PCORI FEE CHART. December 2012 New PCORI Fee Impacts Employers and Health Insurers Employee Benefits Law Update

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1 PCORI FEE CHART December 2012 New PCORI Fee Impacts Employers and Health Insurers Employee Benefits Law Update On December 6, 2012, the Internal Revenue Service ( IRS ) published final regulations detailing how employers and insurers will calculate a new fee imposed under the Patient Protection and Affordable Care Act (now called the ACA by regulators). The new fee, called the patient-centered outcomes research trust fund fee ( PCORI Fee or Fee ), will directly apply to employers offering self-funded major medical plans and certain other self-funded plans (such as some but not all health reimbursement arrangements ( HRA )). In addition, the new fee will apply to insurance issuers with respect to fully insured health policies, including a health maintenance organization ( HMO ) contract. The fee is rather modest, starting at $1 per covered life per year. The final regulations generally track the previous, proposed regulations from April Effective Date of Regulations. The regulations are effective immediately and will apply when employers determine the PCORI Fee for the current plan year. The first PCORI Fee applies to the first plan year which ends on or after October 1, For example, a calendar year plan will end on December 31, The PCORI Fee must be paid by July 31 of the year following the last day of the policy or plan year. Thus, a calendar year plan must pay its first PCORI Fee by July 31, Use of Fee Revenue. The ACA contains provisions intended to improve the quality of health care. One provision establishes a private, nonprofit corporation called the Patient-Centered Outcomes Research Institute (the Institute ). The Institute will help evaluate the quality and effectiveness of various medicines and treatments. The PCORI Fee will help fund the Institute. Plans Subject to Fee. The PCORI Fee generally will apply to major medical benefits. Many other benefits such as dental plans, vision plans and health flexible spending arrangements ( Health FSAs ) will often be excepted benefits and therefore usually not subject to the PCORI Fee (see below for test). The following chart discusses how the PCORI Fee applies to various benefits that may be offered by an employer. See below for an important non-duplication rule, which can reduce the Fee owed by an employer. Benefit Type Does PCORI Fee Apply? Comments Dental Plan Usually not. Many dental plans are excepted benefits under HIPAA. If so, the PCORI Fee does not apply. Excepted benefit test: If there is a separate fully insured contract for the plan, then it is an excepted benefit. For selffunded plans, the plan must meet two tests to be an excepted benefit. The participant: (1) must be able to elect the benefit separately; and (2) if elected, must pay an additional premium for the coverage. Thus, 100 percent employer-paid dental plans do not qualify as an excepted benefit and the PCORI Fee will apply to such plans.

2 Employee Assistance Program Disease Management Program In both situations, coverage must be limited to treatment of the mouth. The PCORI Fee regulations do significant benefits. The determination of whether significant benefits are provided does not look to state law definitions (e.g., California or Nevada rules, which regulate EAPs when they provide a certain number of visits in a specified time period). The PCORI Fee guidance does significant benefits. Expatriate Policy apply if the facts and circumstances show the policy was designed and issued specifically to cover primarily employees working and residing outside the United States. Governmental Plan Generally yes, but some exceptions. An exempt governmental program includes: (1) Medicare; (2) Medicaid; (3) Children's Health Insurance Program; (4) Armed Forces or veterans' coverage; and (5) certain medical care to members of Indian tribes. Health FSA Health Savings Account ("HSA") HRA Usually not. Most Health FSAs are excepted benefits under HIPAA. If the Health FSA is not an excepted benefit, the PCORI Fee would apply. Usually not. Most HSAs are not a plan. Yes, in some situations. An HRA usually does not constitute an excepted Excepted benefits test for Health FSAs usually satisfied if no employer contributions (or employer contributions are capped at $500). PCORI Fee test identical to test for other purposes (so employer likely already knows whether its Health FSA is an excepted benefit). The high deductible health plan ( HDHP ) relating to an HSA typically would be subject to the PCORI Fee. A non-duplication rule can reduce (or eliminate) an

