Health Insurance Providers Fee, 71476-71493 [2013-28412]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 78, Number 230 (Friday, November 29, 2013)]
[Rules and Regulations]
[Pages 71476-71493]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-28412]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 57 and 602

[TD 9643]
RIN 1545-BL20


Health Insurance Providers Fee

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to the 
annual fee

[[Page 71477]]

imposed on covered entities engaged in the business of providing health 
insurance for United States health risks. This fee is imposed by 
section 9010 of the Patient Protection and Affordable Care Act, as 
amended. The regulations affect persons engaged in the business of 
providing health insurance for United States health risks.

DATES: Effective date: These regulations are effective on November 29, 
2013.
    Applicability date: For dates of applicability see Sec. Sec.  57.10 
and 57.6302-1.

FOR FURTHER INFORMATION CONTACT: Charles J. Langley, Jr. at (202) 317-
6855 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
under control number 1545-2249. The collection of information in these 
final regulations is in Sec.  57.2(e)(2)(i). The information is 
required to be maintained, in the case of a controlled group, by the 
designated entity and each member of the controlled group. An agency 
may not conduct or sponsor, and a person is not required to respond to, 
a collection of information unless the collection of information 
displays a valid control number. Books or records relating to a 
collection of information must be retained as long as their contents 
may become material in the administration of any internal revenue law. 
Generally, tax returns and tax return information are confidential, as 
required by section 6103.

Background

    This document adds the Health Insurance Providers Fee Regulations 
to the Code of Federal Regulations (26 CFR Part 57) under section 9010 
of the Patient Protection and Affordable Care Act (PPACA), Public Law 
111-148 (124 Stat. 119 (2010)), as amended by section 10905 of PPACA, 
and as further amended by section 1406 of the Health Care and Education 
Reconciliation Act of 2010, Public Law 111-152 (124 Stat. 1029 (2010)) 
(collectively, the Affordable Care Act or ACA). All references in this 
preamble to section 9010 are references to the ACA. Section 9010 did 
not amend the Internal Revenue Code (Code) but contains cross-
references to specified Code sections.
    A notice of proposed rulemaking (REG-118315-12, 78 FR 14034) was 
published in the Federal Register on March 4, 2013 (the proposed 
regulations). The Department of the Treasury (Treasury Department) and 
the IRS received over 80 written comments from the public in response 
to the proposed regulations. A public hearing was held on June 21, 
2013. After considering the public written comments and hearing 
testimony, the proposed regulations are adopted as final regulations by 
this Treasury decision with certain changes as described in this 
preamble.
    Unless otherwise indicated, all other references to subtitles, 
chapters, subchapters, and sections in this preamble are references to 
subtitles, chapters, subchapters, and sections in the Code and related 
regulations. All references to ``fee'' in the final regulations are 
references to the fee imposed by section 9010.

Explanation of Provisions and Summary of Comments

Covered Entities and Exclusions

In General

    Section 9010(a) imposes an annual fee, beginning in 2014, on each 
covered entity engaged in the business of providing health insurance. 
Section 9010(c) provides that a covered entity is any entity that 
provides health insurance for any United States health risk during each 
year, subject to certain exclusions. The proposed regulations defined 
the term covered entity generally to mean any entity with net premiums 
written for United States health risks during the fee year that is: (1) 
a health insurance issuer within the meaning of section 9832(b)(2); (2) 
a health maintenance organization within the meaning of section 
9832(b)(3); (3) an insurance company subject to tax under part I or II 
of subchapter L, or that would be subject to tax under part I or II of 
subchapter L but for the entity being exempt from tax under section 
501(a); (4) an entity that provides health insurance under Medicare 
Advantage, Medicare Part D, or Medicaid; or (5) a non-fully insured 
multiple employer welfare arrangement (MEWA).
    With respect to the first category of covered entity, the proposed 
regulations provided that a health insurance issuer within the meaning 
of section 9832(b)(2) means an insurance company, insurance service, or 
insurance organization that is required to be licensed to engage in the 
business of insurance in a State and that is subject to State law that 
regulates insurance. A commenter suggested that the final regulations 
eliminate any State licensing requirement for a covered entity because 
an entity may provide health insurance for a United States health risk 
and not be licensed. The final regulations do not adopt this 
suggestion. The final regulations modify this category of covered 
entity to more closely align with section 9832(b)(2), which provides 
that a health insurance issuer must be licensed to engage in the 
business of insurance in a State and not merely required to be licensed 
as stated in the proposed regulations. A health insurance issuer within 
the meaning of section 9832(b)(2) cannot lawfully engage in the 
business of selling insurance in a State unless it is licensed to 
engage in the business of insurance in that State.
    Notwithstanding this licensing limitation for the first category of 
covered entity, the term covered entity is not limited to an entity 
that is a health insurance issuer within the meaning of section 
9832(b)(2). An insurance company subject to tax under subchapter L, an 
entity providing health insurance under Medicare Advantage, Medicare 
Part D, or Medicaid, or a MEWA may also be a covered entity under these 
regulations, whether or not that entity is licensed to engage in the 
business of insurance in a State.

Multiple Employer Welfare Arrangements (MEWAs)

    The proposed regulations provided that the term covered entity 
includes a MEWA within the meaning of section 3(40) of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. chapter 18) (ERISA), 
to the extent that the MEWA is not a fully-insured MEWA, regardless of 
whether the MEWA is subject to regulation under State insurance law. In 
the case of a fully-insured MEWA, the MEWA is not a covered entity 
because, even though the MEWA receives premiums, it applies those 
premiums to pay an insurance company to provide the coverage it 
purchases. If the MEWA is not fully insured, however, the MEWA is a 
covered entity to the extent that it uses the premiums it receives to 
provide the health coverage rather than to pay an insurance company to 
provide the coverage.
    Commenters suggested that a MEWA not be treated as a covered 
entity, stating that Federal and State law do not support the 
interpretation that a MEWA offers ``insurance.'' Commenters also stated 
that an employer who participates in a non-fully insured MEWA should be 
treated the same as an employer who offers a self-insured plan. The 
final regulations do not adopt these suggestions. By participating in a 
non-fully insured MEWA, a participating employer generally is pooling 
its health insurance risks, transferring those risks to the MEWA, or 
both, similar to the

[[Page 71478]]

way an employer pools and transfers those risks by purchasing a group 
insurance policy from an insurance company. In a non-fully insured 
MEWA, the responsibility for a claim that a participant makes against 
it lies with the MEWA, and possibly with all of the contributing 
employers. Therefore, a MEWA is different from a self-insured plan in 
which responsibility for a participant's claim lies solely with the 
claimant's employer.
    Moreover, section 514(b)(6) of ERISA provides that a MEWA is 
subject to State insurance law and regulation as an insurance provider, 
unlike non-MEWA ERISA-covered employee benefit plans which are not 
subject to State insurance law and regulation due to Federal 
preemption. For example, a non-fully insured multiemployer plan, 
defined under section 3(37) of ERISA, generally would not be subject to 
State insurance law, whereas an ERISA-covered MEWA, within the meaning 
of section 3(40) of ERISA, that is not fully insured (as defined in 
section 514(b)(6)(D) of ERISA) generally would be subject to State 
insurance law.
    The Joint Committee on Taxation General Explanation also indicates 
that a MEWA is intended to be a covered entity under section 9010: ``A 
covered entity does not include an organization that qualifies as a 
VEBA [voluntary employees' beneficiary association] under section 
501(c)(9) that is established by an entity other than the employer 
(i.e., a union) for the purpose of providing health care benefits. This 
exclusion does not apply to multi-employer [sic] welfare arrangements 
(`MEWAs').'' See General Explanation of Tax Legislation Enacted by the 
111th Congress, JCS-2-11 (March 2011) (JCT General Explanation) at 330.
    For these reasons, the Treasury Department and the IRS have 
concluded that a MEWA within the meaning of section 3(40) of ERISA is 
an entity that provides health insurance for purposes of section 9010 
to the extent that the MEWA is not a fully-insured MEWA and regardless 
of whether the MEWA is subject to regulation under State insurance law. 
In addition, such a MEWA is not eligible for the exception from the fee 
under section 9010(c)(2)(A) for self-insured employers.
    The proposed regulations excluded a MEWA that is exempt from 
Department of Labor (DOL) reporting requirements under 29 CFR 2520.101-
2(c)(2)(ii)(B). This section of the DOL regulations generally excludes 
a MEWA that provides coverage to the employees of two or more employers 
due to a change in control of businesses (such as a merger or 
acquisition) that occurs for a purpose other than to avoid the 
reporting requirements and does not extend beyond a limited time. A 
commenter suggested that the final regulations also exclude a MEWA that 
is exempt from reporting under 29 CFR 2520.101-2(c)(2)(ii)(A), which 
generally applies to an entity that would not be a MEWA but for the 
fact that it provides coverage to two or more trades or businesses that 
share a common control interest of at least 25 percent (applying 
principles similar to the principles of section 414(c)) at any time 
during the plan year. The commenter also suggested that the final 
regulations exclude a MEWA that is exempt from reporting under 29 CFR 
2520.101-2(c)(2)(ii)(C), which generally applies to an entity that 
would not be a MEWA but for the fact that it provides coverage to 
persons who are not employees or former employees of the plan sponsor 
(such as non-employee members of the board of directors or independent 
contractors), if coverage of such persons does not exceed one percent 
of the total number of employees or former employees covered by the 
arrangement, determined as of the last day of the year to be reported, 
or determined as of the 60th day following the date the MEWA began 
operating in a manner such that a filing is required pursuant to 29 CFR 
2520.101-2(e)(2) or (3).
    The final regulations adopt these suggestions and follow the DOL 
rules excepting these entities from the DOL reporting requirements 
under 29 CFR 2520.101-2 governing MEWAs. The reasons supporting the 
DOL's filing exemption also justify exempting these arrangements from 
section 9010 as more akin to health coverage provided by a self-insured 
employer. Similar to the filing exemption for certain temporary MEWAs, 
these two filing exemptions are intended to address situations in which 
the status as a MEWA derives not from the design of the arrangement but 
instead from the limited participation by individuals who are not the 
employees of a single employer or from a desire to have a single plan 
for entities sharing substantial common ownership (though not 
sufficient to be treated as a single employer under the controlled 
group rules). Accordingly, a MEWA will not be considered a covered 
entity if it satisfies the requirements of 29 CFR 2520.101-
2(c)(2)(ii)(A), (B), or (C) for the plan year ending with or within the 
section 9010 data year.
    The proposed regulations provided that, solely for purposes of 
section 9010, an Entity Claiming Exception (ECE)\1\ is subject to the 
same regime addressing MEWAs. Commenters requested that an ECE not 
categorically be treated as a MEWA for purposes of section 9010. 
Commenters pointed out that some ECEs are multiemployer plans and 
coverage during the period of their status as an ECE would not be 
consistent with this status. In addition, as a practical matter, an 
entity's status as an ECE is only relevant for reporting during a 
limited period of time. For these reasons, the final regulations adopt 
this suggestion so that whether an entity is or is not an ECE is not 
relevant to whether the entity is subject to section 9010.
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    \1\ An ECE is defined in 29 CFR 2520.101-2(b) as an entity that 
claims it is not a MEWA on the basis that the entity is established 
or maintained pursuant to one or more agreements that the Secretary 
of Labor finds to be collective bargaining agreements within the 
meaning of section 3(40)(A)(i) of ERISA and 29 CFR 2510.3-40. We 
also note that ERISA section 501(b) imposes criminal penalties on 
any person who is convicted of violating the prohibition in ERISA 
section 519 against making false statements or representations of 
fact in connection with the marketing or sale of a MEWA.
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Voluntary Employees' Beneficiary Associations (VEBAs)

