As noted in my two earlier blogs here and here, the Patient Protection and Affordable Care Act (PPACA) imposes a new fee to fund a Patient-Centered Outcomes Research Institute that will research effective medical treatments. The fee is paid by insurance companies for fully insured plans and by plan sponsors for self-funded plans. The fee is based on the average number of participants in the plan during the year. On April 17, 2012, the IRS published proposed regulations on which taxpayers can rely, addressing a number of issues, including the method of determining the average number of participants covered under a policy or plan during the year.
Under the proposed regulations, insurance companies will be permitted to choose one of four methods for determining the average number of participants covered under the plan. The four methods are an actual count method, a snapshot method, a method based upon a filing with the National Association of Insurance Commissioners (NAIC), and a method based upon a similar state filing. Insurance companies must use the same method for all policies reported in a single filing, which will occur once a year. (My next blog post will discuss the mechanics of paying the fee.) Insurers using the method based on NAIC or state filings are required to continue to use that method during the years the fee is imposed and cannot change the method. Insurance companies using the actual count or snapshot method can change from year to year.
Because the insurance company is required to use the same method for all its policies for a year, an employer will undoubtedly have no say in the method used by the insurance company to determine the average number of participants under the plan. The employer will be required to pay its portion of the fee as calculated and determined by the insurance company – assuming that the insurance company passes through the fee to the employer, which seems likely. Because the employer is likely to have no input on the use of the insurance company’s calculation method, I will not discuss them in this blog post, but will discuss the methods available to a sponsor of a self-funded plan.
An employer with a self-funded plan has three choices regarding the method of calculating the average number of participants in the plan. One is an actual count method, where the employer actually counts the number of lives covered for each day of the plan year and divides that total by the number of days in the plan year. The number of lives covered includes not only employees, but also spouses and dependents. The second method is a snapshot method where the employer can add the total number of lives covered on one date in each quarter or more dates if an equal number of dates are used in each quarter and then divide that total by the number of dates on which the count was made. The date or dates used in each quarter must be the same, for example, the first day of the quarter, the first day of each month, etc. The employer can use either the actual number of lives on those dates or the employer can add the number of plan participants with self only coverage to the number of participants with coverage that is other than self only, multiplying the latter number by 2.35. In other words, the employer can use a simplifying factor rather than tracking the actual number of dependents on any given day.
The third method is the Form 5500 method. That method requires using the numbers reported on the Form 5500 to determine the average number of participants. An employer that offers only self only coverage would add the number of participants on the first day of the year and the number of participants on the last day of the year and divide by two to get the average number. An employer that offers coverage other than self only coverage would simply add together those two numbers and that would be the average for the year. Of course, this is available only with respect to an employer who files a Form 5500 for the plan, which is required only of plans with 100 or more participants. On the other hand, most smaller employers have fully insured plans and so therefore would not be required to pay the fee directly in any case.
In many cases, health flexible savings accounts and health reimbursement arrangements might not be subject to the fee. See my earlier blog post discussing this issue. If, however, they are, an employer is allowed to treat each participant as having self only coverage so that the employer does not have to take into account any spouses or dependents who could receive benefits under those programs.
For the first year that this fee is in effect, an employer can use any reasonable method for determining the average number of participants.