DOL Releases PPACA and HIPAA Self-Compliance Tools

The U.S. Department of Labor (“DOL”) has issued two self-compliance tools that allow sponsors of group health plans to test whether they are in compliance with the Patient Protection and Affordable Care Act (“PPACA”) and the Health Information Portability and Accountability Act (“HIPAA”).

The PPACA self-compliance tool provides plan sponsors with a checklist of requirements that are already in effect under the law and offers guidance on how group health plans should currently be operating. However, this tool does not offer guidance on requirements that do not have final regulations or on those that have a future effective date.

The HIPAA self-compliance tool primarily evaluates whether a group health plan is compliant with requirements other than those under PPACA. This tool provides assistance to plan sponsors in determining whether a plan is compliant with the HIPAA nondiscrimination rules, wellness program guidelines, the Mental Health Parity Act requirements, the Women’s Health and Cancer Rights Act and the Newborns’ and Mothers’ Health Protection Act.

While both tools provide plan sponsors with valuable tips about how to achieve compliance, neither tool offers definitive guidance on all aspects of these laws.

The PPACA compliance tool is at http://www.dol.gov/ebsa/pdf/part7-2.pdf and the HIPAA compliance tool is at http://www.dol.gov/ebsa/pdf/CAGappA.pdf

HHS Issues Final Regulations Implementing Provisions of the HITECH Act

HHS has released final regulations implementing many provisions of the Health Insurance Technology for Economic and Clinical Health Act (“HITECH”). In particular, the final regulations modify the HIPAA Privacy, Security, Enforcement and Breach Notification Rules under HITECH and create numerous new compliance obligations for covered entities, including health plans and their business associates. Some of the key changes made by the final regulations that directly impact health plans and their business associates are as follows:

New Content and Distribution Requirements for Notice of Privacy Practices. Health plans must currently maintain and distribute a Notice of Privacy Practices. The notice describes the plan’s permitted uses and disclosures, privacy practices, and legal duties regarding protected health information (“PHI”). The final regulations require plans to revise their notices to include the following:

• A statement that certain PHI disclosures (i.e., disclosures involving psychotherapy notes, disclosures of PHI for marketing purposes, disclosures that constitute a sale of PHI, and disclosures other than those listed in the notice) require an individual’s prior authorization and that such authorization may be revoked.
• If the plan intends to contact an individual for fundraising purposes, a statement of such intent and the individual’s right to opt out of receiving fundraising communications.
• If the plan intends to use or disclose PHI for underwriting purposes, a statement that the plan is prohibited from providing genetic information about an individual for such underwriting purposes.
• A statement informing individuals of their right to be notified following a breach of unsecured PHI.

The final regulations provide that the inclusion of these required statements creates a material change to the notice, thereby requiring plans to notify individuals of the changes. The final regulations provide health plans with the following methods for distributing this information:

• Health plans that post the notice on a website must: (1) prominently post the changes on the website by the effective date of the change; and (2) provide a copy of the revised notice, or information about the changes and how to request a copy of the revised notice, in the plan’s next annual mailing.
• Health plans that do not post the notice on a website must provide a copy of the revised notice, or information about the changes and how to request a copy of the revised notice, within 60 days of the changes.

Definition of Business Associate. HIPAA allows a health plan to disclose PHI to its business associates if both parties meet certain requirements, including the execution of a Business Associate Agreement (“BAA”). The final regulations change the definition of business associate to include subcontractors of business associates. As a result, business associates must now execute BAAs with any subcontractors that create, receive or maintain PHI on behalf of the business associate.

Business Associate Agreements. Health plans and business associates must revise their current BAAs to incorporate certain new requirements specified in the final regulations. For example, BAAs must now provide that:

• The business associate will not only report any security incidents of which it becomes aware, but also any breaches of unsecured PHI; and
• If the health plan delegates any of its Privacy Rule obligations, the business associate will comply with the Privacy Rule when performing those obligations.

