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New Research Fee Begins, but Little Guidance for Employers

Employee Benefits Law Alert John L. Barlament

The health care reform law from last year, the Patient Protection and Affordable Care Act (now called the "Affordable Care Act" or "ACA" by federal regulators), contained a number of new taxes. One of the taxes is designed to fund a new nonprofit corporation that will conduct research into the effectiveness of particular medical treatments. This corporation, the Patient-Centered Outcomes Research Institute (the "Institute") will receive revenue through new taxes imposed on sponsors of many self-funded health plans and insurers who issue fully insured health policies. The tax will initially be a yearly amount of $1 multiplied by the "average number of lives covered" under the plan or policy. This amount will increase to $2 for future years. This new tax is scheduled to begin for plan years starting on or after October 1, 2011 (January 1, 2012 for a calendar year plan) and will end in 2018. However, basic issues remain open, such as whether some health plans will be exempt, how to calculate the number of covered lives and what forms to use to pay the tax. Until formal guidance is issued, employers have little ability to calculate (or minimize) the tax.


The primary goal of the ACA is to increase health plan coverage of U.S. citizens. However, the ACA also is intended to improve the quality of health care services. The Institute is intended to help health care providers evaluate and compare the effectiveness and risks of various medical treatments and procedures. The Institute will receive substantial funding through the new tax on health plans and their sponsors.

Which Plans Create Tax Liability?

The tax applies with respect to a "specified health insurance policy." This term has yet to be defined by regulations, but it will include major medical plan coverage. Most stand-alone dental and vision plans will be exempt from the tax. However, dental and vision plans that are "integrated" into major medical plan coverage (or that otherwise are not an "excepted benefit" under HIPAA) will likely be subject to the tax. Most health flexible spending arrangements ("Health FSAs") will be exempt from the tax. In a recent Internal Revenue Service ("IRS") notice, the IRS questioned whether health reimbursement arrangements ("HRAs") should be exempt from the tax.

Who Must Pay the Tax?

For a fully insured health plan, the issuer of the policy must pay the tax. For a self-funded health plan, the sponsor must pay the tax. Special rules apply for determining who is the "sponsor" of a multiemployer plan, a multiple employer welfare arrangement (a "MEWA") and a voluntary employees' beneficiary association (a "VEBA"). The IRS has requested comments on whether a third-party administrator (a "TPA") could pay the tax on behalf of a sponsor. It is unclear whether issuers will attempt to "pass along" the tax to employers through a very modest premium increase.

Determining the "Average Number of Lives Covered"

The IRS has sought comments on how to determine the "average number of lives covered" under a plan or policy. The calculation may be based on a formula tied to the number of participants covered without requiring an exact count of dependents. It is unclear whether an employer will be able to take a "snapshot" test of covered lives as of a point in time (e.g., the beginning, middle or end of the plan year) or whether some other calculation will be required. It appears that retirees who are covered by a plan and COBRA-qualified beneficiaries will count for purposes of the tax, although this is not certain.

Transition Rules

The IRS has requested guidance on whether special transition rules should apply for the first year. The IRS seems to be concerned that employers and insurers will not have sufficient data for the first year and will therefore have difficulty determining the amount of tax owed.

Future IRS Guidance

The IRS is accepting comments on this new tax through September 6, 2011. The IRS then intends to issue proposed - not final - regulations on the tax. After that, the IRS will issue final regulations, likely in 2012.

Action Items for Employers

Given the lack of guidance, there is little employers can do at this time. When future guidance is issued, employers should carefully analyze the guidance.

Future guidance may prompt an employer to modify its plan design. For example, an employer may have "wrapped" together its major medical, Health FSA, dental and vision plans. This may increase the number of "lives covered" in a way that increases the employer's tax liability. It may be possible to decrease this tax liability by "unwrapping" the programs that can be "excepted benefits" (such as dental plans, vision plans and Health FSAs). This "unwrapping" may leave the sponsor to only pay the tax with respect to individuals covered by the major medical plan, which should reduce the tax liability.

The opposite action may also be wise. If an employer has several plans that are subject to the tax and individuals participate in multiple plans (e.g., a major medical plan and a separate dental plan that is not an excepted benefit) "wrapping" the plans together may decrease the employer's tax liability. However, given the lack of even proposed regulations, at this point any plan design modification seems premature.

Link to IRS Request for Information

The IRS request for information (IRS Notice 2011-35) can be found here:

For more information contact the author of this alert, John Barlament, at (414) 277-5727 / You may also contact any of the following Quarles & Brady employee benefits attorneys: Marla Anderson at (414) 277-5453 /; Amy Ciepluch at (414) 277-5585 /; Sarah Fowles, at (414) 277-5287 /; Angie Hubbell at (312) 715-5097 /; Paul Jacobson at (414) 277-5631 /; David Olson at (414) 277-5671 /; Robert Rothacker at (414) 277-5643 / or your Quarles & Brady attorney.