    In accordance with section 9010(c)(2)(D), the proposed regulations 
explicitly excluded any VEBA that is established by an entity other 
than an employer or employers for the purpose of providing health care 
benefits. Further, the preamble to the proposed regulations stated 
that, if an employer provides self-insured employee health benefits 
through a VEBA, the VEBA is not a covered entity because the exclusion 
for employers with self-insured arrangements under section 
9010(c)(2)(A) applies. The preamble also stated that, if a VEBA 
purchases health insurance to cover the beneficiaries of the VEBA, the 
VEBA is not a covered entity because the issuer providing the health 
insurance that the VEBA purchases is the covered entity subject to the 
fee rather than the VEBA. The preamble stated that the Treasury 
Department and the IRS were not aware of any VEBAs that would be 
covered entities under the proposed regulations and invited comments on 
the types of VEBAs, if any, that do not fall within the exclusions and 
therefore would be covered entities.
    A commenter requested that the final regulations clarify that a 
VEBA established by a union qualifies for the section 9010(c)(2)(D) 
exclusion. Commenters also asked for clarification that the section 
9010(c)(2)(D) exclusion applies to any VEBA established by a joint 
board of trustees in the case of a multiemployer plan within the 
meaning of section 3(37) of ERISA. The final

[[Page 71479]]

regulations adopt these suggestions with respect to plans established 
by unions and joint boards of trustees because the union or joint board 
of trustees is an entity other than the employer or employers. Thus, in 
the case of a multiemployer plan that maintains a VEBA, neither the 
plan nor the VEBA is a covered entity.
    Commenters also requested that the final regulations clarify the 
application of the section 9010(c)(2)(D) exclusion to a VEBA that is 
part of a single-employer plan established pursuant to a collective 
bargaining agreement and having a joint board of trustees. As in the 
case of a multiemployer plan, a VEBA that is, for example, part of a 
single-employer plan established by a joint board of trustees pursuant 
to section 302(c)(5) of the Labor Management Relations Act of 1947, is 
considered to be established by an entity other than the employer or 
employers and so is eligible for the section 9010(c)(2)(D) exclusion.
    The preamble to the proposed regulations stated that, if a MEWA 
provides health benefits through a VEBA, the VEBA is not a covered 
entity. A commenter asked whether the section 9010(c)(2)(D) exclusion 
applies to a non-fully insured MEWA that is also a VEBA. The section 
9010(c)(2)(D) exclusion does not apply to an entity that is both a non-
fully insured MEWA and a VEBA because, for section 9010 purposes, the 
entity has been established by the employers whose employees 
participate in the MEWA, and the section 9010(c)(2)(D) exclusion does 
not apply to an employer-established VEBA. Additionally, the entity 
does not qualify as a self-insured arrangement that is eligible for the 
exclusion for self-insured employers under section 9010(c)(2)(A) 
because, as previously described in the section of this preamble titled 
``Multiple Employer Welfare Arrangements (MEWAs),'' a non-fully insured 
MEWA is not a self-insured employer. Accordingly, a MEWA that is also a 
VEBA is a covered entity.

Section 9010(c)(2)(C) Exclusion

    In accordance with section 9010(c)(2)(C)(i)-(iii), the proposed 
regulations excluded any entity (i) that is incorporated as a nonprofit 
corporation under State law; (ii) no part of the net earnings of which 
inures to the benefit of any private shareholder or individual, no 
substantial part of the activities of which is carrying on propaganda, 
or otherwise attempting to, influence legislation (except as provided 
in section 501(h)), and that does not participate in, or intervene in 
(including the publishing or distributing of statements), any political 
campaign on behalf of (or in opposition to) any candidate for public 
office; and (iii) that receives more than 80 percent of its gross 
revenues from government programs that target low-income, elderly, or 
disabled populations under titles XVIII, XIX, and XXI of the Social 
Security Act (which include Medicare, Medicaid, the Children's Health 
Insurance Plan (CHIP), and dual eligible plans).
    Commenters suggested that the final regulations exclude a for-
profit entity that meets the section 9010(c)(2)(C)(ii) and (iii) 
requirements. According to the commenters, imposing the fee on these 
for-profit entities will effectively reduce benefits provided under 
Medicare and Medicaid, require the entities to pass the cost of the fee 
back to the government, and competitively disadvantage these entities 
in favor of excluded nonprofit corporations. Another commenter 
suggested that the final regulations permit an entity that is treated 
as a nonprofit entity under State law to satisfy the section 
9010(c)(2)(C)(i) requirement even if it is not incorporated as a 
nonprofit corporation. Commenters also suggested that the final 
regulations exclude an entity that meets the section 9010(c)(2)(C)(i) 
and (ii) requirements and that targets low-income, elderly, or disabled 
populations described in section 9010(c)(2)(C)(iii), but whose income 
is not derived from title XVIII, XIX, or XXI programs, but rather from 
similar types of programs that do not come under those titles. The 
final regulations do not adopt these suggested changes. The statutory 
language sets forth specific requirements for an entity to qualify for 
the exception, including that the entity be a nonprofit corporation and 
that the entity receive the required portion of its gross income from 
the enumerated Federal government programs.
    Commenters suggested that the final regulations interpret the 
requirement set forth in section 9010(c)(2)(C)(iii), that the entity 
receive more than 80 percent of its gross revenues from enumerated 
Federal government programs to qualify for that exception, to apply 
only to revenues that relate to net premiums written. Because gross 
revenues include all revenues of the covered entity without taking into 
account their source, the final regulations do not adopt this 
suggestion.
    As explained in the preamble to the proposed regulations, an entity 
is not required to be exempt from tax under section 501(a) to qualify 
for the section 9010(c)(2)(C) exclusion. However, because the 
provisions of section 9010(c)(2)(C)(ii) relating to private inurement, 
lobbying, and political campaign activity are the same as those 
provisions applicable to organizations described in section 501(c)(3), 
for purposes of applying these requirements, the proposed regulations 
adopted the standards set forth under section 501(c)(3) and the related 
regulations. Commenters generally agreed with this approach, which is 
adopted in the final regulations.
    One commenter suggested that the final regulations incorporate a 
``safe harbor'' under which a transaction will not violate the private 
inurement prohibition under section 9010(c)(2)(C)(ii) if either the 
transaction complies with applicable State insurance laws governing the 
reasonableness of transactions between a health insurance provider and 
its affiliates or the transaction is approved in accordance with 
certain procedures set forth in the regulations under section 4958 
(relating to taxes on excess benefit transactions). The final 
regulations do not adopt this suggestion. The private inurement 
prohibition under section 501(c)(3) contains no exception for 
transactions that comply with State insurance laws or other applicable 
State or Federal laws. Similarly, while most situations that constitute 
inurement will also violate the general rules of section 4958, the two 
standards are not the same. See Sec.  1.501(c)(3)-1(f)(2) of the Income 
Tax Regulations and Sec.  53.4958-8(a) of the Foundation and Similar 
Excise Tax Regulations.

Agencies and Instrumentalities as Governmental Entities

    Section 9010(c)(2)(B) excludes any governmental entity from the 
definition of covered entity. In defining the term governmental entity, 
the proposed regulations did not include instrumentalities. The 
preamble to the proposed regulations requested comments on the types of 
instrumentalities, if any, that would be considered covered entities 
under the general definition of covered entity and the extent to which 
those entities would qualify for other exclusions consistent with the 
statute.
    Commenters suggested that the final regulations define governmental 
entity to include an instrumentality, citing statutory language that 
excludes ``any'' governmental entity and arguing that, in certain 
instances, an instrumentality that provides health insurance performs a 
governmental function and therefore should be excluded. For those 
reasons, the final regulations adopt this suggestion and define 
governmental entity to include any agency or instrumentality of the 
United States, a

[[Page 71480]]

State, a political subdivision of a State, an Indian tribal government, 
or a subdivision of an Indian tribal government.
    The final regulations also revise the governmental entity 
definition to delete the specific provision relating to any public 
agency that is created by a State or political subdivision thereof and 
contracts with the State to administer State Medicaid benefits through 
local providers or health maintenance organizations (HMOs). The 
Treasury Department and the IRS intend that such a public agency would 
qualify as an agency or instrumentality of a State or political 
subdivision thereof for purposes of the governmental entity definition. 
See JCT General Explanation at 330.
    Determinations of whether an entity is an agency or instrumentality 
have typically been analyzed on a facts and circumstances basis. In 
determining whether an entity is an agency or instrumentality, courts 
have applied a test similar to the six-factor test in Revenue Ruling 
57-128 (1957-1 CB 311), which generally provides guidance on whether an 
entity is an instrumentality for purposes of the exemption from 
employment taxes under sections 3121(b)(7) and 3306(c)(7). See, for 
example, Bernini v. Federal Reserve Bank of St. Louis, Eighth District, 
420 F.Supp. 2d 1021 (E.D. Mo. 2005) and Rose v. Long Island Railroad 
Pension Plan, 828 F.2d 910, 918 (2d Cir. 1987), cert. denied, 485 U.S. 
936 (1988). For further background information relating to agency or 
instrumentality determinations, see the ``Background'' section of the 
preamble in the section 414(d) draft general regulations in the 
Appendix to the ANPRM (REG-157714-06) relating to governmental plan 
determinations, 76 FR 69172 (November 8, 2011).
    Applying principles similar to those described in Revenue Ruling 
57-128, in determining whether an entity is an agency or 
instrumentality for purposes of section 9010, factors taken into 
consideration include whether the entity is used for a governmental 
purpose and performs a governmental function. The Treasury Department 
and the IRS question whether providing health insurance on a commercial 
market in direct competition with non-governmental commercial entities 
is a governmental function, absent particular circumstances. 
Accordingly, an entity may jeopardize its status as an agency or 
instrumentality if it engages in the business of providing insurance on 
the commercial market on a continuing and regular basis.
    Further, section 9010(i) authorizes the IRS to prescribe such 
regulations as are necessary or appropriate to prevent avoidance of the 
purposes of section 9010, including inappropriate actions taken to 
qualify as an excluded entity under section 9010(c)(2). If the Treasury 
Department and the IRS conclude that agencies or instrumentalities have 
entered the commercial market in competition with commercial entities 
in a manner that makes it inappropriate to apply the governmental 
entity exclusion under section 9010(c)(2)(B), the Treasury Department 
and the IRS may reconsider the exclusion of agencies and 
instrumentalities and exercise the authority under section 9010(i) to 
address particular concerns in this area.

Educational Institutions

    A commenter suggested that the final regulations exclude 
educational institutions from the definition of covered entity. The 
final regulations do not adopt this request. The statute does not 
exclude educational institutions from the definition of covered entity, 
but as noted in the preamble to the proposed regulations, other 
exceptions may apply. For example, if an educational institution uses 
the premiums it receives from students to purchase insurance from a 
separate, unrelated issuer, the issuer, and not the educational 
institution, will be the covered entity for purposes of section 9010. 
If an educational institution provides students with health coverage 
through a self-insured arrangement, the exclusion for self-insuring 
employers does not apply because the institution is not providing 
health coverage as an employer. However, other exclusions may apply. 
For example, the exclusion for governmental entities applies if an 
educational institution is a wholly-owned instrumentality of a State. 
In addition, although an educational institution that is a covered 
entity must report to the IRS its net premiums written, it will not be 
subject to the fee unless the institution (or its controlled group that 
is treated as a single covered entity) has net premiums written for 
United States health risks of more than $25 million pursuant to section 
9010(b)(2)(A).

Other Entities

    Commenters suggested that the final regulations exclude certain 
section 501(c)(5) labor organizations that provide health coverage 
under the Federal Employees Health Benefit Plan (FEHBP) on the basis 
that providing health coverage is part of their exempt function as a 
section 501(c)(5) entity. The commenters asserted that, although a 
section 501(c)(5) entity is not organized as a VEBA, it operates like a 
VEBA because of the various FEHBP rules (including, for example, on use 
of reserves) and therefore should be treated as a VEBA for section 9010 
purposes. The final regulations do not adopt this suggestion. Congress 
identified specific exclusions from section 9010 and there is no 
statutory exclusion for section 501(c)(5) entities.
    Another commenter suggested that the final regulations exclude high 
risk pools under section 1101 of the ACA, which will expire on December 
31, 2013. Section 9010(c)(1) defines a covered entity to mean any 
entity that provides health insurance for a United States health risk 
in the year that the fee is due. The first year the fee is due is 2014. 
Therefore, for the first fee year, an entity is not a covered entity 
unless it provides health insurance for United States health risks in 
2014. Because high risk pools will expire on December 31, 2013, they 
will not provide health insurance in 2014 and will not be covered 
entities. In the event a high risk pool provides health insurance for 
United States health risks in 2014, it will be a covered entity if it 
does not meet one of the exclusions described in section 9010(c)(2).
    A commenter requested that the final regulations provide an 
exclusion for an entity that is selling or otherwise failing to 
continue the majority of its health insurance business by December 31, 
2013, but is contractually required to provide some residual health 
insurance. The entity's fee liability for 2014 based on the 2013 data 
year will be significantly larger than the total amount of net premiums 
written that the entity will collect in 2014. The final regulations do 
not adopt this request because it is inconsistent with the statute, 
which bases the fee liability on net premiums written during the data 
year.
    The proposed regulations defined the term covered entity to include 
an HMO, as defined in section 9832(b)(3). A commenter requested that 
the final regulations exclude an HMO that is a tax-exempt organization 
described in section 501(c)(3) or (4) on the basis that Congress did 
not intend to subject a tax-exempt HMO to the fee. The final 
regulations do not adopt this suggestion. Section 9010(c)(2) describes 
the entities that are excluded from the definition of covered entity. 
While section 9010(c)(2)(D) excludes certain types of VEBAs described 
in section 501(c)(9), there is no similar exclusion for an entity that 
qualifies as a tax-exempt organization under either section 501(c)(3) 
or (4). However, such a tax-

[[Page 71481]]

exempt organization would be eligible for the partial exclusion under 
section 9010(b)(2)(B).