Expansion of Individual Rights. The Privacy Rule allows an individual to request that the health plan restrict both the use and disclosure of PHI for treatment, payment and healthcare operations. Previously, plans were generally not required to accommodate an individual’s request to restrict PHI disclosures. The final regulations now require plans to agree to an individual’s request to restrict PHI disclosure if: (1) the disclosure is for the purpose of payment or health care operations; (2) the disclosure is not required by law; and (3) the PHI relates only to a health care item or service that has already been paid in full by a source other than the plan.

The Privacy Rule generally permits individuals to request access to their PHI. Within 30 days after receiving such a request, plans must either grant access or provide a written explanation of why access is being denied. Previously, plans that did not maintain PHI on-site had 60 days to respond to such requests. The final regulations require all plans to respond within the 30-day period. In addition, plans must provide PHI in the form and format requested by individuals if it is readily producible in that form and format. If the PHI is not readily producible in the requested form and format, the plan must provide the PHI in a readable electronic form and format that is acceptable to the individual. Finally, if an individual requests in writing that the plan provide his or her PHI directly to another person, the plan must comply with the request if it is signed by the individual and identifies the designated individual and where to send the PHI.

Breach Notification. HITECH requires plans to provide notification of a breach of unsecured PHI to affected individuals, the Department of Health and Human Services (“HHS”) and, in some cases, the media. The final regulations make the following changes regarding breach notifications:

• “Breach” is now defined so that an impermissible use or disclosure of PHI is presumed to be a breach, unless the plan or business associate demonstrates that there is a low probability that PHI has actually been compromised.
• The risk assessment to determine if breach notification is required now focuses on the probability of whether the PHI has been compromised instead of the risk of harm posed by the breach. If the plan or business associate can demonstrate that there is a low probability that PHI has been compromised, breach notification is not required. (Under the proposed regulations, breach notification was not required if a plan or business associate could demonstrate that the breach presented no risk of significant harm to individuals.)
• Risk assessments must evaluate: (1) the nature and extent of PHI involved; (2) the unauthorized person who used PHI or to whom the disclosure was made; (3) whether PHI was actually acquired or viewed; and (4) the extent to which the risk to PHI has been mitigated.

Compliance Date. While the official effective date of the final regulations is March 26, 2013, health plans and their business associates have until September 23, 2013, to comply with the applicable provisions. Existing BAAs may remain in effect without revision until either the underlying contract is up for renewal or until September 23, 2014, whichever is earlier.

Actions Steps for Health Plan Administrators. In response to the final regulations, health plan administrators should promptly:

• Review their HIPAA policies and procedures and revise them as necessary to ensure compliance by the applicable date.
• Review and revise Notice of Privacy Practices to ensure that they accurately describe their policies and procedures regarding privacy practices, including any required changes made by the final regulations.
• Review BAAs to determine the required revision date.
• Develop strategies to train front-line staff on implementing the required changes.
• Review HIPAA training and education materials and update as required.

DOL Updates Delinquent Filer Voluntary Compliance Program

The DOL has issued a notice providing technical updates to its Delinquent Filer Voluntary Compliance (“DFVC”) Program.

ERISA requires most employee benefit plans to file a Form 5500 annually. Plan administrators may be liable for significant monetary penalties for failure to file timely and complete Forms 5500. The DFVC Program encourages plan administrators to file for overdue or incomplete Forms 5500 by offering reduced penalties. In general, plan administrators are eligible for relief under the DFVC Program if they comply with the Program’s requirements before receiving written notice from the DOL of the Form 5500 filing failure.

The recent notice incorporates changes to the DFVC Program since it was last updated in 2002, including the following:

• All Forms 5500 filed under the DFVC Program must now be filed electronically, using the ERISA Filing Acceptance System (“EFAST2”). The DOL has also created an electronic online payment option and payment calculator to help filers determine applicable penalty amounts.
• Filers generally must use the Form 5500 and schedules for the appropriate plan year when filing under the DFVC Program. However, if the delinquent filing is for a plan year that is more than three years prior to the most recent forms available in EFAST2, the filing must be completed using the current year’s Form 5500 and schedules. To help filers determine which forms to use when filing for past years, the DOL has created a Form 5500 Version Selection Tool, which is available at: www.dol.gov/ebsa/5500selectorinstructions.html.
• Schedule SSA and IRS Form 8955-SSA cannot be submitted through EFAST2. Instead, plan administrators must file these documents directly with the IRS.
• While the DFVC Program does not directly provide relief from late filing penalties under the Internal Revenue Code, the IRS is expected to issue guidance that will provide relief from penalties under the Code for delinquent Form 5500 filings if plan administrators satisfy the DFVC Program requirements.

