[Federal Register Volume 77, Number 74 (Tuesday, April 17, 2012)]
[Proposed Rules]
[Pages 22691-22706]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-9173]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 40 and 46

[REG-136008-11]
RIN 1545-BK59


Fees on Health Insurance Policies and Self-Insured Plans for the 
Patient-Centered Outcomes Research Trust Fund

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations that implement and 
provide guidance on the fees imposed by the Patient Protection and 
Affordable Care Act on issuers of certain health insurance policies and 
plan sponsors of certain self-insured health plans to fund the Patient-
Centered Outcomes Research Trust Fund. These proposed regulations 
affect the issuers and plan sponsors that are directed to pay those 
fees. This document also contains a request for comments and provides 
notice of public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by July 16, 
2012. Requests to speak and outlines of topics to be discussed at the 
public hearing scheduled for Wednesday, August 8, 2012, at 10 a.m., 
must be received by July 30, 2012.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-136008-11), Internal 
Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 
20044. Submissions may be hand-delivered Monday through Friday between 
the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-136008-11), 
Courier's Desk Internal Revenue Service, 1111 Constitution Avenue NW., 
Washington, DC, or sent electronically via the IRS Internet site via 
the Federal eRulemaking Portal at www.regulations.gov (IRS REG-136008-
11). The public hearing will be held in the IRS Auditorium at the 
Internal Revenue Building, 1111 Constitution Avenue NW., Washington, 
DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Rebecca L. Baxter at (202) 622-3970 (regarding health insurance 
policies) or R. Lisa Mojiri-Azad at (202) 622-6080 (regarding self-
insured health arrangements); concerning the submission of comments or 
the public hearing, Oluwafunmilayo (Funmi)

[[Page 22692]]

Taylor at (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)). Comments on the collection of information should be sent to 
the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collection of information should 
be received by July 16, 2012. Comments are specifically requested 
concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the IRS, including whether the 
information will have practical utility;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    The collections of information in these proposed regulations are in 
Sec.  46.4375-1(c)(2)(v) (use of National Association of Insurance 
Commissioners (NAIC) Supplemental Health Care Exhibit to calculate the 
fee under section 4375); Sec.  46.4375-1(c)(2)(vi) (use of certain 
state forms to calculate the fee under section 4375); Sec.  46.4376-
1(b)(2)(G) (identification or designation of a plan sponsor under the 
governing plan document for certain applicable self-insured health 
plans); and Sec.  46.4376-1(c)(2)(v) (use of the Form 5500, ``Annual 
Return/Report of Employee Benefit Plan,'' to calculate the fee under 
section 4376).
    The collections of information under Sec.  46.4375-1(c)(2)(v), 
Sec.  46.4375-1(c)(2)(vi), and Sec.  46.4376-1(c)(2)(v) are intended to 
lower the burden on issuers and plan sponsors of calculating the 
average number of lives covered for the applicable policy year or plan 
year. The burden for the collection of information contained in these 
provisions will be reflected in the burden on the Form 720 ``Quarterly 
Federal Excise Tax Return'' after it is revised to include the 
reporting and payment of the fee imposed by sections 4375 and 4376.
    The collection of information contained in Sec.  46.4376-1(b)(2)(G) 
is necessary to provide certain entities that establish or maintain an 
applicable self-insured health plan the flexibility to designate the 
person that will be responsible for reporting and paying the fee 
imposed by section 4376. The likely respondents are employers, employee 
organizations, or persons that establish or maintain an applicable 
self-insured health plan and are entitled to make an election under 
Sec.  46.4376-1(b)(2)(G).
    Estimated number of respondents is 10,000.
    Estimated average annual burden per respondent is 5 minutes.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    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 26 U.S.C. 6103.

Background

    This document contains proposed amendments to 26 CFR part 40 
(Excise Tax Procedural Regulations) and 26 CFR part 46 (relating to 
excise taxes imposed on policies issued by foreign insurers and 
obligations not in registered form) to implement the requirements under 
sections 4375 through 4377 of the Internal Revenue Code (Code). 
Sections 4375 and 4376 of the Code impose fees on issuers of specified 
health insurance policies and plan sponsors of applicable self-insured 
health plans, and section 4377 contains special rules that apply to 
these issuers and plan sponsors with respect to these fees. Sections 
4375, 4376, and 4377 were added to the Code by section 6301 of the 
Patient Protection and Affordable Care Act (Affordable Care Act), 
Public Law 111-148 (124 Stat. 119 (2010)).
    The Affordable Care Act includes provisions that promote research 
to evaluate and compare health outcomes and the clinical effectiveness, 
risks, and benefits of medical treatments, services, procedures, drugs, 
and other strategies or items that treat, manage, diagnose, or prevent 
illness or injury. One such provision relates to the establishment of 
the private, nonprofit corporation, the Patient-Centered Outcomes 
Research Institute (the ``Institute''). The Institute will assist, 
through research, patients, clinicians, purchasers, and policy-makers 
in making informed health decisions by advancing the quality and 
relevance of evidence-based medicine through the synthesis and 
dissemination of comparative clinical effectiveness research findings. 
The statute specifically prohibits the Secretary of Health and Human 
Services (HHS) from using the evidence or findings of the research 
conducted in determining coverage, reimbursement, or incentive programs 
unless it is through an iterative and transparent process which 
includes public comment and considers the effect on subpopulations. 
Nothing under this provision allows the Secretary of HHS to deny 
coverage of items or services solely on the basis of comparative 
clinical effectiveness research. The statute provides that the 
Institute will not develop a dollars-per-quality-life-year estimate as 
a threshold to establish effective or recommended care. Section 6301 of 
the Affordable Care Act amended the Code by adding new section 9511 to 
establish the Patient-Centered Outcomes Research Trust Fund (the 
``Trust Fund''), which is the funding source for the Institute. Section 
6301 of the Affordable Care Act also added new Code sections 4375, 
4376, and 4377 to provide a funding source for the Trust Fund that is 
to be financed, in part, by fees to be paid by issuers of specified 
health insurance policies and sponsors of applicable self-insured 
health plans.

Statutory Provisions

    Section 4375(a) imposes a fee on an issuer of a specified health 
insurance policy for each policy year ending on or after October 1, 
2012, and before October 1, 2019. Under section 4375(a), the fee is two 
dollars (one dollar in the case of policy years ending before October 
1, 2013) multiplied by the average number of lives covered under the 
policy. Under section 4375(d), for policy years ending on or after 
October 1, 2014, the fee is increased based on increases in the 
projected per capita amount of National Health Expenditures. Section 
4375(b) provides that the fee imposed by section 4375(a) shall be paid 
by the issuer of the policy.
    Section 4375(c) defines specified health insurance policy as any 
accident or health insurance policy (including a policy under a group 
health plan) issued with respect to individuals residing in the United 
States. Section 4375(c)(2) excludes from a specified health insurance 
policy any insurance if

[[Page 22693]]

substantially all of its coverage is of excepted benefits described in 
section 9832(c). Section 4375(c)(3) provides that a specified health 
insurance policy includes any prepaid health coverage arrangement 
described in section 4375(c)(3)(B). An arrangement is described in 
section 4375(c)(3)(B) if, under the arrangement, fixed payments or 
premiums are received as consideration for a person's agreement to 
provide or arrange for the provision of accident or health coverage to 
residents of the United States, regardless of how the coverage is 
provided or arranged to be provided.
    Section 4376 imposes a fee on a plan sponsor of an applicable self-
insured health plan for each plan year ending on or after October 1, 
2012, and before October 1, 2019. Under section 4376(a), the fee is two 
dollars (one dollar for plan years ending before October 1, 2013) 
multiplied by the average number of lives covered under the plan for 
the plan year. Under section 4376(d), for plan years ending on or after 
October 1, 2014, the fee is increased based on increases in the 
projected per capita amount of National Health Expenditures. Section 
4376(b)(1) provides that the fee imposed by section 4376(a) shall be 
paid by the plan sponsor.
    Section 4376(b)(2) defines plan sponsor as the employer in the case 
of a plan established or maintained by a single employer, or the 
employee organization in the case of a plan established or maintained 
by an employee organization. Section 4376(b)(2) also provides that, in 
the case of (1) a plan established or maintained by two or more 
employers or jointly by one or more employers and one or more employee 
organizations, (2) a multiple employer welfare arrangement, or (3) a 
voluntary employees' beneficiary association described in section 
501(c)(9), the plan sponsor is the association, committee, joint board 
of trustees, or other similar group of representatives of the parties 
who establish or maintain the plan. Section 4376(b)(2) further provides 
that in the case of a plan established or maintained by a rural 
electric cooperative (as defined in section 3(40)(B)(iv) of the 
Employee Retirement Income Security Act of 1974 (ERISA)) or rural 
telephone cooperative association (as defined in section 3(40)(B)(v) of 
ERISA), the plan sponsor is the cooperative or association that 
established or maintained the plan.
    Section 4376(c) defines applicable self-insured health plan as any 
plan for providing accident or health coverage if any portion of the 
coverage is provided other than through an insurance policy, and the 
plan is established or maintained: (1) By one or more employers for the 
benefit of their employees or former employees, (2) by one or more 
employee organizations for the benefit of their members or former 
members, (3) jointly by one or more employers and one or more employee 
organizations for the benefit of employees or former employees, (4) by 
a voluntary employees' beneficiary association described in section 
501(c)(9), (5) by any organization described in section 501(c)(6), or 
(6) if not previously described, by a multiple employer welfare 
arrangement (as defined in section 3(40) of ERISA), a rural electric 
cooperative (as defined in section 3(40)(B)(iv) of ERISA), or a rural 
telephone cooperative association (as defined in section 3(40)(B)(v) of 
ERISA).
    Section 4377 includes definitions and special rules that apply for 
purposes of sections 4375 and 4376. Section 4377(a)(1) defines accident 
and health coverage as any coverage that, if provided by an insurance 
policy, would cause the policy to be a specified health insurance 
policy (as defined in section 4375(c)).
    Section 4377(b)(1)(B) provides that ``[n]otwithstanding any other 
law or rule of law, governmental entities shall not be exempt from'' 
the fee imposed by sections 4375 and 4376 unless the policy or plan is 
an exempt governmental program. Section 4377(b)(3) defines exempt 
governmental program as (1) any insurance program established under 
title XVIII of the Social Security Act (42 U.S.C. 1395 et seq.) 
(Medicare), (2) the medical assistance program established by title XIX 
(42 U.S.C. 1396 et seq.) (Medicaid) or title XXI of the Social Security 
Act (42 U.S.C. 1397aa et seq.) (Children's Health Insurance Program), 
(3) any program established by Federal law for providing medical care 
(other than through insurance policies) to individuals (or the spouses 
and dependents thereof) by reason of such individuals being members of 
the Armed Forces of the United States or veterans, and (4) any program 
established by Federal law for providing medical care (other than 
through insurance policies) to members of Indian tribes (as defined in 
section 4(d) of the Indian Health Care Improvement Act, 25 U.S.C. 
1603). Under these special rules, a governmental entity (including a 
federally recognized Indian tribal government) that is the plan sponsor 
of an applicable self-insured health plan that does not meet the 
definition of an exempt governmental program must pay the fee imposed 
by section 4376.
    Section 4377(c) provides that the fees imposed by sections 4375 and 
4376 are treated as taxes for purposes of subtitle F of the Code.

