Tax Watch

BREAKING NEWS
On Tuesday July 2nd, Administration Officials for President Obama announced that it will provide an additional year before the employer mandate and insurer responsibility reporting will begin under the Affordable Care Act (ACA). These requirements were set to kick in January 1, 2014 but now will begin January 1, 2015 for employers with 50 or more fulltime employees. The announcement extends the implementation date of employer level penalties for providing minimal affordable coverage. The change was initiated to allow the Administration to look at ways to simplify reporting requirements and allow more time for the exchanges to be established. The Treasury Department looks to publish proposed guidelines later this summer. No delay has been announced on implementation of the individual mandate scheduled to start January 1, 2014.

PCORI AND ITS IMPACT ON PLAN SPONSORS OF SELFINSURED HEALTH PLANS

For employers with fully insured health plans, your insurers may have already alerted you of the impact of the fees for the PatientCentered Outcomes Research Institute (PCORI) on their health insurance premiums. However, you may not be aware that you, as an employer and plan sponsor of a selfinsured health plan, may also be subject to additional PCORI fees. PCORI was created under the Patient Protection and Affordable Care Act (PPACA) to promote research which evaluates outcomes and benefits of medical services, including treatments procedures and drugs. The PCORI is to be funded by fees imposed on issuers of individual and group health insurance policies and on plan sponsors of selfinsured health plans, which includes Health Reimbursement Accounts (HRAs). Most Flexible Spending Accounts (FSAs) are generally not considered to be accident and health coverage plans so they are not subject to the PCORI fees. The PCORI fee is collected by the IRS as an excise tax and must be reported annually on Form 720, Quarterly Federal Excise Tax Return, on IRS Line No. 133. You may already be filing the Form 720 quarterly to report other excise taxes, if you are, you can combine the PCORI filing on the Form 720 that you will file on July31st. In this case, you will not report the PCORI fee on the Form 720s that you file for the remaining three quarters. However, if you do not already file the Form 720 quarterly to report other excise taxes, you will only file the Form 720 annually on July 31st to report the PCORI fee. Due dates for filing the initial Form 720 to report the PCORI fee are as follows: 1. Calendar year plans initial payment and filing due July 31, 2013. 2. Plans with years beginning between October 2, 2011 and December 31, 2011 initial payment and filing due July 31, 2013. 3. Plans with years beginning after January 1, 2012 and before October 2, 2012 initial payment and filing due July 31, 2014.

In general terms, the issuer of individual and group health insurance policies is the insurance company and the plan sponsor is usually the employer. HRAs are considered to be selfinsured health plans, so if you provide an HRA benefit to your employees and also provide them health insurance coverage through a fully insured plan, both you and the insurance company must pay the fee, so essentially, employees are double counted. However, if you provide both the selfinsured (or partially selfinsured health plan coverage) and also provide an HRA you are considered to have two selffunded plans. If both of these selffunded plans are maintained by one plan sponsor, the plan sponsor is allowed to count the covered lives only once, provided both the HRA and the selfinsured health plan share the same plan year. This means that the covered lives are only counted once, and the plan sponsor pays one set of PCORI fees. The fee is $1 times the average number of covered lives for plan years ending after September 30, 2012 but before October 1, 2013, and $2 times the average number of covered lives for plan years ending after September 30, 2013. Going forward the fee will be indexed for inflation. Under current regulations the fee will be discontinued for plan years ending after September 30, 2019. Plan sponsors are required to use one of 3 methods to calculate the number of covered lives. The plan sponsor must use the same method consistently for the duration of the plan year; however they may use a different method from one plan year to the next. Covered lives must include not only the employee or member, but would also include their spouses and dependents if they are covered under the plan. It also includes individuals and their dependents covered under COBRA, and retirees and any other former employees who are covered under the plan. The methods are: Actual Count Method which is calculated by adding the total covered lives for EACH day of the plan year and then dividing by the number of total days within the plan year. This method is the most accurate, but may be difficult to calculate unless you are a small employer with little changes in covered lives throughout the plan year. Snapshot Method which may be calculated using one of two approaches, either the snapshot factor method or the snapshot count method. Using the snapshot factor method, first, obtain the number of plan participants with selfonly coverage on a single day in each quarter. Then obtain the number of participants with other than selfonly coverage for that same day and multiply those with other than selfonly coverage by 2.35. Then add those two counts together. Repeat this same process to calculate counts for each quarter and divide by the number of quarters. Using the snapshot count method, obtain the number of covered lives on a single day in each quarter and divide by the number of dates on which a count was made. Each quarterly date used must be within three days of the date that corresponds to the first quarter. (For example, a combination such as Jan 2nd, April 3rd, July 1st, and September 4th would meet these guidelines.) You may choose to obtain the counts for more than one day in each quarter but must follow the same guidelines regarding timing of the dates within the subsequent quarters. Form 5500 Method which uses the number of participants reported on the form 5500 filed for that plan year to determine the average number of covered lives. For plans that cover employees only, calculate the number of covered lives by adding the number of plan participants at the beginning of the year as reported on the form 5500 to the end of year number and divide by two. Using the sample 5500 below, this calculation would be as follows: (297 plus 333)/2 = 315. For plans that cover employees and dependents, calculate the number of covered lives by adding the number of plan participants at the beginning of the year as reported on the form 5500 to the end of year number and stop.

Using the sample below, this calculation would be as follows: 297 plus 333 = 630.

The Form 5500 method appears to be the least complicated method. However in order to use this method, for calendar year plans, you must file your form 5500 for that plan year by July 31st with no extensions, so this may limit the use of this method for some plan sponsors. Special Rules: 1. FSAs and HRAs: If the plan sponsor only maintains a FSA or HRA and does not maintain any other self insured plan, the plan sponsor may treat each participant as a single (employeeonly) coverage so they can exclude the employees spouses and dependents from the count. (Note although this special rule addresses both FSAs and HRAs, as previously noted most FSAs are generally exempt from the PCORI fee.) 2. If the plan sponsor provides an FSA or HRA and also provides a selfinsured health plan, they may combine the plans and treat them as one for purposes of reporting and paying the fee. 3. For the first year of the PCORI fee filing, if your plan years begins before July 11, 2012 and ends on or after October 1, 2012, plan sponsors may determine the average number of covered lives using any reasonable method and do not have to use the methods described above. All employers providing selfinsured health plans, including taxexempt organizations and governmental entities, are subject to the PCORI fees, unless they are given a specific exception as an exempt governmental program. So in summary, in order to ensure you are compliant with the filing requirements for the PCORI fee, you must: 1. Determine if you are a plan sponsor for an applicable selfinsured health plan. 2. Determine your initial filing due date, which is either July 31, 2013 or July 31, 2014, based on your plan year. 3. Determine the appropriate method for counting the covered lives and perform that calculation. Complete Form 720, Part II, IRS Line No. 133 Applicable SelfInsured Health Plans and file the form, and pay the total tax.

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Circular 230 Disclosure: The advice we provide in this letter is not intended or written to be used, and cannot be used by you or any other person or entity for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or any applicable state or local law.