The DFVC Program will no longer be formally amended through Federal Register notices for non-substantive, technical changes (e.g., deleting references to obsolete addresses for remitting penalty payments). Instead, the DFVC Program’s website (www.dol.gov/ebsa) will be used for announcing non-substantive technical adjustments to the Program.

HHS Issues Final Regulations on PPACA’s Transitional Reinsurance Fees

HHS has issued final regulations on group health plan sponsors’ liability under the transitional reinsurance fee provisions of PPACA.

During the first three years that the Health Insurance Exchanges are in effect (i.e., 2014 through 2016), employer-sponsored group health plans are subject to PPACA’s transitional reinsurance fees. These fees will be used to fund transitional reinsurance programs, which are designed to protect against premium increases caused by the implementation of the 2014 market reform rules, particularly guaranteed availability.

The final regulations offer much needed clarification about the assessment, calculation and payment of these fees, including the following:

• The transitional reinsurance fee for 2014 will be $63 per covered life. Although HHS suggested that the 2014 fee might be lowered, this is the same amount as set forth in the proposed regulations.
• The fee applies on a per-covered-life basis, which includes spouses, children and domestic partners.
• Plan sponsors may use one of the following methods to calculate the number of covered lives:
  • The actual count method (i.e., the plan sponsor adds the number of lives covered on each day, and divides that number by the by the number of days in the plan year);
  • The snapshot method (i.e., the plan sponsor uses total lives covered on one day in each quarter of the plan year); or
  • The Form 5500 method (i.e., the plan sponsor uses a specified formula that includes the number of participants actually reported on the Form 5500 for the plan year).

• The fee is applicable only to group health plans that provide “major medical coverage,” which is defined as health coverage for a broad range of services and treatments, including diagnostic and preventive services, as well as medical and surgical conditions. As a practical matter, this includes typical PPO, HMO and high-deductible health plan coverages, whether insured or self-insured.
• Qualified beneficiaries receiving COBRA continuation coverage must be counted as covered lives.
• Health savings accounts, health reimbursement arrangements, flexible spending arrangements, prescription drug coverage, dental and vision plans offered on a stand-alone basis, and other programs providing ancillary benefits are generally not major medical coverage and are not a factor in the assessment of plan sponsors’ fee liabilities.
• For employees who have both Medicare and employer-provided coverage, when Medicare is the primary payer, the employer coverage is not considered major coverage and the employee is not counted as a covered life.
• Plan sponsors must report the total number of covered lives to HHS by November 15 (of 2014, 2015 and 2016). In turn, HHS will notify plan sponsors of their fee assessment by December 15. Plan sponsors will then be required to remit fee payments to HHS within 30 days of receiving the fee assessment notices.
• Plan sponsors that maintain multiple group health plans that provide major medical coverage for the same covered lives may combine the plans to prevent double counting. Plan sponsors may deduct the reinsurance fees for income tax purposes as ordinary and necessary business expenses.
• Self-insured plans may use plan assets to pay the fee assessments.

Given the financial impact of the reinsurance fees, group health plan sponsors are advised to begin estimating the amount of transitional reinsurance fees that their plans will be assessed and factor these amounts into their 2014 budgets.

HHS Issues Final Regulations on Essential Health Benefits and Plan Value under PPACA

HHS has issued final regulations on the essential health benefits EHBs and actuarial value requirements contained in PPACA.

Essential Health Benefits. Beginning in 2014, health plans offered in the individual and small group markets, including “Qualified Health Plans” offered through Exchanges, must cover the following ten categories of EHBs:

• Ambulatory patient services,
• Emergency services,
• Hospitalization,
• Maternity and newborn care,
• Mental health and substance use disorder services,
• Prescription drugs,
• Rehabilitative and habilitative services and devices,
• Lab services,
• Preventive and wellness services and chronic disease management, and
• Pediatric services.

