1. HUMAN CAPITAL PRACTICE
ALERT:
HEALTH CARE REFORM BILL
February 2013 www.willis.com
IRS ISSUES FINAL REGULATIONS
FOR COMPARATIVE EFFECTIVENESS
RESEARCH FEES
Final regulations on the fee to fund the Patient Centered Outcomes Research Institute (PCORI),
known as the Comparative Effectiveness Research (CER) fee, were issued by the Department of
the Treasury on December 6, 2012.
BACKGROUND
The Patient Protection and Affordable Care Act (PPACA) includes a provision that promotes
research to evaluate and compare health outcomes and the clinical effectiveness, risks and
benefits of medical treatments, services, procedures, drugs and other strategies that treat,
manage, diagnose or prevent illness or injury. The PCORI was created under PPACA to promote
this research. The funding source for the Institute is a trust financed by fees paid by health
insurers and sponsors of self-insured health plans. The final regulations can be found here.
The fee began to apply to plan years ending on or after October 1, 2012 and ceases to apply to plan
years ending on or after October 1, 2019. Thus, calendar year plans were subject to the fee for
2012. Furthermore, for calendar year plans, the fee will not be applicable after the 2018 year,
since the plan for 2019 will end after October 1, 2019.
Generally, the fee is tiered, starting at $1, multiplied by the average number of lives covered
under the plan for those plans ending before October 1, 2013. For plan years and policy years
(fully insured groups) ending on or after October 1, 2013, the fee is $2 multiplied by the average
number of lives covered under the plan. Plan or policy years ending on or after October 1, 2014
may see the $2 fee increased for inflation.
Responsibility for calculating and paying the fee lies with the health insurer for a fully insured
plan and with the plan sponsor for a self-insured plan. The remainder of this Alert will address
the fee only as it pertains to self-insured plans.
AFFECTED PLANS AND EXCEPTIONS
Plan sponsors of applicable self-insured health plans are subject to the fee. An applicable self-
insured health plan is one that provides accident and health coverage other than through an
insurance policy and is established for the benefit of employees, former employees, members,
former members or other eligible individuals. Special attention should be given to the fact that
for purposes of the CER fee, plans for “former employees” are included. Thus, plans that provide
for retiree coverage are not excepted from this PPACA provision, as they have been excepted
from other PPACA health insurance market reforms. Self-insured governmental plans are also
“applicable self-insured health plans” subject to the fee as well as multiple employer welfare

2. arrangements (MEWAs), multiemployer plans, rural electric cooperatives and voluntary
employees’ beneficiary associations (VEBAs).
However, the regulations outline which plans or benefits are not subject to the fee:
Plans designed and issued specifically to cover primarily employees not working and
residing in the United States (expatriate plans). For residential clarification, the
regulations provide that if the address on file for the primary insured is outside of the
United States, then the insurer or plan sponsor may treat the primary insured, spouse,
dependents or other beneficiaries as not residing in the United States.
Health flexible spending accounts (FSA) that meet the definition of an excepted benefit.
A health FSA is an excepted benefit if (i) the maximum benefit that is available to a
participant in any given year is not more than two times his or her salary reduction (or, if
greater, his or her salary reduction plus $500) and (ii) major medical coverage is made
available that same year to employees participating in the health FSA.
Employee assistance programs, disease management or wellness programs as long as
the program does not provide for significant medical care or treatment.
A plan that provides benefits substantially all of which are excepted benefits, including
limited-scope dental and vision plans, accident-only or disability-only plans, and on-site
clinics. A dental or vision plan will be deemed excepted if participants may decline
coverage, and participants must pay an additional contribution to elect the coverage.
Health savings accounts.
Medicare, Medicaid, CHIP programs and federal care for the armed forces, veterans, and
Indian tribes are exempt from the fee.
Stop loss coverage.
PLAN SPONSOR – PLAN DOCUMENT
Because the plan sponsor is responsible for payment of the fee, it is important to understand
the number of plans which an employer sponsors. In the instance of a plan maintained by a
single employer, the employer is the plan sponsor. If an employer participates in a plan
maintained by a single employee organization, the employee organization is the plan
sponsor.
Generally, when a self-insured plan covers employees of more than one related employer,
they are deemed to be under common control of one employer and one plan sponsor.
However, the regulations for the CER fee do not contain rules that would treat related
entities as a single employer. Thus, in this situation, the regulations provide that the plan
sponsor (and entity responsible for the fee) will be the person identified in the terms of the
plan document that governs the plan. In addition to being named in the plan document as
the plan sponsor, the entity must also consent to the designation by no later than the due
date for paying the fee.
