The IRS has issued proposed regulations (REG-118315-12) for implementing the annual fee on the health insurance industry that is scheduled to take effect in 2014. The industrywide fee was enacted as part of the 2010 health care reform legislation and is allocated among insurers based on market share.
The total fee for the entire industry starts at $8 billion in 2014 and will increase annually until 2018, when it will be indexed for inflation. The fee is allocated based on market share among all insurers with "aggregate net premiums written" over $25 million. It is treated as an excise tax and is not deductible. Aggregate net premiums written is generally calculated after discounting a percentage of the net premiums under $50 million. The first $25 million in premiums is not included, and tax-exempt entities exclude 50% of all aggregate net premiums written (see tables).
The fee is generally imposed on all entities engaged in the business of providing health insurance. However, the statute provides the following specific exclusions:
- Employers who self-insure employee health risks
- Governmental entities
- A voluntary employees' beneficiary association (VEBA) established under Section 501(c)(9) unless it is established by an employer to provide health coverage benefits for employees
- A nonprofit corporation that does not benefit a private shareholder or individual, does not attempt to influence legislation or carry on propaganda, and receives at least 80% of gross revenues for government programs that target low-income, elderly or disabled populations
The proposed regulations would extend the exclusion for government entities to state health departments and state insurance commissions, but not instrumentalities. A self-insured employer is defined under the proposed regulations as an employer that sponsors a self-insured plan within the meaning of Treas. Reg. Sec. 1.105-11(b)(1)(i) and (ii). A self-insured plan could use a third party for administration functions and still be considered self-insured if risk is not shifted to the third party.
Covered entities required to pay the fee would generally include health insurance issuers, health maintenance organizations, insurance companies taxed under part I or II of subchapter L (or that would be taxed under subchapter L if they were not tax-exempt), a multiple employer welfare arrangement (MEWA) that is not fully insured, and insurers providing insurance under Medicare Advantage, Medicare Part D or Medicaid. A fully insured MEWA will not be subject to the fee. The proposed regulations provide blanket exclusion for certain categories of MEWAs set by the Department of Labor. An entity claiming exception (ECE) is subject to the same regime addressing MEWAs.
The IRS generally defines health insurance as benefits offered by a health insurance issuer consisting of medical care under any hospital or medical service policy or certificate, hospital or medical service plan contract, or health maintenance organization contract. It includes limited-scope dental and vision plans, but does not include:
- accident-only or disability-only insurance (or a combination thereof),
- coverage for only a specified disease or illness, and hospital indemnity or other fixed indemnity insurance,
- any insurance for long-term care,
- supplemental Medicare insurance, or
- travel insurance, as long as health benefits are not offered on a standalone basis and are incidental to other coverage.
The proposed regulations would require each covered entity to report its net premiums written annually by May 1 on new Form 8963, Report of Health Insurance Provider Information. A covered entity with net premiums written under the $25 million must still report its premiums on the form even though it is not liable for a fee.
Members of a controlled group (treated as a single employer under sections 52(a), 52(b), 414(m) or 414(o) are treated as a single entity for reporting purposes, and their net premiums written would be aggregated for purposes of calculating the fee. They must use a designated entity for filing Form 8963.
Under the proposed regulations, net premiums written will include reinsurance premiums written, reduced by reinsurance ceded, ceding commissions and medical loss ratio (MLR) rebates. Indemnity reinsurance is not included, but assumption reinsurance is included.
The penalty for failing to report is $10,000 plus the lesser of $1,000 for each day the failure continues or the amount of the fee for which the report was required.
Under the proposed regulations, the IRS will determine net premiums written based on the reports submitted by covered entities and any other source of information available to the IRS. The IRS noted that most covered entities are already required to file a supplemental health care exhibit (SHCE) with the National Association of Insurance Commissioners (NAIC), and that net premiums reported to the IRS should equal what is reported on the SHCE, minus MLR rebates. To determine net premiums written, the IRS may use other sources of information besides the SHCE, including:
- the NAIC annual statement,
- the Accident and Health Policy Experience Exhibit filed with the NAIC,
- and the MLR Annual Reporting Form filed with the Center for Medicare & Medicaid Services' Center for Consumer Information and Insurance Oversight of the U.S. Department of Health and Human Services.
The IRS will send each covered entity a preliminary fee calculation at a date to be specified in future guidance. There is a substantial penalty for any understatement of net premiums written. Taxpayers will be required to pay both the difference in the fee that should have been paid if the report was correct and a 100% penalty of that amount.
Disputing the calculation
The proposed regulations establish an error correction process that will allow a covered entity to submit an error report to contest the preliminary fee calculation. The date and format for submitting reports will be specified in future guidance.
Paying the fee
The IRS will notify taxpayers of the final fee calculation by Aug. 31. The fee will be due by Sept. 30. The IRS regulations provide that the IRS will not accept additional error reports once the final fee determination is made.
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