The final regulations base required EHBs on a state-specific benchmark plan. The state options for benchmarks include:

1. The largest plan by enrollment in any of the three largest small group insurance products in the state;
2. Any of the three largest state employee health benefit plans;
3. Any of the three largest Federal Employees Health Benefits Programs; or
4. The largest insured non-Medicaid HMO in the state.

All plans offered within a state that are subject to the EHB requirements must contain benefits substantially equal in scope to the benefits offered by the selected benchmark plan. For states that fail to select a benchmark plan, the default benchmark plan will be the largest plan in the largest product within the state’s small group market.

The final regulations contain standards to protect consumers against discrimination and ensure that benchmark plans offer a full suite of EHB benefits and services. In particular, the final rule:

• Prohibits discriminatory benefit designs;
• Includes special standards and options for coverage of benefits not typically covered by individual and small group policies today; and
• Includes standards for prescription drug coverage to ensure that individuals have access to needed prescription medications.

Actuarial Value. The final regulations outline actuarial levels in the individual and small group markets, which helps consumers to distinguish between health plans offering different levels of coverage. Beginning in 2014, health plans that offer EHBs must cover a certain percentage of costs, known as actuarial value or “metal levels.” PPACA requires non-grandfathered health plans to meet one of the following four “metal” levels: 60 percent for a bronze plan, 70 percent for a silver plan, 80 percent for a gold plan and 90 percent for a platinum plan. The metal levels are also intended to help consumers in comparing and selecting health plans by allowing a potential enrollee to compare the relative payment generosity of available plans. HHS is finalizing an actuarial value calculator that it will make available to the public to assist in determining a health plan’s actuarial value.

Individual Shared Responsibility Penalty

The IRS has issued proposed regulations addressing the individual shared responsibility provision contained in PPACA. Beginning in 2014, PPACA’s individual shared responsibility provision requires individuals either to be insured by “minimum essential coverage” or to pay a penalty on their federal tax returns. Below is a summary of the sections of the proposed regulations that address: (i) the definition of minimum essential coverage; (ii) how the shared responsibility penalty will be calculated and paid; and (iii) who is exempt from paying the penalty.

Minimum Essential Coverage. For purposes of the shared responsibility penalty, an individual is considered to have minimum essential coverage for any month in which he or she is enrolled in one of the following types of coverage for at least one day:

• Employer-sponsored coverage (including COBRA and retiree coverage);
• Coverage purchased in the individual market; or
• Government-sponsored coverage, such as Medicare, Medicaid, the Children’s Health Insurance Program, or TRICARE.

Minimum essential coverage does not include specialized coverage such as vision care or dental care, workers’ compensation, disability policies, or coverage for a specific disease or condition.

Calculating Shared Responsibility Penalty. The penalty is the greater of: a flat dollar amount; or a specific percentage of income. For 2014, the penalty amount will be the greater of $95 per adult and $47.50 per child under age 18 (maximum of $285 per family) or 1% of income over the tax-filing threshold which, in 2012, was $19,500 for a joint return.

The 2014 shared responsibility penalties are payable when individuals file their 2014 federal income tax returns in 2015. If the penalty applies for less than a full calendar year, it is prorated to 1/12 of the annual penalty for each month without coverage.

Exemptions from Shared Responsibility Penalties. PPACA provides certain statutory exemptions from the minimum essential coverage requirement. Individuals who meet the following criteria are exempt from paying the shared responsibility penalty:

• Members of religious organizations that object to coverage on religious principles;
• Members of health care sharing ministries (i.e., non-profit religious organizations where members share medical costs);
• Members of federally recognized Indian tribes;
• Individuals with incomes below the minimum threshold for filing a tax return;
• Individuals who have a gap in minimum essential coverage for less than three consecutive calendar months in a year;
• Individuals who qualify for a hardship exemption;
• Individuals who cannot afford coverage because their required contribution towards minimum essential coverage exceeds 8% of their annual household income;
• Individuals who are incarcerated; and
• Individuals not lawfully present in the United States.