3 benefit. amount owed with respect to an HRA, if the employer also maintains a separate selfinsured health plan with the same plan year. The nonduplication rule is discussed below. Prescription Drug Plan Generally yes. A non-duplication rule (discussed below) can reduce (or eliminate) the PCORI Fee with respect to prescription drug coverage. Retiree Major Medical Plan Yes. There is no exception for retiree-only plans (or for plans which cover both retirees and active employees). Stop Loss Policy or Indemnity Reinsurance Policy Tribal Program Established by Federal Law Vision Plan Wellness Program No. No. Usually not. Many vision plans are excepted benefits under HIPAA. If the vision plan is not an excepted benefit, the PCORI Fee would apply. Regulations contain broad definition of both terms, which seems to exempt most stop loss and indemnity reinsurance policies from the Fee. Program established by Federal law for providing medical care (other than through insurance policies) to members of Indian tribes is not subject to PCORI Fee. See above box, Dental Plan Comments, for excepted benefits test. Coverage must be limited to the treatment of the eye. The PCORI Fee regulation does significant benefits. Non-Duplication Rule. An employer may offer two or more self-funded health plans. If both the plans have the same plan year, an employer may treat them as a single health plan for purposes of calculating the PCORI Fee. If so, the same life (i.e., enrollee) covered under each arrangement would count as only one covered life, not two covered lives. Example of Non-Duplication Rule. Suppose an employer offers major medical benefits and a separate prescription drug benefit. Both benefits are self-funded and have the same plan year. The medical plan has 1,000 lives covered under it while the prescription drug plan has 800 lives covered under it. Of the prescription drug plan enrollees, 700 are also covered by the major medical plan, while 100 are covered only by the prescription drug plan. For simplicity, assume that no employees or dependents terminate coverage

4 during the year and that no new employees or dependents begin participating during the year. If both plans were considered separately, the employer generally would owe $1,800 ($1,000 for the major medical plan and $800 for the prescription drug plan). Under the non-duplication rule, the employer would consider the number of unique lives covered under both plans. Here, there are 1,100 unique lives (1,000 from the medical plan and 100 who are covered under the prescription drug plan, but not the medical plan). Thus, the employer generally would owe $1,100 (not $1,800), which is $1 per unique covered life. Who is Responsible for Fee? For a fully-insured health plan, the insurance issuer is responsible for the PCORI Fee. For a self-funded plan, the plan sponsor is responsible for the PCORI Fee. The plan sponsor is generally the employer that established or maintains the plan. The regulations provide other rules for other types of plans. For example, the board of trustees is the plan sponsor of a multiemployer plan, and the committee is the plan sponsor of a multiple employer welfare arrangement. Calculating Covered Lives. The regulations contain detailed guidance on how an employer with a selffunded plan calculates the average number of covered lives under the plan. The determination is made once per year, after the end of the plan year. Methods for Calculating Covered Lives. An employer must use one of three methods provided in the regulations to determine the average number of covered lives. Each method is described in more detail below. The regulations provide examples to illustrate how to employ each method. The Actual Count Method To calculate average covered lives using this method, add the total lives covered for each day of the plan year and divide that total by the number of days in the plan year. The Snapshot Method To calculate average covered lives using this method, add the total lives covered on a date during the first, second or third month of each quarter of the plan year, and then divide that total by the number of dates on which a count was made. Each date used in the second, third and fourth quarter must be within three days of the corresponding date chosen in the first quarter. For example, if an employer chooses January 7 as the counting date in the first quarter, the employer may use any date from April 4-10 as the counting date for the second quarter. An employer may actually count each individual with coverage. Alternatively, an employer can determine the number of individuals with other than self-only coverage and multiply that number by The employer would then add that number to the number of individuals with self-only coverage. The Form 5500 Method Under this method, the average number of covered lives is determined based on the number reported on the Form 5500 or Form 5500-SF. Employers may use this method provided the Form 5500 was filed no later than July 31 of the year following the last day of the plan year. Transitional Rule. For a plan year beginning before July 11, 2012 and ending on or after October 1, 2012, a plan sponsor may determine the average number of lives covered under the plan using any reasonable method. However, since the term reasonable method is not defined, we expect that plan sponsors will likely use one of the three prescribed (and better-defined) methods. Individuals Residing in United States. The PCORI Fee applies with respect to individuals residing in the United States. The plan sponsor may rely on the most recent address on file when making this determination. The United States includes American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, the Virgin Islands, and any other possession of the United States. Future Changes. The $1 per covered life fee increases to $2 for plan years ending on or after October 1, 2013 and before October 1, The $2 fee increases in future years based on certain health expenditure

5 data. The fee ceases in approximately Payment of Fee. As noted previously, the PCORI Fee must be paid by July 31 of the calendar year immediately following the last day of the plan year. Thus, an employer with a calendar year plan will pay its first PCORI Fee by July 31, Employers will file IRS Form 720. While the PCORI regulations do not contain specific recordkeeping requirements, IRS Form 720 does contain some recordkeeping requirements. Third parties (such as a third party administrator) will not be able to report and pay the Fee on behalf of a plan sponsor. Future Department of Labor guidance is expected to provide that the fee generally cannot be paid from plan assets.