Disregarded Entities

    Two commenters requested further guidance on how to treat 
disregarded entities for purposes of section 9010. One commenter 
suggested that the final regulations specifically state that the 
general rules for disregarded entities apply. A second commenter 
suggested that, solely for section 9010 purposes, a disregarded entity 
should always be regarded as a corporation. The final regulations do 
not adopt any special entity classification rules. Thus, if a covered 
entity is an eligible entity under Sec.  301.7701-3(a) of the Procedure 
and Administration Regulations, has a single owner, and does not elect 
to be classified as a corporation under Sec.  301.7701-3(c), then the 
covered entity is disregarded as an entity separate from its owner and 
its activities are treated in the same manner as a branch or division 
of its owner pursuant to Sec.  301.7701-2(a). Additionally, although 
Sec.  301.7701-2(c)(2)(v) treats a disregarded entity as a corporation 
for certain enumerated excise taxes, the fee under section 9010 is not 
among the enumerated excise taxes. However, an insurance company is a 
corporation under Sec.  301.7701-2(b)(4) and cannot be disregarded as 
an entity separate from its owner. See also Rev. Rul. 83-132 (1983-2 CB 
270). Under sections 816(a) and 831(c), a company is an insurance 
company if more than half of its business during the taxable year is 
the issuing of insurance or annuity contracts or the reinsuring of 
risks underwritten by insurance companies. Therefore, if the covered 
entity is an insurance company under sections 816(a) and 831(c), then 
it is a corporation and cannot be disregarded as an entity separate 
from its owner.

Controlled Groups

    In accordance with section 9010(c)(3), the proposed regulations 
treated a controlled group as a single covered entity, and defined a 
controlled group as a group of two or more persons, including at least 
one person that is a covered entity, that are treated as a single 
employer under section 52(a), 52(b), 414(m), or 414(o).
    Section 52(a) and (b) provide rules that treat all organizations 
that are members of a controlled group as a single entity. Generally, 
section 52(a) provides that the term controlled group of corporations 
has the meaning given to such term by section 1563(a), except that 
``more than 50 percent'' is substituted for ``at least 80 percent'' 
each place it appears in section 1563(a)(1) and the determination is 
made without regard to section 1563(a)(4) (relating to special rules 
for certain insurance companies) and 1563(e)(3)(C) (relating to 
attribution rules for ownership interest held under a trust described 
in section 401(a) that is exempt from tax under section 501). Section 
52(b) provides similar rules for determining whether trades or 
businesses (whether or not incorporated) are under common control. 
Section 414(m) requires that all members of an affiliated service group 
be treated as a single organization, and section 414(o) provides 
authority for additional rules that may be necessary to prevent the 
avoidance of certain requirements related to employee benefits.
    A commenter suggested that the final regulations clarify the 
circumstances under which nonprofit organizations are included in 
controlled groups under section 9010(c)(3). The Treasury Department and 
the IRS are considering whether further guidance is needed under 
section 52(a) or (b) to address either organizations exempt from tax 
under section 501(a) or nonprofit organizations that, although not 
exempt from tax under section 501(a), do not have members or 
shareholders that are entitled to receive distributions of the 
organization's income or assets (including upon dissolution) or that 
otherwise retain equity interests similar to those generally held by 
owners of for-profit entities. Until further guidance is issued, those 
two types of organizations may either rely on a reasonable, good-faith 
application of section 52(a) and (b) (taking into account the reasons 
for which the controlled group rules are incorporated into section 
9010) or apply the rules set forth in Sec.  1.414(c)-5(a) through (d) 
(but substituting ``more than 50 percent'' in place of ``at least 80 
percent'' each place it appears in Sec.  1.414(c)-(5).

Health Insurance

In General

    Section 9010 does not define health insurance, providing in section 
9010(h)(3) only that health insurance does not include coverage only 
for accident, or disability income insurance, or any combination 
thereof as described in section 9832(c)(1)(A); coverage only for a 
specified disease or illness and hospital indemnity or other fixed 
indemnity insurance as described in section 9832(c)(3); insurance for 
long-term care; or Medicare supplemental health insurance (as defined 
in section 1882(g)(1) of the Social Security Act). The proposed 
regulations generally defined the term health insurance, subject to 
certain exclusions, by reference to section 9832(b)(1)(A) to mean 
benefits consisting of medical care (provided directly, through 
insurance or reimbursement, or otherwise) under any hospital or medical 
service policy or certificate, hospital or medical service plan 
contract, or HMO contract offered by a health insurance issuer. The 
final regulations clarify that these benefits constitute health 
insurance when they are offered by any type of covered entity, and not 
solely by a health insurance issuer within the meaning of section 
9832(b)(2).

Stop-Loss Coverage

    Several comments requested that the final regulations clarify the 
treatment of stop-loss coverage. Employers that self-insure their 
employees' health benefits frequently purchase stop-loss coverage to 
mitigate risk. The stop-loss provider assumes the risk of claims above 
a certain agreed-upon threshold known as the attachment point. Some 
commenters suggested including stop-loss coverage in the definition of 
health insurance for purposes of section 9010, whereas other commenters 
suggested excluding it. The DOL, the Department of Health and Human 
Services (HHS), and the Treasury Department are concerned that more 
employers in small group markets with healthier employees may pursue 
self-insured arrangements with stop-loss arrangements that have low 
attachment points as a functionally equivalent alternative to an 
insured group health plan. As a result, the three agencies issued a 
Request for Information (RFI) regarding such practices, with a focus on 
the prevalence and consequences of stop-loss coverage at low attachment 
points. See 77 FR 25788 (May 1, 2012). Because the scope of stop-loss 
coverage that may constitute health insurance, if any, has not been 
determined, the final regulations do not expressly include stop-loss 
coverage in the definition of health insurance. Accordingly, section 
9010 will not apply to stop-loss coverage until such time and only to 
the extent that future guidance addresses the issue of whether, and if 
so under what circumstances, stop-loss coverage constitutes health 
insurance.

Limited Scope Dental and Vision Benefits

    The proposed regulations defined health insurance to include 
limited scope dental and vision benefits under section 9832(c)(2)(A). 
Commenters suggested revising the definition of health insurance to 
exclude limited scope dental and vision benefits (sometimes referred to 
as stand-alone

[[Page 71482]]

dental and vision benefits). Alternatively, commenters suggested 
including only those dental and vision policies that can be offered on 
an Exchange, such as pediatric dental plans. The final regulations do 
not adopt these suggestions. The JCT General Explanation indicates that 
dental and vision benefits are intended to be included as health 
insurance for purposes of section 9010 and the comments received do not 
compel a different conclusion. See JCT General Explanation at 331. 
Accordingly, the final regulations retain the rule in the proposed 
regulations and provide that limited scope dental and vision benefits, 
including arrangements that may be sold on an Exchange (for example, 
pediatric dental coverage), are health insurance for purposes of 
section 9010.

Coverage Funded by Targeted Government Programs

    Commenters suggested that the final regulations exclude coverage 
funded by government programs that target low-income, elderly, or 
disabled populations under titles XVIII, XIX, and XXI of the Social 
Security Act (which include Medicare, Medicaid, CHIP, and dual eligible 
plans) from the definition of health insurance or exclude revenues 
received from these government programs from net premiums written. The 
final regulations do not adopt these suggestions. A full exclusion for 
these types of coverage or associated revenues would not be consistent 
with section 9010. Section 9010(c)(2)(C) excludes a limited subset of 
entities that provide coverage funded by these governmental programs, 
which indicates that entities providing such coverage are otherwise 
providing health insurance that is subject to the fee. The JCT General 
Explanation further indicates that Medicare and Medicaid coverage is 
health insurance that is subject to the fee. Thus, an entity providing 
this type of coverage is a covered entity unless it qualifies for a 
statutory exclusion from the definition of a covered entity, such as 
the section 9010(c)(2)(C) exclusion. See JCT General Explanation at 330 
and 331.

Indemnity Reinsurance

    The proposed regulations provided that, solely for purposes of 
section 9010, health insurance does not include indemnity reinsurance, 
defined as an agreement between two or more insurance companies under 
which the reinsuring company agrees to accept, and to indemnify the 
issuing company for, all or part of the risk of loss under policies 
specified in the agreement and the issuing company retains its 
liability to, and its contractual relationship with, the individuals 
whose health risks are insured under the policies specified in the 
agreement. A commenter suggested that the final regulations clarify 
that the definition of indemnity reinsurance extends to reinsurance 
obtained by HMOs. The final regulations adopt this suggestion and 
clarify that the issuer of the policies specified in the indemnity 
reinsurance agreement may be any covered entity.
    Commenters asked about the treatment of a ``carve-out'' arrangement 
or similar types of arrangement in which one insurer accepts 
responsibility for all or part of the health risk within a defined 
category of medical benefits that another insurer is obligated to 
provide. For example, a full-service insurer that includes dental 
benefits as part of its health insurance plan may contract with a 
dental insurer to provide those benefits to plan members, but still 
retain an exclusive contractual relationship with plan members and 
liability for benefits. The commenters expressed concern that premiums 
received by both the full-service insurer and the secondary services 
insurer for these benefits could be subject to the fee. Although the 
final regulations do not expressly address a carve-out arrangement, the 
secondary services insurer in such an arrangement is not providing 
health insurance for purposes of section 9010 to the extent the 
arrangement meets the definition of indemnity reinsurance.

Subcapitation

    A commenter requested that the final regulations clarify the 
treatment of a subcapitation arrangement. Under a typical subcapitation 
arrangement, a Medicaid plan provider contracts with a separate service 
provider to provide certain services to the Medicaid plan participants 
and share some of the provider's risk. A Medicaid plan provider that 
enters into a subcapitation arrangement remains fully liable on the 
underlying plans, and any amounts paid to compensate the service 
provider for the subcapitation arrangement are not considered premiums 
for State regulatory purposes or reported as such. Therefore, although 
the final regulations do not directly address a subcapitation 
arrangement, amounts paid to a service provider under such an 
arrangement are not included in net premiums written for health 
insurance to the extent they are not treated as premiums for State 
regulatory and reporting purposes.

