IRS ISSUES FINAL REGULATIONSFOR COMPARATIVE EFFECTIVENESSRESEARCH FEESFinal regulations on the fee to fund the Patient Centered Outcomes Research Institute (PCORI),known as the Comparative Effectiveness Research (CER) fee, were issued by the Department ofthe Treasury on December 6, 2012.

BACKGROUND

The Patient Protection and Affordable Care Act (PPACA) includes a provision that promotesresearch to evaluate and compare health outcomes and the clinical effectiveness, risks andbenefits of medical treatments, services, procedures, drugs and other strategies that treat,manage, diagnose or prevent illness or injury. The PCORI was created under PPACA to promotethis research. The funding source for the Institute is a trust financed by fees paid by healthinsurers and sponsors of self-insured health plans. The final regulations can be found here.

The fee began to apply to plan years ending on or after October 1, 2012 and ceases to apply to planyears ending on or after October 1, 2019. Thus, calendar year plans were subject to the fee for2012. Furthermore, for calendar year plans, the fee will not be applicable after the 2018 year,since the plan for 2019 will end after October 1, 2019.

Generally, the fee is tiered, starting at $1, multiplied by the average number of lives coveredunder the plan for those plans ending before October 1, 2013. For plan years and policy years(fully insured groups) ending on or after October 1, 2013, the fee is $2 multiplied by the averagenumber of lives covered under the plan. Plan or policy years ending on or after October 1, 2014may see the $2 fee increased for inflation.

Responsibility for calculating and paying the fee lies with the health insurer for a fully insuredplan and with the plan sponsor for a self-insured plan. The remainder of this Alert will addressthe fee only as it pertains to self-insured plans.

AFFECTED PLANS AND EXCEPTIONS

Plan sponsors of applicable self-insured health plans are subject to the fee. An applicable self-insured health plan is one that provides accident and health coverage other than through aninsurance policy and is established for the benefit of employees, former employees, members,former members or other eligible individuals. Special attention should be given to the fact thatfor purposes of the CER fee, plans for “former employees” are included. Thus, plans that providefor retiree coverage are not excepted from this PPACA provision, as they have been exceptedfrom other PPACA health insurance market reforms. Self-insured governmental plans are also“applicable self-insured health plans” subject to the fee as well as multiple employer welfare

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arrangements (MEWAs), multiemployer plans, rural electric cooperatives and voluntaryemployees’ beneficiary associations (VEBAs).

However, the regulations outline which plans or benefits are not subject to the fee:

� Plans designed and issued specifically to cover primarily employees not working andresiding in the United States (expatriate plans). For residential clarification, theregulations provide that if the address on file for the primary insured is outside of theUnited States, then the insurer or plan sponsor may treat the primary insured, spouse,dependents or other beneficiaries as not residing in the United States.

� Health flexible spending accounts (FSA) that meet the definition of an excepted benefit.A health FSA is an excepted benefit if (i) the maximum benefit that is available to aparticipant in any given year is not more than two times his or her salary reduction (or, ifgreater, his or her salary reduction plus $500) and (ii) major medical coverage is madeavailable that same year to employees participating in the health FSA.

� Employee assistance programs, disease management or wellness programs as long asthe program does not provide for significant medical care or treatment.

� A plan that provides benefits substantially all of which are excepted benefits, includinglimited-scope dental and vision plans, accident-only or disability-only plans, and on-siteclinics. A dental or vision plan will be deemed excepted if participants may declinecoverage, and participants must pay an additional contribution to elect the coverage.

� Health savings accounts.

� Medicare, Medicaid, CHIP programs and federal care for the armed forces, veterans, andIndian tribes are exempt from the fee.

� Stop loss coverage.

PLAN SPONSOR – PLAN DOCUMENT

Because the plan sponsor is responsible for payment of the fee, it is important to understandthe number of plans which an employer sponsors. In the instance of a plan maintained by asingle employer, the employer is the plan sponsor. If an employer participates in a planmaintained by a single employee organization, the employee organization is the plansponsor.

Generally, when a self-insured plan covers employees of more than one related employer,they are deemed to be under common control of one employer and one plan sponsor.However, the regulations for the CER fee do not contain rules that would treat relatedentities as a single employer. Thus, in this situation, the regulations provide that the plansponsor (and entity responsible for the fee) will be the person identified in the terms of theplan document that governs the plan. In addition to being named in the plan document asthe plan sponsor, the entity must also consent to the designation by no later than the duedate for paying the fee.

