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IRS: How should we treat the new health insurer "fee"?

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The Internal Revenue Service (IRS) has posted a draft of proposed “health insurance providers fee” (RIN 1545-BL20) regulations. 

Consumer representatives and others are trying to get the IRS to write the regulations in such a way that the agency will discourage health insurance providers from trying to “recover a large portion of the fee from policyholders,” officials said in a preamble to draft regulations.

The rulemaking notice is set to appear in the Federal Register Monday. Comments will be due 60 days after the official publication date.

The fee
The proposed regulations are supposed to help the IRS implement Section 9010 of the Patient Protection and Affordable Care Act of 2010 (PPACA).

PPACA will require “covered entities” that are “engaged in the business of providing health insurance” to pay a total of $8 billion in “fee amount” in 2014, $11.3 billion in 2015 and 2016, $13.9 billion in 2017, and $14.3 billion in 2018.

Starting in 2019, the fee amount will be the total for the previous year increased by the rate of premium growth for the preceding year, officials said.

PPACA Section 9010 defines the term “covered entity” to include any health coverage provider with more than $25 million in aggregate net premiums that is a health insurer; a health maintenance organization; a provider of Medicare Advantage, Medicare Part D prescription drug coverage or Medicaid coverage; or a non-fully insured multiple employer welfare arrangement (MEWA).

The fee program excludes self-insured employers, voluntary employees’ beneficiary associations (VEBAs), and governmental entities, such as state health departments and state insurance commissions. Officials ask how they should handle providers such as self-insured student health plans and state programs that provide health benefits for residents with serious health problems. 

The proposed regulations
IRS officials noted in the preamble to the draft regulations that PPACA Section 9010(f)(1) treats the new provider fee as an excise tax.

Only civil actions for refund apply to an excise tax, officials said.

Elsewhere, officials observed that PPACA Section 9010(g)(4) strips the usual tax return confidentiality protection from the health insurer fee filing information.

The IRS and its parent, the U.S. Treasury Department, are “considering making available to the public the information reported” on the health insurance provider filing, officials said. “The Treasury Department and the IRS invite comments on  which reported information the IRS should make publicly available.”

Recovered fee amounts
One section of PPACA, PPACA Section 9010(f)(2) classifies the new insurance provider fee as a tax for purposes of applying Internal Revenue Code Section 275(a)(6).

Section 275(a) forbids taxpayers from taking deductions for certain taxes.

Some commenters told the IRS they want it to state that recovered fee amounts are excluded from health insurance providers’ gross income, officials said.

“The income tax treatment of recovered fee amounts is outside the scope of the proposed regulations,” officials said.

But the IRS believes that “gross income” includes all income from any source, unless a provision in a federal law provides otherwise, officials said.

Because no law excludes PPACA-fee-related revenue from a health insurance provider’s gross income, the provider’s gross income will include fees recovered from policyholders, whether or not that amount is separately stated on any bill, officials said.

“The Treasury Department and the IRS invite comments on whether the text of the regulations should be revised to clarify that recovered fee amounts are included in a covered entity’s gross income,” officials said.

AHIP fights back
America’s Health Insurance Plans (AHIP) is trying to keep the new fee from taking effect by rounding up support for H.R. 763, a health insurance provider fee repeal bill introduced by Reps. Charles Boustany, R-La., and Jim Matheson, D-Utah.

AHIP President Karen Ignagni said in a statement that implementing the tax as written would impose a financial burden on families and employers at a time when they can least afford it.

“This tax alone will mean that next year an individual purchasing coverage on his or her own will pay $110 in higher premiums, small businesses will pay an additional $360 for each family they cover, seniors enrolled in Medicare Advantage will face $220 in reduced benefits and higher out-of-pocket costs, and state Medicaid managed care plans will incur an additional $80 in costs for each person enrolled,” Ignagni said.

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