Insurers pay premium tax under section 9010

September 1, 2013

With the start date fast approaching, health insurers are searching for potential strategies to avoid or minimize the fee

Starting January 1, 2014, health insurance providers with net insurance premium over $25 million must pay an annual fee under the Patient Protection and Affordable Care Act (PPACA). The federal government seeks to generate revenue from the health insurance industry starting at $8 billion for 2014 and gradually increasing to $14.3 billion for 2018.

Specifically, under Section 9010 of PPACA, each health insurance provider must pay to IRS an annual fee calculated based upon its premium revenue proportionately. The annual fee will be treated as an excise tax and non-deductible for income tax purposes. The IRS issued proposed regulations in March 2013, but has yet to publish the final regulations.

The annual fee requirement applies to a wide range of insurance companies, such as indemnity insurer, HMOs, Medicare Advantage and Medicare Part D organizations, Medicaid plans and even non-fully insured, multiple employer welfare arrangements (MEWAs). Although Section 9010 of PPACA does not define “health insurance,” it expressly excludes certain categories including long-term care insurance and Medicare supplemental health insurance. Retiree-only health plans will qualify unless provided through an employer-based self-funded arrangement.

Also, companies that are commonly owned or related will be treated as one covered entity with a designated entity within the control group to be responsible for annual reporting on behalf of the entire group. Although a single entity is responsible for the fee payment and reporting, all entities in a controlled group will be jointly and severally liable for the fee.

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. Any insurer that fails to file a timely report will 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. The law also imposes a penalty for inaccurate reporting.

Exemptions

Section 9010 includes a number of exemptions. Health insurance providers with annual net premiums less than or equal to $25 million are not subject to the fee, although they are still required to report the premiums. Self-insured employers, government entities, and voluntary employees’ beneficiary associations (VEBAs) are not subject to the annual fee.

Additionally, those entities that receive more than 80% of gross revenue from government programs such as Medicare, Medicaid and CHIP are not required to pay the fee if they are nonprofit entities under state law and do not distribute net earnings to private parties. Further, a tax-exempt entity under 501(a) of the Internal Revenue Code (IRC), that is a charity, social welfare organization, state high-risk health pool, or a CO-OP health insurer, will only have 50% of its net written premiums which are linked to those “exempt activities” accounted for in the fee calculation.

As expected, the annual fee has been met with strong opposition from the health insurance industry. Opponents argue that the annual fee will upset the cost structure of insurance companies and increase premiums as much as 3% on average.

Several bills have been introduced that would essentially repeal Section 9010. The Jobs and Premium Protection Act (S. 603), introduced by Senators John Barrasso (R-Wyo.) and Orrin Hatch (R-Utah), and H.R. 763, introduced by Rep. Charles Boustany (R-La.-3), both seek to abolish the annual fee and reduce the financial burden of the excise tax on health insurers, employers and consumers.

On the other hand, supporters of the annual fee suggest that repealing the tax on health insurers would increase the budget deficit about $116 billion in the next 10 years. They argue that large health insurers are financially positioned to bear some of the tax, PPACA has built-in mechanisms which will slow the growth of insurance premiums and the new health insurance exchange will increase competition and reduce administrative fees through standard benefits and the prohibition of medical underwriting.

Avoiding the Fee

With the start date fast approaching, health insurers are searching for potential strategies to avoid or minimize the fee.

One obvious way to minimize the impact of the fee is to push the costs onto consumers, whether as an additional premium or a separate fee to be paid by policyholders. However, according to IRS, any increase in premium and other revenue must be reported as taxable income.

Another strategy for an insurer that receives more than 80% of its premium revenue from government programs is to convert to a not-for-profit entity under state law, thus allowing it to avoid the fee. It is important to note that the insurer only needs to be a not-for-profit entity under state law and does not have to become a tax exempt entity under federal law, which contains more restrictions. Generally, conversion to a not-for-profit entity is permitted in most states, subject to certain regulatory approval.

However, this strategy is not available to many privately owned health plans without significant reorganization because of the restriction from distribution to private parties. On the other hand, this strategy could be a good option for provider-owned or -sponsored health plans since these plans are already owned by tax exempt health systems.

In terms of qualifying as a tax exempt entity under IRC 501(a), this option is not available to health insurance companies as commercial insurance cannot qualify as a tax exempt purpose under IRC 501(m). Also, we are not aware of any insurance license category that would fit within a tax exempt insurance company except HMOs.

Some health plans have considered a variety of self-insurance options for employers as small as 75 employees for a variety of reasons, including avoiding the insurance fee. However, this means a fundamental shift in the plan’s business model.

What Happens Next

Due to the nearly $60 billion dollar cost to the health insurance industry over the next five years, the fee is likely to remain a contentious issue. The lack of final regulations has left interested parties with many unanswered questions and a great deal of speculation, although the IRS has indicated that final regulations will be issued sometime this year. New strategies for avoiding the tax and fresh attempts to abolish it are likely to continue.