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Under the Health Care Reform Act, Employers With HRA’s May Soon Find Themselves Having to Pay Additional Taxes

April 17, 2012
Joshua L. Cannon

Joshua L. Cannon

On April 17, 2012, the IRS released proposed regulations implementing the fees imposed by Sections 4375 and 4376 of the Patient Protection and Affordable Care Act (“PPACA”), which are likely to have an impact on many employers providing health insurance coverage to their employees. These fees are intended to fund the newly created Patient-Centered Outcomes Research Institute, a private nonprofit corporation created by PPACA to conduct research in evidence-based medicine.


Section 4375 imposes the fee on issuers of specified health insurance policies, while section 4376 imposes it on the plan sponsor of any applicable self-insured plan.  For each policy/plan year, the fee is determined by multiplying $2 ($1 for policy/plan years ending during fiscal year 2013) by the average number of lives covered under the insurance policy or self-insured plan for that year.  The fee may be increased for policy/plan years beginning after September 30, 2014 by the expected percentage increase in per capita national health expenditures.  The fee is first applicable to policy/plan years ending after September 30, 2012 and is scheduled to sunset for policy/plan years ending after September 30, 2019.

Under section 4376, a “plan sponsor” of an applicable self-insured health plan includes the employer if the plan is established or maintained by that single employer.  Health reimbursement arrangements (“HRAs”) and health flexible spending arrangements (“health FSAs”) are self-insured health plans under section 4376.  However, the proposed regulations clarify that health FSAs that provide “excepted benefits” (e.g., limited scope dental or vision FSAs) will not be subject to the fee. 

Employers Subject to Fee

The proposed regulations generally provide that employers that maintain HRAs and health FSAs will be subject to the fee when these plans are integrated, or otherwise provided in connection with, an insured group health plan.  Importantly, multiple self-insured arrangements (e.g., an HRA and a health FSA) established and maintained by the same employer and with the same plan year are subject to a single fee.  The proposed regulations provide a special rule that permits the employer, when determining the average number of lives covered under the plan, to assume that only one person is covered by an HRA or health FSA, even though an employee may have a spouse or dependents who are also eligible to received amounts under the HRA or health FSA.

Under the proposed regulations, employers required to pay the fee under section 4376 will do so using Form 720, “Quarterly Federal Excise Tax Return.”  However, employers filing Form 720 based only on their liability for the fee will be required to do so only once per year by July 31st.  Full payment of the fee will also be due by July 31st of each year.

TAX ADVICE LIMITATION:  To ensure compliance with the requirements of Circular 230, we inform you that any tax advice contained above is not intended or written to be used and cannot be used (i) by any taxpayer for the purpose of avoiding penalties that may otherwise be imposed under the Internal Revenue Code or (ii) by anyone for the purpose of promoting, marketing or recommending to another party any entity, investment plan or arrangement addressed herein.