U.S. citizens residing in a foreign country are also generally exempt from the shared responsibility penalty if they meet certain requirements, such as living abroad for the entire calendar year.

Recently Released Health Care Reform FAQs Address HRAs

The DOL, HHS and IRS have issued the eleventh set of FAQs relating to the implementation of various provisions PPACA. In particular, the eleventh set of FAQs offer guidance on the application of PPACA’s prohibition against annual or lifetime dollar limits to health reimbursement arrangements (“HRAs”).

HRAs and PPACA’s Restriction on Lifetime or Annual Limits. PPACA generally prohibits group health plans from imposing annual or lifetime dollar limits on “essential health benefits.” HRAs are group health plans that typically reimburse medical expenses up to a specified dollar amount. Thus, it is impossible for an HRA to comply with PPACA’s prohibition on annual or lifetime dollar limits.

The final regulations implementing PPACA’s prohibition on annual and lifetime dollar limits made a distinction between HRAs that are “integrated” with other employer health coverage and “stand-alone” HRAs that are not integrated. Specifically, the final regulations provide that when an HRA is integrated with other employer health coverage that complies with PPACA’s annual and lifetime dollar limit prohibitions, the fact that benefits under the HRA are limited will not violate PPACA because the combined plans satisfy the requirements.

The FAQs offer the following additional guidance on when an HRA will be considered “integrated” with other employer health coverage:

• An employer-sponsored HRA is not considered integrated unless it specifies that coverage is available only to employees who are also covered by employer-provided health coverage that complies with the annual and lifetime dollar limit prohibitions.
• An employer-sponsored HRA cannot be integrated with individual market coverage or with an employer-provided plan that provides coverage through individual policies.
• An employer-sponsored HRA may be treated as integrated with other employer-provided health coverage only if the employee covered by the HRA is actually enrolled in the other coverage.

Although PPACA’s prohibition on lifetime or annual dollar limits has been in effect since 2010, the FAQs permit any amounts credited to an HRA before January 1, 2014, to be used after December 31, 2013, without violating PPACA, regardless of whether the HRA is integrated.

DOL Issues Guidance on PPACA Exchange Notices

The DOL has issued temporary guidance on the requirement that employers issue “Exchange Notices” to employees. PPACA requires certain employers to provide this Notice, which explains the coverage options available under the Health Insurance Exchanges that will open in January of 2014.

Employers Subject to Requirement. PPACA’s Exchange Notice requirement applies to employers that are subject to the Fair Labor Standards Act (“FLSA”), including:

• Employers who have at least $500,000 in annual business;
• Federal, state and local government agencies;
• Hospitals and other institutions primarily engaged in the care of the sick, aged, mentally ill, or disabled; and
• Pre-schools, elementary and secondary schools, and institutions of higher learning.

Employers can use DOL’s FLSA compliance assistance tool to determine if they are subject to the FLSA and, consequently, PPACA’s Exchange Notice requirement. DOL’s compliance assistance tool is at: http://www.dol.gov/elaws/esa/flsa/scope/screen24.asp

Content. In general, the Exchange Notice must:

• Inform employees of the existence of the Exchanges, describe the services provided by the Exchanges, and explain how an employee can contact an Exchange for assistance;
• Explain that the employee may be eligible for a premium tax credit to purchase health coverage through an Exchange if the employer’s plan does not meet certain requirements; and
• Inform employees that if they purchase a qualified health plan through an Exchange, they may lose any employer contribution made towards health coverage, and that a portion of that employer contribution may be tax exempt.

Model Notices. The temporary guidance provides the following model Exchange Notice templates:

• A notice for employers that do not offer a health plan (http://www.dol.gov/ebsa/pdf/FLSAwithoutplans.pdf); and
• A notice for employers that offer a health plan to some or all employees ( http://www.dol.gov/ebsa/pdf/FLSAwithplans.pdf).