Notice 2011-35

    On June 8, 2011, the IRS released Notice 2011-35 (2011-25 IRB 879), 
which requested comments on how the fees imposed under sections 4375 
and 4376 should be calculated and paid, including possible rules and 
safe harbors. The Treasury Department and the IRS received numerous 
comments in response to Notice 2011-35 and have considered all comments 
in drafting these proposed regulations. The relevant portions of Notice 
2011-35 and comments are discussed in more detail in this preamble. See 
Sec.  601.601(d)(2).

Explanation of Provisions

Specified Health Insurance Policies Subject to the Fee Under Section 
4375

    The fee under section 4375 is imposed on the issuer of a specified 
health insurance policy. Under the proposed regulations, the fee must 
be calculated using the applicable dollar amount in effect for the 
policy year (for example, $1 for policy years ending on or after 
October 1, 2012, and before October 1, 2013) and one of the permitted 
methods for determining the average number of lives covered under the 
policy during the policy year.
    The term specified health insurance policy includes only accident 
and health insurance policies that are issued with respect to an 
individual residing in the United States. The proposed regulations 
clarify that for purposes of this fee, ``an individual residing in the 
United States'' means an individual who has a place of abode in the 
United States. The United States, for this purpose, includes American 
Samoa, Guam, the Northern Mariana Islands, Puerto Rico, the Virgin 
Islands, and any other possession of the United States.
    Commentators requested a bright-line rule for determining whether 
an individual covered by a policy is residing in the United States. 
Many commentators suggested that issuers should be able to rely on the 
address on file for the primary insured to determine whether 
individuals covered by the policy are residing in the United States. 
The Treasury Department and the IRS recognize that the address on file 
for the primary insured may be the only information the insurer has 
with respect to the residence of the individuals covered under the 
policy, and also that the address on file is likely the place of abode 
for most, if not all, of the covered individuals. Accordingly, the 
proposed

[[Page 22694]]

regulations provide that if the address on file with the issuer or plan 
sponsor for the primary insured is outside of the United States, the 
issuer or plan sponsor may treat the primary insured and the primary 
insured's spouse, dependents, or other beneficiaries covered under the 
policy as having the same place of abode and not residing in the United 
States. For this purpose, the term ``primary insured'' refers to the 
individual eligible for coverage other than due to his or her status as 
a spouse, dependent, or other beneficiary of another insured individual 
(for example, in the case of a group health plan for employees, the 
individual eligible for coverage due to his or her status as an 
employee).
    Several commentators also suggested that expatriate policies not be 
considered specified health insurance policies for purposes of the fee 
because the policies are issued principally to cover employees who do 
not reside in the United States. Commentators argued that expatriate 
policies are predominantly group health insurance policies sold to 
employers for a unique subset of their employees, the substantial 
majority of whom are living outside the United States while working for 
the employer. According to these commentators, only a small minority of 
the individuals covered under these expatriate policies may be foreign 
nationals working for the employer in the United States. For these 
reasons, the proposed regulations provide that the term ``specified 
health insurance policy'' does not include any group policy issued to 
an employer if the facts and circumstances show that the group policy 
was designed and issued specifically to cover primarily employees who 
are working and residing outside of the United States.
    Commentators requested that the regulations provide that stop loss 
and indemnity reinsurance policies not be considered specified health 
insurance policies. Commentators argued that stop loss and indemnity 
reinsurance policies are not providing coverage for lives covered; 
rather, these types of policies are intended to limit the original 
obligor's financial exposure. Section 4375 imposes a fee based on the 
average number of lives covered. Because stop loss and indemnity 
reinsurance policies generally do not provide coverage based upon the 
number of lives covered, the proposed regulations provide that for 
purposes of section 4375, these policies are not specified health 
insurance policies subject to the fee under section 4375. No inference 
is intended as to whether stop loss or indemnity reinsurance policies 
may constitute health insurance policies for other purposes.
    Commentators raised questions about the description of prepaid 
health coverage arrangements in section 4375(c)(3)(B) and requested 
that the regulations clarify which types of arrangements are covered by 
that section. One commentator suggested that the language in section 
4375(c)(3)(B) is intended to describe health maintenance organizations 
and similar arrangements, noting that the definition of ``health 
insurance,'' which was added to ERISA, the Public Health Service Act, 
and the Code by the Health Insurance Portability and Accountability Act 
of 1996, Public Law 104-191 (110 Stat. 1936 (1996)), was specifically 
drafted to include health maintenance organizations and similar 
arrangements. The Treasury Department and the IRS agree that the 
language in section 4375(c)(3)(B) describes health maintenance 
organizations and similar organizations; therefore, the proposed 
regulations clarify that the description in section 4375(c)(3)(B) 
covers any hospital or medical service policy or certificate, hospital 
or medical service plan contract, or health maintenance organization 
contract.

Self-insured Health Plans and Plan Sponsors Subject to the Fee Under 
Section 4376

    The fee under section 4376 is imposed on the plan sponsor of an 
applicable self-insured health plan. Under the statute and these 
proposed regulations, the fee must be calculated using the applicable 
dollar amount in effect for the plan year (for example, $1 for plan 
years ending on or after October 1, 2012, and before October 1, 2013) 
and one of the permitted methods for determining the average number of 
lives covered under the plan during the plan year.
    These proposed regulations provide that an applicable self-insured 
health plan is a plan that is established or maintained by a plan 
sponsor for the benefit of employees, former employees, members, former 
members, or other eligible individuals to provide accident and health 
coverage (within the meaning of Sec.  46.4377-1(a)(1) of these proposed 
regulations), any portion of which is provided other than through an 
insurance policy and that meets certain other conditions. The proposed 
regulations provide that an applicable self-insured health plan does 
not include an exempt governmental program (as defined in section 
4377(c)(3)) but does include a plan that is established or maintained 
solely for the benefit of former employees (commonly referred to as a 
retiree-only plan).\1\ A self-insured health plan that does not provide 
coverage described in section 4376(c) is not an applicable self-insured 
health plan. For example, a self-insured group health plan of a 
Federally recognized Indian tribal government that provides coverage 
only to tribal members that are not employees of the Indian tribal 
government would not be an applicable self-insured health plan, unless 
it otherwise falls within one of the statutory definitions of an 
applicable self-insured health plan (for example, the plan is 
established or maintained by a section 501(c)(6) organization).
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    \1\ Sections 4375 and 4376 may apply to a retiree-only plan 
because, although section 9832 excludes group health plans that have 
less than two participants who are current employees (such as 
retiree-only plans) from the requirements of chapter 100 (which 
includes a number of requirements added by the Affordable Care Act), 
this exclusion does not apply to sections 4375 and 4376 because 
these sections are in chapter 34. In addition, section 4376(c)(2)(A) 
indicates explicitly that an applicable self-insured health plan 
includes a plan established or maintained by one or more employers 
for the benefit of their employees or former employees.
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    Notice 2011-35 (2011-25 IRB 879) invited comments on the type or 
types of health flexible spending arrangements (as described in section 
106(c)(2)) (health FSAs) and health reimbursement arrangements (as 
described in Notice 2002-45 (2002-2 CB 93)) (HRAs) that would be 
excluded from the definition of an applicable self-insured health plan 
because they provide the kind of coverage that, if provided by an 
insurance policy, would not cause the policy to be treated as a 
specified health insurance policy, as defined in section 4375(c). 
Health FSAs and HRAs are both self-insured health plans.\2\ See Sec.  
601.601(d)(2).
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    \2\ Archer Medical Savings Accounts (Archer MSAs) under section 
220(d) and Health Savings Accounts (HSAs) under section 223(d) are 
tax-favored trusts for the purpose of paying the qualified medical 
expenses of the account beneficiary. Archer MSAs and HSAs are 
generally neither health insurance policies nor self-insured health 
plans and thus are not subject to the taxes under sections 4375 and 
4376.
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    Commentators generally requested that all health FSAs and HRAs be 
excluded from the definition of applicable self-insured health plan 
under section 4376. Commentators also suggested that because the 
majority of health FSAs or HRAs are provided in connection with a major 
medical plan, they should be excluded from the fee imposed by section 
4376 to avoid the fee from being imposed twice with respect to the same 
individual. Some of the commentators also observed that there would be 
challenges arising from the possibility that an employer may lack 
information on the number of dependents whose medical expenses are

[[Page 22695]]

