Annual Fee on Health Insurance Providers
Effective in 2014, the Affordable Care Act (ACA) imposed an annual, non-deductible fee on the health insurance sector, allocated across the industry according to market share. The Health Insurance Providers Fee, also referred to as Health Insurer Fee, is treated as an excise tax and is non-deductible for income tax purposes. The fee is required to be paid by Sept. 30 of each calendar year. The first fees were due from covered entities by Sept. 30, 2014.
On Dec. 18, 2015, President Barack Obama signed a federal budget bill for 2016 into law, which imposes a one-year moratorium on the collection of the ACA’s health insurer fee for 2017. As a result, no health insurance issuers are required to pay this fee for 2017.
On Jan. 26, 2016, the IRS issued FAQs to provide guidance on how the moratorium affects covered entities. HHS also issued a set of FAQs addressing the moratorium on Feb. 29, 2016.
What is the purpose of this fee?
This annual fee will be used to offset at least a portion of the expense related to premium subsidies and tax credits made available to qualifying individuals purchasing health insurance coverage on the exchanges, which have been operational since 2014.
What entities are subject to the fee?
The health insurance provider’s fee applies to all “covered entities”, which is generally defined under the statue as “any entity which provides health insurance for any United States health risk”. Covered entities include health insurance issuers, HMOs and insurers that provide health insurance under Medicare Advantage, Medicare Part D plans or Medicaid. Generally, self-insured multiple employer welfare associations (MEWAs) are subject to the annual fee, but specified MEWAs will not be treated as covered entities.
The term covered entity excludes an employer that self-insures its employees’ health risk, so this fee does not apply to self-insured employers. Fully-insured employers are not directly subject to the health insurance provider’s fee. However, in many instances, providers of insured plans have been passing the cost of the fee on to the employers sponsoring that coverage. As a result, this one-year moratorium may result in significant savings for some employers on their health insurance rates.
How is the fee calculated?
The IRS is responsible for calculating the fee amount based on an insurer’s total annual premium as reported. In doing so, the IRS will disregard each entity’s first $25 million of net premiums and then determine each insurer’s fee amount proportionately based upon the total fee to be collected from the insurance industry.
This means that the IRS will assess a portion of the applicable amount to each covered entity based on the ratio of:
The covered entity’s net premiums written for health insurance during the preceding calendar year; to
The aggregate net premiums for health insurance of all covered entities during the preceding calendar year.
Beginning in 2019, the applicable amount will increase based on the rate of premium growth.
Under the current law, the fee has no expiration date. Given that this fee will be assessed only on insured health plans, the Secretary of the Treasury, through the IRS, will determine the amount of the fee due from each health insurer based on net premiums written for U.S. health risks, and bill each carrier annually.
Penalty for Non-compliance
Any insurer that fails to file a timely report may be subject to a penalty starting at $10,000 plus the lesser of: $1,000 per day for each day the report is late; or the amount of the fee for which the report was required. Entities able to show that failure to report was due to a “reasonable cause”, a term defined in the regulations, may avoid penalty. The law also imposes a penalty for the reporting of understated net premium by a covered entity.