Taxes and Fees That Will Impact Employers’ Health Care Costs
There are several taxes and fees designed into the Affordable Care Act (ACA) that will impact employer costs in significant ways. Recent regulations on a couple of these taxes/fees provide enlightening clarification. We discuss a few prominent taxes and fees in brief below.
COMPARATIVE EFFECTIVENESS RESEARCH FEE OR PATIENT? CENTERED OUTCOMES RESEARCH INSTITUTE FEE
In the last few months, the IRS issued final regulations on the Comparative Effectiveness Research Fee (CERF) [also named the Patient?Centered Outcomes Research Institute (PCORI) fee] finalizing the proposed regulations from April 2012.
Provide funding for the Patient?Centered Outcomes Research Institute created by the ACA. The Institute will study and evaluate health outcomes and the risks, benefits, and clinical effectiveness of certain medical treatments.
- -The fee is effective for plan years beginning October 1, 2012 or later, thru October 1, 2019
- -In year one, the fee is $1.00 per participant per year moving to $2.00 in year two and indexed thereafter, based on a per capita amount of National Health Expenditures
- -It applies to commercial insurers and plan sponsors of self?insured health care plans
- -Health plans are allowed to pay this fee on behalf of their fully insured customers, but self?insured plans are required to remit payment directly
- -The plan sponsor must state their annual fee liability on Form 720 “Quarterly Federal Excise Tax Return”
- -It includes retiree?only plans
- -The regulations allow three approaches to count employees: actual count, snapshot (there are two versions), or Form 5500 (see below)
- -Payments are due July 31st of the year following the last day of the policy or plan year (first payment due July 31, 2013)
- -The actual count method is the sum of participants in the plan each day of the policy year divided by the number of policy days in the year
- -The first snapshot count method is the actual number of covered lives on a particular date or dates in a quarter divided by the number of dates use. The other snapshot methodology allows plans to use the total number of single?only participants added to participants in other tiers multiplied by 2.35
- -The Form 5500 method is the sum of the total participants at the beginning and end of the plan year divided by two
Here is additional information.
HEALTH INSURANCE INDUSTRY FEE
The health insurance industry fee is designed to return to the federal government some of the health insurance industry gains (increased enrollment and federal subsidies) achieved from health care reform.
- -The total annual fee is $8 billion in 2014, increasing to $14.3 billion in 2018, and indexed to the growth of health care premium thereafter
- -Beginning in 2014, most plans will load this fee into the insured plan premiums. Health plans estimate the fee to be about 2% to 2.5% in year one, increasing to 3% to 4% in future years
- -Health plans are liable for the payment of this fee
- -It is not tax-deductible, which increases the cost impact, and is not applicable to self?insured plans
- -Regulatory guidance is pending
TRANSITIONAL REINSURANCE FEE
The Transitional Reinsurance Fee will provide premium stabilization for insurers that offer coverage through exchanges for the first three years.
- -The total fee is $12 billion in 2014, decreasing to $8 billion in 2015, and $5 billion in 2016
- -The fee is payable for plan years 2014 through 2016, after which the program terminates
- -The fee is estimated to be $63 per participant including dependents for year one (2014)
- -The final fee will most likely be announced late in 2014 when health plan enrollment can be more accurately estimated
- -For fully insured clients, carriers are required to pay the fee on the client’s behalf. Self insured clients are liable for direct payment, but can engage their health plan or TPA to remit payment on their behalf
- -The regulations allow the same approaches to count employees depending on the plan type (fully insured or self?insured) as the CERF Fee, which are: actual count, snapshot, or Form 5500 (See the Comparative Effectiveness Reach Fee – Counting Methodology above)
MEDICARE PAYROLL AND INVESTMENT INCOME TAX
The Medicare payroll and investment income tax is designed to provide additional revenue for Medicare, by taxing high?income earners and taxing investment income.
- -The Medicare payroll tax applies to individuals making more than $200,000 annually or a couple making more than $250,000 annually
- -The payroll tax is 0.9% on employee earnings over the threshold amounts. There is no increased tax liability to employers
- -Employers are required to withhold the additional tax for employees making more than the threshold, but for couples employers may not have insight into household income. The onus of payment then falls on the employee in their tax filings
- -The investment income tax is 3.8% on investment income. There is no action required for employers
WHAT THIS MEANS FOR EMPLOYERS?
Health plans will most certainly pass the cost of these fees along to their clients in the form of higher premiums. Employers will in turn share the cost, or pass the cost along to employees. Several action items all employers should take now include:
- -Review your funding approach to make sure it is the most cost-effective. Self?funded employers may be able to avoid the health insurance industry fee
- -Ensure compliance by confirming that a process is in place to pay the CERF by July 31, 2013
- -Work with your carriers to clarify how these fees will impact your premiums
- -Work with your payroll vendor to make sure the Medicare payroll tax on high income earners started January 1, 2013
- -If you have been participating in the Medicare Part D drug subsidy, ensure your scheduled filings are current and in line with the ACA
If you would like to learn more, please contact Gary with any questions or concerns.
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