The rules are necessary for implementation of the federal healthcare reform law in 2014 and were issued just before the Thanksgiving holiday.
The health insurer fee applies to insurance firms with premium revenues in excess of $25 million annually. Insuring entities excluded from the fee are government entities, nonprofit groups that receive at least 80% of their revenue from government programs such as Medicaid, and self-insured businesses.
In comments to the IRS, not-for-profit HMOs argued that Congress intended for them to be exempt from the fee as well. But the final rules indicate that these insurers will be subject to the new tax.
Douglas Mancino, an attorney with the law firm Hunton & Williams, said he expects the not-for-profit HMO issue to be the subject of litigation. “Based on the language of the statute, I think the congressional intent was clear to not subject tax-exempt HMOs to the fee,” said Mancino, who represent a number of these HMOs. “I think there will probably be several actions brought.”
Another disputed issue was whether “stop-loss” coverage should be treated as insurance and thus subject to the fee. The final rules do not apply the fee for this type of coverage.
Small employers that self-insure sometimes buy stop-loss coverage to protect them from unexpectedly high medical bills. That way, if costs exceed a certain threshold, the company won't be on the hook for those catastrophic costs. Some states have sought to limit such coverage to discourage small employers from self insuring, leaving the broader insurance risk pool, and exempting themselves from state and federal rules governing standard insurance plans.
Timothy Jost, a law professor and healthcare reform expert at Washington and Lee University, argued in comments to the IRS that such stop-loss coverage should be subject to the fee. His concern is that small employers will essentially use stop-loss coverage as a high-deductible insurance plan and evade state rules and Obamacare regulations. “If you are a small employer and you'd rather not comply with the ACA, you can just buy one of these plans and have a lot of flexibility in your coverage,” Jost said.
The IRS rules suggested that the fee issue for stop-loss coverage could be revisited in the future. “I think they're leaving the door open if we see a lot of abuse of stop-loss coverage to essentially substitute for major medical coverage,” Jost said.
The rules require insurers to report their total premium revenue each year to the federal government by April 15. The IRS then will notify them how much they owe for the ACA premium tax by the end of August. They will have one month to pay the fee.
The net investment income tax is a 3.8% levy on individuals, estates and trusts. It applies to income from interest, dividends, royalties and rent. The final rules detail how net investment income should be calculated, how specific types of trusts should be handled and what types of investment income are exempt from the tax.
There were more than 80 comments each submitted on the proposed rules for the insurer fee and investment income tax. By contrast, only five individuals submitted comments about the additional Medicare tax withholding. The rules apply to income in excess of $200,000 for individuals and $250,000 for joint filers.
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