eligible for reimbursement from an employee's health FSA or HRA.
    Some commentators requested that if HRAs were not excluded from the 
definition of applicable self-insured health plan, the guidance limit 
the fee under section 4376 to HRAs that are not offered in connection 
with a major medical plan or permit treatment of an HRA that is offered 
in connection with a major medical plan as a single applicable self-
insured health plan to avoid the fee applying twice with respect to 
individuals covered by a major medical plan and a related HRA.
    The proposed regulations do not exclude all health FSAs and HRAs 
from the definition of an applicable self-insured health plan under 
section 4376. In response to comments, however, these proposed 
regulations provide that multiple self-insured arrangements established 
and maintained by the same plan sponsor and with the same plan year are 
subject to a single fee. Accordingly, an HRA is not subject to a 
separate fee under section 4376 if the HRA is integrated with another 
applicable self-insured health plan that provides major medical 
coverage, provided that the HRA and the other plan are established or 
maintained by the same plan sponsor. However, section 4375 imposes a 
separate fee on the issuer of a specified health insurance policy. 
Consistent with the statutory structure which separates the fee with 
respect to health insurance policies from the fee with respect to self-
insured plans, the proposed regulations provide that an HRA that is 
integrated with an insured group health plan is treated as an 
``applicable self-insured health plan'' the plan sponsor of which is 
subject to the fee under section 4376, while the issuer of the group 
insurance policy for the insured group health plan is subject to the 
fee under section 4375, even though the HRA and the insured group 
health plan are maintained by the same plan sponsor.
    These proposed regulations reflect the special rule in section 
4375(c)(2), which is carried over to self-insured arrangements through 
the definition of ``accident and health coverage'' in section 
4377(a)(1), that a specified health insurance policy does not include 
any insurance if substantially all of its coverage is of excepted 
benefits described in section 9832(c). The proposed regulations provide 
that a health FSA that satisfies the requirements of an excepted 
benefit under section 9832(c) is excluded from the definition of an 
``applicable self-insured health plan'' and therefore is not subject to 
the fee imposed by section 4376. (See Sec.  54.9831-1(c)(3)(v), 
relating to additional rules on health FSAs that are excepted 
benefits.) A health FSA that does not satisfy the requirements to be 
treated as an excepted benefit is an applicable self-insured health 
plan subject to the fee imposed by section 4376 (and, for purposes of 
the rules in the preceding paragraph, is treated the same as an 
integrated HRA).
    In addition, to address the concerns raised about the availability 
of information on the lives covered under an HRA or health FSA, the 
proposed regulations contain a special rule permitting the plan sponsor 
to assume one covered life for each employee with an HRA and for each 
employee with a health FSA that is not an excepted benefit.
    Commentators also requested that an employee assistance program 
(EAP) or wellness arrangement be exempt from the fee. Commentators 
argued that generally, under an EAP or wellness arrangement, benefits 
for medical care are secondary or incidental to non-medical benefits. 
In response, these proposed regulations exclude from the definition of 
applicable self-insured health plan an EAP, disease management program, 
or wellness program, if the program does not provide significant 
benefits in the nature of medical care or treatment.
    For each type of applicable self-insured health plan identified in 
section 4376(c), the plan sponsor is the person responsible for the 
payment of the fee. Section 4376(b)(2) provides that in the case of a 
plan established or maintained by a single employer, the plan sponsor 
is the employer, and in the case of a plan established or maintained by 
a single employee organization, the plan sponsor is the employee 
organization. Section 4376 does not contain rules that would treat 
related entities as a single entity. Accordingly, for example, under 
these proposed regulations, a plan that is maintained by multiple 
related employers is not a plan that is established or maintained by a 
single employer, but, for section 4376 purposes, is considered a plan 
that is established or maintained by two or more employers.
    In the case of a plan maintained by two or more employers, the 
proposed regulations provide that the plan sponsor is the person 
identified as the plan sponsor by the terms of the document under which 
the plan is operated, or the employer designated as the plan sponsor 
for purposes of section 4376 by the terms of the document under which 
the plan is operated (provided that such designation is made, and that 
employer has consented to the designation, by no later than the due 
date of the return under section 4376 for that plan year is required to 
be filed, after which date such designation for that plan year may not 
be changed or revoked, and provided further that an employer may be 
designated as the plan sponsor only if that employer is one of the 
employers maintaining the plan). In the absence of the identification 
or designation of a plan sponsor by the terms of the document under 
which the plan is operated, the proposed regulations provide that the 
plan sponsor is each employer that maintains the plan (with respect to 
employees of that employer). Because the plan sponsor may be designated 
on or before the due date for filing the Form 720, ``Quarterly Federal 
Excise Tax Return,'' for the plan year, and under these proposed 
regulations the first potential due date for filing the Form 720 is 
July 31, 2013, this rule provides related employers that provide 
coverage for their employees under a single plan ample time to 
designate a plan sponsor if the employers wish to consolidate the 
filing and the payment of the fee under section 4376. In the absence of 
designation of a plan sponsor in the governing plan document, the 
proposed regulations provide that the plan sponsor is each employer 
that maintains the plan (with respect to employees of that employer), 
and therefore each employer would be required to file its own Form 720, 
reflecting the section 4376 fee applicable to that employer as a plan 
sponsor with respect to its employees.
    As discussed in Notice 2011-35 and earlier in the section of this 
preamble entitled ``Statutory Provisions,'' section 4377(b) provides 
that the fee imposed by section 4376 applies to a governmental entity 
that establishes or maintains an applicable self-insured health plan 
(other than a plan that qualifies as an exempt governmental program) 
for its employees. These proposed regulations provide that a 
governmental entity that establishes or maintains an applicable self-
insured health plan for its current or former employees is the plan 
sponsor for purposes of the fee imposed by section 4376. Thus, these 
proposed regulations require that a governmental entity (including a 
Federally recognized Indian tribal government) that establishes or 
maintains an applicable self-insured health plan (other than a plan 
that qualifies as an exempt governmental program) must calculate, 
report, and pay the fee under section 4376 in accordance with the 
guidance in these proposed regulations.
    Several commentators requested that the guidance clarify that, in 
the case of

[[Page 22696]]

an applicable self-insured health plan that is established or 
maintained by a board of trustees, plan assets (for example, amounts 
held in a trust) or the employer contributions to the plan could be 
used to pay the fee under section 4376. Because the use of plan assets 
to pay the fee under section 4376 may have implications under various 
state and Federal laws (including, for example, ERISA's fiduciary 
provisions), the question of what the permissible sources of funds are 
for paying the fee under section 4376 is an issue that is outside the 
scope of these proposed regulations. The Treasury Department and the 
IRS have consulted the Department of Labor concerning comments on the 
appropriate sources to pay the fee under section 4376. The Department 
of Labor has advised the Treasury Department and the IRS that it is 
considering permissible funding sources for these fee payments by plan 
sponsors that are subject to ERISA's fiduciary provisions.

Calculation of the Fee Under Section 4375

    The fee imposed on an issuer of a specified health insurance policy 
under section 4375 is based on the average number of lives covered 
under the policy. Notice 2011-35 invited comments on reasonable methods 
an issuer may use to determine the average number of lives covered 
under a policy. Notice 2011-35 also invited comments on whether 
guidance should provide a safe harbor for issuers that are required to 
file the National Association of Insurance Commissioners (NAIC) 
Supplemental Health Care Exhibit (Exhibit). In particular, the Treasury 
Department and the IRS outlined a potential safe harbor based on the 
number of lives reported on the most recently filed Exhibit or based on 
the average of the covered lives reported on the most recently filed 
Exhibit and the immediately preceding Exhibit.
    Commentators generally favored a safe harbor that allows issuers to 
calculate the average number of lives covered under the policy based on 
data reported on the Exhibit but expressed concerns with exclusive 
reliance upon covered lives data on the Exhibit. According to the 
instructions to the Exhibit, the term ``covered lives'' means the total 
number of lives insured, including dependents, at any time during the 
reporting period, which means the Exhibit captures all lives covered 
without regard to how long the coverage lasted. Several commentators 
recommended that the regulations allow issuers to use member months 
data reported in the Exhibit. The Exhibit defines the term ``member 
months,'' as the sum of the number of lives covered on a single day in 
every month. Commentators argued that dividing the member months data 
by 12 (the number of months in a reporting period) is a more accurate 
measure of the average number of lives covered because it better 
reflects that some individuals may only be insured for part of the 
year.
    Commentators noted that some entities are not required to file the 
Exhibit, but must provide comparable forms to their applicable state 
regulators. Commentators recommended that the proposed regulations 
permit issuers to use information included in any other report filed 
with a state government.
    Some commentators suggested that the regulations allow issuers to 
determine the average number of lives covered by counting the actual 
number of lives covered during the policy year. Other commentators 
requested that the regulations allow the use of any reasonable formula 
or other method to determine the average number of lives covered, 
including a formula or method that historically has been used by the 
issuer for other business purposes.
    The proposed regulations provide issuers the choice of using any of 
four alternative methods to determine the average number of lives 
covered under policies that it issues for purposes of the fee imposed 
by section 4375. First, an issuer may determine the average number of 
lives covered under a policy for a policy year by calculating the sum 
of lives covered for each day of the policy year and dividing that sum 
by the number of days in the policy year (the actual count method). 
Second, an issuer may determine the average number of lives covered 
under a policy for a policy year by adding the total number of lives 
covered on one date in each quarter of the policy year, or an equal 
number of dates for each quarter, and dividing the total by the number 
of dates on which a count was made (the snapshot method). Third, as an 
alternative to determining the average number of lives covered under 
each individual policy for its respective policy year, an issuer may 
determine the average number of lives covered under all policies in 
effect for a calendar year based on the ``member months'' reported on 
the Exhibit divided by 12 (the member months method). Fourth, an issuer 
that is not required to file the Exhibit may determine the average 
number of lives covered under all of its policies in effect for a 
calendar year using data in any form that is equivalent to the Exhibit 
that is filed with the state of domicile if the state form reports 
lives covered in the same manner as member months is reported on the 
Exhibit (the state form method). For this purpose, an equivalent form 
includes only a form that reports all the lives covered under the 
policy (including, for example, spouses, dependents, and other 
beneficiaries, as applicable).
    The proposed regulations direct an issuer to apply a single method 
in determining the average number of lives covered under the policy for 
the year. In addition, issuers must use the same method of counting 
lives for all policies reported on a single return. Issuers using the 
actual count or snapshot method may change to the snapshot or actual 
count method from one policy year to the next. For example, an issuer 
with a policy that has a policy year that ends on June 30, Policy A, 
may determine lives covered under Policy A for July 1, 2013 to June 30, 
2014, using the actual count method if the issuer uses the actual count 
method for all policies for which a liability will be reported on the 
Form 720, ``Quarterly Federal Excise Tax Return,'' due by July 31, 2015 
(the due date for the return that will include the July 2013 to June 
2014 policy year for Policy A, as discussed in the section of this 
preamble entitled ``Application of Excise Tax Procedural Rules (Filing 
of Returns and Payment of Fees'')). The issuer may change its method 
for determining lives covered under Policy A to the snapshot method for 
the July 1, 2014, to June 30, 2015 policy year, provided that the 
snapshot method is used for all policies for which a liability will be 
reported on the return due by July 31, 2016 (the due date for the 
return that will include the July 2014 to June 2015 policy year for 
Policy A).
    While the actual count and snapshot methods count lives covered on 
a policy-by-policy basis for each policy having a policy year that ends 
in the reporting period (which is based on the calendar year), the 
member months and state form methods count all lives covered during the 
calendar year for all policies in effect during the calendar year 
irrespective of when actual policy years end. For example, for a policy 
with a policy year that ends on June 30, member months will include 
lives covered under that policy from January 1 to December 31 and 
aggregate those lives covered with all other lives covered for the 
calendar year under all policies in effect during the calendar year. To 
convert the lives covered from the member months to the total lives 
covered under a particular policy for a policy year is administratively 
burdensome. Accordingly, the proposed regulations provide that an 
issuer using

[[Page 22697]]

the member months or state form method must use that method for all 
policies for all years for which the fee applies. The Treasury 
Department and the IRS solicit comments on whether there should be an 
exception to this rule for issuers of calendar-year only policies who 
want to switch from the member months or state form method to the 
actual count or snapshot method and, if so, how to address the 
transition in methods for the 2012 and 2019 calendar years.
    Commentators noted that for 2012 and 2019 a partial year adjustment 
will be needed because the member months data, which uses the calendar 
year for all policies, will include in the member months for 2012 and 
2019 lives covered under policies with a policy year that ends before 
October 1, 2012, or after September 30, 2019, which are policies to 
which the fee under section 4375 does not apply. The Treasury 
Department and the IRS also understand that the data reported on state 
forms is generally also based on the calendar year. To adjust for 2012 
and 2019, the proposed regulations adopt a pro rata approach for 
calculating the average number of lives covered using the member months 
method or the state form method for 2012 and 2019. For example, the 
member months number for 2012 is divided by 12 and the resulting number 
is multiplied by one-quarter to arrive at the average number of lives 
covered for October through December 2012. The proposed regulations 
further treat the amount calculated under this pro rata approach as the 
average number of lives covered for policies with policy years that end 
on or after October 1, 2012, and before January 1, 2013. Similar rules 
are provided for 2019.
    The Treasury Department and the IRS understand that these proposed 
regulations are being issued after the beginning of some policy years 
to which the fee under section 4375 will apply. Because issuers that do 
not use the member months method or state form method may not have 
started counting lives covered for policy years that end on or after 
October 1, 2012, but that began before May 14, 2012, issuers using the 
actual count method may begin counting lives covered under a policy as 
of May 14, 2012 rather than the first day of the policy year, and 
divide by the appropriate number of days remaining in the policy year. 
Similarly, for policy years that end on or after October 1, 2012, but 
that began before May 14, 2012, issuers using the snapshot method may 
use counts from quarters beginning on or after May 14, 2012 to 
determine the average number of lives covered under the policy. The 
Treasury Department and the IRS intend for these rules to facilitate 
compliance for the initial policy years covered by section 4375. 
Comments are requested as to whether any additional transition rules 
under section 4375 are needed for this purpose.