Employee Assistance Programs

    Commenters requested that the final regulations exclude benefits 
under an employee assistance program (EAP) from the definition of 
health insurance, including an EAP that is treated as insurance in 
California or Nevada. Generally, an EAP does not exhibit the risk 
pooling and risk transferring characteristics of insurance, but certain 
States regulate benefits under an EAP as insurance in some situations. 
The Treasury Department, DOL, and HHS currently are considering 
guidance that would treat benefits under an EAP as an excepted benefit 
under section 9832(c) (as well as corresponding provisions of ERISA and 
the Public Health Service Act (42 U.S.C. chapter 6A) (PHSA)), and 
provided in Q&A 9 of Notice 2013-54 (2013-40 IRB 287; September 30, 
2013) that until that separate rulemaking is finalized in other 
guidance, and through at least 2014, a taxpayer may treat an EAP that 
does not provide significant benefits in the nature of medical care or 
treatment as constituting excepted benefits. Whether and under what 
conditions an EAP provides health insurance coverage has been a 
longstanding issue that this other guidance is intended to address by 
defining an EAP and setting forth the conditions under which the 
benefits under an EAP will be treated as excepted benefits.
    Because the extent to which benefits under an EAP may constitute 
health insurance has not been determined, the final regulations do not 
expressly define health insurance to include benefits under an EAP. If 
an EAP provides significant benefits in the nature of medical care or 
treatment, those benefits would meet the definition of health insurance 
for section 9010 purposes. Otherwise, benefits under an EAP will not be 
treated as health insurance for section 9010 purposes until such time 
and only to the extent that the Treasury Department, DOL and HHS 
determine such benefits do not qualify as an excepted benefit.
    Commenters also requested that the final regulations exclude 
coverage under a disease management program or a wellness program from 
the definition of health insurance. The final regulations do not 
specifically address the treatment of a stand-alone wellness plan or 
disease management program. These programs generally do not exhibit the 
risk shifting and risk distribution characteristics of insurance. 
Additionally, a program of this type may be contained within an EAP 
that satisfies the standard in Q&A 9 of Notice 2013-54 for being an 
excepted benefit (taking into account the benefits provided under the 
programs in determining whether the EAP provides substantial benefits 
in the nature of

[[Page 71483]]

medical treatment). For these reasons, the final regulations do not 
expressly define health insurance to include coverage under a disease 
management program or wellness program. If these programs provide 
significant benefits in the nature of medical care or treatment, those 
benefits would meet the definition of health insurance for section 9010 
purposes. Otherwise, coverage under these programs will not be treated 
as health insurance for section 9010 purposes until such time and only 
to the extent that the three agencies determine these benefits do not 
qualify as an excepted benefit.

Long-Term Care

    The proposed regulations excluded from the definition of health 
insurance any benefits for long-term care, nursing home care, home 
health care, community-based care, or any combination thereof, within 
the meaning of section 9832(c)(2)(B), and such other similar, limited 
benefits to the extent such benefits are specified in regulations under 
section 9832(c)(2)(C). A commenter questioned whether this exclusion 
applies to Medicaid managed long-term care premiums, such as those 
provided to covered entities that may participate in State Medicaid 
managed long-term care programs. To the extent Medicaid plan providers 
can separately identify premiums received for long-term care, these 
amounts are not for health insurance and are not included in net 
premiums written.

Medicare Advantage and Medicare Part D Plans

    Some employers or unions provide Medicare Advantage or Medicare 
Part D benefits in connection with an Employer Group Waiver Plan (EGWP) 
for employees and retirees who are Medicare beneficiaries. According to 
commenters, an employer or union can provide these benefits on a self-
insured basis. Commenters requested that the final regulations clarify 
whether a union or employer that provides Medicare Advantage and 
Medicare part D benefits under an EGWP or similar arrangement is a 
covered entity subject to section 9010 with respect to premiums 
received for the coverage. No change was made in the final regulations 
to specifically address this issue. However, while the benefits 
provided by these arrangements may constitute health insurance within 
the meaning of section 9010, an employer or union that provides 
benefits under an EGWP or similar arrangement is not a covered entity 
to the extent the arrangement is eligible for the self-insuring 
employer exception under section 9010(c)(2)(A).

Medicare Cost Contract Plans

    A commenter asked that the final regulations clarify how section 
9010 applies to the Medicare cost contract portion of an entity's 
business. A Medicare cost contract plan is a type of plan established 
by section 1876 of Title XVIII of the Social Security Act. Cost 
contract plans are paid based on the reasonable costs incurred by 
delivering Medicare-covered services to plan members. Although the 
final regulations do not specifically address the treatment of a 
Medicare cost contract plan, benefits under a Medicare cost contract 
plan are health insurance for section 9010 purposes if they meet the 
general definition of health insurance and do not qualify for a 
specific exclusion.

Section 9010(b)(2)(B) Partial Exclusion

    After applying section 9010(b)(2)(A) to determine the amount of net 
premiums written for health insurance of United States health risks 
that are taken into account, the proposed regulations excluded under 
section 9010(b)(2)(B) 50 percent of the remaining net premiums written 
for health insurance of United States health risks that are 
attributable to the activities (other than activities of an unrelated 
trade or business as defined in section 513) of any covered entity 
qualifying under section 501(c)(3), (4), (26), or (29) and exempt from 
tax under section 501(a). Commenters requested that the final 
regulations apply this exclusion to a for-profit hospital health plan 
(HHP) that is owned and controlled by an entity exempt from tax under 
section 501(a) and further described in section 501(c). According to 
the commenters, an HHP functions like a nonprofit entity because it 
reinvests whatever profits it produces each year in its parent owner's 
charitable mission. The final regulations do not adopt this request. By 
statute, the partial exclusion only applies to a covered entity that is 
a section 501(c)(3), (4), (26), or (29) entity, and even then only with 
respect to premium revenue from its exempt activities.
    One commenter suggested that the final regulations require any 
covered entity claiming the partial exclusion to submit an IRS 
determination letter recognizing it as tax-exempt under section 
501(c)(3), (4), (26), or (29). Another commenter objected to this 
suggestion on the basis that the Code does not require all tax-exempt 
entities to apply to the IRS for recognition of tax-exempt status. The 
final regulations do not impose any additional requirements on entities 
claiming the partial exclusion. For purposes of section 9010, whether 
an entity qualifies as exempt from Federal income tax under section 
501(a) as an organization described in section 501(c)(3), (4), (26), or 
(29) will be determined under the Code provisions applicable to those 
organizations. To provide greater certainty, the final regulations 
provide that an entity is eligible for the section 9010(b)(2)(B) 
partial exclusion if it meets the requirements for that exclusion as of 
December 31st of the data year.

Reporting and Penalties

    Section 9010(g)(1) requires each covered entity to report to the 
IRS its net premiums written for health insurance for United States 
health risks during the data year. The proposed regulations required 
that this information be reported on Form 8963, ``Report of Health 
Insurance Provider Information.'' Commenters suggested that the final 
regulations require an entity that qualifies for an exclusion from the 
definition of covered entity to report its net premiums written to 
claim the exclusion. The final regulations do not adopt this 
suggestion. The required reporting under section 9010(g)(1) only 
applies to covered entities.
    A commenter requested that each covered entity be required to 
report even if it receives no more than $25 million in net premiums 
written and therefore is not liable for the fee. The proposed 
regulations already imposed this requirement in accordance with the 
statute. The final regulations retain this requirement.
    Section 9010(g)(2) imposes a penalty for failing to timely submit a 
report containing the required information unless the covered entity 
can show that the failure is due to reasonable cause. Section 
9010(g)(3) imposes an accuracy-related penalty for any understatement 
of a covered entity's net premiums written. Commenters requested that 
the final regulations provide a reasonable cause exception for the 
accuracy-related penalty similar to the reasonable cause exception for 
the failure to report penalty. Unlike section 9010(g)(2), section 
9010(g)(3) does not contain a reasonable cause exception. Therefore, 
the final regulations do not create a reasonable cause exception for 
the accuracy-related penalty. However, the final regulations require a 
covered entity to submit a corrected Form 8963 during the error 
correction period if the entity believes there are any errors in the 
preliminary fee calculation. The corrected Form 8963 will replace the 
original Form 8963 for all purposes, including for the purpose of 
determining whether an accuracy-

[[Page 71484]]

related penalty applies, except that a covered entity remains subject 
to the failure to report penalty if it fails to timely submit the 
original Form 8963.
    The proposed regulations clarified that the failure to report 
penalty and the accuracy-related penalty apply in addition to the fee. 
The final regulations retain this clarification and further clarify 
that a covered entity may be liable for both penalties.
    A commenter suggested that the final regulations create a safe 
harbor for the failure to report penalty imposed by section 9010(g)(2) 
and waive or reduce the penalty for small businesses, or exclude small 
businesses altogether from the definition of covered entity so that the 
penalty does not apply. The final regulations do not adopt this 
suggestion. The statute does not exclude small businesses from either 
the definition of covered entity or the requirement to report. However, 
certain statutory provisions will mitigate the impact on small 
business. Although a small business that is a covered entity must 
report its net premiums written, it will not be subject to the fee if 
its net premiums written are $25 million or less pursuant to section 
9010(b)(2)(A). Further, section 9010(g)(2) allows the IRS to waive the 
failure to report penalty if there is reasonable cause for such 
failure. The IRS will determine whether reasonable cause exists for a 
covered entity's failure to report based on the facts and 
circumstances.
    Commenters requested that the IRS wait to assess the accuracy-
related penalty until the error correction process is complete. Under 
section 9010(g)(3)(A), the amount of the accuracy-related penalty is 
equal to the excess of the amount of the covered entity's fee 
determined in the absence of the understatement (that is, the correct 
fee amount) over the amount of the fee determined based on the 
understatement (that is, the amount of the fee based on understated 
reporting). Because the fee is allocated among covered entities based 
on each entity's net premiums written, the IRS must determine the 
correct amount of net premiums written for all covered entities before 
it can determine the correct fee amount for a covered entity. 
Therefore, the IRS cannot compute and assess any accuracy-related 
penalties until the conclusion of the error correction process when the 
IRS computes the final bills. As stated earlier in this preamble, if 
the covered entity timely submits a corrected Form 8963 during the 
error correction period, the corrected Form 8963 will replace the 
original Form 8963 for the purpose of determining whether an accuracy-
related penalty applies.

Fee Calculation and Error Correction Process

In General

    The proposed regulations required each covered entity to report 
annually its net premiums written for health insurance of United States 
health risks during the data year to the IRS on Form 8963 by May 1st of 
the fee year. The proposed regulations also required the IRS to send 
each covered entity its final fee calculation no later than August 
31st, and required the covered entity to pay the fee by September 30th 
by electronic funds transfer. In addition, the proposed regulations 
required the IRS to send preliminary fee calculations and give covered 
entities an opportunity to submit error correction reports, with the 
time and manner of error correction reporting to be specified in other 
guidance published in the Internal Revenue Bulletin.
    The final regulations adopt April 15th as the date on which the 
Form 8963 is due, rather than May 1st, to provide additional time to 
prepare the preliminary fee calculation for each covered entity. Also, 
to ensure that any errors are timely corrected, the final regulations 
require a covered entity to review its preliminary fee calculation and, 
if it believes there are any errors, to timely submit to the IRS a 
corrected Form 8963 during the error correction period. As stated 
earlier in this preamble, the corrected Form 8963 will replace the 
original Form 8963. In the case of a controlled group, if the 
preliminary fee calculation for the controlled group contains one or 
more errors, the corrected Form 8963 must include all of the required 
information for the entire controlled group, including members that do 
not have corrections. Further rules regarding the manner for submitting 
Form 8963, the time and manner for notifying covered entities of their 
preliminary fee calculation, and the time and manner for submitting 
error correction reports for the error correction process are contained 
in other guidance in the Internal Revenue Bulletin being published 
concurrently with these final regulations.
    Commenters suggested that the final regulations create a ``true-
up'' process by which the fee will be continually adjusted from year to 
year. Because the fee is an allocated fee, allowing a true-up process 
for one covered entity will result in adjustments to the fee for all 
covered entities. In the interest of providing finality and certainty 
to fee liability, the final regulations do not adopt this suggestion.

Source of Data Used to Calculate the Fee

    The proposed regulations defined the term net premiums written to 
mean premiums written, including reinsurance premiums written, reduced 
by reinsurance ceded, and reduced by ceding commissions and medical 
loss ratio (MLR) rebates with respect to the data year. The preamble to 
the proposed regulations explained that, for covered entities that file 
the Supplemental Health Care Exhibit (SHCE) with the National 
Association of Insurance Commissioners (NAIC), net premiums written for 
health insurance generally will equal the amount reported on the SHCE 
as direct premiums written minus MLR rebates with respect to the data 
year, subject to any applicable exclusions under section 9010 such as 
exclusions from the term health insurance.
    Commenters suggested that the final regulations require a covered 
entity to use the SHCE and any equivalent forms as the basis for 
determining net premiums written if it is required to file the SHCE and 
any equivalent forms pursuant to State reporting requirements. The 
final regulations do not adopt this suggestion because forms can 
change. The instructions to Form 8963 provide additional information on 
how to determine net premiums written using the SHCE and any equivalent 
forms as the source of data, and can be updated to reflect changes in 
forms.

