Editor: Kevin D. Anderson, CPA, J.D.
One of the key revenue provisions of the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148, is Section 9010, which provides for the imposition of an annual fee for calendar years beginning after 2013 on health insurance providers that are "covered entities." A covered entity is any entity with net premiums written for health insurance for "U.S. health risks," or the health risk of any individual who is a U.S. citizen, a resident of the United States, or who is located in the United States. Such an entity includes a "health insurance issuer," defined as an insurance company, insurance service, or insurance organization (including a health maintenance organization) that is licensed to engage in the business of insurance in a state and is subject to state law that regulates insurance (Regs. Sec. 57.2(b)).
"Health insurance" includes coverage providing benefits consisting of medical care (provided directly, through insurance or reimbursement, or otherwise) under any hospital or medical service policy or certificate, hospital or medical service plan contract, or health maintenance organization contract offered by a health insurance issuer (Regs. Sec. 57.2(h)(1)).
To be subject to the fee, a covered entity must have net premiums written with respect to such health insurance for a calendar year exceeding $25 million. However, reporting requirements apply even if the covered entity's premiums fall below the $25 million threshold. The net premiums written taken into account during any calendar year are shown in Exhibit 1.
Net premiums written include reinsurance premiums written, reduced by reinsurance ceded, and reduced by ceding commissions and medical loss ratio rebates with respect to the data year (the year preceding the fee year). In determining net premiums written, medical loss ratio rebates are computed on an accrual basis. Net premiums written do not include premiums written for indemnity reinsurance and are not reduced by indemnity reinsurance ceded. However, the net premiums written do include premiums written for assumption reinsurance and are reduced by assumption reinsurance premiums ceded (Regs. Sec. 57.2(k)).
Each covered entity's allocated fee will be based on the applicable amount for the fee year (see Exhibit 2). Each entity's allocated fee is computed by multiplying the applicable amount by the ratio of the entity's net premiums written with respect to health insurance for U.S. health risks during the preceding year to the aggregate net premiums written with respect to such health insurance of all covered entities for that year. Thus, for calendar year 2014 (the fee year), the net premiums written in calendar year 2013 (the data year) are used to determine the covered entity's allocation ratio. For purposes of the fee, a controlled group is treated as a single covered entity.
Covered Entity Exclusions
Covered entities do not include (1) any employer to the extent that such entity self-insures its employees' health risks; (2) any governmental entity or state or political subdivision thereof; (3) certain nonprofit corporations; and (4) certain voluntary employees' beneficiary associations. The IRS is considering whether additional guidance is required when a nonprofit corporation is included in a controlled group.
Health Insurance Exclusions
Sixteen health insurance exclusions are listed in Regs. Sec. 57.2(h)(2). It is worth highlighting that indemnity reinsurance is excluded but assumption reinsurance is included.
"Indemnity reinsurance" means an agreement between one or more reinsuring companies and a covered entity under which (1) the reinsuring company agrees to accept, and to indemnify the issuing company for, all or part of the risk of loss under policies specified in the agreement, and (2) the covered entity retains its liability to, and its contractual relationship with, the individuals whose health risks are insured under the policies specified in the agreement. "Assumption reinsurance" means reinsurance for which there is a novation (an agreement to replace one party to an insurance policy or reinsurance agreement with another company) and the reinsurer takes over the entire risk of loss pursuant to a new contract (Regs. Sec. 57.2(h)(5)).
Time and Manner for Submitting Form 8963
Form 8963, Report of Health Insurance Provider Information, has been prescribed for complying with these requirements. Each covered entity must report its net premiums written for health insurance of U.S. health risks during the data year to the IRS by April 15 of the fee year. The IRS will then make a preliminary fee calculation and notify each covered entity, by June 15 of the fee year, of its allocated fee and net premiums written, as well as the net premiums written for all covered entities. The covered entity will then have 30 days to review this preliminary fee and file a corrected report by July 15 if there are any errors. The IRS will send each covered entity a final fee calculation no later than Aug. 31 of each fee year, and this amount is required to be paid electronically no later than Sept. 30 of each fee year.
To verify a covered entity's net premiums written, the IRS may use the Supplemental Health Care Exhibit, which supplements the entity's annual statement filed with the National Association of Insurance Commissioners (NAIC) under state law, the annual statement itself, the Accident and Health Policy Experience report filed with the NAIC, the MLR (medical loss ratio) Annual Reporting Form filed with the Centers for Medicare & Medicaid Services' Center for Consumer Information and Insurance Oversight of the U.S. Department of Health and Human Services, or any similar statements filed with the NAIC, with any state government, or with the federal government pursuant to applicable state or federal requirements (Regs. Sec. 57.4(b)(1)).
A penalty is imposed on any covered entity that fails to timely file Form 8963, unless the failure is due to reasonable cause. The penalty is $10,000 plus the lesser of (1) $1,000 multiplied by the number of days during which the failure continues or (2) the amount of the covered entity's fee for which the report was required. Furthermore, a covered entity that understates its net premiums written in the report is liable for an accuracy-related penalty, in addition to its fee liability and any other applicable penalty. The accuracy-related penalty is the excess of (1) the amount of the covered entity's fee for the fee year that the IRS determines should have been paid in the absence of any understatement, over (2) the amount of the covered entity's fee for the fee year that the IRS determines based on the understatement (Regs. Sec. 57.3(b)).
Procedure and Administration
Under current law, this fee has no expiration date. There is a three-year statute of limitation (from Sept. 30 of the fee year) for the IRS to assess the fee. The fee, which is treated as an excise tax for purposes of the procedure and administration chapters of IRC subtitle F, is not deductible in computing taxable income. To make matters worse, any amounts collected from the policyholder to defray the cost of the annual fee are includible in the insurer's gross income.
The inability of insurers to deduct this tax while having to include any passthrough of the fee to policyholders in income is likely to increase the amount of the premium increase that insurers will pass through to policyholders. If the insurer passes along $1 in added costs to its insureds to offset the $1 in excise taxes it has to pay the government, the insurer will also owe federal income tax of up to 35 cents on that $1 of added income. The potential impact of state taxes, including income and premium taxes, may impose additional costs. Therefore, an insurer would have to charge $1.54 ($1 ÷ [1 ‒ 0.35]) for every dollar of the fee passed on to its insureds to break even. The income tax on $1.54 would be as much as 54 cents, with the remaining $1 going for the fee.
Section 9010 of the PPACA is intended to establish a means for insurance companies to help fund the cost of those who need insurance the most. The key tenet of the PPACA was to ensure everyone has access to affordable health insurance. Many of the uninsured are lower-income families who are expected to receive federal subsidies toward the purchase of insurance. However, it appears that the insureds may end up indirectly funding the costs in an amount exceeding the marginal revenue generated from the insurance companies, as the imposition of these fees upon health insurers will undoubtedly be passed on to the insureds, resulting in increased premiums for all.
Kevin Anderson is a partner, National Tax Office, with BDO USA LLP in Bethesda, Md.
For additional information about these items, contact Mr. Anderson at 301-634-0222 or firstname.lastname@example.org.
Unless otherwise noted, contributors are members of or associated with BDO USA LLP.