Calculation of the Fee Under Section 4376

    The fee imposed on a plan sponsor of an applicable self-insured 
health plan under section 4376 is based on the average number of lives 
covered under the plan. Notice 2011-35 invited comments on reasonable 
methods that could reduce administrative burdens on plan sponsors that 
must compute the average number of lives covered under an applicable 
self-insured health plan. Notice 2011-35 also invited comments on safe 
harbors that would permit a plan sponsor to determine the average 
number of covered lives under the plan using a formula based on the 
number of participants and one or more additional factors that account 
for the number of dependents without requiring that every actual 
dependent covered under the plan be counted.
    Commentators generally favored using reasonable simplifying methods 
and safe harbors to determine the average number of lives covered under 
the plan. Some commentators suggested that the guidance permit the use 
of snapshot data to determine the number of lives taken into account 
for calculating the average number of lives covered during the plan 
year. Commentators also suggested that plan sponsors be permitted to 
determine the average number of lives covered during the year based on 
information reported on the plan's Form 5500, ``Annual Return/Report of 
Employee Benefit Plan.''
    Commentators generally recognized that a method that is based on 
Form 5500 reporting will have limited application because the 
requirement to file a Form 5500 does not apply to all plan sponsors 
that are subject to the fee under section 4376. These commentators also 
noted that the Form 5500 does not include information on the number of 
lives (participants and dependents) covered under the plan during the 
plan year, but rather includes information only on the number of 
participants on the first day and last day of the plan year. 
Accordingly, the information reported on the Form 5500 would need to be 
converted to a number that accurately represents the average number of 
covered lives under the plan for the plan year.
    To make it easier for plan sponsors to determine the average number 
of lives covered under the plan for the plan year, these proposed 
regulations provide plan sponsors a choice to use any of three 
alternative methods. First, a plan sponsor may determine the average 
number of lives covered under the plan for the plan year by calculating 
the sum of the lives covered for each day of the plan year and dividing 
that sum by the number of days in the plan year (the actual count 
method). Second, a plan sponsor may determine the average number of 
lives covered under the plan for the plan year by adding the totals of 
lives covered on one date in each quarter, or an equal number of dates 
for each quarter, and dividing the total by the number of dates on 
which a count was made (the snapshot method). For this purpose, the 
number of lives covered on a date may be determined as equal to either 
the sum of the actual number of lives covered on the dates (the 
snapshot count method) or the sum of (1) the number of participants 
with self-only coverage on that date, plus (2) the product of the 
number of participants with coverage other than self-only coverage on 
the date and 2.35 (the snapshot factor method).\3\ The Treasury 
Department and the IRS request comments on additional sources of data 
that could be used to calculate a more accurate conversion factor.
---------------------------------------------------------------------------

    \3\ The 2.35 dependency factor reflects that all participants 
with coverage other than self-only have coverage for themselves and 
some number of dependents. The Treasury Department and the IRS 
developed the factor, and other similar factors used in the 
regulations, in consultation with Treasury Department economists and 
in consultation with plan sponsors regarding the procedures they 
currently use for estimating the number of covered individuals.
---------------------------------------------------------------------------

    Third, a plan sponsor may determine the average number of lives 
covered under the plan for the plan year based on a formula that 
includes the number of participants actually reported on the Form 5500 
for the applicable self-insured health plan for the plan year (the Form 
5500 method). For a plan providing only self-only coverage, under the 
Form 5500 method the plan sponsor may treat the average number of 
covered lives under the plan for a plan year as the sum of the total 
participants at the beginning and the end of the plan year, in each 
case as reported on the Form 5500, divided by two.
    For plans providing coverage that is not limited to the self-only 
coverage, the Form 5500 does not identify whether the coverage is self-
only or family (or some other non-self-only coverage). Therefore, the 
number of participants reported on the Form 5500 generally is converted 
to covered lives by multiplying the number of participants on each date 
by a factor of 2.0. (This

[[Page 22698]]

factor is lower than the 2.35 factor used in the snapshot factor method 
because this factor takes into account participants with self-only 
coverage that covers one life, as well as participants with other 
coverage that covers two or more lives.) Accordingly, under the Form 
5500 method for plans that provide coverage not limited to self-only 
coverage, a plan sponsor may simply add the number of participants 
reported for the beginning of the plan year to the number reported for 
the end of the plan year to determine the average number of covered 
lives for the plan year. The Treasury Department and the IRS request 
comments on additional sources of data that could be used to calculate 
a more accurate conversion factor.
    The proposed regulations direct a plan sponsor to apply a single 
method in determining the average number of lives covered under the 
plan for the entire plan year. However, a plan sponsor is not required 
to use the same method from one plan year to the next.
    The Treasury Department and the IRS understand that these proposed 
regulations are being issued after the beginning of some plan years to 
which the fee under section 4376 will apply. Therefore, these proposed 
regulations include a special rule for the fee under section 4376 
applicable for a plan year that ends on or after October 1, 2012, and 
began before July 11, 2012. Because self-insured plans generally are 
not required to complete the Exhibit or determine the number of covered 
lives for other regulatory purposes, under this special rule, a plan 
sponsor may use any reasonable method to determine the average number 
of lives covered under the plan for purposes of calculating the fee 
under section 4376 for those plan years. For more information about the 
return filing requirements and payment of the fees, see the section in 
this preamble entitled ``Application of Excise Tax Procedural Rules 
(Filing of Returns and Payment of Fees).''

Application of Subtitle F

    In accordance with section 4377(c), references in subtitle F 
(section 6001-7874) to ``taxes imposed by this title,'' ``internal 
revenue tax,'' and similar references apply to the fees imposed by 
sections 4375 and 4376. For example, the fees imposed by sections 4375 
and 4376 are assessed pursuant to section 6201, collected pursuant to 
sections 6301, 6321, and 6331, enforced pursuant to section 7602, 
subject to examination and summons pursuant to section 7602, and 
subject to confidentiality rules pursuant to section 6103, in the same 
manner as other taxes imposed by the Code.
    Sections 4375 and 4376 are in chapter 34 of the Code (Taxes on 
Certain Insurance Policies). The deficiency procedures of sections 
6211-6216 apply only to income, estate, and gift taxes imposed by 
subtitle A (Income Taxes) and B (Estate and Gift Taxes) and the excise 
taxes imposed by chapters 41-44. Because sections 4375 and 4376 are in 
chapter 34, the deficiency procedures do not apply to the fee. Thus, 
the IRS may assess and collect the fees using the procedures in 
subtitle F without regard to the restrictions on assessment in section 
6213 (relating to petitions to the Tax Court).

Application of Excise Tax Procedural Rules (Filing of Returns and 
Payment of Fees)

    The Excise Tax Procedural Regulations in 26 CFR part 40 contain 
rules for depositing, paying, and return filing for a number of excise 
taxes, including the excise taxes in chapter 34.
    Under existing rules for chapter 34 excise taxes, taxpayers pay and 
report these taxes quarterly on Form 720, ``Quarterly Federal Excise 
Tax Return,'' by the last day of the first calendar month following the 
calendar quarter for which it is filed. The proposed regulations amend 
this rule so that issuers and plan sponsors will report and pay the 
section 4375 and 4376 fees only once a year on Form 720, which will be 
due by July 31 of each year. A person that files a Form 720 only to 
report liability imposed by section 4375 or 4376 is not required to 
file a Form 720 at other times during the year. A return will generally 
cover policy years (section 4375) and plan years (section 4376) that 
end during the preceding calendar year, or in the case of an issuer 
that determines the average number of lives covered for purposes of 
section 4375 using the member months method or the state form method, 
the return is for all policies in effect during the previous calendar 
year. The instructions for Form 720 inform filers how and when to file 
and pay. These instructions require that the filer (the issuer or plan 
sponsor, as applicable) have an Employer Identification Number (EIN) to 
use in filing the Form 720.
    Most excise taxes reported on Form 720 are required to be deposited 
semimonthly. However, these proposed regulations do not require 
semimonthly deposits of the fee imposed by section 4375 or 4376; 
rather, full payment of the fee is due annually by the July 31 due date 
of Form 720.
    Any claim for a refund of the section 4375 or 4376 fees must be 
filed on Form 8849, ``Claim for Refund of Excise Taxes,'' or Form 720X, 
``Amended Quarterly Federal Excise Tax Return,'' in accordance with the 
instructions for those forms.
    These proposed regulations do not impose any specific recordkeeping 
requirements for calculating the fees under sections 4375 and 4376. 
However, see the instructions for Form 720 for general information on 
recordkeeping requirements.
    The IRS will revise the current Form 720 to reflect these fees.

Electronic Filing of Returns

    Form 720 may be filed electronically. For more information on e-
file, see www.irs.gov/efile. Although electronic filing of the Form 
720, ``Quarterly Federal Excise Tax Return,'' is not required, the IRS 
encourages taxpayers to file the Form 720 electronically. Electronic 
filing of Form 720 is quick and easy, and it will allow the IRS to 
provide expedited and improved service and reliability to taxpayers 
while reducing processing time and errors. Forms 720 can be submitted 
on-line. A taxpayer wishing to file the Form 720 electronically must 
submit it through an approved transmitter software developer. The IRS 
has posted on its Web site contact information for all approved Form 
720 e-file transmitters at http://www.irs.gov/efile/lists/0,,id=176152,00.html. To electronically file the Form 720, taxpayers 
will incur the cost of the provider's required service fee for online 
submission.

Third-Party Reporting and Payments

    Notice 2011-35 requested comments on the ability of third parties 
to act on behalf of a plan sponsor in complying with the requirements 
of the fee under section 4376. A number of commentators suggested that 
guidance should permit third parties to act on behalf of a plan sponsor 
in reporting and paying the fee. Most of these commentators requested 
that the Treasury Department and the IRS establish a special reporting 
and filing regime for third parties that is different than the regime 
for plan sponsors. Although the IRS has established limited third-party 
reporting and payment regimes in certain instances (see for example, 
Rev. Proc. 2007-38 (2007-1 CB 1442)) the IRS does not intend to adopt 
such a program for the fee under section 4375 or the fee under section 
4376 because the benefits of such a program would be outweighed by the 
administrative burdens, particularly given the limited period over 
which the fee will apply. See Sec.  601.601(d)(2).

[[Page 22699]]

Proposed Effective Date

    These regulations are proposed to apply to policy and plan years 
ending on or after October 1, 2012, and before October 1, 2019. Issuers 
and plan sponsors may rely on these proposed regulations for guidance 
pending the issuance of final regulations. Final regulations will be 
effective as of the date these proposed regulations are published in 
the Federal Register. If and to the extent future guidance is more 
restrictive than the guidance in these proposed regulations, the future 
guidance will be applied without retroactive effect.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866, as supplemented by Executive Order 13653. Therefore, a 
regulatory assessment is not required. It is hereby certified that 
these proposed regulations will not have a significant economic impact 
on a substantial number of small entities. This certification is based 
on the fact that small businesses generally do not have self-insured 
health plans and that these regulations will therefore primarily affect 
large corporations. Therefore, a Regulatory Flexibility Analysis under 
the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. 
The Treasury Department and the IRS specifically solicit comments from 
any party, particularly affected small entities, on the accuracy of 
this certification. Pursuant to section 7805(f) of the Code, this 
notice of proposed rulemaking has been submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comments on its 
impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written or electronic comments that 
are submitted timely to the IRS. The Treasury Department and the IRS 
request comments on all aspects of the proposed rules. All comments 
will be available for public inspection and copying.
    A public hearing has been scheduled for August 8, 2012, beginning 
at 10 a.m. in room the auditorium of the Internal Revenue Building, 
1111 Constitution Avenue NW., Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance more than 15 minutes before the hearing 
starts. For information about having your name placed on the building 
access list to attend the hearing, see the FOR FURTHER INFORMATION 
CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written or 
electronic comments and an outline of the topics to be discussed and 
the time to be devoted to each topic by July 30, 2012. A period of 10 
minutes will be allotted to each person for making comments. An agenda 
showing the scheduling of the speakers will be prepared after the 
deadline for receiving outlines has passed. Copies of the agenda will 
be available free of charge at the hearing.