Medical Loss Ratio (MLR) Rebates

    The proposed regulations invited comments on how to compute MLR 
rebates with respect to the data year using data reported on the SHCE. 
Commenters suggested that MLR rebates be computed on an accrual basis 
using lines 5.3, 5.4, and 5.5 of the 2012 SHCE. In response to this 
comment, the final regulations clarify that MLR rebates are computed on 
an accrual basis. The final regulations do not designate specific SHCE 
line numbers as the source of data for computing MLR rebates because 
forms can change. Instead, the instructions to Form 8963 provide this 
information.

Medicaid Bonuses

    A commenter requested that the final regulations address the 
treatment of Medicaid bonuses in determining net premiums written. 
According to the commenter, Medicaid plans sometimes receive bonuses 
for meeting plan goals. In some cases, the bonuses are paid up front 
and must be returned if the plan

[[Page 71485]]

does not meet its goals, and in other cases, bonuses are paid only 
after the plan meets its goals. The final regulations do not create a 
special rule for the treatment of Medicaid bonuses. The treatment of 
Medicaid bonuses in determining net premiums written depends on whether 
and when these amounts are treated as premiums written for State or 
other Federal regulatory and reporting purposes.

Amounts Taken Into Account

    In accordance with section 9010(b)(2)(A), the proposed regulations 
provided that, for each covered entity (or each controlled group 
treated as a single covered entity), the IRS will not take into account 
the first $25 million of net premiums written. The IRS will take into 
account 50 percent of the net premiums written for amounts over $25 
million and up to $50 million, and 100 percent of the net premiums 
written that are over $50 million. Thus, for any covered entity with 
net premiums written of $50 million or more, the IRS will not take into 
account the first $37.5 million of net premiums written. Additionally, 
after this reduction, the proposed regulations provided that, in 
accordance with section 9010(b)(2)(B), if the covered entity (or any 
member of the controlled group treated as a single covered entity) is 
exempt from tax under section 501(a) and is described in section 
501(c)(3), (4), (26), or (29), the IRS will take into account only 50 
percent of the remaining net premiums written of that entity (or 
member) that are attributable to its exempt activities.
    A commenter asked how the fee will be calculated for a controlled 
group that is treated as a single covered entity when some but not all 
of the group's members qualify for the 50-percent exclusion under 
section 9010(b)(2)(B). The final regulations clarify that, in this 
circumstance, the section 9010(b)(2)(A) exclusion applies first to each 
member of the controlled group on a pro rata basis, and then the 
section 9010(b)(2)(B) exclusion applies only to eligible members of the 
group.
    For example, if a controlled group consists of one member with $100 
million in net premiums written and a second member with $50 million in 
net premiums written, two-thirds of the group's total $37.5 million 
reduction under section 9010(b)(2)(A), or $25 million, applies to the 
first member, and the remaining one-third, or $12.5 million, applies to 
the second member. Therefore, after this initial reduction, the first 
member has $75 million of net premiums written ($100 million minus $25 
million), and the second member has $37.5 million of net premiums 
written ($50 million minus $12.5 million). If the second member is 
eligible for the 50-percent exclusion under section 9010(b)(2)(B), the 
50-percent exclusion applies to this member's remaining net premiums 
written, resulting in $18.75 million (50 percent of $37.5 million) 
being taken into account. Thus, total net premiums written taken into 
account for this controlled group are $93.75 million ($150 million 
minus $37.5 million minus $18.75 million).

Designated Entities

    The proposed regulations required each controlled group to have a 
designated entity, defined as a person within the controlled group that 
is designated to act on behalf of the controlled group with regard to 
the fee. The proposed regulations further provided that if the 
controlled group, without regard to foreign corporations included under 
section 9010(c)(3)(B), is also an affiliated group that files a 
consolidated return for Federal income tax purposes, the designated 
entity is the common parent of the affiliated group identified on the 
tax return filed for the data year. If the controlled group is not a 
part of an affiliated group that files a consolidated return, the 
proposed regulations allowed the controlled group to select its 
designated entity but did not require it to do so. The proposed 
regulations also required each member of a controlled group to maintain 
a record of its consent to the designated entity selection and required 
the designated entity to maintain a record of all member consents. 
Under the proposed regulations, if the controlled group did not select 
a person as its designated entity, the IRS would select a person as a 
designated entity for the controlled group and advise the designated 
entity accordingly.
    The final regulations modify the proposed regulations, which 
provided that the common parent of a consolidated group was the 
designated entity in all cases. To better coordinate with the 
consolidated return regulations, the final regulations provide that the 
designated entity of a controlled group, without regard to foreign 
corporations included under section 9010(c)(3)(B), that is a 
consolidated group (within the meaning of Sec.  1.1502-1(h)) is the 
agent for the group (within the meaning of Sec.  1.1502-77). In the 
case of a controlled group that is not a part of an affiliated group 
that files a consolidated return, the Treasury Department and the IRS 
believe that the controlled group members are in the best position to 
determine which of its members should be the designated entity. To 
promote greater certainty and ease of administration in the fee 
reporting and determination process, the final regulations thus 
require, rather than permit, a controlled group that is not also a 
consolidated group to select its designated entity. The final 
regulations further provide that the IRS will select a member of the 
controlled group to be the designated entity for the controlled group 
if a controlled group fails to do so, but the controlled group may be 
liable for penalties for failure to meet its filing requirements. In 
the event the controlled group fails to select a designated entity and 
the IRS selects a designated entity for the controlled group, the final 
regulations deem all members of the controlled group that provide 
health insurance for a United States health risk to have consented to 
the IRS's selection of the designated entity.

Disclosure

    Section 9010(g)(4) provides that section 6103 (relating to the 
confidentiality and disclosure of returns and return information) does 
not apply to any information reported by the covered entities under 
section 9010(g). The preamble to the proposed regulations stated that 
the Treasury Department and the IRS are considering making available to 
the public the information reported on Form 8963, including the 
identity of the covered entity and the amount of its net premiums 
written, at the time the notice of preliminary fee calculation is sent, 
and invited comments on which reported information the IRS should make 
publicly available. Numerous commenters requested that the IRS make all 
information reported on Form 8963 available to the public, and several 
commenters requested that this information be reported on the IRS Web 
site no later than 15 days after the reporting deadline to promote 
transparency and assist health insurers in determining whether an error 
correction request is necessary. One commenter requested that consumers 
have access to the information that shows how much each covered entity 
will pay. In response to comments, the final regulations provide that 
the information reported on each Form 8963 will be open for public 
inspection or available upon request. The Treasury Department and the 
IRS expect that, at a time to be determined, certain information will 
be made available on www.irs.gov, including the identity of each 
reporting entity and the amount of its reported net premiums written.

[[Page 71486]]

Expatriate Policies

    In accordance with section 9010(d), the proposed regulations 
defined the term United States health risk to mean the health risk of 
any individual who is (1) a United States citizen, (2) a resident of 
the United States (within the meaning of section 7701(b)(1)(A)), or (3) 
located in the United States, with respect to the period such 
individual is so located. The preamble to the proposed regulations 
requested comments on how the final regulations should apply to 
expatriate policies. The medical loss ratio final rule issued by HHS 
(MLR final rule) defines expatriate policies as predominantly group 
health insurance policies that provide coverage to employees, 
substantially all of whom are: (1) Working outside their country of 
citizenship; (2) working outside their country of citizenship and 
outside the employer's country of domicile; or (3) non-U.S. citizens 
working in their home country. 45 CFR 158.120(d)(4). The NAIC tracks 
the definition in the MLR final rule for purposes of State reporting 
requirements.
    The proposed regulations did not provide specific rules for 
expatriate policies. However, the definitions of covered entity and 
health insurance in the proposed regulations only extended to entities 
and policies that are subject to State or Federal regulation. 
Commenters expressed the concern that the proposed regulations provided 
an unfair advantage to foreign health insurers. Not all foreign 
insurers issuing expatriate policies on United States health risks are 
subject to State regulation or to Federal regulation under ERISA. As a 
result, commenters asserted that a foreign insurance company that is 
not a covered entity will be able to charge less than a U.S. insurance 
company for nearly identical expatriate policies. Commenters suggested 
that the final regulations exclude expatriate policies (or defer their 
inclusion until more facts can be gathered). Alternatively, commenters 
suggested broadening the definition of covered entity to include a 
foreign insurer regardless of whether it is subject to State or Federal 
regulation.
    The final regulations do not adopt these suggestions. Section 9010 
defines a United States health risk to include the health risk of a 
U.S. citizen or a resident alien. An insurer that issues a policy to a 
U.S. citizen or resident living abroad is still providing coverage for 
a United States health risk, despite the fact that the individual may 
not be currently residing in the United States. Thus, excluding 
expatriate policies is inconsistent with the language of section 
9010(d).
    Alternatively, broadening the definition of covered entity to 
include a foreign insurer that does not do business in the United 
States is not in the interest of sound tax administration. Legal and 
practical restrictions significantly limit the ability of the IRS to 
compel an entity that does not do business in the United States to file 
a report and pay a tax or fee. Further, the Treasury Department and the 
IRS expect that, in the overwhelming majority of cases, foreign 
insurers that do not do business in the United States will not have 
more than $25 million in net premiums written for United States health 
risks and thus will not be subject to liability for the fee. Therefore, 
the final regulations do not expand the definition of covered entity to 
include a foreign insurer that does not do business in the United 
States.
    The proposed regulations created a presumption under which the 
entire amount reported on the SHCE filed with the NAIC pursuant to 
State reporting requirements will be considered to be for United States 
health risks unless the covered entity can demonstrate otherwise. 
Commenters expressed concern that the data necessary to affirmatively 
establish that an individual is not a United States health risk will be 
difficult for covered entities to obtain because they will need to know 
the location of each insured individual at all times and that 
individual's nationality. Moreover, commenters contended that such 
information may not be clear or accurate because location or 
nationality can vary among multiple members of the same family (some of 
whom may hold dual citizenship), and that covered entities may simply 
be unable to obtain such information because of the constant mobility 
of those covered. Commenters suggested allowing a covered entity to 
determine expatriate net premiums written for United States health 
risks by multiplying its total expatriate net premiums written by the 
ratio of claims paid in the United States to claims paid worldwide. The 
final regulations do not adopt this suggestion. A ratio based on claims 
paid in the United States would not accurately represent the relative 
proportion of United States health risks because a United States health 
risk includes the health risks of U.S. citizens who are living abroad. 
The Treasury Department and the IRS also considered alternative methods 
for a covered entity to account for its expatriate policies, but were 
unable to identify any that would be verifiable and administrable. 
Therefore, the final regulations retain the presumption in the proposed 
regulations and allow a covered entity to demonstrate that certain net 
premiums written are not for a United States health risk.

