Employers Must Pay Excise Tax on Self-Insured Health Plans by July 31
Employers that sponsor a self-insured health plan have until July 31, 2014, to submit an updated form and payment for a new tax requirement. The new fee was established by the Patient Protection and Affordable Care Act (PPACA) to fund the Patient-Centered Outcomes Research Institute (PCORI), a new initiative to improve health decisions by advancing comparative clinical effectiveness research.
“The IRS finally released the updated form for submitting this tax,” observes Anita Baker, managing partner of the employee benefits group at CliftonLarsonAllen. “Employers with self-insured health plans will need to move quickly to meet the filing deadline.”
Who is responsible for the fee
Internal Revenue Code Section 4376 imposes a new PCORI fee on self-insured health plans. Generally, this is any plan providing accident and health coverage other than through an insurance policy.
Below is a summary of plans for which the PCORI fee applies and those which are exempt:
|Plans subject to the fee||Plans exempt from the fee|
For single-employer plans, the employer is responsible for the fee. In addition, organizations must pay the fee for plans established and maintained by an employer organization. Both for-profit and nonprofit employers are subject to the fee, along with governmental medical reimbursement plans (unless they cover military members or Indian tribes).
“A similar fee applies to insured plans,” notes Baker. “That fee is not imposed on the employer, but rather on the issuer of the insurance policy.”
How to calculate the fee
Employers can figure out how much they must pay by multiplying the average number of “lives covered” for the plan year by the rate of tax. Fortunately, the tax rate per participant is nominal:
|Plan Year Ending||Rate of Tax|
|Between October 1, 2012 and October 1, 2013||$1|
|Between October 1, 2013 and October 1, 2014||$2|
|On or after October 1, 2014||To be determined|
To determine the number of lives covered, the employer must count not only the employee, but any family members covered under the medical reimbursement plan. IRS regulations allow the employer to determine the average number of lives covered by using one of three methods:
- Actual count — The employer determines the total lives covered for each day of the plan year and divides that total by the number of days in the plan year.
- Snapshot — There are two approaches to the snapshot method, but both use the same basic method. A number of lives covered is computed on a date during each quarter, added together, and divided by four.
- Snapshot count: Actual number of lives covered is used for each designated date.
- Snapshot factor: Computed by taking the sum of the number of participants with self-only coverage and number of participants with other than self-only coverage multiplied by 2.35
- Form 5500 — For employers filing an annual Form 5500, Annual Return/Report of Employee Benefit Plan, the average number of lives may be derived from the total participants as reported on the form at the beginning and end of the year, divided by two. Generally, a plan with fewer than 100 participants is not required to file Form 5500.
A special rule applies if an HRA is the only self-insured plan. In that case, the employer may count only the employee as covered (family members are ignored). See IRS Regulation 46.4376-1(c)(2) for more details on these rules and the three methods for calculating lives covered.
When to pay the fee
Employers must submit Form 720, Quarterly Federal Excise Tax Return when paying the tax.
The form is designed for a variety of excise taxes and is normally sent quarterly. However, for the PCORI fee, employers must file the form annually by July 31 of the calendar year immediately following the last day of the plan year. For example, an employer with a 2013 calendar year group health plan must file the form with the PCORI fee by July 31, 2014.
The PCORI fee is computed under Part II of the form, at No. 133. The employer simply enters the average number of lives covered, multiplies by the rate of tax ($1 for the first year filing and $2 for the second year filing per covered life currently), and remits the fee with the form.
“Unfortunately, there is no de minimis exception for small employers. We have many small business and family entities that only have one or two covered lives that are still required to submit the Form 720, just like a large corporation with several thousand employees in a self-insured plan,” states Baker. "And the IRS announced that this fee is tax deductible, even though it is remitted to the IRS on a tax form," she adds.
How we can help
Some small employers who utilize a third party administrator, such as those whose group health plan is provided through AgriPlan or BizPlan, will have their Form 720 completed by their sponsor. Others who self-administer their group health plan will need to take responsibility for filing this form.
Please contact your CliftonLarsonAllen tax advisor if you have questions. Our employee benefits group can provide assistance to larger employers who need help identifying which components of their health plans are subject to this fee, or determining the best method to assess the annual number of lives covered.