Drafting Information

    The principal authors of these regulations are Rebecca L. Baxter, 
Office of Associate Chief Counsel (Financial Institutions & Products), 
and R. Lisa Mojiri-Azad, Office of Division Counsel/Associate Chief 
Counsel (Tax Exempt and Government Entities). However, other personnel 
from the Treasury Department and the IRS participated in their 
development.

List of Subjects

26 CFR Part 40

    Excise taxes, Reporting and recordkeeping requirements.

26 CFR Part 46

    Excise taxes, Insurance, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 40 and 46 are proposed to be amended as 
follows:

PART 40--EXCISE TAX PROCEDURAL REGULATIONS

    Paragraph 1. The authority citation for part 40 continues to read 
in part as follows:

    Authority:  26 U.S.C. 7805 * * *

    Par. 2. Section 40.0-1 is amended as follows:
    1. Paragraph (a) is amended by removing from the third sentence the 
language ``chapter 34 to taxes imposed on policies issued by foreign 
insurers'' and adding ``chapter 34 to taxes imposed on certain 
insurance policies'' in its place, and adding a new sentence after the 
third sentence to read as follows:


Sec.  40.0-1  Introduction.

    (a) * * * References in this part to ``taxes'' also include 
references to the fees imposed by sections 4375 and 4376. * * *
* * * * *
    Par. 3. Section 40.6011(a)-1 is amended by:
    1. In paragraph (a)(2)(i), first sentence, the language ``paragraph 
(b) of this section'' is removed and the language ``paragraphs (b) and 
(c) of this section'' is added in its place.
    2. Paragraph (c) is added.
    The addition reads as follows:


Sec.  40.6011(a)-1  Returns.

* * * * *
    (c) Fees on health insurance policies and self-insured health 
plans--(1) In general. A return that reports liability imposed by 
section 4375 or 4376 is a return for policies or plans with policy or 
plan years ending in the previous calendar year, or for issuers that 
determine the average number of lives covered under a policy for 
purposes of section 4375 using the member months method under Sec.  
46.4375-1(c)(2)(v) of this chapter or the state form method under Sec.  
46.4375-1(c)(2)(vi) of this chapter, the return is for all policies in 
effect during the previous calendar year. The second sentence of 
paragraph (a)(2)(i) of this section (relating to filing quarterly 
returns regardless of whether liability is incurred) does not apply to 
a person that files a Form 720, ``Quarterly Federal Excise Tax 
Return,'' only to report liability imposed by section 4375 or 4376.
    (2) Effective/applicability date. This paragraph (c) is applicable 
on April 17, 2012. This paragraph (c) applies to returns that report 
liability imposed by section 4375 or 4376 for all policies and plans to 
which section 4375 or 4376 applies.
    Par. 4. Section 40.6071(a)-1 is amended as follows:
    1. Paragraph (c) is revised.
    2. Paragraph (d) is added.
    The revision and addition read as follows:


Sec.  40.6071(a)-1  Time for filing returns.

* * * * *
    (c) Fees on health insurance policies and self-insured health 
plans. A return that reports liability for the fee imposed by section 
4375 must be filed by July 31 of the calendar year immediately 
following the last day of the policy year. For issuers that determine 
the average number of lives covered under the policy for section 4375 
using the member months method under Sec.  46.4375-1(c)(2)(v) of this 
chapter or the state form method under Sec.  46.4375-

[[Page 22700]]

1(c)(2)(vi) of this chapter, the return must be filed by July 31 of the 
immediately following calendar year. A return that reports liability 
for the fee imposed by section 4376 for a plan year must be filed by 
July 31 of the calendar year immediately following the last day of the 
plan year. Thus, for example, a return that reports liability for the 
fee imposed by section 4375 for the year ending on December 31, 2012, 
must be filed by July 31, 2013. As another example, a return that 
reports liability for the fee imposed by section 4376 for the plan year 
ending on January 31, 2013, must be filed by July 31, 2014.
    (d) Effective/applicability date. Paragraph (c) of this section is 
applicable on April 17, 2012. Paragraphs (a) and (b) of this section 
apply to returns for calendar quarters beginning on or after October 1, 
2001, and paragraph (c) of this section applies to returns that report 
liability imposed by section 4375 or 4376 for all policies and plans to 
which section 4375 or 4376 applies.


Sec.  40.6091-1  [Amended]

    Par. 5. Section 40.6091-1(a) is amended by removing the language 
``paragraph (b) of this section, quarterly returns'' and by adding the 
language ``paragraphs (b) and (c) of this section, returns'' in its 
place.
    Par. 6. Section 40.6302(c)-1 is amended by revising the section 
heading and paragraph (e)(1)(iv) to read as follows:


Sec.  40.6302(c)-1  Use of Government depositaries.

* * * * *
    (e) * * *
    (1) * * *
    (iv) Sections 4375 and 4376 (relating to fees on health insurance 
policies and self-insured health plans).
* * * * *

PART 46--EXCISE TAX ON CERTAIN INSURANCE POLICIES AND OBLIGATIONS 
NOT IN REGISTERED FORM

    Par. 7. The authority citation for part 46 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805. * * *

    Par. 8. In Part 46, the heading is revised to read as set forth 
above.


Sec.  46.0-1  [Amended]

    Par. 9. In Sec.  46.0-1, first sentence, the language ``policies 
issued by foreign insurers'' is removed and the language ``certain 
insurance policies'' is added in its place.


Sec.  46.0-2  [Removed]

    Par. 10. Section 46.0-2 is removed.
    Par. 11. In Part 46, subpart C is redesignated as subpart D and a 
new subpart C is added to read as follows:
Subpart C--Fees on Insured and Self-Insured Health Plans
Sec
46.4375-1 Fee on issuers of specified health insurance policies.
46.4376-1 Fee on sponsors of self-insured health plans.
46.4377-1 Definitions and special rules.

Subpart C--Fees on Insured and Self-Insured Health Plans


Sec.  46.4375-1  Fee on issuers of specified health insurance policies.

    (a) In general. An issuer of a specified health insurance policy is 
liable for a fee imposed by section 4375 for policy years ending on or 
after October 1, 2012, and before October 1, 2019. Paragraph (b) of 
this section provides definitions that apply for purposes of section 
4375 and this section. Paragraph (c) of this section provides rules for 
calculating the fee under section 4375. Paragraph (d) of this section 
provides the effective/applicability date. For rules relating to filing 
the required return and paying the fee, see Sec. Sec.  40.6011(a)-1 and 
40.6151(a)-1 of this chapter.
    (b) Definitions. The following definitions apply for purposes of 
section 4375 and this section. See also Sec.  46.4377-1 for additional 
definitions.
    (1) Specified health insurance policy--(i) In general. Except as 
provided in paragraph (b)(1)(ii) of this section and Sec.  46.4377-1, 
specified health insurance policy means any accident or health 
insurance policy (including a policy under a group health plan) issued 
with respect to individuals residing in the United States (as defined 
in Sec.  46.4377-1(a)(2)), including certain prepaid health coverage 
arrangements as described in paragraph (b)(2) of this section.
    (ii) Exceptions. The term specified health insurance policy does 
not include--
    (A) Any insurance policy if substantially all of its coverage is of 
excepted benefits described in section 9832(c);
    (B) Any group policy issued to an employer where the facts and 
circumstances show that the group policy was designed and issued 
specifically to cover primarily employees who are working and residing 
outside of the United States (see Sec.  46.4377-1(a)(3)); or
    (C) Any stop loss or indemnity reinsurance policy.
    (iii) Stop loss policy. For purposes of paragraph (b)(1)(ii) of 
this section, stop loss policy means an insurance policy in which--
    (A) The insurer that issues the policy to a person establishing or 
maintaining a self-insured health plan becomes liable for all, or an 
agreed upon portion of, losses that person incurs in covering the 
applicable lives in excess of a specified amount; and
    (B) The person establishing or maintaining the self-insured health 
plan retains its liability to, and its contractual relationship with, 
the applicable lives covered.
    (iv) Indemnity reinsurance policy. For purposes of paragraph 
(b)(1)(ii) of this section, indemnity reinsurance policy means an 
agreement between two or more insurance companies 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 issuing company retains its liability to, and its 
contractual relationship with, the applicable lives covered.
    (2) Prepaid health coverage arrangement. The term prepaid health 
coverage arrangement means an arrangement under which fixed payments or 
premiums are received as consideration for a person's agreement to 
provide or arrange for the provision of accident or health coverage to 
individuals residing in the United States, regardless of how such 
coverage is provided or arranged to be provided. For example, any 
hospital or medical service policy or certificate, hospital or medical 
service plan contract, or health maintenance organization contract is a 
specified health insurance policy.
    (c) Calculation of fee--(1) In general. The amount of the fee for a 
policy for a policy year is equal to the product of the average number 
of lives covered under the policy for the policy year (determined in 
accordance with paragraphs (c)(2) and (c)(3) of this section) and the 
applicable dollar amount (determined in accordance with paragraph 
(c)(4) of this section). For purposes of computing the fee under this 
paragraph (c), in the case of an issuer that determines the average 
number of lives covered for all policies in effect during a calendar 
year using the member months method under paragraph (c)(2)(v) of this 
section or the state form method under paragraph (c)(2)(vi) of this 
section, the applicable dollar amount with respect to such issuer's 
policies for such calendar year is the applicable dollar amount for 
policy years ending on December 31 of such calendar year (determined in 
accordance with paragraph (c)(4) of this section), except that the 
applicable