If a plan sponsor is not designated in the terms of the plan document, then the plan sponsor
is each employer who has employees covered under the plan. Thus, each employer would be
responsible for paying any applicable fee and any filing requirement. This provision again
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3. emphasizes the importance of an employer ensuring its plan is paying and reporting the CER fee for the
established and governed by a plan document. fully insured HDHP, while the plan
sponsor is responsible for paying and
MULTIPLE SELF-INSURED ARRANGEMENTS reporting the fee for the HRA.
OF THE SAME PLAN SPONSOR FEE HEADCOUNT
It is not out of the ordinary for an employer to sponsor more than one
The fee imposed on a plan sponsor of an
group health plan. For example, an employer may have one
applicable health plan is based on the average
arrangement for medical benefits and another for prescription drugs.
number of lives (employees and dependents)
Likewise, an employer may have a high deductible health plan
covered under the plan. The proposed
(HDHP) and a health reimbursement arrangement (HRA). As it
regulations provide plan sponsors a choice of
relates to the CER fee the issue is whether all arrangements are self-
three methods for calculating the average
insured or a combination of self- and fully insured. The final
number of lives. To be consistent, a plan
regulations provide that if a plan sponsor has two or more
sponsor must use the same method for the
arrangements that are all self-insured with the same plan year, then
duration of the plan year; however, a different
for purposes of calculating the fee, they may be treated as a single
method may be used from one plan year to
applicable self-insured health plan. Conversely, if a plan sponsor has
the next.
a self-insured arrangement and a fully insured arrangement, then the
plan sponsor will be responsible for the fee for the self-insured
arrangement and the health insurer will be responsible for the fee for
ACTUAL COUNT METHOD
The average number of lives covered under
the fully insured arrangement. The rules provide that when covered
the plan for the plan year can be determined
lives are counted for purposes of determining the fee under an HRA
by adding the total number of lives covered
or a non-exempted health FSA, only the employee and not his or her
for each day of the plan year and dividing that
dependents must be counted. This special rule for HRAs and non-
total by the number of days in the plan year.
exempted FSAs only applies to participants in the account plan that
do not also participate in the major medical plan. The following
EXAMPLE: Employer is the plan sponsor of a
scenarios help to clarify this.
self-insured health plan with a plan year of
January 1, 2013 through December 31, 2013.
Plan sponsor has a HRA that is integrated with another
Employer determines the sum of the lives
applicable self- insured health plan providing major medical
covered for each day of the plan year ending
coverage, and both have a calendar plan year. In order to
on December 31, 2013 as 3,285,000. The
participate in the HRA, an employee must also be enrolled in the
average number of lives covered under the
major medical coverage. Since both arrangements are self-
plan will be determined by dividing 3,285,000
insured with the same plan year, the plan sponsor will have only
by 365 days (the number of days in the
to pay and report a single fee. If the plan sponsor is in a situation
calendar plan year): 9,000.
where the HRA and major medical coverage have different plan
years, in order to avoid paying duplicate fees, the employer may
want to address with its counsel amending the HRA to conform SNAPSHOT METHODS
its plan year to the medical plan year or consolidating the two Using this method, a plan sponsor can
programs under a “wrap plan.” determine the average number of lives
covered for a plan year by adding the totals of
Plan sponsor has a fully insured HDHP with a plan year of lives covered on one date in each quarter (a
January 1 through December 31. To assist employees with the plan sponsor can use more dates if desired, as
deductible it also has a self-insured HRA with the same calendar long as an equal number of dates are used for
plan year. In this instance, the health insurer is responsible for each quarter) and then dividing the total by
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4. the number of dates on which the count was made. The and family which has a calendar plan year.