Distribution of the Notice. Employers must distribute the Exchange Notice to all employees, regardless of plan enrollment status or part- or full-time status. New employees must be given the Notice “at the time of hiring.” For 2014, this means within 14 days of the employment starting date. Employers do not have to provide a separate Notice to the employees’ dependents.

The Exchange Notice may be furnished electronically, provided the DOL’s electronic disclosure safe harbor requirements are met.

Compliance Date. The Exchange Notice requirement is effective October 1, 2013. It was originally slated to take effect on March 1, 2013. However, DOL delayed the effective date until this fall, so that Exchange Notice distribution efforts are coordinated with the open enrollment period for the Exchanges.

The temporary guidance is at: http://www.dol.gov/ebsa/pdf/tr13-02.pdf

IRS Issues Proposed Regulations on PPACA’s Employer Pay-or-Play Penalties

The IRS began 2013 by releasing proposed regulations that offer much needed guidance to employers regarding their potential liability for the “pay-or-play” penalties contained in the PPACA. Beginning in 2014, PPACA subjects large employers (i.e., employers with 50 or more full-time equivalent employees (“FTEs”)) to two different pay-or-play penalties if they fail to comply with PPACA’s “employer shared responsibility” provisions. Below is a summary of the penalties imposed for violations of PPACA’s pay-or-play rules.

Pay-or-Play Penalties. The first pay-or-play penalty applies if: (i) an employer fails to offer coverage to “substantially all” of its full-time employees; and (ii) a low-income, full-time employee receives a premium tax credit through an Exchange. In those situations, the employer must pay an annual penalty of $2,000 multiplied by: the number of full-time employees, minus 30.

The other pay-or-play penalty applies in situations where: (i) an employer offers coverage to its full-time employees that is either “unaffordable” or does not provide “minimum value;” and (ii) a low-income, full-time employee receives a premium tax credit through an Exchange. In such situations, the employer must pay an annual penalty of $3,000 for each full-time employee who receives the premium tax credit. However, this penalty is capped at $2,000 multiplied by: the number of full-time employees minus 30.

Full-time Employee vs. FTEs. Although the hours of part-time workers are aggregated into FTEs when determining if an employer is a large employer subject to the penalties, for purposes of determining penalty amounts, only actual full-time employees are counted. Generally, a full-time employee is an employee who is employed an average of at least 30 hours per week. Hours of service include not only hours when work is performed but also hours for which an employee is paid or entitled to payment, even when no work is performed (i.e., vacation, sick leave, holidays).

“Substantially All” Employees. An employer is consider to have offered health care coverage to “substantially all” of its employees if the offer is made to at least 95% of the full-time employees. Therefore, an employer that offers health coverage to 97% of its full-time employees is not subject to the $2,000 penalty. However, that employer is still subject to the $3,000 penalty for each low income full-time employee who receives a premium tax credit through an Exchange, regardless of whether that employee is or is not eligible to participate in the employer’s plan.

Employees vs. Dependents. In 2014, with certain exceptions, large employers must offer coverage to full-time employees’ dependents in order to avoid the penalty. For purposes of the pay-or-play penalty, the term “dependent” means an employee’s dependent children up to age 26, but does not include the employee’s spouse.

Determining if Coverage Provides Minimum Value. In general, an employer’s health coverage provides “minimum value” only if it covers at least 60% of the total allowed costs of benefits that are expected to be incurred under the plan. The IRS, DOL and HHS will make a minimum value calculator available to help employers determine whether their coverage provides minimum value. Employers will input certain information about their plan (e.g., deductibles and co-pays) into the calculator and get a determination as to whether their coverage provides minimum value.

Affordability Safe Harbors. Coverage is “unaffordable” if the employee’s share of the premium is more than 9.5% of his or her annual household income. However, employers generally do not know their employees’ household incomes. The proposed regulations provide the following affordability safe harbors that employers may use to determine if their coverage is affordable:

• W-2 safe harbor. If the employee’s contribution for single coverage under the employer’s lowest cost medical option does not exceed 9.5% of the employee’s Box 1, W-2 pay for that year, the affordability test is satisfied.
• Rate of pay safe harbor.If the employee’s contribution for single coverage under the employer’s lowest cost medical option does not exceed 9.5% of the employee’s monthly wage amount, the affordability test is satisfied.
• Federal poverty line safe harbor. If the employee’s contribution for single coverage under the employer’s lowest cost medical option does not exceed 9.5% of the federal poverty line for a single individual, the affordability test is satisfied.

