The IRS recently issued a proposed regulation explaining a new fee imposed by the Patient Protection and Affordable Care Act (PPACA). For calendar year plans, the fee begins this calendar year and remains in effect through 2018. The fee for 2012 is $1 multiplied by the number of covered lives under the medical plan. The fee increases to $2 in 2013 and thereafter is indexed based on national health expenditures. For self-insured plans, the employer sponsoring the plan is responsible for payment of the fee and, therefore, employers should budget accordingly. For insured plans, the insurance carrier is responsible for paying the fee. The fee is paid by filing IRS Form 720, and for a 2012 calendar year plan is due by July 31, 2013.


PPACA established a private research institute, the Patient-Centered Outcomes Research Institute, to research, evaluate and compare health outcomes and clinical effectiveness of treatment. The research will be funded, in part, by this new fee imposed on insured and self-insured medical plans.

Covered Lives

The fee is based on the average number of “covered lives” —employees, spouses, dependents and certain beneficiaries—under the plan.

Plans Covered

The fee will be imposed on:

  • Insured and self-insured medical and prescription drug plans;
  • Retiree-only plans;
  • HRAs offered in tandem with insured arrangements (but not on HRAs offered in tandem with self-insured arrangements);
  • Governmental plans; and
  • FSAs to the extent they are offered on a stand-alone basis and not offered in connection with conventional group coverage (and subject to certain limits).

Plans Exempt

HIPAA “Excepted Benefit” plans, with the exception of retiree-only plans, are exempt. This category generally includes:

  • Stand-alone dental or vision plans;
  • Long-term care plans;
  • Coverage for a specific disease or illness offered as a separate policy;
  • On-site medical clinics;
  • Coverage of accident and/or disability insurance; and
  • Workers’ compensation and automobile payment insurance.

Also Exempt Are:

  • HSAs;
  • Archer MSAs;
  • Most FSAs (except as described above);
  • EAPs that do not provide significant medical benefits;
  • Stop-loss insurance policies;
  • Group policies that cover workers outside the United States; and
  • Certain governmental programs—Medicare and Medicaid.

Who Pays the Fee

For self-insured plans, the employer sponsoring the plan is responsible for paying the fee. The insurance company is responsible for insured plans, and the board of trustees is responsible for multiemployer (union) plans.

Determining the Number of Covered Lives

There are three alternative methods for determining the average number of lives covered under the plan. Most employers will find the Form 5500 method to be the most practical method of compliance, even though it may overstate the number of covered lives:

  1. Actual method. Calculate the sum of all lives covered on each day of the plan year and divide by the number of days.
  2. Snapshot method. Calculate the total number of lives on one day in each quarter and divide by four. If the count is based just on employee coverage, multiply the number of employees covered by 2.3 for the number of dependents covered.
  3. Form 5500 method. From IRS Form 5500, add together the total number of participants covered at the beginning of the year plus the number at the end of the year. The numbers added together are supposed to account for dependents. If no dependents are covered, add the beginning and ending coverage numbers and divide by two.

There is a special rule for stand-alone HRAs. Sponsors are permitted to count only the employee (or former employee) and not the spouse or other dependent.

Plan Years

The fee applies to plan years ending on or after Oct. 1, 2012, and continues through Oct. 1, 2019. For calendar year plans, the fee will apply for each of the 2012-2018 plan years.

If you have any questions, please call any member of the Davis Wright Tremaine Employee Benefits group.