health insurance issuer" (i.e., an issuer required to be licensed to engage in the business of insurance in a state and that is subject to the respective laws of such jurisdictions that regulate insurance);
  • a Code section 9832(b)(3) health maintenance organization;
  • an insurance company subject to tax under part I or II of subchapter L of the Code, or that would be subject to tax under such part(s) but for the entity being exempt from tax under Code section 501(a);
  • an entity that provides health insurance under Medicare Advantage, Medicare Part D or Medicaid; or
  • a multiple employer welfare arrangement (MEWA) to the extent not fully insured, with a limited exception.

Certain entities, including self-insured employers, governmental entities, and certain nonprofit corporations, are excluded from the definition of "covered entity." The Proposed Rule clarifies that a self-insured plan may use a third party for administration and bookkeeping functions and still be considered self-insured if there is no risk-shifting to the third party. 

Although a blanket exception for voluntary employees' beneficiary associations (VEBAs) is not provided, the preamble notes that the regulators are "not aware of any VEBAs that would be covered entities" under the Proposed Rule. Liability for any Fee with respect to student health insurance runs to the issuer, and not to the educational institution. 

Definition of Health Insurance

Section 9010 does not provide an affirmative definition of "health insurance"; rather, it defines the term in the negative. The Proposed Rule provides guidance regarding what constitutes health insurance for purposes of the Fee, defining the term to mean benefits consisting of medical care (provided directly, through insurance, reimbursement, or otherwise) under any hospital or medical service policy or certificate, hospital or medical service plan contract, or health maintenance organization contract offered by a health insurance issuer. The Proposed Rule excludes from the term all Code section 9832(c) excepted benefits except for limited scope dental and vision benefits. Retiree-only plans, however, may constitute health insurance. 

Neither student administrative health fee arrangements (where students pay a fee to help cover the cost of health services in a non-insurance context) nor travel insurance (where any health benefits are not offered on a stand-alone basis and are incidental to other coverage) are health insurance for purposes of the Fee. 

The Proposed Rule provides that, solely for purposes of ACA section 9010, indemnity reinsurance is not health insurance. Assumption reinsurance is considered health insurance. 

Net Premiums Written

Each year's Fee is based on each covered entity's share of "net premiums written" for health insurance of United States health risks during the preceding year.  ACA section 9010 does not define net premiums written. The Proposed Rule defines net premiums written to mean:

. . . premiums written, including reinsurance premiums written, reduced by reinsurance ceded, and reduced by ceding commissions and medical loss ratio ("MLR") rebates with respect to the [preceding] year. 

The term net premiums written does not include premiums written for indemnity reinsurance. The Proposed Rule also clarifies that net premiums written are not reduced by indemnity reinsurance ceded, only by assumption reinsurance.

The preamble notes that net premiums written will generally equal the amount reported on the Supplemental Health Care Exhibit (SHCE) filed with the National Association of Insurance Commissioners (NAIC), minus MLR rebates with respect to the preceding year, subject to any applicable exclusions under ACA section 9010 such as exclusions from the term "health insurance." 

The Proposed Rule confirms that the Internal Revenue Service will not take into account the first $25 million of net premiums written for each covered entity (determined on a controlled group basis), and only 50% of the net premiums written for amounts over $25 million and up to $50 million. In addition, for those covered entities that satisfy a certain tax-exempt standard, only 50% of the remaining net premiums written will be taken into account. In the case of a controlled group, the IRS will not take into account any net premiums written of any member that is a nonprofit corporation or a VEBA excluded from the definition of covered entity.

Reporting

The Proposed Rule requires each covered entity, including each controlled group that is treated as a single covered entity, to annually report its net premiums written for health insurance of United States health risks during the preceding year to the IRS by May 1st of the year in which the Fee is due.  Form 8963, "Report of Health Insurance Provider Information," will be used for this purpose. A covered entity with net premiums written under the $25 million threshold is not liable for a Fee but must still report its net premiums written. Penalties may be imposed for failure to timely submit a report containing the required information unless the covered entity can show that the failure is due to reasonable cause. A covered entity is liable for an accuracy-related penalty to the extent it understates its net premiums written on the Form 8963. 

The preamble provides that the regulators are 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, at the time the notice of preliminary Fee calculation is sent.

Amount of Fee

The IRS will determine net premiums written based on the reports submitted by covered entities and any other source of information available to the IRS, including potentially the SHCE, the Accident and Health Policy Experience Exhibit filed with the NAIC, and the MLR Annual Reporting Form filed with CMS. 

The Internal Revenue Service will calculate a covered entity's fee based on the ratio of the covered entity's net premiums written that are taken into account (after applying any permitted reductions or exclusions discussed in "Net Premiums Written," above) to the total net premiums written of all covered entities that are taken into account.   

The Proposed Rule provides that the IRS will send each covered entity a notice of preliminary fee calculation each fee year. After receipt of the preliminary notice, entities may utilize an error correction process referenced in the proposed rules and to be developed in other guidance. 

The Proposed Rule provides that a notice of the final Fee calculation will be sent to each covered entity for a fee year no later than August 31st of that fee year, and the covered entity must pay the Fee by September 30th of the fee year by electronic funds transfer. No tax return is to be filed with the payment of the fee. 

All members of a controlled group are jointly and severally liable for the fee. 

Tax Treatment of Fee

The Proposed Rule reiterates the statutory language providing that the Fee is treated as a non-deductible excise tax. The preamble indicates that any amounts recovered by a covered entity from policyholders in connection with the Fee would be included in the covered entity's income, whether or not separately stated on any bill. 

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For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

A. Xavier Baker
Partner – Washington, D.C.
Phone: +1 202.624.2842
Email: xbaker@crowell.com