If a plan sponsor is not designated in the terms of the plan document, then the plan sponsoris each employer who has employees covered under the plan. Thus, each employer would beresponsible for paying any applicable fee and any filing requirement. This provision again

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emphasizes the importance of an employer ensuring its plan isestablished and governed by a plan document.

MULTIPLE SELF-INSURED ARRANGEMENTSOF THE SAME PLAN SPONSOR

It is not out of the ordinary for an employer to sponsor more than onegroup health plan. For example, an employer may have onearrangement for medical benefits and another for prescription drugs.Likewise, an employer may have a high deductible health plan(HDHP) and a health reimbursement arrangement (HRA). As itrelates to the CER fee the issue is whether all arrangements are self-insured or a combination of self- and fully insured. The finalregulations provide that if a plan sponsor has two or morearrangements that are all self-insured with the same plan year, thenfor purposes of calculating the fee, they may be treated as a singleapplicable self-insured health plan. Conversely, if a plan sponsor hasa self-insured arrangement and a fully insured arrangement, then theplan sponsor will be responsible for the fee for the self-insuredarrangement and the health insurer will be responsible for the fee forthe fully insured arrangement. The rules provide that when coveredlives are counted for purposes of determining the fee under an HRAor a non-exempted health FSA, only the employee and not his or herdependents must be counted. This special rule for HRAs and non-exempted FSAs only applies to participants in the account plan thatdo not also participate in the major medical plan. The followingscenarios help to clarify this.

� Plan sponsor has a HRA that is integrated with anotherapplicable self- insured health plan providing major medicalcoverage, and both have a calendar plan year. In order toparticipate in the HRA, an employee must also be enrolled in themajor medical coverage. Since both arrangements are self-insured with the same plan year, the plan sponsor will have onlyto pay and report a single fee. If the plan sponsor is in a situationwhere the HRA and major medical coverage have different planyears, in order to avoid paying duplicate fees, the employer maywant to address with its counsel amending the HRA to conformits plan year to the medical plan year or consolidating the twoprograms under a “wrap plan.”

� Plan sponsor has a fully insured HDHP with a plan year ofJanuary 1 through December 31. To assist employees with thedeductible it also has a self-insured HRA with the same calendarplan year. In this instance, the health insurer is responsible for

paying and reporting the CER fee for thefully insured HDHP, while the plansponsor is responsible for paying andreporting the fee for the HRA.

FEE HEADCOUNT

The fee imposed on a plan sponsor of anapplicable health plan is based on the averagenumber of lives (employees and dependents)covered under the plan. The proposedregulations provide plan sponsors a choice ofthree methods for calculating the averagenumber of lives. To be consistent, a plansponsor must use the same method for theduration of the plan year; however, a differentmethod may be used from one plan year tothe next.

ACTUAL COUNT METHODThe average number of lives covered underthe plan for the plan year can be determinedby adding the total number of lives coveredfor each day of the plan year and dividing thattotal by the number of days in the plan year.

EXAMPLE: Employer is the plan sponsor of aself-insured health plan with a plan year ofJanuary 1, 2013 through December 31, 2013.Employer determines the sum of the livescovered for each day of the plan year endingon December 31, 2013 as 3,285,000. Theaverage number of lives covered under theplan will be determined by dividing 3,285,000by 365 days (the number of days in thecalendar plan year): 9,000.

SNAPSHOT METHODSUsing this method, a plan sponsor candetermine the average number of livescovered for a plan year by adding the totals oflives covered on one date in each quarter (aplan sponsor can use more dates if desired, aslong as an equal number of dates are used foreach quarter) and then dividing the total by

4 Willis North America • 02/13

the number of dates on which the count was made. Thefinal regulations made a slight change as to considering thedates when using the snapshot method. Previously, theproposed regulations provided that the date or dates foreach quarter must be the same, such as the first day of thequarter or the last day of the quarter. However, the finalregulations provide that when counting lives under thesnap shot method, the date or dates used for the second,third and fourth quarters must be within three days of thedate or dates in that quarter that correspond to the dateused for the first quarter. All dates used must be within thesame plan year. The 30th and 31st day of a month are treatedas the last day of the month for purposes of determiningthe corresponding date for any month that has fewer than31 days.