United States Possessions

    Commenters suggested that the fee should not apply to health 
insurance providers in Puerto Rico and Guam. The final regulations do 
not adopt this suggestion. Section 9010(h)(2) specifically states that 
the term United States includes the U.S. possessions. Section 
9010(c)(1) defines a covered entity as any entity that provides health 
insurance for any United States health risk, and under section 
9010(d)(3), a United States health risk includes coverage of the health 
risk of any individual located in the U.S. possessions. To aid in 
determining whether an entity qualifies as a covered entity, the 
proposed regulations incorporated the definition of health insurance 
issuer under section 9832(b)(2) as one category of covered entity. The 
only definition of health insurance issuer in the Code is the 
definition of health insurance issuer in section 9832(b)(2), and the 
language of this provision is substantially similar to the only 
definition of health insurance issuer referenced in the ACA.\2\ Section 
9832(b)(2) defines a health insurance issuer as an insurance company, 
insurance service, or insurance organization that is licensed to engage 
in the business of insurance in a State and that is subject to State 
laws that regulate insurance within the meaning of section 514(b)(2) of 
ERISA. Under section 514(b)(2) of ERISA, State law that regulates 
insurance generally means any State regulation. Section 3(10) of ERISA 
defines State for purposes of ERISA to include the U.S. possessions. 
Accordingly, the references to State and State law in section 
9832(b)(2) encompass the 50 States, the District of Columbia, and the 
U.S. possessions.
---------------------------------------------------------------------------

    \2\ See ACA section 1301(b)(2), referencing section 2791(b) of 
the PHSA (42 U.S.C. 300gg-91). The definition of health insurance 
issuer in section 2791(b) of the PHSA is substantially similar to 
the definition in section 9832(b)(2) of the Code.
---------------------------------------------------------------------------

Taxability and Other Treatment of the Fee

    Section 9010(f)(2) treats the fee as a tax described in section 
275(a)(6) (relating to taxes for which no deduction is allowed). Before 
issuing the proposed regulations, the Treasury Department and the IRS 
received comments stating that covered entities may attempt to pass on 
the cost of the fee to policyholders, either by a corresponding 
increase in premiums or by separately charging policyholders for

[[Page 71487]]

a portion of the fee. The preamble to the proposed regulations stated 
that, under section 61(a), gross income means all income from whatever 
source derived unless a provision of the Code or other law specifically 
excludes the payment from gross income. Therefore, a covered entity's 
gross income includes amounts received from policyholders to offset the 
cost of the fee, whether or not separately stated on any bill. The 
preamble requested 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. Numerous commenters disagreed with the 
preamble statement and requested that the final regulations permit 
covered entities to exclude from income any amounts collected from 
policyholders to offset the cost of the fee. One commenter 
alternatively suggested that the payment of income taxes on the fee 
should count towards the payment of the fee itself. The final 
regulations do not adopt these suggestions. The Treasury Department and 
the IRS will issue separate guidance to clarify that covered entities 
must include in income under section 61(a) any amounts they collect 
from policyholders to offset the cost of the fee.
    Commenters suggested that the final regulations prohibit a covered 
entity from collecting amounts to offset the cost of the fee when they 
collect premiums from excluded entities such as governmental entities 
and VEBAs. The final regulations do not adopt this suggestion. The 
health insurance provider, and not the payor of premiums, is liable for 
the fee. Therefore, any exclusions apply at the health insurance 
provider level.
    A commenter asked if a covered entity must disclose to its 
policyholders the extent to which the cost of the fee is included in a 
policyholder's premium. Because the health insurance provider, and not 
the policyholder, is liable for the fee, the final regulations do not 
require a covered entity to disclose to its policyholders any amounts 
included in premiums to offset the cost of the fee, although nothing in 
the final regulations prohibits a covered entity from disclosing these 
amounts. However, a covered entity may be subject to State or other 
Federal rules, if any, regarding disclosures of these amounts.

Availability of IRS Documents

    The IRS revenue rulings cited in this preamble are published in the 
Internal Revenue Cumulative Bulletin and are available from the 
superintendent of Documents, United States Government Printing Office, 
Washington, DC 20402. The IRS notice cited in this preamble is 
available at www.irs.gov.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. Therefore, a regulatory 
assessment is not required. This regulation merely implements the fee 
imposed by section 9010 and does not impose the fee itself. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations. It is hereby 
certified that the collection of information in these regulations will 
not have a significant economic impact on a substantial number of small 
entities. This certification is based on the fact that the only 
collection burden imposed by these regulations is the requirement to 
maintain a record of consent to the selection of a designated entity, 
and this collection burden applies only to designated entities of 
controlled groups, which tend to be large corporations, and their 
members. Therefore, a Regulatory Flexibility Analysis under the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. 
Pursuant to section 7805(f), the notice of proposed rulemaking was 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business, and no 
comments were received.

Drafting Information

    The principal author of these regulations is Charles J. Langley, 
Jr., Office of the Associate Chief Counsel (Passthroughs and Special 
Industries). However, other personnel from the Treasury Department and 
the IRS participated in their development.

List of Subjects

26 CFR Part 57

    Health insurance, Reporting and recordkeeping requirements.

26 CFR 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR chapter 1 is amended as follows:

0
Paragraph 1. Part 57 is added to read as follows:

PART 57--HEALTH INSURANCE PROVIDERS FEE

Sec.
57.1 Overview.
57.2 Explanation of terms.
57.3 Reporting requirements and associated penalties.
57.4 Fee calculation.
57.5 Notice of preliminary fee calculation.
57.6 Error correction process.
57.7 Notification and fee payment.
57.8 Tax treatment of fee.
57.9 Refund claims.
57.10 Effective/applicability date.
57.6302-1 Method of paying the health insurance providers fee.

    Authority:  26 U.S.C. 7805; sec. 9010, Pub. L. 111-148 (124 
Stat. 119 (2010)).

    Section 57.3 also issued under 26 U.S.C. 6071(a)
    Section 57.7 also issued under 26 U.S.C. 6302(a).
    Section 57.6302-1 also issued under 26 U.S.C. 6302(a).

Sec.  57.1  Overview.

    (a) The regulations in this part are designated ``Health Insurance 
Providers Fee Regulations.''
    (b) The regulations in this part provide guidance on the annual fee 
imposed on covered entities engaged in the business of providing health 
insurance by section 9010 of the Patient Protection and Affordable Care 
Act (PPACA), Public Law 111-148 (124 Stat. 119 (2010)), as amended by 
section 10905 of PPACA, and as further amended by section 1406 of the 
Health Care and Education Reconciliation Act of 2010, Public Law 111-
152 (124 Stat. 1029 (2010)) (collectively, the Affordable Care Act or 
ACA). All references to section 9010 in this part 57 are references to 
section 9010 of the ACA. Unless otherwise indicated, all other 
references to subtitles, chapters, subchapters, and sections are 
references to subtitles, chapters, subchapters and sections in the 
Internal Revenue Code and the related regulations.
    (c) Section 9010(e)(1) sets an applicable fee amount for each year, 
beginning with 2014, that will be apportioned among covered entities 
with aggregate net premiums written over $25 million for health 
insurance for United States health risks. Generally, each covered 
entity is liable for a fee in each fee year that is based on its net 
premiums written during the data year in an amount determined by the 
Internal Revenue Service (IRS) under the rules of this part.


Sec.  57.2  Explanation of terms.

    (a) In general. This section explains the terms used in this part 
57 for purposes of the fee.

[[Page 71488]]

    (b) Covered entity--(1) In general. Except as provided in paragraph 
(b)(2) of this section, the term covered entity means any entity with 
net premiums written for health insurance for United States health 
risks in the fee year if the entity is--
    (i) A health insurance issuer within the meaning of section 
9832(b)(2), defined in section 9832(b)(2) as an insurance company, 
insurance service, or insurance organization that is licensed to engage 
in the business of insurance in a State and that is subject to State 
law that regulates insurance (within the meaning of section 514(b)(2) 
of the Employee Retirement Income Security Act of 1974 (ERISA));
    (ii) A health maintenance organization within the meaning of 
section 9832(b)(3), defined in section 9832(b)(3) as--
    (A) A Federally qualified health maintenance organization (as 
defined in section 1301(a) of the Public Health Service Act);
    (B) An organization recognized under State law as a health 
maintenance organization; or
    (C) A similar organization regulated under State law for solvency 
in the same manner and to the same extent as such a health maintenance 
organization;
    (iii) An insurance company subject to tax under part I or II of 
subchapter L, or that would be subject to tax under part I or II of 
subchapter L but for the entity being exempt from tax under section 
501(a);
    (iv) An entity that provides health insurance under Medicare 
Advantage, Medicare Part D, or Medicaid; or
    (v) A multiple employer welfare arrangement (MEWA), within the 
meaning of section 3(40) of ERISA, to the extent not fully insured, 
provided that for this purpose a covered entity does not include a MEWA 
that with respect to the plan year ending with or within the section 
9010 data year satisfies the requirements to be exempt from reporting 
under 29 CFR 2520.101-2(c)(2)(ii)(A), (B), or (C).
    (2) Exclusions--(i) Self-insured employer. The term covered entity 
does not include any entity (including a voluntary employees' 
beneficiary association under section 501(c)(9) (VEBA)) that is part of 
a self-insured employer plan to the extent that such entity self-
insures its employees' health risks. The term self-insured employer 
means an employer that sponsors a self-insured medical reimbursement 
plan within the meaning of Sec.  1.105-11(b)(1)(i) of this chapter. 
Self-insured medical reimbursement plans include plans that do not 
involve shifting risk to an unrelated third party as described in Sec.  
1.105-11(b)(1)(ii) of this chapter. A self-insured medical 
reimbursement plan may use an insurance company or other third party to 
provide administrative or bookkeeping functions. For purposes of this 
section, the term self-insured employer does not include a MEWA.
    (ii) Governmental entity. The term covered entity does not include 
any governmental entity. For this purpose, the term governmental entity 
means--
    (A) The government of the United States;
    (B) Any State or a political subdivision thereof (as defined for 
purposes of section 103) including, for example, a State health 
department or a State insurance commission;
    (C) Any Indian tribal government (as defined in section 
7701(a)(40)) or a subdivision thereof (determined in accordance with 
section 7871(d)); or
    (D) Any agency or instrumentality of any of the foregoing.
    (iii) Certain nonprofit corporations. The term covered entity does 
not include any entity--
    (A) That is incorporated as a nonprofit corporation under a State 
law;
    (B) No part of the net earnings of which inures to the benefit of 
any private shareholder or individual (within the meaning of Sec. Sec.  
1.501(a)-1(c) and 1.501(c)(3)-1(c)(2) of this chapter);
    (C) No substantial part of the activities of which is carrying on 
propaganda, or otherwise attempting, to influence legislation (within 
the meaning of Sec.  1.501(c)(3)-1(c)(3)(ii) of this chapter) (or which 
is described in section 501(h)(3) and is not denied exemption under 
section 501(a) by reason of section 501(h));
    (D) That does not participate in, or intervene in (including the 
publishing or distributing of statements), any political campaign on 
behalf of (or in opposition to) any candidate for public office (within 
the meaning of Sec.  1.501(c)(3)-1(c)(3)(iii) of this chapter); and
    (E) More than 80 percent of the gross revenues of which is received 
from government programs that target low-income, elderly, or disabled 
populations under titles XVIII, XIX, and XXI of the Social Security 
Act.
    (iv) Certain voluntary employees' beneficiary associations (VEBAs). 
The term covered entity does not include any entity that is described 
in section 501(c)(9) that is established by an entity (other than by an 
employer or employers) for purposes of providing health care benefits. 
This exclusion applies to a VEBA that is established by a union or 
established pursuant to a collective bargaining agreement and having a 
joint board of trustees (such as in the case of a multiemployer plan 
within the meaning of section 3(37) of ERISA or a single-employer plan 
described in section 302(c)(5) of the Labor Management Relations Act, 
29 U.S.C. 186(c)(5)). This exclusion does not apply to a MEWA.
    (3) State. Solely for purposes of paragraph (b) of this section, 
the term State means any of the 50 States, the District of Columbia, or 
any of the possessions of the United States, including American Samoa, 
Guam, the Northern Mariana Islands, Puerto Rico, and the Virgin 
Islands.
    (c) Controlled groups--(1) In general. The term controlled group 
means a group of two or more persons, including at least one person 
that is a covered entity, that is treated as a single employer under 
section 52(a), 52(b), 414(m), or 414(o).
    (2) Treatment of controlled group. A controlled group (as defined 
in paragraph (c)(1) of this section) is treated as a single covered 
entity for purposes of the fee.
    (3) Special rules. For purposes of paragraph (c)(1) of this section 
(related to controlled groups)--
    (i) A foreign entity subject to tax under section 881 is included 
within a controlled group under section 52(a) or (b); and
    (ii) A person is treated as being a member of the controlled group 
if it is a member of the group at the end of the day on December 31st 
of the data year.
    (d) Data year. The term data year means the calendar year 
immediately before the fee year. Thus, for example, 2013 is the data 
year for fee year 2014.
    (e) Designated entity--(1) In general. The term designated entity 
means the person within a controlled group that is designated to act on 
behalf of the controlled group regarding the fee with respect to--
    (i) Filing Form 8963, ``Report of Health Insurance Provider 
Information'';
    (ii) Receiving IRS communications about the fee for the group;
    (iii) Filing a corrected Form 8963 for the group, if applicable, as 
described in Sec.  57.6; and
    (iv) Paying the fee for the group to the government.
    (2) Selection of designated entity--(i) In general. Except as 
provided in paragraph (e)(2)(ii) of this section, each controlled group 
must select a designated entity by having that entity file the Form 
8963 in accordance with the form instructions. The designated entity 
must state under penalties of perjury that all persons that provide 
health insurance for United States health risks that are members of the