[[Page 22701]]

dollar amount with respect to such an issuer's policies for calendar 
year 2019 shall be the applicable dollar amount for policy years ending 
on September 30, 2019. For more information, see the examples in 
paragraphs (c)(2)(iii)(B), (c)(2)(iv)(B), (c)(2)(v)(B), and 
(c)(2)(vi)(B) of this section.
    (2) Determination of the average number of lives covered under a 
policy--(i) In general. To determine the average number of lives 
covered under a specified health insurance policy during a policy year, 
an issuer must use one of the following methods--
    (A) The actual count method (described in paragraph (c)(2)(iii) of 
this section);
    (B) The snapshot method (described in paragraph (c)(2)(iv) of this 
section);
    (C) The member months method (described in paragraph (c)(2)(v) of 
this section); or
    (D) The state form method (described in paragraph (c)(2)(vi) of 
this section).
    (ii) Consistency requirements. An issuer must use the same method 
of calculating the average number of lives covered under a policy 
consistently for the duration of the year. In addition, for all 
policies for which a liability is reported on a Form 720, ``Quarterly 
Federal Excise Tax Return,'' for a particular year, the issuer must use 
the same method of computing lives covered. An issuer that determines 
the average number of lives covered by using the actual count method 
described in paragraph (c)(2)(iii) of this section or the snapshot 
method described in paragraph (c)(2)(iv) of this section may change its 
method of computing the average lives covered to the snapshot method or 
actual count method, provided that the issuer uses the same method for 
computing the average lives covered for all policies for which a 
liability is reported on the Form 720 for that year. For example, an 
issuer with a policy having a policy year that ends on June 30, Policy 
A, may determine the average number of lives covered under Policy A for 
July 1, 2013, to June 30, 2014, using the actual count method if the 
issuer uses the actual count method for all policies for which a 
liability will be reported on the Form 720 due by July 31, 2015 (the 
due date for return that will include the liability for the July 2013 
to June 2014 policy year for Policy A). The issuer may change its 
method for determining the average number of lives covered under Policy 
A to the snapshot method for the July 1, 2014, to June 30, 2015, policy 
year, provided that the snapshot method is used for all policies for 
which a liability will be reported on the Form 720 due by July 31, 2016 
(the due date for return that will include the liability for the July 
2014 to June 2015 policy year for Policy A). An issuer that determines 
the average number of lives covered by using the member months method 
under paragraph (c)(2)(v) of this section or the state form method 
under paragraph (c)(2)(vi) of this section must use the same method for 
calculating lives covered for all policy years for which the fee 
applies.
    (iii) Actual count method--(A) Calculation method. An issuer may 
determine the average number of lives covered under a policy for a 
policy year by adding the total number of lives covered for each day of 
the policy year and dividing that total by the number of days in the 
policy year.
    (B) Example. The following example illustrates the principles of 
paragraphs (c)(1) and (c)(2)(iii)(A) of this section:

    Example. Insurance Company A issues three policies that are in 
effect during 2014, Group Health Insurance Policy A, which has a 
policy year from December 1 to November 30, Group Health Insurance 
Policy B, which has a policy year from March 1 to February 28, and 
Group Health Insurance Policy C, which has a policy year from 
January 1 to December 31. To calculate the average number of lives 
covered for 2014, Insurance Company A must calculate the average 
number of lives covered for each of its three policies for the 
policy year that ends in 2014. Insurance Company A chooses to use 
the actual count method under paragraph (c)(2)(iii)(A) of this 
section to determine average lives covered for policies having a 
policy year that ends in 2014. Insurance Company A calculates the 
sum of lives covered under Policy A for each day of the policy year 
ending November 30, 2014, as 3,285,000. The average number of lives 
covered under Policy A for the policy year ending November 30, 2014, 
is 3,285,000 divided by 365, or 9,000. Insurance Company A 
calculates the sum of lives covered under Policy B for each day of 
the policy year ending February 28, 2014, as 547,500. The average 
number of lives covered under Policy B for the policy year ending on 
February 28, 2014, is 547,500 divided by 365, or 1,500. Insurance 
Company A calculates the sum of lives covered under Policy C for 
each day of the policy year ending December 31, 2014, as 4,380,000. 
The average number of lives covered under Policy C for the policy 
year ending December 31, 2014, is 4,380,000 divided by 365, or 
12,000. To calculate the section 4375 fee under paragraph (c)(1) of 
this section for calendar year 2014, Insurance Company A must first 
determine the applicable dollar amount for each policy under 
paragraph (c)(4) of this section and multiply that amount by the 
average number of lives covered for that policy. Insurance Company A 
then adds the total fees for all three policies to determine the 
total fee under section 4375 that it must pay for calendar year 
2014.

    (iv) Snapshot method--(A) Calculation method. An issuer may 
determine the average number of lives covered under a policy for a 
policy year by adding the totals of lives covered on one date in each 
quarter of the policy year, or more dates if an equal number of dates 
is used for each quarter, and dividing that total by the number of 
dates on which a count was made. For this purpose, the date or dates 
for each quarter must be the same (for example, the first day of the 
quarter, the last day of the quarter, or the first day of each month).
    (B) Example. The following example illustrates the principles of 
paragraphs (c)(1) and (c)(2)(iv)(A) of this section:

    Example. Insurance Company B issues three policies that are in 
effect during 2014, Group Health Insurance Policy A, which has a 
policy year from December 1 to November 30, Group Health Insurance 
Policy B, which has a policy year from March 1 to February 28, and 
Group Health Insurance Policy C, which has a policy year from 
January 1 to December 31. To calculate the average number of lives 
covered for 2014, Company A must calculate the average number of 
lives covered for each of its three policies for the policy year 
that ends in 2014. Insurance Company B chooses to determine its 
average lives covered using the snapshot method for all policies 
that have a policy year that ends in 2014 and chooses to count lives 
covered on the first day of each quarter of the policy years. On 
December 1, 2013, Policy A covers 8,900 lives covered, on March 1, 
2014, 9,100 lives covered, on June 1, 2014, 9,050 lives covered, and 
on September 1, 2014, 9,050 lives covered. Insurance Company B 
treats the average number of lives covered under Policy A for the 
policy year ending November 30, 2014, as 36,100 (8,900 + 9,100 + 
9,050 + 9,050) divided by 4, or 9,025. On March 1, 2013, Policy B 
covers 1,500 lives covered, on June 1, 2013, 1,350 lives covered, on 
September 1, 2013, 1,400 lives covered, and on December 1, 2013, 
1,550 lives covered. Insurance Company B treats the average number 
of lives covered under Policy B for the policy year ending February 
28, 2014, as 5,800 (1,500 + 1,350 + 1,400 + 1,550) divided by 4, or 
1,450. On January 1, 2014, Policy C covers 12,500 lives covered, on 
April 1, 2014, 12,250 lives covered, on July 1, 2014, 12,000 lives 
covered, and on October 1, 2014, 11,250 lives covered. Insurance 
Company B treats the average number of lives covered under Policy C 
for the policy year ending December 31, 2014, as 47,750 (12,500 + 
12,250 + 12,000 + 11,250) divided by 4, or 12,000. To calculate the 
section 4375 fee under paragraph (c)(1) of this section for calendar 
year 2014, Insurance Company B must first determine the applicable 
dollar amount for each policy under paragraph (c)(4) of this section 
and multiply that amount by the number of average lives covered for 
that policy. Insurance Company B then adds the total fees for all 
three policies to determine the total fee under section 4375 that it 
must pay for calendar year 2014.
    (v) Member months method--(A) Calculation method. An issuer may

[[Page 22702]]

determine the average number of lives covered under all policies in 
effect for a calendar year based on the member months (an amount that 
equals the sum of the totals of lives covered on pre-specified days in 
each month of the reporting period) reported on the National 
Association of Insurance Commissioners (NAIC) Supplemental Health Care 
Exhibit filed for that calendar year. Under this method, the average 
number of lives covered under the policies in effect for the calendar 
year equals the member months divided by 12.
    (B) Example. The following example illustrates the principles of 
paragraphs (c)(1) and (c)(2)(v)(A) of this section:

    Example. Insurance Company C chooses to determine the average 
number of lives covered for all years to which the section 4375 fee 
applies using the member months method of paragraph (c)(2)(v)(A) of 
this section. Insurance Company C reports 12,000,000 as its member 
months on the NAIC Supplemental Health Care Exhibit filed for 
calendar year 2013. Under the member months method, Insurance 
Company C calculates the average number of lives covered for all its 
specified health insurance policies in force during calendar year 
2013 by dividing 12,000,000 (member months) by 12 (number of months 
in the reporting period), which equals 1,000,000. To determine the 
section 4375 fee it must pay for calendar year 2013, Insurance 
Company C multiplies 1,000,000 by the applicable dollar amount that 
is in effect at the end of the calendar year under paragraph (c)(4) 
of this section.

    (vi) State form method--(A) Calculation method. An issuer that is 
not required to file NAIC annual financial statements may determine the 
number of lives covered under all policies in effect for the calendar 
year using a form that is filed with the issuer's state of domicile and 
a method similar to that described in paragraph (c)(2)(v) of this 
section, if the form reports the number of lives covered in the same 
manner as member months are reported on the NAIC Supplemental Health 
Care Exhibit.
    (B) Example. The following example illustrates the principles of 
paragraphs (c)(1) and (c)(2)(vi)(A) of this section:

    Example. Insurance Company D is not required to file the NAIC 
Supplemental Health Care Exhibit, but files a form with its state of 
domicile. Insurance Company D chooses to determine the average 
number of lives covered for all years to which the section 4375 fee 
applies using the state form method of paragraph (c)(2)(vi)(A) of 
this section. The state form reports the number of lives covered in 
the same manner as member months is reported on the NAIC 
Supplemental Health Care Exhibit. For calendar year 2013, Insurance 
Company D reports 12,000,000 as its equivalent member months on the 
state form. Under the state form method, Insurance Company D 
calculates the average number of lives covered for all of its 
specified health insurance policies in force during calendar year 
2013 by dividing 12,000,000 (equivalent member months) by 12 (number 
of months in the reporting period), which equals 1,000,000. To 
determine the section 4375 fee it must pay for calendar year 2013, 
Insurance Company D multiplies 1,000,000 by the applicable dollar 
amount that is in effect at the end of the calendar year under 
paragraph (c)(4) of this section.

    (3) Special rules for the first year and the last year the fee is 
in effect--(i) Calculation of the average number of lives covered under 
the policy for the first year the fee is in effect. For issuers that 
determine the average number of lives covered using data reported on 
the 2012 NAIC Supplemental Health Care Exhibit or a permitted state 
form that covers the 2012 calendar year, the average number of lives 
covered under all policies in effect for the 2012 calendar year equals 
the average number of lives covered for that year (as determined under 
paragraph (c)(2)(v) or (vi) of this section) multiplied by \1/4\. The 
resulting number is deemed to be the average number of lives covered 
for policies with policy years ending on or after October 1, 2012, and 
before January 1, 2013. For policy years beginning before May 14, 2012 
and ending on or after October 1, 2012, issuers that determine the 
average number of lives covered using the actual count method under 
paragraph (c)(2)(iii) of this section may calculate the average number 
of lives covered using data from the period beginning May 14, 2012 
through the end of the policy year. For policy years beginning before 
May 14, 2012 and ending on or after October 1, 2012, issuers that 
determine the average number of lives covered using the snapshot method 
under paragraph (c)(2)(iv) of this section may calculate the average 
number of lives covered using dates from the quarters remaining in the 
policy year starting on or after May 14, 2012. If an abbreviated year 
is used, the issuer will divide the number of lives covered by the 
number of days from May 14, 2012 through the end of the policy year 
(for the actual count method) or the number of days on which a count 
was made (for the snapshot method).
    (ii) Calculation of the average number of lives covered under the 
policy for the last year the fee is in effect. For issuers that 
determine the average number of lives covered using data reported on 
the 2019 NAIC Supplemental Health Care Exhibit or a permitted state 
form that covers the 2019 calendar year, the average number of lives 
covered for all policies in effect during the 2019 calendar year equals 
the average number of lives covered for that year (as determined under 
paragraph (c)(2)(v) or (vi) of this section) multiplied by \3/4\. The 
resulting number is deemed to be the average number of lives covered 
for policies with policy years ending on or after January 1, 2019, and 
before October 1, 2019.
    (iii) Example. The following examples illustrate the principles of 
paragraph (c)(3) of this section:

    Example 1. Insurance Company E issues Group Health Insurance 
Policy C, which has a policy year that ends on November 30, 2012. 
Insurance Company E determines the average number of lives covered 
under a policy by using the actual count method. Under that method, 
for that policy year, Insurance Company E calculates the sum of 
lives covered under Policy C for each day between May 14, 2012 and 
November 30, 2012 as 10,000. The average number of lives covered 
under Policy C for that policy year is 10,000 divided by the number 
of days from May 14, 2012 through November 30, 2012. Alternatively, 
Insurance Company E could have counted the number of lives covered 
for the entire policy year and divided the sum by 365.
    Example 2. Insurance Company F reports 12,000,000 as its member 
months on its NAIC Supplemental Health Care Exhibit filed for 
calendar year 2012. Under the member months method, Insurance 
Company F calculates the average number of lives covered for 2012 by 
dividing 12,000,000 (member months) by 12 (number of months in the 
reporting period), and then multiplying the result (1,000,000) by 
\1/4\, which equals 250,000. Accordingly, the average number of 
lives covered for policies with policy years ending on or after 
October 1, 2012, and before January 1, 2013, is 250,000.