EXAMPLE: Employer has a calendar plan year and usesJanuary 7, 2013 as the counting date for the first quarter.The plan sponsor may use any date beginning with the 4thand ending with the 10th as the counting date for the second(April 4-10), third (July 4-10) and fourth quarter (October4-10).

When using the snapshot method, the final regulationsprovide two ways the number of lives covered on adesignated date may be determined. They are the snapshotfactor and snapshot count.

� SNAPSHOT FACTOR METHOD: The number of lives coveredwith self-only coverage on that date, plus 2.35 timesthe number of lives covered with other than self-onlycoverage.

� EXAMPLE: Employer has a self-insured health planproviding coverage for employee, employee plus oneand family, which has a calendar plan year. Employerdesignates the first day of each quarter for determiningcovered lives. On January 1 there is employee-onlycoverage for 600 participants, and 800 for other thanemployee-only coverage. On April 1 there is employee-only coverage for 608 lives and 800 for other thanemployee-only coverage. On July 1 and October 1 theplan provides employee-only coverage for 610 lives andfor other than employee-only coverage 809 lives. Theaverage number of lives covered under the plan forthe plan year is 2,497. [((600 +(2.35x800)+((608+(2.35x800) +((610+(2.35x809)+((610+2.35x809)) divided by four]

� SNAPSHOT COUNT METHOD: The actual number of livescovered on each date.

� EXAMPLE: Employer has a self-insured health planproviding coverage for employee, employee plus one

and family which has a calendar plan year.Employer designates the first day of eachquarter of the plan for counting coveredlives under the plan. On January 1, thereare 2,000 covered lives, April 1 there are2,100 covered lives, July 1 there are 2,050covered lives and on October 1, 2,050covered lives. The average number oflives covered under the plan for this planyear is 2, 050. ((2,000+2,100+2,050+2,050) divided by four)

FORM 5500 METHODThe average number of lives is determined onthe basis of information in the ERISA Form5500 filings. For plans providing coverage toemployees and dependents, the number oflives is the sum of the number of participantson Form 5500 at the beginning and end of theplan year. Plans providing self-only coveragecalculate the number of lives by adding thenumber of participants reported on the Form5500 at the beginning and end of the planyear, divided by two.

The Form 5500 method may only be used ifthe required 5500 filing is filed no later thanthe due date, without extensions, for the feeimposed for that plan year. Thus, sincecalendar plan years generally must file Form5500 by July 31, which is also the date forpayment of the CER fee, the Form 5500method may not be used if the plan does notfile its 5500 by that date.

EXAMPLE: Employer has a self-insured healthplan with a plan year of August 1, 2012through July 31, 2013 offering employee,employee plus one and family coverage. OnForm 5500 the employer reports 4,000participants on the first day of the plan yearand 4,200 participants on the last day of theplan year. The plan sponsor determines theaverage number of lives covered by adding4,000 and 4,200 (8,200).

EXAMPLE: Employer has a self-insured healthplan with a calendar plan year of January 1,2013 through December 31, 2013 offeringemployee-only coverage. In order to use theForm 550 method, employer must file itsForm 5500 by July 31, 2014. On Form 5500the employer reports 4,000 participants on

5 Willis North America • 02/13

the first day of the plan year and 4,200 participants on the last dayof the plan year. The plan sponsor determines the average numberof lives covered by adding 4,000 and 4, 200 (8,200) divided bytwo (4,100).

Two special rules are also contained in the final regulations forplan sponsors.

� Health FSAs and HRAs: If a plan sponsor does not maintain anapplicable self-insured health plan other than a health FSA orHRA, the plan sponsor may treat each participant’s health FSA orHRA as covering a single covered life. Thus, the plan sponsor isnot required to include in its headcount for the plan the lives ofspouses, dependents or any other beneficiary of the individualparticipant.

� First Year of CER Fee: Any reasonable method may be used by aplan sponsor to determine the average number of lives coveredunder an applicable self-insured health plan for a plan yearbeginning before July 11, 2012 and ending on or after October 1,2012.

PAYMENT OF FEES AND FILINGOF RETURNS

The CER fee falls under the excise tax provisions of the InternalRevenue Code. Thus, as an excise tax, there are regulations whichcontain rules for depositing, paying and return filing; plan sponsorswill pay and report the tax on Form 720, “Quarterly Federal ExciseTax Return.”

