The Affordable Care Act imposes a host of new fees on employers in connection with the health benefits they provide to their employees. One fee that has received little attention is the annual fee for health insurance providers under section 9010 of ACA, which becomes effective with respect to premiums written in 2013. The government will calculate the fee for each covered entity based on the relative amount of health premiums the entity writes compared with all other covered entities.
It is not surprising that large employers have ignored section 9010, since the annual fee applies only to certain health insurance providers. Most large employers self-insure their group health plans, and the statute makes clear that the “covered entities” subject to the fee do not include employers that self-insure employees’ health risks.
It is less clear, however, that voluntary employees’ beneficiary associations (“VEBAs”) and other funding arrangements for self-insured group health plans are exempt from the annual fee. The definition of a “covered entity” expressly excludes a VEBA “established by an entity (other than an employer or employers) for purposes of providing health care benefits.” For example, a VEBA maintained by labor union for its members would not be a covered entity; but this limited exception strongly implies that a VEBA maintained by an employer would be a covered entity, and would potentially be subject to the annual fee.
To add to the confusion, the Joint Committee on Taxation’s Technical Explanation of section 9010 says that an organization exempt from tax under section 501(a) is a covered entity “except as provided in specific exceptions.” This statement suggests that a section 401(h) account established under a tax-exempt pension trust to fund medical benefits might also be subject to the annual fee.
So where does this leave employers that set aside assets in a tax-exempt trust to fund employee and retiree health benefits? Unfortunately, we will have to wait until the agencies issue regulations interpreting section 9010 to know for sure. Our prediction, though, is that the annual fee under section 9010 will not apply to VEBAs, section 401(h) accounts, and similar funding arrangements that employers maintain in connection with their self-insured group health plans.
The annual fee under section 9010 applies to a covered entity only if it is engaged in the business of providing health insurance. The Internal Revenue Service has never regarded VEBAs, section 401(h) accounts, and similar funds as insurance arrangements, and we think that the agencies will be reluctant to treat these funds as being “engaged in the business of providing health insurance” for purposes of assessing the annual fee.
In addition, if the agencies extend section 9010 to VEBAs and section 401(h) accounts, the agencies will face a practical difficulty. A covered entity’s annual fee is based on its share of the aggregate “net premiums written” (in excess of certain thresholds) to insure U. S. health risks during the preceding year. “Net premiums written” (or “net written premiums”) is a technical term that is familiar in the insurance industry: it refers to the amount of premium recorded when a policy is issued, reduced by commissions and ceded reinsurance premiums. Information about an insurance company’s net premiums written is included in publicly-available financial statements that insurance companies file with state regulators, and is reported by rating agencies; but this concept would be difficult to apply to tax-exempt funds maintained by employers, which do not “write premiums” in any conventional sense.
Accordingly, in spite of the oddly limited (and seemingly unnecessary) exclusions from the definition of “covered entity” in section 9010, we do not think that the annual fee imposed on health insurance providers under this section will apply to VEBAs, section 401(h) accounts, and similar arrangements maintained by employers to fund their group health plans.