final regulations made a slight change as to considering the Employer designates the first day of each
dates when using the snapshot method. Previously, the quarter of the plan for counting covered
proposed regulations provided that the date or dates for lives under the plan. On January 1, there
each quarter must be the same, such as the first day of the are 2,000 covered lives, April 1 there are
quarter or the last day of the quarter. However, the final 2,100 covered lives, July 1 there are 2,050
regulations provide that when counting lives under the covered lives and on October 1, 2,050
snap shot method, the date or dates used for the second, covered lives. The average number of
third and fourth quarters must be within three days of the lives covered under the plan for this plan
date or dates in that quarter that correspond to the date year is 2, 050. ((2,000+2,100+2,050
used for the first quarter. All dates used must be within the +2,050) divided by four)
same plan year. The 30th and 31st day of a month are treated
as the last day of the month for purposes of determining FORM 5500 METHOD
the corresponding date for any month that has fewer than The average number of lives is determined on
31 days. the basis of information in the ERISA Form
5500 filings. For plans providing coverage to
EXAMPLE: Employer has a calendar plan year and uses employees and dependents, the number of
January 7, 2013 as the counting date for the first quarter. lives is the sum of the number of participants
The plan sponsor may use any date beginning with the 4th on Form 5500 at the beginning and end of the
and ending with the 10th as the counting date for the second plan year. Plans providing self-only coverage
(April 4-10), third (July 4-10) and fourth quarter (October calculate the number of lives by adding the
4-10). number of participants reported on the Form
5500 at the beginning and end of the plan
When using the snapshot method, the final regulations year, divided by two.
provide two ways the number of lives covered on a
designated date may be determined. They are the snapshot The Form 5500 method may only be used if
factor and snapshot count. the required 5500 filing is filed no later than
the due date, without extensions, for the fee
SNAPSHOT FACTOR METHOD: The number of lives covered imposed for that plan year. Thus, since
with self-only coverage on that date, plus 2.35 times calendar plan years generally must file Form
the number of lives covered with other than self-only 5500 by July 31, which is also the date for
coverage. payment of the CER fee, the Form 5500
method may not be used if the plan does not
EXAMPLE: Employer has a self-insured health plan file its 5500 by that date.
providing coverage for employee, employee plus one
and family, which has a calendar plan year. Employer EXAMPLE: Employer has a self-insured health
designates the first day of each quarter for determining plan with a plan year of August 1, 2012
covered lives. On January 1 there is employee-only through July 31, 2013 offering employee,
coverage for 600 participants, and 800 for other than employee plus one and family coverage. On
employee-only coverage. On April 1 there is employee- Form 5500 the employer reports 4,000
only coverage for 608 lives and 800 for other than participants on the first day of the plan year
employee-only coverage. On July 1 and October 1 the and 4,200 participants on the last day of the
plan provides employee-only coverage for 610 lives and plan year. The plan sponsor determines the
for other than employee-only coverage 809 lives. The average number of lives covered by adding
average number of lives covered under the plan for 4,000 and 4,200 (8,200).
the plan year is 2,497. [((600 +(2.35x800)+
((608+(2.35x800) +((610+(2.35x809) EXAMPLE: Employer has a self-insured health
+((610+2.35x809)) divided by four] plan with a calendar plan year of January 1,
2013 through December 31, 2013 offering
SNAPSHOT COUNT METHOD: The actual number of lives employee-only coverage. In order to use the
covered on each date. Form 550 method, employer must file its
Form 5500 by July 31, 2014. On Form 5500
EXAMPLE: Employer has a self-insured health plan the employer reports 4,000 participants on
providing coverage for employee, employee plus one
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5. the first day of the plan year and 4,200 participants on the last day year ending on December 31, 2012) must
of the plan year. The plan sponsor determines the average number report and pay its first CER fee by July 31,
of lives covered by adding 4,000 and 4, 200 (8,200) divided by 2013. For a plan with a plan year ending on
two (4,100). January 31, 2013, the fee must be reported
and paid by July 31, 2014.
Two special rules are also contained in the final regulations for
plan sponsors. Although the IRS encourages electronic filing
of Form 720, it may also be filed via hard copy.
Health FSAs and HRAs: If a plan sponsor does not maintain an Filing electronically requires a plan sponsor
applicable self-insured health plan other than a health FSA or to submit the form through an approved
HRA, the plan sponsor may treat each participant’s health FSA or transmitter software developer. Additional
HRA as covering a single covered life. Thus, the plan sponsor is information on electronic filing can be
not required to include in its headcount for the plan the lives of found here.
spouses, dependents or any other beneficiary of the individual
participant. The final regulations confirm that third
parties will not be permitted to report or pay
First Year of CER Fee: Any reasonable method may be used by a the CER fee on behalf of plan sponsors.
plan sponsor to determine the average number of lives covered Furthermore, the preamble to the final
under an applicable self-insured health plan for a plan year regulations emphasizes that the CER fee
beginning before July 11, 2012 and ending on or after October 1, must be paid by the plan sponsor and
2012. generally cannot be paid out of plan assets
since they are not a plan expense.