    (4) Applicable dollar amount. For policy years ending on or after 
October 1, 2012, and before October 1, 2013, the applicable dollar 
amount is $1. For policy years ending on or after October 1, 2013, and 
before October 1, 2014, the applicable dollar amount is $2. For any 
policy years ending in any fiscal year beginning on or after October 1, 
2014, the applicable dollar amount is the sum of--
    (i) The applicable dollar amount for the policy year ending in the 
previous fiscal year; plus
    (ii) The amount equal to the product of--
    (A) The applicable dollar amount for the policy year ending in the 
previous fiscal year; and
    (B) The percentage increase in the projected per capita amount of 
the National Health Expenditures most recently released by the 
Department of Health and Human Services before the beginning of the 
fiscal year.

[[Page 22703]]

    (d) Effective/applicability date. This section is effective on 
April 17, 2012. This section applies for policies with policy years 
ending on or after October 1, 2012, and before October 1, 2019.


Sec.  46.4376-1  Fee on sponsors of self-insured health plans.

    (a) In general. A plan sponsor of an applicable self-insured health 
plan is liable for a fee imposed by section 4376 for plans with plan 
years ending on or after October 1, 2012, and before October 1, 2019. 
Paragraph (b) of this section provides the definitions that apply for 
purposes of section 4376 and this section. Paragraph (c) of this 
section provides the requirements for calculating the fee imposed by 
section 4376. Paragraph (d) of this section provides the effective/
applicability date. For rules relating to filing the required return 
and paying the fee, see Sec. Sec.  40.6011(a)-1 and 40.6151(a)-1 of 
this chapter.
    (b) Definitions. The following definitions apply for purposes of 
section 4376 and this section. See Sec.  46.4377-1 for additional 
definitions.
    (1) Applicable self-insured health plan--(i) In general. Except as 
provided in paragraph (b)(1)(ii) of this section and Sec.  46.4377-1, 
applicable self-insured health plan means a plan that provides for 
accident or health coverage (within the meaning of Sec.  46.4377-1(a)) 
if any portion of the coverage is provided other than through an 
insurance policy and the plan is established or maintained--
    (A) By one or more employers for the benefit of their employees or 
former employees;
    (B) By one or more employee organizations for the benefit of their 
members or former members;
    (C) Jointly by one or more employers and one or more employee 
organizations for the benefit of employees or former employees;
    (D) By a voluntary employees' beneficiary association, as described 
in section 501(c)(9);
    (E) By an organization described in section 501(c)(6); or
    (F) By a multiple employer welfare arrangement (as defined in 
section 3(40) of the Employee Retirement Income Security Act of 1974 
(ERISA)), a rural electric cooperative (as defined in section 
3(40)(B)(iv) of ERISA), or a rural cooperative association (as defined 
in section 3(40)(B)(v) of ERISA).
    (ii) Exceptions. The term applicable self-insured health plan does 
not include any of the following:
    (A) A plan that provides benefits substantially all of which are 
excepted benefits, as defined in section 9832(c). For example, a health 
flexible spending arrangement (health FSA) (as described in section 
106(c)(2)) that satisfies the requirements to be treated as an excepted 
benefit under section 9832(c) (see also Sec.  54.9831-1(c)(3)(v) of 
this chapter) is not an applicable self-insured health plan. A health 
FSA that is not treated as an excepted benefit under section 9832(c) is 
an applicable self-insured health plan.
    (B) An employee assistance program, disease management program, or 
wellness program if the program does not provide significant benefits 
in the nature of medical care or treatment.
    (iii) Multiple self-insured arrangements established or maintained 
by the same plan sponsor. For purposes of section 4376, two or more 
arrangements established or maintained by the same plan sponsor that 
provides for accident and health coverage (within the meaning of Sec.  
46.4377-1(a)) other than through an insurance policy and that have the 
same plan year may be treated as a single applicable self-insured 
health plan for purposes of calculating the fee imposed by section 
4376. For example, if a plan sponsor establishes or maintains a self-
insured arrangement providing major medical benefits, and a separate 
self-insured arrangement with the same plan year providing prescription 
drug benefits, the two arrangements may be treated as one applicable 
self-insured health plan so that the same life covered under each 
arrangement would count as only one covered life under the plan. 
Similarly, if a plan sponsor provides a Health Reimbursement 
Arrangement (HRA) that is integrated with another applicable self-
insured health plan that provides major medical coverage, the HRA and 
the major medical plan may be treated as one applicable self-insured 
health plan.
    (2) Plan sponsor--(i) In general. The term plan sponsor means--
    (A) The employer, in the case of an applicable self-insured health 
plan established or maintained by a single employer;
    (B) The employee organization, in the case of an applicable self-
insured health plan established or maintained by an employee 
organization;
    (C) The joint board of trustees, in the case of a multiemployer 
plan (as defined in section 414(f));
    (D) The committee, in the case of a multiple employer welfare 
arrangement;
    (E) The cooperative or association that establishes or maintains an 
applicable self-insured health plan established or maintained by a 
rural electric cooperative (as defined in section 3(40)(B)(iv) of 
ERISA) or rural cooperative association (as defined in section 
3(40)(B)(v) of ERISA);
    (F) The trustee, in the case of an applicable self-insured health 
plan established or maintained by a voluntary employees' beneficiary 
association (meaning that the voluntary employees' beneficiary 
association is not merely serving as a funding vehicle for a plan that 
is established or maintained by an employer or other person); or
    (G) In the case of an applicable self-insured health plan the plan 
sponsor of which is not described in paragraphs (b)(2)(i)(A) through 
(F) of this section, the person identified by the terms of the document 
under which the plan is operated as the plan sponsor, or the person 
designated by terms of the document under which the plan is operated as 
the plan sponsor for section 4376 purposes, provided that designation 
is made, and that person has consented to the designation, by no later 
than the date by which the return paying the fee under section 4376 for 
that plan year is required to be filed, after which date that 
designation for that plan year may not be changed or revoked, and 
provided further that a person may be designated as the plan sponsor 
only if the person is one of the persons maintaining the plan (for 
example, one of the employers that is maintaining the plan with one or 
more other employers or employee organizations).
    (H) In the case of an applicable self-insured health plan the 
sponsor of which is not described in paragraphs (b)(2)(i)(A) through 
(F) of this section, and for which no identification or designation of 
a plan sponsor has been made pursuant to paragraph (b)(2)(i)(G) of this 
section, each employer that maintains the plan (with respect to 
employees of that employer), each employee organization that maintains 
the plan (with respect to members of that employee organization), and 
each board of trustees, cooperative or association that maintains the 
plan, meaning that each plan sponsor must file a separate Form 720, 
``Quarterly Federal Excise Tax Return,'' reflecting its separate 
liability under section 4376.
    (ii) Example. The following examples illustrate the principles of 
paragraph (b)(2) of this section:

    Example 1.  Employer XYZ is a holding company with no employees 
that owns all the issued and outstanding shares of Employer X, 
Employer Y, and Employer Z. Employer X, Employer Y, and Employer Z 
have established the XYZ Group Health Plan to provide accident and 
health coverage, provided other than through an insurance policy, 
for the benefit of their employees. The

[[Page 22704]]

XYZ Group Health Plan has a calendar year plan year. In addition, 
there is no plan sponsor identified or designated in the plan 
document. As a self-insured health plan for employees of two or more 
employers, the XYZ Group Health Plan is an applicable self-insured 
health plan under section 4376(c)(2)(A) and paragraph (b)(1)(i)(A) 
of this section. However, a plan sponsor is not identified or 
designated in the governing plan document. Accordingly, the plan 
sponsor for purposes of section 4376 is identified under paragraph 
(b)(2)(i)(H) of this section as Employer X, Employer Y, and Employer 
Z, each with respect to its own employees covered under the plan. 
Accordingly, Employer X, Employer Y, and Employer Z each must file a 
Form 720 reflecting their separate liabilities under section 4376, 
calculated based upon lives covered that are employees of that 
employer, or spouses, dependents, or other beneficiaries of 
employees of that employer and the applicable dollar amount in 
effect for the plan year.
    Example 2.  The same facts as Example 1, except that the 
governing plan document designates Employer X as the plan sponsor of 
the XYZ Group Health Plan for purposes of the fee under section 
4376. Accordingly, the plan sponsor for purposes of section 4376 is 
identified under paragraph (b)(2)(i)(G) of this section as Employer 
X. Employer X must file a Form 720 reflecting liabilities under 
section 4376, calculated based upon lives covered that are employees 
of Employer X, Employer Y, or Employer Z, or spouses, dependents, or 
other beneficiaries of employees of those employers and the 
applicable dollar amount in effect for the plan year.

    (c) Calculation of fee--(1) In general. The amount of the fee for a 
plan year is equal to the product of the average number of lives 
covered under the plan for the plan year (determined in accordance with 
paragraph (c)(2) of this section) and the applicable dollar amount 
(determined in accordance with paragraph (c)(3) of this section). For 
more information, see the examples in paragraphs (c)(2)(iii)(B), 
(c)(2)(iv)(D), and (c)(2)(v)(B) of this section.
    (2) Determination of the average number of covered lives under the 
plan--(i) In general. To determine the average number of lives covered 
under an applicable self-insured health plan during a plan year, a plan 
sponsor must use one of the following--
    (A) The actual count method (described in paragraph (c)(2)(iii) of 
this section);
    (B) The snapshot dates method (described in paragraph (c)(2)(iv) of 
this section); or
    (C) The Form 5500 method (described in paragraph (c)(2)(v) of this 
section).
    (ii) Consistency within plan year. A plan sponsor must use the same 
method of calculating the average number of lives covered under the 
plan consistently for the duration of the plan year. However, a plan 
sponsor may use a different method from one plan year to the next.
    (iii) Actual count method--(A) Calculation method. A plan sponsor 
may determine the average number of lives covered under a plan for a 
plan year by adding the totals of lives covered for each day of the 
plan year and dividing that total by the number of days in the plan 
year.
    (B) Example. The following example illustrates the principles of 
paragraphs (c)(1) and (c)(2)(iii)(A) of this section:

    Example.  Employer A is the plan sponsor of the Employer A Self-
Insured Health Plan, which has a calendar year plan year. Employer A 
calculates the sum of covered lives under the plan for each day of 
the plan year ending December 31, 2013 as 3,285,000. The average 
number of covered lives under the plan for the plan year ending 
December 31, 2013 is 3,285,000 divided by 365, or 9,000. To 
calculate the section 4376 fee for the plan under paragraph (c)(1) 
of this section for the plan year ending December 31, 2013, Employer 
A must determine the applicable dollar amount under paragraph (c)(3) 
of this section and multiply that amount by the average number of 
lives covered under the plan.