[[Page 71489]]

group have consented to the selection of the designated entity. Each 
member of a controlled group must maintain a record of its consent to 
the controlled group's selection of the designated entity. The 
designated entity must maintain a record of all member consents.
    (ii) Requirement for consolidated groups; common parent. If a 
controlled group, without regard to foreign corporations included under 
section 9010(c)(3)(B), is also an affiliated group the common parent of 
which files a consolidated return for Federal income tax purposes, the 
designated entity is the agent for the group (within the meaning of 
Sec.  1.1502-77 of this chapter) for the data year.
    (iii) Failure to select a designated entity. Excepted as provided 
in paragraph (e)(2)(ii) of this section, if a controlled group fails to 
select a designated entity as provided in paragraph (e)(2)(i) of this 
section, then the IRS will select a member of the controlled group to 
be the designated entity. If the IRS selects the designated entity, 
then all members of the controlled group that provide health insurance 
for a United States health risk will be deemed to have consented to the 
IRS's selection of the designated entity.
    (f) Fee. The term fee means the fee imposed by section 9010 on each 
covered entity engaged in the business of providing health insurance.
    (g) Fee year. The term fee year means the calendar year in which 
the fee must be paid to the government. The first fee year is 2014.
    (h) Health insurance--(1) In general. Except as provided in 
paragraph (h)(2) of this section, the term health insurance generally 
has the same meaning as the term health insurance coverage in section 
9832(b)(1)(A), defined to mean benefits consisting of medical care 
(provided directly, through insurance or reimbursement, or otherwise) 
under any hospital or medical service policy or certificate, hospital 
or medical service plan contract, or health maintenance organization 
contract, when these benefits are offered by an entity that is one of 
the types of entities described in paragraph (b)(1)(i) through 
(b)(1)(v) of this section. The term health insurance includes limited 
scope dental and vision benefits under section 9832(c)(2)(A) and 
retiree-only health insurance.
    (2) Exclusions. The term health insurance does not include--
    (i) Coverage only for accident, or disability income insurance, or 
any combination thereof, within the meaning of section 9832(c)(1)(A);
    (ii) Coverage issued as a supplement to liability insurance within 
the meaning of section 9832(c)(1)(B);
    (iii) Liability insurance, including general liability insurance 
and automobile liability insurance, within the meaning of section 
9832(c)(1)(C);
    (iv) Workers' compensation or similar insurance within the meaning 
of section 9832(c)(1)(D);
    (v) Automobile medical payment insurance within the meaning of 
section 9832(c)(1)(E);
    (vi) Credit-only insurance within the meaning of section 
9832(c)(1)(F);
    (vii) Coverage for on-site medical clinics within the meaning of 
section 9832(c)(1)(G);
    (viii) Other insurance coverage that is similar to the insurance 
coverage in paragraph (h)(2)(i) through (vii) of this section under 
which benefits for medical care are secondary or incidental to other 
insurance benefits, within the meaning of section 9832(c)(1)(H), to the 
extent such insurance coverage is specified in regulations under 
section 9832(c)(1)(H);
    (ix) Benefits for long-term care, nursing home care, home health 
care, community-based care, or any combination thereof, within the 
meaning of section 9832(c)(2)(B), and such other similar, limited 
benefits to the extent such benefits are specified in regulations under 
section 9832(c)(2)(C);
    (x) Coverage only for a specified disease or illness within the 
meaning of section 9832(c)(3)(A);
    (xi) Hospital indemnity or other fixed indemnity insurance within 
the meaning of section 9832(c)(3)(B);
    (xii) Medicare supplemental health insurance (as defined under 
section 1882(g)(1) of the Social Security Act), coverage supplemental 
to the coverage provided under chapter 55 of title 10, United States 
Code, and similar supplemental coverage provided to coverage under a 
group health plan, within the meaning of section 9832(c)(4);
    (xiii) Coverage under an employee assistance plan, a disease 
management plan, or a wellness plan, if the benefits provided under the 
plan constitute excepted benefits under section 9832(c)(2) (or do not 
otherwise provide benefits consisting of health insurance under 
paragraph (h)(1) of this section);
    (xiv) Student administrative health fee arrangements, as defined in 
paragraph (h)(3);
    (xv) Travel insurance, as defined in paragraph (h)(4) of this 
section; or
    (xvi) Indemnity reinsurance, as defined in paragraph (h)(5)(i) of 
this section.
    (3) Student administrative health fee arrangement. For purposes of 
paragraph (h)(2)(xiv) of this section, the term student administrative 
health fee arrangement means an arrangement under which an educational 
institution, other than through an insured arrangement, charges student 
administrative health fees to students on a periodic basis to help 
cover the cost of student health clinic operations and care delivery 
(regardless of whether the student uses the clinic and regardless of 
whether the student purchases any available student health insurance 
coverage).
    (4) Travel insurance. For purposes of paragraph (h)(2)(xv) of this 
section, the term travel insurance means insurance coverage for 
personal risks incident to planned travel, which may include, but is 
not limited to, interruption or cancellation of trip or event, loss of 
baggage or personal effects, damages to accommodations or rental 
vehicles, and sickness, accident, disability, or death occurring during 
travel, provided that the health benefits are not offered on a stand-
alone basis and are incidental to other coverage. For this purpose, the 
term travel insurance does not include major medical plans that provide 
comprehensive medical protection for travelers with trips lasting 6 
months or longer, including, for example, those working overseas as an 
expatriate or military personnel being deployed.
    (5) Reinsurance--(i) Indemnity reinsurance. For purposes of 
paragraphs (h)(2)(xvi) and (k) of this section, the term indemnity 
reinsurance means an agreement between one or more reinsuring companies 
and a covered entity under which--
    (A) The reinsuring company agrees to accept, and to indemnify the 
issuing company for, all or part of the risk of loss under policies 
specified in the agreement; and
    (B) The covered entity retains its liability to, and its 
contractual relationship with, the individuals whose health risks are 
insured under the policies specified in the agreement.
    (ii) Assumption reinsurance. For purposes of paragraph (k) of this 
section, the term assumption reinsurance means reinsurance for which 
there is a novation and the reinsurer takes over the entire risk of 
loss pursuant to a new contract.
    (i) Located in the United States. The term located in the United 
States means present in the United States (within the meaning of 
paragraph (m) of this section) under section 7701(b)(7) (for presence 
in the 50 States and the District of Columbia) or Sec.  1.937-

[[Page 71490]]

1(c)(3)(i) of this chapter (for presence in a possession of the United 
States).
    (j) NAIC. The term NAIC means the National Association of Insurance 
Commissioners.
    (k) Net premiums written--The term net premiums written means 
premiums written, including reinsurance premiums written, reduced by 
reinsurance ceded, and reduced by ceding commissions and medical loss 
ratio (MLR) rebates with respect to the data year. For this purpose, 
MLR rebates are computed on an accrual basis in determining net 
premiums written. Because indemnity reinsurance within the meaning of 
paragraph (h)(5)(i) of this section is not health insurance under 
paragraph (h)(1) of this section, the term net premiums written does 
not include premiums written for indemnity reinsurance and is not 
reduced by indemnity reinsurance ceded. However, in the case of 
assumption reinsurance within the meaning of paragraph (h)(5)(ii) of 
this section, the term net premiums written does include premiums 
written for assumption reinsurance and is reduced by assumption 
reinsurance premiums ceded.
    (l) SHCE. The term SHCE means the Supplemental Health Care Exhibit. 
The SHCE is a form published by the NAIC that most covered entities are 
required to file annually under State law.
    (m) United States. For purposes of paragraph (i) of this section, 
the term United States means the 50 States, the District of Columbia, 
and any possession of the United States, including American Samoa, 
Guam, the Northern Mariana Islands, Puerto Rico, and the Virgin 
Islands.
    (n) United States health risk. The term United States health risk 
means the health risk of any individual who is--
    (1) A United States citizen;
    (2) A resident of the United States (within the meaning of section 
7701(b)(1)(A)); or
    (3) Located in the United States (within the meaning of paragraph 
(i) of this section) during the period such individual is so located.


Sec.  57.3  Reporting requirements and associated penalties.

    (a) Reporting requirement--(1) In general. Annually, each covered 
entity, including each controlled group that is treated as a single 
covered entity, must report its net premiums written for health 
insurance of United States health risks during the data year to the IRS 
by April 15th of the fee year on Form 8963, ``Report of Health 
Insurance Provider Information,'' in accordance with the instructions 
for the form. A covered entity that has net premiums written during the 
data year is subject to this reporting requirement even if it does not 
have any amount taken into account as described in Sec.  57.4(a)(4). If 
an entity is not in the business of providing health insurance for any 
United States health risk in the fee year, it is not a covered entity 
and does not have to report.
    (2) Manner of reporting. The IRS may provide rules in guidance 
published in the Internal Revenue Bulletin for the manner of reporting 
by a covered entity under this section, including rules for reporting 
by a designated entity on behalf of a controlled group that is treated 
as a single covered entity.
    (3) Disclosure of reported information. Pursuant to section 
9010(g)(4), the information reported on each original and corrected 
Form 8963 will be open for public inspection or available upon request.
    (b) Penalties--(1) Failure to report--(i) In general. A covered 
entity that fails to timely submit a report containing the information 
required by paragraph (a) of this section is liable for a failure to 
report penalty in the amount described in paragraph (b)(1)(ii) of this 
section in addition to its fee liability and any other applicable 
penalty, unless the failure is due to reasonable cause as defined in 
paragraph (b)(1)(iii) of this section.
    (ii) Amount. The amount of the failure to report penalty described 
in paragraph (b)(1)(i) of this section is--
    (A) $10,000, plus
    (B) The lesser of--
    (1) An amount equal to $1,000 multiplied by the number of days 
during which such failure continues; or
    (2) The amount of the covered entity's fee for which the report was 
required.
    (iii) Reasonable cause. The failure to report penalty described in 
paragraph (b)(1)(i) of this section is waived if the failure is due to 
reasonable cause. A failure is due to reasonable cause if the covered 
entity exercised ordinary business care and prudence and was 
nevertheless unable to submit the report within the prescribed time. In 
determining whether the covered entity was unable to submit the report 
timely despite the exercise of ordinary business care and prudence, the 
IRS will consider all the facts and circumstances surrounding the 
failure to submit the report.
    (iv) Treatment of penalty. The failure to report penalty described 
in this paragraph (b)(1)--
    (A) Is treated as a penalty under subtitle F;
    (B) Must be paid on notice and demand by the IRS and in the same 
manner as a tax under the Internal Revenue Code; and
    (C) Is a penalty for which only civil actions for refund under 
procedures of subtitle F apply.
    (2) Accuracy-related penalty--(i) In general. A covered entity that 
understates its net premiums written for health insurance of United 
States health risks in the report required under paragraph (a)(1) of 
this section is liable for an accuracy-related penalty in the amount 
described in paragraph (b)(2)(ii) of this section, in addition to its 
fee liability and any other applicable penalty.
    (ii) Amount. The amount of the accuracy-related penalty described 
in paragraph (b)(2)(i) of this section is the excess of--
    (A) The amount of the covered entity's fee for the fee year that 
the IRS determines should have been paid in the absence of any 
understatement; over
    (B) The amount of the covered entity's fee for the fee year that 
the IRS determined based on the understatement.
    (iii) Understatement. An understatement of a covered entity's net 
premiums written for health insurance of United States health risks is 
the difference between the amount of net premiums written that the 
covered entity reported and the amount of net premiums written that the 
IRS determines the covered entity should have reported.
    (iv) Treatment of penalty. The accuracy-related penalty is subject 
to the provisions of subtitle F that apply to assessable penalties 
imposed under chapter 68.
    (3) Controlled groups. Each member of a controlled group that is 
required to provide information to the controlled group's designated 
entity for purposes of the report required to be submitted by the 
designated entity on behalf of the controlled group is jointly and 
severally liable for any penalties described in this paragraph (b) for 
any reporting failures by the designated entity.