PAYMENT OF FEES AND FILING
OF RETURNS CONCLUSION
Published final regulations for the CER fee
The CER fee falls under the excise tax provisions of the Internal
clarify the amount of fee, when and how it is
Revenue Code. Thus, as an excise tax, there are regulations which
to be paid, and how to calculate the number of
contain rules for depositing, paying and return filing; plan sponsors
average lives upon which the fee is based.
will pay and report the tax on Form 720, “Quarterly Federal Excise
Sponsors of self-insured plans, particularly
Tax Return.”
for those whose plan years ended between
October 1, 2012 and December 31, 2012,
However, don’t let the name of the form fool you. Although entitled a
should begin to determine how they will
“quarterly” return, Form 720 for CER fee purposes is only filed once
calculate the average number of lives, as well
a year. Plan sponsors must report and pay the fee for a plan year by
as if they will file the required IRS Form 720
July 31 of the calendar year immediately following the last day of the
electronically or in hard copy.
plan year. The first CER fee applies to the first plan year ending on or
after October 1, 2012. For example, a calendar year plan (with a plan
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6. KEY CONTACTS
U.S. HUMAN CAPITAL PRACTICE OFFICE LOCATIONS
NEW ENGLAND ATLANTIC Miami, FL Moline, IL WESTERN
305 421 6208 309 764 9666
Auburn, ME Baltimore, MD Mobile, AL Fresno, CA
207 783 2211 410 584 7528 251 544 0212 Pittsburgh, PA 559 256 6212
412 645 8506
Bangor, ME Knoxville, TN Orlando, FL Irvine, CA
207 942 4671 865 588 8101 407 562 2493 Schaumburg, IL 949 885 1200
847 517 3469
Boston, MA Memphis, TN Raleigh, NC Las Vegas, NV
617 437 6900 901 248 3103 704 344 4856 SOUTH 602 787 6235
CENTRAL 602 787 6078
Burlington, VT Metro DC Savannah, GA
802 264 9536 301 581 4262 912 239 9047 Amarillo, TX Los Angeles, CA
806 376 4761 213 607 6300
Hartford, CT Nashville, TN Tallahassee, FL
860 756 7365 615 872 3716 850 385 3636 Austin, TX Phoenix, AZ
512 651 1660 602 787 6235
Manchester, NH Norfolk, VA Tampa, FL 602 787 6078
603 627 9583 757 628 2303 813 490 6808 Dallas, TX
813 289 7996 972 715 2194 Portland, OR
Portland, ME Reston, VA 972 715 6272 503 274 6224
207 553 2131 703 435 7078 Vero Beach, FL
772 469 2842 Denver, CO Rancho/Irvine, CA
Shelton, CT Richmond, VA 303 765 1564 562 435 2259
203 924 2994 804 527 2343 MIDWEST 303 773 1373
San Diego, CA
NORTHEAST Rockville, MD Appleton, WI Houston, TX 858 678 2000
301 692 3025 800 236 3311 713 625 1017 858 678 2132
Buffalo, NY 713 625 1082
716 856 1100 SOUTHEAST Chicago, IL San Francisco, CA
312 288 7700 McAllen, TX 415 291 1567
Morristown, NJ Atlanta, GA 312 348 7700 956 682 9423
973 539 1923 404 224 5000 San Jose, CA
Cleveland, OH Mills, WY 408 436 7000
Mt. Laurel, NJ Birmingham, AL 216 861 9100 307 266 6568
856 914 4600 205 871 3300 Seattle, WA
Columbus, OH New Orleans, LA 800 456 1415
New York, NY Charlotte, NC 614 326 4722 504 581 6151
212 915 8802 704 344 4856
Detroit, MI Oklahoma City, OK The information contained
248 539 6600 405 232 0651 in this publication is not
Norwalk, CT Gainesville, FL
intended to represent legal or
203 523 0501 352 378 2511 tax advice and has been
Grand Rapids, MI Overland Park, KS prepared solely for
Radnor, PA Greenville, SC 616 957 2020 913 339 0800 educational purposes. You
610 254 7289 704 344 4856 may wish to consult your
Milwaukee, WI San Antonio, TX attorney or tax adviser
regarding issues raised in
Wilmington, DE Jacksonville, FL 262 780 3476 210 979 7470
this publication.
302 397 0171 904 562 5552
Minneapolis, MN Wichita, KS
Marietta, GA 763 302 7131 316 263 3211
770 425 6700 763 302 7209
6 Willis North America • 02/13