The Affordable Care Act (ACA) established three risk-spreading programs to provide payments to health insurance issuers that cover higher-risk populations and to more evenly spread the financial risk carried by issuers. These programs, which will be effective in 2014, are a transitional reinsurance program, a temporary risk corridor program and a permanent risk adjustment program.
The transitional reinsurance program is intended to help stabilize premiums for coverage in the individual market during the first three years of Exchange operation (2014 through 2016) when individuals with higher-cost medical needs gain insurance coverage. This program will impose a fee on health insurance issuers and self-insured group health plans.
Who Must Pay the Fees?
ACA requires health insurance issuers and self-insured group health plans to pay fees to support the reinsurance program. As described below, certain types of coverage are excluded from paying fees to the reinsurance program.
For insured health plans, the issuer of the health insurance policy is required to pay fees to the reinsurance program. Although sponsors of fully insured plans are not responsible for paying the reinsurance fees, issuers will likely shift the cost of the fees to sponsors through premium increases. Issuers will not be required to pay the reinsurance fees until the end of each year, but they may want to collect the fees during the year. For example, issuers may include the fees in their 2014 insurance rates.
The 2013 final rule clarifies that, for self-insured group health plans, the plan sponsor is liable for paying the reinsurance fees, although a third-party administrator (TPA) or administrative-services-only (ASO) contractor may be used to make the fee payment at the plan’s direction. For a plan maintained by a single employer, the employer would be the plan sponsor. A self-insured, self-administered group health plan without a TPA or ASO contractor would pay its reinsurance fees directly to HHS.
In addition, the Department of Labor (DOL) has advised that paying reinsurance fees constitutes a permissible expense of the plan under ERISA because the payment is required by the plan under ACA.
What Types of Coverage are Excluded?
Contributions to the reinsurance program are only required for plans that provide major medical coverage. Major medical coverage is coverage for a broad range of services and treatments, including diagnostic and preventive services, as well as medical and surgical conditions in various settings, such as inpatient, outpatient and emergency room settings. According to the 2013 final rule, health flexible spending account (FSA) coverage is not major medical coverage due to ACA’s $2,500 annual limit on salary deferrals to a health FSA.
Coverage that consists solely of excepted benefits under HIPAA is not subject to the reinsurance program. This includes, for example, stand-alone dental and vision plans, accident-only coverage, disability income coverage, liability insurance, workers’ compensation coverage, credit-only insurance or coverage for on-site medical clinics. Thus, issuers and plan sponsors will not be required to pay fees for these types of plans.
In addition, the following plans and coverage are excluded from reinsurance fees under the 2013 final rule:
- Health reimbursement arrangements (HRAs) that are integrated with major medical coverage (although reinsurance fees will be required for the group health plan providing major medical coverage);
- Health savings accounts (HSAs) (although reinsurance fees will be required for an employer-sponsored high-deductible health plan);
- Health FSAs;
- Employee assistance plans, wellness programs and disease management plans that provide ancillary benefits and not major medical coverage;
- Expatriate health coverage (as defined by HHS in future guidance);
- A self-insured group health plan or health insurance coverage that consists solely of benefits for prescription drugs; and
- Stop-loss and indemnity reinsurance policies.
Also, under the 2013 final rule, fees are only required for individuals with Medicare coverage when the employer-provided group health coverage is the primary payer and Medicare is the secondary payer. If the group health plan is the secondary payer, individuals with Medicare coverage will not be counted for the reinsurance fees. For example, a 68-year-old retiree enrolled in a group health plan who, under the Medicare Secondary Payer rules, is a beneficiary for whom Medicare is the primary payer will not be counted for purposes of reinsurance contributions.
How Much are the Fees?
The reinsurance program’s fees will be based on a national contribution rate, which HHS will announce annually. For 2014, HHS announced a national contribution rate of $5.25 per month ($63 per year).
The amount of reinsurance fees for 2015 and 2016 has not yet been determined. However, based on the reinsurance program’s revenue requirements, it is predicted that the national contribution rate for each of these years will be less than the rate for 2014.
The 2013 final rule provides that an issuer’s or plan sponsor’s reinsurance fee is calculated by multiplying the number of covered lives (employees and their dependents) during the benefit year for all of the entity’s plans and coverage that must pay contributions, by the national contribution rate for the benefit year. Thus, the annual contribution for a group health plan with 150 covered lives would be $9,450 per year (150 x $63 = $9,450).
Individuals who are receiving continuation coverage (such as COBRA coverage) are included in the number of covered lives under the plan. The 2013 final rule includes a variety of methods for issuers and plan sponsors to determine the average number of covered lives under a health plan. These methods include a snapshot method, an actual count method and a method based on using data from insurance forms or the Form 5500. A self-insured plan can use the Form 5500 counting method even if the plan year is not the calendar year.
Also, states operating reinsurance programs may elect to collect additional contributions on top of the federal contribution rate to cover administrative expenses or additional reinsurance payments. The 2013 final rule notes that neither ACA nor the regulations give a state the authority to collect additional contributions from self-insured plans covered by ERISA.
How Will the Fees be Determined and Collected?
Under the 2013 final rule, HHS will collect the reinsurance fees from issuers and plan sponsors in all states, including states that elect to operate their own reinsurance programs.
These collections by HHS will be made based on a national, uniform calendar. If a state imposes an additional contribution on top of the federal contribution rate, issuers would be required to make those payments in a manner specified by the state.
The 2013 final rule requires issuers and plan sponsors to submit an annual enrollment count to HHS no later than Nov. 15 of 2014, 2015 and 2016 based on enrollment data from the first nine months of the year. Within 30 days of this submission or by Dec. 15, whichever is later, HHS will notify each issuer or plan sponsor of the amount of its required reinsurance contribution. The issuer or plan sponsor would be required to remit this amount to HHS within 30 days after the date of HHS’ notification.
Are the Fees Deductible?
The Internal Revenue Service (IRS) issued a set of FAQs to address the tax treatment of ACA’s reinsurance fees. Taxpayers generally may deduct ordinary and necessary business expenses, including most fees and taxes paid to the government. However, under the rules of the Internal Revenue Code (Code), deductions for ordinary and necessary business expenses may be disallowed, limited or deferred in some circumstances.
According to the FAQs, a sponsor of a self-insured group health plan that pays reinsurance fees may treat the fees as ordinary and necessary business expenses, subject to any applicable disallowances or limitations under the Code. This tax treatment applies whether the contributions are made directly by the plan sponsor or through a TPA or ASO contractor.