Sec.  57.4  Fee calculation.

    (a) Fee components--(1) In general. For every fee year, the IRS 
will calculate a covered entity's allocated fee as described in this 
section.
    (2) Calculation of net premiums written. Each covered entity's 
allocated fee for any fee year is equal to an amount that bears the 
same ratio to the applicable amount as the covered entity's net 
premiums written for health insurance of United States health risks 
during the data year taken into account bears to the aggregate net 
premiums written for health insurance of United States health risks of 
all covered entities during the data year taken into account.

[[Page 71491]]

    (3) Applicable amount. The applicable amounts for fee years are--

------------------------------------------------------------------------
                 Fee year                         Applicable amount
------------------------------------------------------------------------
2014......................................  $8,000,000,000
2015......................................  $11,300,000,000
2016......................................  $11,300,000,000
2017......................................  $13,900,000,000
2018......................................  $14,300,000,000
2019 and thereafter.......................  The applicable amount in the
                                             preceding fee year
                                             increased by the rate of
                                             premium growth (within the
                                             meaning of section
                                             36B(b)(3)(A)(ii)).
------------------------------------------------------------------------

    (4) Net premiums written taken into account--(i) In general. A 
covered entity's net premiums written for health insurance of United 
States health risks during any data year are taken into account as 
follows:

------------------------------------------------------------------------
                                             Percentage of net premiums
   Covered entity's net premiums written     written taken into account
      during the data year that are:                     is:
------------------------------------------------------------------------
Not more than $25,000,000.................                             0
More than $25,000,000 but not more than                               50
 $50,000,000..............................
More than $50,000,000.....................                           100
------------------------------------------------------------------------

    (ii) Controlled groups. In the case of a controlled group, 
paragraph (a)(4)(i) of this section applies to all net premiums written 
for health insurance of United States health risks during the data 
year, in the aggregate, of the entire controlled group, except that any 
net premiums written by any member of the controlled group that is a 
nonprofit corporation meeting the requirements of Sec.  57.2(b)(2)(iii) 
or a voluntary employees' beneficiary association meeting the 
requirements of Sec.  57.2(b)(2)(iv) are not taken into account.
    (iii) Partial exclusion for certain exempt activities. After the 
application of paragraph (a)(4)(i) of this section, if the covered 
entity (or any member of a controlled group treated as a single covered 
entity) is exempt from Federal income tax under section 501(a) and is 
described in section 501(c)(3), (4), (26), or (29) as of December 31st 
of the data year, then only 50 percent of its remaining net premiums 
written for health insurance of United States health risks that are 
attributable to its exempt activities (and not to activities of an 
unrelated trade or business as defined in section 513) during the data 
year are taken into account. If an entity to which this partial 
exclusion applies is a member of a controlled group, then the partial 
exclusion applies to that entity after first applying paragraph 
(a)(4)(i) on a pro rata basis to all members of the controlled group.
    (b) Determination of net premiums written--(1) In general. The IRS 
will determine net premiums written for health insurance of United 
States health risks for each covered entity based on the Form 8963, 
``Report of Health Insurance Provider Information,'' submitted by each 
covered entity, together with any other source of information available 
to the IRS. Other sources of information that the IRS may use to 
determine net premiums written for each covered entity include the 
SHCE, which supplements the annual statement filed with the NAIC 
pursuant to State law, the annual statement itself or the Accident and 
Health Policy Experience filed with the NAIC, the MLR Annual Reporting 
Form filed with the Center for Medicare & Medicaid Services' Center for 
Consumer Information and Insurance Oversight of the U.S. Department of 
Health and Human Services, or any similar statements filed with the 
NAIC, with any State government, or with the Federal government 
pursuant to applicable State or Federal requirements.
    (2) Presumption for United States health risks. For any covered 
entity that files the SHCE with the NAIC, the entire amount reported on 
the SHCE as direct premiums written will be considered to be for health 
insurance of United States health risks as described in Sec.  57.2(n) 
(subject to any applicable exclusions for amounts that are not health 
insurance as described in Sec.  57.2(h)(2)) unless the covered entity 
can demonstrate otherwise.
    (c) Determination of amounts taken into account. (1) For each fee 
year and for each covered entity, the IRS will calculate the net 
premiums written for health insurance of United States health risks 
taken into account during the data year. The resulting number is the 
numerator of the fraction described in paragraph (d)(1) of this 
section.
    (2) For each fee year, the IRS will calculate the aggregate net 
premiums written for health insurance of United States health risks 
taken into account for all covered entities during the data year. The 
resulting number is the denominator of the fraction described in 
paragraph (d)(2) of this section.
    (d) Allocated fee calculated. For each covered entity for each fee 
year, the IRS will calculate the covered entity's allocated fee by 
multiplying the applicable amount from paragraph (a)(3) of this section 
by a fraction--
    (1) The numerator of which is the covered entity's net premiums 
written for health insurance of United States health risks during the 
data year taken into account (described in paragraph (c)(1) of this 
section); and
    (2) The denominator of which is the aggregate net premiums written 
for health insurance of United States health risks for all covered 
entities during the data year taken into account (described in 
paragraph (c)(2) of this section).


Sec.  57.5  Notice of preliminary fee calculation.

    (a) Content of notice. Each fee year, the IRS will make a 
preliminary calculation of the fee for each covered entity as described 
in Sec.  57.4. The IRS will notify each covered entity of its 
preliminary fee calculation for that fee year. The notification to a 
covered entity of its preliminary fee calculation will include--
    (1) The covered entity's allocated fee;
    (2) The covered entity's net premiums written for health insurance 
of United States health risks;
    (3) The covered entity's net premiums written for health insurance 
of United

[[Page 71492]]

States health risks taken into account after the application of Sec.  
57.4(a)(4);
    (4) The aggregate net premiums written for health insurance of 
United States health risks taken into account for all covered entities; 
and
    (5) Instructions for how to submit a corrected Form 8963, ``Report 
of Health Insurance Provider Information,'' to correct any errors 
through the error correction process.
    (b) Timing of notice. The IRS will specify in other guidance 
published in the Internal Revenue Bulletin the date by which it will 
send each covered entity a notice of its preliminary fee calculation.


Sec.  57.6  Error correction process.

    (a) In general. Upon receipt of its preliminary fee calculation, 
each covered entity must review this calculation during the error 
correction period. If the covered entity identifies one or more errors 
in its preliminary fee calculation, the covered entity must timely 
submit to the IRS a corrected Form 8963, ``Report of Health Insurance 
Provider Information,'' during the error correction period. The 
corrected Form 8963 will replace the original Form 8963 for all 
purposes, including for the purpose of determining whether an accuracy-
related penalty applies, except that a covered entity remains subject 
to the failure to report penalty if it fails to timely submit the 
original Form 8963. In the case of a controlled group, if the 
preliminary fee calculation for the controlled group contains one or 
more errors, the corrected Form 8963 must include all of the required 
information for the entire controlled group, including members that do 
not have corrections.
    (b) Time and manner. The IRS will specify in other guidance 
published in the Internal Revenue Bulletin the time and manner by which 
a covered entity must submit a corrected Form 8963. The IRS will 
provide its final determination regarding the covered entity's 
submission no later than the time the IRS provides a covered entity 
with a final fee calculation.
    (c) Finality. Covered entities must assert any basis for contesting 
their preliminary fee calculation during the error correction period. 
In the interest of providing finality to the fee calculation process, 
the IRS will not accept a corrected Form 8963 after the end of the 
error correction period or alter final fee calculations on the basis of 
information provided after the end of the error correction period.


Sec.  57.7  Notification and fee payment.

    (a) Content of notice. Each fee year, the IRS will make a final 
calculation of the fee for each covered entity as described in Sec.  
57.4. The IRS will base its final fee calculation on each covered 
entity's original or corrected Form 8963, ``Report of Health Insurance 
Provider Information,'' as adjusted by other sources of information 
described in Sec.  57.4(b)(1). The notification to a covered entity of 
its final fee calculation will include--
    (1) The covered entity's allocated fee;
    (2) The covered entity's net premiums written for health insurance 
of United States health risks;
    (3) The covered entity's net premiums written for health insurance 
of United States health risks taken into account after the application 
of Sec.  57.4(a)(4);
    (4) The aggregate net premiums written for health insurance of 
United States health risks taken into account for all covered entities; 
and
    (5) The final determination on the covered entity's corrected Form 
8963, ``Report of Health Insurance Provider Information,'' if any.
    (b) Timing of notice. The IRS will send each covered entity a 
notice of its final fee calculation by August 31st of the fee year.
    (c) Differences in preliminary fee calculation and final 
calculation. A covered entity's final fee calculation may differ from 
the covered entity's preliminary fee calculation because of changes 
made pursuant to the error correction process described in Sec.  57.6 
or because the IRS discovered additional information relevant to the 
fee calculation through other information sources as described in Sec.  
57.4(b)(1). Even if a covered entity did not file a corrected Form 8963 
described in Sec.  57.6, a covered entity's final fee may differ from a 
covered entity's preliminary fee because of information discovered 
about that covered entity through other information sources. In 
addition, a change in aggregate net premiums written for health 
insurance of United States health risks can affect every covered 
entity's fee because each covered entity's fee is equal to a fraction 
of the aggregate fee collected from all covered entities.
    (d) Payment of final fee. Each covered entity must pay its final 
fee by September 30th of the fee year. For a controlled group, the 
payment must be made using the designated entity's Employer 
Identification Number as reported on Form 8963. The fee must be paid by 
electronic funds transfer as required by Sec.  57.6302-1. There is no 
tax return to be filed with the payment of the fee.
    (e) Controlled groups. In the case of a controlled group that is 
liable for the fee, all members of the controlled group are jointly and 
severally liable for the fee. Accordingly, if a controlled group's fee 
is not paid, the IRS may separately assess each member of the 
controlled group for the full amount of the controlled group's fee.


Sec.  57.8  Tax treatment of fee.

    (a) Treatment as an excise tax. The fee is treated as an excise tax 
for purposes of subtitle F (sections 6001-7874). Thus, references in 
subtitle F to ``taxes imposed by this title,'' ``internal revenue 
tax,'' and similar references, are also references to the fee. For 
example, the fee is assessed (section 6201), collected (sections 6301, 
6321, and 6331), enforced (section 7602), and subject to examination 
and summons (section 7602) in the same manner as taxes imposed by the 
Code.
    (b) Deficiency procedures. The deficiency procedures of sections 
6211-6216 do not apply to the fee.
    (c) Limitation on assessment. The IRS must assess the amount of the 
fee for any fee year within three years of September 30th of that fee 
year.
    (d) Application of section 275. The fee is treated as a tax 
described in section 275(a)(6) (relating to taxes for which no 
deduction is allowed).


Sec.  57.9  Refund claims.

    Any claim for a refund of the fee must be made by the entity that 
paid the fee to the government and must be made on Form 843, ``Claim 
for Refund and Request for Abatement,'' in accordance with the 
instructions for that form.


Sec.  57.10  Effective/applicability date.

    Sections 57.1 through 57.9 apply to any fee that is due on or after 
September 30, 2014.


Sec.  57.6302-1  Method of paying the health insurance providers fee.

    (a) Fee to be paid by electronic funds transfer. Under the 
authority of section 6302(a), the fee imposed on covered entities 
engaged in the business of providing health insurance for United States 
health risks under section 9010 and Sec.  57.4 must be paid by 
electronic funds transfer as defined in Sec.  31.6302-1(h)(4)(i) of 
this chapter, as if the fee were a depository tax. For the time for 
paying the fee, see Sec.  57.7.
    (b) Effective/Applicability date. This section applies with respect 
to any fee that is due on or after September 30, 2014.


[[Page 71493]]



PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 2. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


0
 Par. 3. In Sec.  602.101, paragraph (b) is amended by adding the 
following entry in numerical order to the table to read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR Part or section where identified and described       control No.
------------------------------------------------------------------------
 
                                 * * * *
57.2(e)(2)(i)...........................................       1545-2249
 
                                 * * * *
------------------------------------------------------------------------


John Dalrymple,
Deputy Commissioner for Services and Enforcement.

    Approved: November 13, 2013.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2013-28412 Filed 11-26-13; 4:15 pm]
BILLING CODE 4830-01-P