All large employers should carefully consider the financial impact of the proposed regulations. Even extremely large employers that offer coverage which provides minimum value should consider the ramifications of the penalty when some of their employees receive premium tax credits through Exchanges. This is because employees may qualify for the premium tax credit with household incomes as high as 400% of the federal poverty line, which, for 2012, was $92,000 for a family of four. Therefore, more employees may receive premium tax credits than would be anticipated by employers.

IRS Releases Final Regulations on PPACA’s Patient-Centered Outcomes Research Fees

The IRS has issued final regulations implementing certain fees imposed by PPACA on health insurers and self-insured health plan sponsors. These fees, which are known as Patient-Centered Outcomes Research Institute (“PCORI”) fees, are for funding medical research and comparing outcomes of various medical techniques. They apply for policy and plan years ending on or after October 1, 2012, and before October 1, 2019 (i.e., seven full policy or plan years).

The final regulations offer guidance explaining which health insurers, and which self-funded health plan sponsors, are subject to the PCORI fees and how to calculate the number of covered lives for purposes of determining the amount of the PCORI fee.

Definition of “Applicable Self-insured Health Plan”

The final regulations define self-insured health plans as all plans that are not fully insured. This includes any plan that provides accident and health coverage to an active employee, former employee or qualifying beneficiary under COBRA, or similar continuation coverage under federal or state law. The definition includes retiree-only health plans, which are exempt from many of the other PPACA mandates.

However, the definition excludes self-insured plans where substantially all of the coverage consists of HIPAA-excepted benefits (e.g., limited scope vision and dental). Employee assistance programs, disease management programs, and wellness programs that do not provide “significant benefits in the nature of medical care or treatment” are also excluded.

HRAs

The final regulations include health reimbursement accounts (HRAs) as self-insured health plans. Nonetheless, multiple, self-insured arrangements maintained by the same plan sponsor can be treated as a single plan subject to only one PCORI fee. For example, an HRA will not be subject to a separate PCORI fee if it is paired with another self-insured group health plan that provides major medical coverage, if the HRA and the other plan are established by the same sponsor and have the same plan year. However, when an HRA is paired with an insured group health plan, each must pay the PCORI fee separately.

FSAs

Under the final regulations, a health flexible spending account (FSA) is not covered if: (i) employees who are eligible for the health FSA are also eligible for group health plan coverage; and (ii) the FSA is funded either solely by employees’ salary reduction contributions or the employer’s contributions to the FSA do not exceed the greater of (a) $500, or (b) twice the employees’ pre-tax contribution. In other words, the typical FSA will be exempt.

Calculating and Paying the Fee

For the first year, the PCORI fee is $1 for each covered life. For the second through seventh years, the amount increases to $2, subject to an adjustment based on increases to the projected per capita amount of the National Health Expenditures.

Plan sponsors of self-funded plans must remit the fee to IRS annually along with an IRS Form 720. The payment and form will be due July 31 for all plan years ending in the preceding calendar year.

Calculating the Number of Covered Lives

The final regulations provide that a plan sponsor may use any of the following methods to calculate the average number of covered lives under the plan:

• The actual count method (i.e., plan sponsor adds the totals of lives covered for each day of the year, divided by the total by the number of days in the plan year).
• The snapshot method (i.e., plan sponsor adds the total lives covered on one date in each quarter of the plan year).
• The Form 5500 method (i.e., plan sponsor uses a certain formula that includes the number of participants actually reported on the Form 5500 for the plan year). Note: The Form 5500 method is not available to sponsors that extend their filing deadlines beyond the July 31 due date for the PCORI fees.

The final regulations provide a special rule that allows sponsors of covered HRAs and health FSAs to count only employee-participants and exclude dependents.

The final regulations are effective immediately, and the first PCORI fees are to be reported and paid to the IRS by July 31, 2013.