However, don’t let the name of the form fool you. Although entitled a“quarterly” return, Form 720 for CER fee purposes is only filed oncea year. Plan sponsors must report and pay the fee for a plan year byJuly 31 of the calendar year immediately following the last day of theplan year. The first CER fee applies to the first plan year ending on orafter October 1, 2012. For example, a calendar year plan (with a plan

year ending on December 31, 2012) mustreport and pay its first CER fee by July 31,2013. For a plan with a plan year ending onJanuary 31, 2013, the fee must be reportedand paid by July 31, 2014.

Although the IRS encourages electronic filingof Form 720, it may also be filed via hard copy.Filing electronically requires a plan sponsorto submit the form through an approvedtransmitter software developer. Additionalinformation on electronic filing can befound here.

The final regulations confirm that thirdparties will not be permitted to report or paythe CER fee on behalf of plan sponsors.Furthermore, the preamble to the finalregulations emphasizes that the CER feemust be paid by the plan sponsor andgenerally cannot be paid out of plan assetssince they are not a plan expense.

CONCLUSION

Published final regulations for the CER feeclarify the amount of fee, when and how it isto be paid, and how to calculate the number ofaverage lives upon which the fee is based.Sponsors of self-insured plans, particularlyfor those whose plan years ended betweenOctober 1, 2012 and December 31, 2012,should begin to determine how they willcalculate the average number of lives, as wellas if they will file the required IRS Form 720electronically or in hard copy.

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NEW ENGLAND

Auburn, ME207 783 2211

Bangor, ME207 942 4671

Boston, MA617 437 6900

Burlington, VT802 264 9536

Hartford, CT860 756 7365

Manchester, NH603 627 9583

Portland, ME207 553 2131

Shelton, CT 203 924 2994

NORTHEAST

Buffalo, NY716 856 1100

Morristown, NJ973 539 1923

Mt. Laurel, NJ856 914 4600

New York, NY212 915 8802

Norwalk, CT203 523 0501

Radnor, PA610 254 7289

Wilmington, DE302 397 0171

ATLANTIC

Baltimore, MD 410 584 7528

Knoxville, TN865 588 8101

Memphis, TN901 248 3103

Metro DC301 581 4262

Nashville, TN615 872 3716

Norfolk, VA757 628 2303

Reston, VA703 435 7078

Richmond, VA804 527 2343

Rockville, MD301 692 3025

SOUTHEAST

Atlanta, GA404 224 5000

Birmingham, AL205 871 3300

Charlotte, NC704 344 4856

Gainesville, FL352 378 2511

Greenville, SC704 344 4856

Jacksonville, FL904 562 5552

Marietta, GA770 425 6700

Miami, FL305 421 6208Mobile, AL251 544 0212

Orlando, FL407 562 2493

Raleigh, NC704 344 4856

Savannah, GA912 239 9047

Tallahassee, FL850 385 3636

Tampa, FL813 490 6808813 289 7996

Vero Beach, FL772 469 2842

MIDWEST

Appleton, WI800 236 3311

Chicago, IL312 288 7700312 348 7700

Cleveland, OH216 861 9100

Columbus, OH614 326 4722

Detroit, MI248 539 6600

Grand Rapids, MI616 957 2020

Milwaukee, WI262 780 3476

Minneapolis, MN763 302 7131 763 302 7209

Moline, IL309 764 9666

Pittsburgh, PA412 645 8506

Schaumburg, IL847 517 3469

SOUTH CENTRAL

Amarillo, TX806 376 4761

Austin, TX512 651 1660

Dallas, TX972 715 2194972 715 6272

Denver, CO303 765 1564303 773 1373

Houston, TX713 625 1017713 625 1082

McAllen, TX956 682 9423

Mills, WY307 266 6568

New Orleans, LA504 581 6151

Oklahoma City, OK405 232 0651

Overland Park, KS913 339 0800

San Antonio, TX210 979 7470

Wichita, KS316 263 3211

WESTERN

Fresno, CA559 256 6212

Irvine, CA949 885 1200

Las Vegas, NV602 787 6235602 787 6078

Los Angeles, CA213 607 6300

Phoenix, AZ602 787 6235602 787 6078

Portland, OR503 274 6224

Rancho/Irvine, CA562 435 2259

San Diego, CA858 678 2000858 678 2132

San Francisco, CA415 291 1567

San Jose, CA408 436 7000

Seattle, WA800 456 1415

The information contained in this publication is not intended to represent legal ortax advice and has been prepared solely for educational purposes. Youmay wish to consult your attorney or tax adviser regarding issues raised in this publication.

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