    (iv) Snapshot methods--(A) In general. A plan sponsor may determine 
the average number of lives covered under a plan for a plan year by 
adding the totals of lives covered on one date in each quarter, or more 
dates if an equal number of dates are used for each quarter, and 
dividing that total by the number of dates on which a count was made. 
For this purpose, the date or dates for each quarter must be the same 
(for example, the first day of the quarter, the last day of the 
quarter, the first day of each month, etc.). For purposes of this 
paragraph (c)(2)(iv), the number of lives covered on a designated date 
may be determined using either the snapshot factor method described in 
paragraph (c)(2)(iv)(B) of this section or the snapshot count method 
described in paragraph (c)(2)(iv)(C) of this section.
    (B) Snapshot factor method. Under the snapshot factor method, the 
number of lives covered on a date is equal to the sum of the number of 
participants with self-only coverage on that date, plus the product of 
the number of participants with coverage other than self-only coverage 
on the date and 2.35.
    (C) Snapshot count method. Under the snapshot count method, the 
number of lives covered on a date equals the actual number of lives 
covered on the designated date.
    (D) Examples. The following examples illustrate the principles of 
paragraphs (c)(1) and (c)(2)(iv) of this section:

    Example 1.  Employer B is the plan sponsor of the Employer B 
Self-Insured Health Plan, which has a calendar year plan year. 
Employer B has designated the first day of each quarter of the plan 
year as the date that Employer B counts the covered lives under the 
Employer B Self-Insured Health Plan. On January 1, 2013, Employer B 
Self-Insured Health Plan covers 2,000 covered lives, on April 1, 
2013, 2,100 covered lives, on July 1, 2013, 2,050 covered lives, and 
on October 1, 2013, 2,050 covered lives. Under the snapshot count 
method, Employer B must determine the average number of covered 
lives under the Employer B Self-Insured Health Plan for the plan 
year ending December 31, 2013 as 8,200 (2,000 + 2,100 + 2,050 + 
2,050) divided by 4, or 2,050. To calculate the section 4376 fee 
under paragraph (c)(1) of this section for the plan year ending 
December 31, 2013, Employer B must determine the applicable dollar 
amount under paragraph (c)(3) of this section and multiply that 
amount by the average number of lives covered under the plan.
    Example 2.  Same facts as Example 1, except Employer B 
determines the number of covered lives not covered by self-only 
coverage based on the number of participants with coverage other 
than self-only multiplied by 2.35 (the factor set forth in 
(c)(2)(iv) of this section). On January 1, 2013, Employer B Self-
Insured Health Plan provides self-only coverage to 600 employees and 
other than self-only coverage to 800 employees. On April 1, 2013, 
Employer B Self-Insured Health Plan provides self-only coverage to 
608 employees and other than self-only coverage to 800 employees. On 
July 1, 2013 and October 1, 2013, Employer B Self-Insured Health 
Plan provides self-only coverage to 610 employees and other than 
self-only coverage to 809 employees. Under the snapshot factor 
method, Employer B must determine the average number of covered 
lives under the Employer B Self-Insured Health Plan for the plan 
year ending December 31, 2013 as 9,988 [(600+(800 x 2.35)) + (608 + 
(800 x 2.35)) + (610 + (809 x 2.35)) + (610 + (809 x 2.35))] divided 
by 4, or 2,497. To calculate the section 4376 fee under paragraph 
(c)(1) of this section for the plan year ending December 31, 2013, 
Employer B must determine the applicable dollar amount under 
paragraph (c)(3) of this section and multiply that amount by the 
average number of lives covered under the plan.

    (v) Form 5500 method--(A) Calculation method. A plan sponsor may 
determine the average number of lives covered under a plan for a plan 
year based on the number of reportable participants for the Form 5500, 
``Annual Return/Report of Employee Benefit Plan,'' that is filed for 
the applicable self-insured health plan for that plan year. For 
purposes of this paragraph (c)(2)(v), the average number of lives 
covered under the plan for the plan year for a plan offering only self-
only coverage equals the sum of total participants covered at the 
beginning and the end of the plan year, as reported

[[Page 22705]]

on the Form 5500 filed for the applicable self-insured health plan, 
divided by 2. For purposes of this paragraph (c)(2)(v), the average 
number of lives covered under the plan for the plan year for a plan 
offering self-only coverage and coverage other than self-only coverage 
equals the sum of total participants covered at the beginning and the 
end of the plan year, as reported on the Form 5500 filed for the 
applicable self-insured health plan.
    (B) Examples. The following examples illustrate the principles of 
paragraphs (c)(1) and (c)(2)(v)(A) of this section:

    Example 1.  Employer C is the plan sponsor of the Employer C 
Self-Insured Health Plan, which has a fiscal year plan year ending 
on July 31, 2013 and offers only self-only coverage. Employer C 
files a Form 5500 for the Employer C Self-Insured Health Plan for 
the plan year ending July 31, 2013 reflecting 4,000 plan 
participants on the first day of the plan year and 4,200 plan 
participants on the last day of the plan year. For purposes of 
calculating the fee under section 4376 using the Form 5500 method, 
Employer C must treat the number of covered lives for the plan year 
ending July 31, 2013 as equal to the sum of 4,000 and 4,200 or 
8,200, divided by 2, or 4,100. To calculate the section 4376 fee 
under paragraph (c)(1) of this section for the plan year ending July 
31, 2013, Employer C must determine the applicable dollar amount 
under paragraph (c)(3) of this section and multiply that amount by 
the average number of lives covered under the plan.
    Example 2.  Same facts as Example 1, except that the Employer C 
Self-Insured Health plan offers self-only coverage and family 
coverage. For purposes of calculating the fee under section 4376 
using the Form 5500 method, Employer C must treat the number of 
covered lives for the plan year ending July 31, 2013 as equal to the 
sum of 4,000 and 4,200, or 8,200. To calculate the section 4376 fee 
under paragraph (c)(1) of this section for the plan year ending July 
31, 2013, Employer C must determine the applicable dollar amount 
under paragraph (c)(3) of this section and multiply that amount by 
the average number of lives covered under the plan.

    (vi) Special rule for health FSAs and HRAs. For purposes of this 
section, if a plan sponsor does not maintain an applicable self-insured 
health plan other than a health flexible spending arrangement (health 
FSA) (as described in section 106(c)(2)) or a health reimbursement 
arrangement (as described in Notice 2002-45 (2002-2 CB 93)) (HRA), the 
plan sponsor may treat each participant's health FSA or HRA as covering 
a single covered life (and therefore the plan sponsor is not required 
to include as covered lives any spouse, dependent, or other beneficiary 
of the individual participant in the health FSA or HRA, as applicable). 
If a health FSA or HRA that is an applicable self-insured health plan 
has the same plan sponsor as another applicable self-insured health 
plan other than a health FSA or HRA, the two arrangements may be 
treated as a single plan under paragraph (b)(1)(iii) of this section. 
However, the special counting rule in this paragraph applies only for 
purposes of the health FSA or HRA and, therefore, applies only for 
purposes of the participants in the health FSA or HRA that do not 
participate in the other applicable self-insured health plan. (The 
participants in the health FSA or HRA that participate in the other 
applicable self-insured health plan will be counted in accordance with 
the method applied for counting lives under that other plan as 
described in paragraph (b)(2)(i) of this section.) See Sec.  
601.601(d)(2) of this chapter.
    (vii) Special rule for the first year the fee is in effect. 
Notwithstanding paragraph (c)(2)(i) of this section, for plan years 
beginning before July 11, 2012 and ending on or after October 1, 2012, 
a plan sponsor may determine the average number of lives covered under 
the plan for the plan year using any reasonable method.
    (3) Applicable dollar amount. For plan years ending on or after 
October 1, 2012, and before October 1, 2013, the applicable dollar 
amount is $1. For plan years ending on or after October 1, 2013, and 
before October 1, 2014, the applicable dollar amount is $2. For any 
plan year ending in any fiscal year beginning on or after October 1, 
2014, the applicable dollar amount is equal to the sum of--
    (i) The applicable dollar amount for plan years ending in the 
previous fiscal year; plus
    (ii) The amount equal to the product of--
    (A) The applicable dollar amount for plan years ending in the 
previous fiscal year; and
    (B) The percentage increase in the projected per capita amount of 
the National Health Expenditures most recently released by the 
Department of Health and Human Services before the beginning of the 
fiscal year.
    (d) Effective/applicability date. This section is effective on 
April 17, 2012. This section applies for plan years that end on or 
after October 1, 2012, and before October 1, 2019.


Sec.  46.4377-1  Definitions and special rules.

    (a) Definitions. The following definitions apply for purposes of 
sections 4375 and 4376 and Sec. Sec.  46.4375-1 and 46.4376-1.
    (1) Accident and health coverage. The term accident and health 
coverage means any coverage that, if provided by an insurance policy, 
would cause such policy to be a specified health policy (as defined in 
section 4375(c)).
    (2) Individual residing in the United States--(i) The term 
individual residing in the United States means an individual with a 
place of abode in the United States.
    (ii) Determination of place of abode. For purposes of paragraph 
(a)(2) of this section, an issuer or a plan sponsor may rely on the 
most recent address on file with the issuer or plan sponsor and may 
treat the primary insured and the primary insured's spouse, dependents, 
or other beneficiaries covered by the policy, as having the same place 
of abode. For this purpose, the primary insured is the individual 
covered by the policy other than due to that individual's status as the 
spouse, dependent, or other beneficiary of another covered individual.
    (3) United States. The term United States includes American Samoa, 
Guam, the Northern Mariana Islands, Puerto Rico, the Virgin Islands, 
and any other possession of the United States.
    (4) Fiscal year. The term fiscal year means the year beginning on 
October 1 and ending on the following September 30.
    (b) Treatment of exempt governmental programs--(1) In general. The 
fees imposed by sections 4375 and 4376 do not apply to any covered life 
under an exempt governmental program as defined in paragraph (b)(2) of 
this section.
    (2) Exempt governmental program. For purposes of this section, 
exempt governmental program means any--
    (i) Insurance program established under title XVIII of the Social 
Security Act;
    (ii) Medical assistance program established by title XIX or XXI of 
the Social Security Act;
    (iii) Program established by Federal law for providing medical care 
(other than through insurance policies) to individuals (or their 
spouses and dependents) by reason of such individuals being (or having 
been) members of the Armed Forces of the United States; and
    (iv) Program established by Federal law for providing medical care 
(other than through insurance policies) to members of Indian tribes (as 
defined in section 4(d) of the Indian Health Care Improvement Act).
    (c) Effective/applicability date. This section is effective on 
April 17, 2012. This section applies to all policies and

[[Page 22706]]

plans to which section 4375 or 4376 applies.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2012-9173 Filed 4-12-12; 4:15 pm]
BILLING CODE 4830-01-P