The assessments to fund these programs will affect insurers, plan sponsors, and employees.
Premium Stabilization Programs
Beginning in 2014, PPACA requires insurers in the individual health insurance market to offer coverage regardless of an individual’s health status or pre-existing conditions, making coverage available to individuals who currently have none. This looming influx of newly insured individuals creates uncertainty for the risks that insurers will assume.
To reduce that uncertainty and its possible effect on health insurance premiums, PPACA establishes three specific programs. Building on guidance
that it issued in 2011, the Department of Health and Human Services has issued proposed regulations governing these programs.
- Risk Adjustment Program
This permanent program provides increased payments to health insurers that enroll higher-risk individuals. The program applies state-by-state to health plans in both the individual and small group markets, with exceptions for plans that are grandfathered under ACA and certain types of benefit arrangements. The new regulations establish a process for approving a state risk-adjustment program and describe rules that HHS will follow to operate a program in the event that a state does not obtain federal approval or chooses not to operate its own program. The program is funded through a transfer of amounts from plans that enroll lower-risk individuals to plans with higher-risk enrollees.
- Risk Corridors Program
This temporary, federally administered program limits the extent of an insurer’s gains and losses from 2014 through 2016. The program applies to qualified health plans offered through an exchange in the individual and small group markets. A cost target is set for each plan, and an acceptable risk corridor is established around that target. Plans with unexpectedly low costs (below the risk corridor) will pay amounts to HHS. Plans with unexpectedly high costs (above the corridor) will receive funds from HHS. The new regulations make adjustments to prior guidance on the program, such as accounting for certain taxes and profits in establishing the corridors.
- Transitional Reinsurance Program
This temporary reinsurance program applies to commercial health insurance in the individual market. The program is funded through required contributions by insurers and self-funded group health plans. It will be in effect from 2014 through 2016.
- The new regulations establish that HHS will operate the program, paying reinsurance amounts from the program and collecting contributions from insurers and self-funded plans to fund those reimbursements.
- Under current guidance, it is expected that insurers and self-funded group health plans will be required to contribute $63 per covered life for 2014. That contribution may be reduced if HHS determines that certain contributions (the assessment includes contributions that are specifically directed set aside to pay for the Early Retiree Reinsurance Program) may be postponed to 2016. Even if that postponement occurs, contributions are expected to be less than $63 per covered life for 2015 and 2016.
- Insurers and sponsors of self-funded plans (a third-party administrator may act on behalf of a plan sponsor) will need to report the number of covered lives (employees plus dependents) by Nov. 15 of each year. HHS will confirm the amount due by Dec.15, and payment will be due within 30 days of its confirmation notice. Employers and insurers will determine the number of covered lives in accordance with the approaches applicable to the PCORI fees (see below), but adjusted for the need to determine transitional reinsurance program fees before the end of the year.
- In separate guidance, the Internal Revenue Service has confirmed the deductibility of contributions under this program.
Group health plan sponsors will need to be particularly mindful of the need to report data for and pay the transitional reinsurance contribution fees late in 2014 (or early in 2015).
The new rules address various details about each of the programs. These details include certain transitional rules for 2014 and guidance on how the programs will coordinate with each other and with the medical loss ratio requirements for insurers. The new rules also address a number of matters relating specifically to the MLR requirements and to state and federally operated insurance exchanges.
Patient-Centered Outcomes Research Institute
PPACA establishes the Patient-Centered Outcomes Research Institute to collect and disseminate research findings on clinical effectiveness that will help patients, providers, and others make better-informed medical decisions. The program is funded by a fee to be paid by group health plans and insurers for seven years. The fee is $1 per covered life for the first plan/policy year that ends on or after October 1, 2012, and $2 (indexed for inflation) per covered life for the remaining years. Payment, and the accompanying report, will be due July 31 of the year following the assessment. This means many plans will need to pay the fee by July 31, 2013.
The IRS recently issued regulations that finalize the rules on fees that it proposed last spring
, with a few modest revisions. For example, those who follow the “snapshot” method of determining the number of covered lives by examining a sample day (or a few sample days) each quarter do not have to use days that are exactly aligned (e.g.,
January 3, April 3, July 3, October 3), but may choose days within three days of the date(s) chosen in the first quarter. With regard to the method that relies on data in the Form 5500, the sponsor of a plan that has both self-funded and insured options may ignore individuals who are covered only by the insured options. This “Form 5500” method will be available only if the form has already been filed for the year for which the fee is due.
Additional Medicare Tax
The IRS has issued proposed regulations and an expansive set of frequently asked questions and answers on the Additional Medicare Tax introduced by PPACA. These regulations and FAQs address a variety of situations that an employer may face in meeting its withholding obligations concerning this tax.
- Beginning in 2013, high wage earners will need to pay an Additional Medicare Tax on wages. The 0.9% tax will apply to all wages subject to the existing Medicare wage tax above a specified income level that depends on an individual’s filing status. For example, the tax will apply to wages above $200,000 for a single individual and above $250,000 for a married couple filing jointly. Because an employer will not necessarily know an individual’s filing status, an employer will be required to withhold on wages above $200,000.
- If an employee owes more than is withheld, the employee will be responsible for paying the tax. Guidance suggests that the employee make estimated tax payments or adjust his or her W-4 form to allow for additional withholding.
- The Additional Medicare Tax also applies to self-employment income above the applicable threshold.
Given the 2013 effective date, employers should be making adjustments to their payroll systems now (if they have not done so already) to account for the Additional Medicare Tax.