n-11-35.pdf

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing.

This collection currently includes the publisher’s available advance-release directory. Historical bulletin renditions are discovered separately; an advance-release record alone does not certify the collection archive complete.

1
Part III – Administrative, Procedural, and Miscellaneous

Request for Comments on Funding of Patient-Centered Outcomes Research
Through Fees Payable by Issuers of Health Insurance Policies and Self-Insured
Health Plan Sponsors

Notice 2011-35

Section 1. PURPOSE
This notice requests public comments on the implementation of provisions of the
Patient Protection and Affordable Care Act, Pub. L. No. 111-148, 124 Stat. 119 (2010),
(Affordable Care Act) to fund comparative clinical effectiveness research relating to
patient-centered outcomes. 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.
As required by the Affordable Care Act, a nonprofit corporation – the Patient-
Centered Outcomes Research Institute (Institute) – was established to assist patients,
clinicians, purchasers, and policy-makers in making informed health decisions by
advancing comparative clinical effectiveness research. The Affordable Care Act
provides that the Institute will not be an agency or establishment of the United States
Government, and will be funded by a Patient-Centered Outcomes Research Trust Fund

2
(Trust Fund). The Trust Fund, in turn, is to be funded in part by fees to be paid by
issuers of health insurance policies and sponsors of self-insured health plans.
The Department of the Treasury (Treasury) and the Internal Revenue Service
(Service) intend to publish proposed regulations implementing and providing guidance
on the statutory requirements applicable to issuers and plan sponsors that pay those
fees. To inform the development of the proposed regulations, this notice invites
comments on how the fees should be determined and paid, including comments on
several possible rules, safe harbors, and issues outlined below. Accordingly, while this
notice does not provide guidance, it describes potential guidance that Treasury and the
Service expect to propose to implement the new fees and seeks comments on this
potential guidance.
Section 2. BACKGROUND
.01 Section 6301 of the Affordable Care Act added new § 9511 to the Internal
Revenue Code (Code) to establish the Patient-Centered Outcomes Research Trust
Fund as a funding source for the Patient-Centered Outcomes Research Institute. The
Trust Fund, in turn, will be funded in part through fees payable by issuers of health
insurance policies and sponsors of self-insured health plans. Section 6301 of the
Affordable Care Act also added new §§ 4375, 4376, and 4377 to the Code to impose
those fees on what the statute refers to as “specified health insurance policies” and
“applicable self-insured health plans” based on the average number of lives covered
under the policy or plan. The fees are effective for policy and plan years ending after
September 30, 2012.

3
Fees on Specified Health Insurance Policies Under § 4375
.02 Section 4375(a) imposes a fee on each specified health insurance policy for
each policy year ending after September 30, 2012. Therefore, the first policy year to
which the fee on a specified health insurance policy applies would be a policy year that
ends on October 1, 2012. The fee does not apply to policy years ending after
September 30, 2019. Accordingly, if the policy year were the calendar year, the fee
would apply to calendar policy years 2012 through 2018.
.03 The fee under § 4375 is equal to 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 § 4375(b), the fee must be paid by the issuer of the policy.
.04 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. The term also includes 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 residents of the United States, regardless of how such coverage is provided
or arranged to be provided. In such a case, the person agreeing to provide or arrange
for the provision of coverage is treated as the issuer. “Specified health insurance
policy” does not include any insurance if substantially all of its coverage is of excepted
benefits described in § 9832(c).
.05 Section 4375(d) provides that, for any policy year ending in any fiscal year
beginning after September 30, 2014, the dollar amount in effect under § 4375(a) is

4
equal to the sum of (1) the dollar amount for policy years ending in the previous fiscal
year, plus (2) the amount equal to the product of (A) the dollar amount for policy years
ending in the previous fiscal year, and (B) the percentage increase in the projected per
capita amount of National Health Expenditures, as most recently published by the
Secretary before the beginning of the fiscal year. For purposes of § 4375, the term
“fiscal year” means the Federal government’s fiscal year, which runs from October 1 to
September 30. Because Treasury does not publish the National Health Expenditures,
Treasury and the Service intend that the proposed regulations will refer to the National
Health Expenditures published by the Department of Health and Human Services.
Fees on Applicable Self-Insured Health Plans Under § 4376
.06 Section 4376(a) imposes a fee on any applicable self-insured health plan for
each plan year ending after September 30, 2012. Therefore, the first plan year to which
the fee on an applicable self-insured health plan applies would be a plan year that ends
on October 1, 2012. The fee does not apply to plan years ending after September 30,
2019. Accordingly, if the plan year were the calendar year, the fee would apply to
calendar plan years 2012 through 2018. The fee is equal to two dollars (one dollar in
the case of plan years ending before October 1, 2013) multiplied by the average
number of lives covered under the plan.
.07 Under § 4376(b)(1), the fee must 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) provides

5
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 § 501(c)(9), the “plan sponsor” is the association, committee,
joint board of trustees, or other similar group of representatives of the parties that
establish or maintain the plan, and, in the case of a plan established or maintained by a
cooperative or association described in § 4376(c)(2)(F), the “plan sponsor” is the
cooperative or association.
.08 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 § 501(c)(9), (5) by any organization described in § 501(c)(6), or
(6) in the case of a plan not previously described, by a multiple employer welfare
arrangement (as defined in § 3(40) of the Employee Retirement Income Security Act of
1974 (ERISA)), a rural electric cooperative (as defined in § 3(40)(B)(iv) of ERISA), or a
rural telephone cooperative association (as defined in § 3(40)(B)(v) of ERISA).
.09 Section 4376(d) provides that, for any plan year ending in any fiscal year
beginning after September 30, 2014, the dollar amount in effect under § 4376(a) is

6
equal to the sum of (1) that dollar amount for plan years ending in the previous fiscal
year, plus (2) an amount equal to (A) that dollar amount for plan years ending in the
previous fiscal year, multiplied by (B) the percentage increase in the projected per
capita amount of National Health Expenditures, as most recently published by the
Secretary before the beginning of the fiscal year. For purposes of § 4376, the term
“fiscal year” means the Federal government’s fiscal year, which, as noted, runs from
October 1 to September 30. As noted, because Treasury does not publish National
Health Expenditures, Treasury and the Service intend that the proposed regulations will
refer to the National Health Expenditures published by the Department of Health and
Human Services.
Definitions and Special Rules Under § 4377 for the Fees Imposed Under §§ 4375 and
4376
.10 Section 4377(a)(1) defines “accident and health coverage” for purposes of
§§ 4375 and 4376 as any coverage that, if provided by an insurance policy, would
cause the policy to be a specified health insurance policy (as defined in § 4375(c)).
.11 Section 4377(a)(2) defines “insurance policy” as any policy or other
instrument whereby a contract of insurance is issued, renewed, or extended.
.12 Section 4377(a)(3) defines “United States” to include any possession of the
United States. Section 4377(d) provides that no amount collected under §§ 4375-4377
is to be covered over to any possession of the United States.
.13 Governmental entities that are issuers of specified health insurance policies
or plan sponsors of applicable self-insured plans are generally subject to the fees

7
imposed under §§ 4375 and 4376. However, § 4377(b) provides that no such fee will
be imposed on any covered life under an “exempt governmental program.” Section
4377(b) defines “exempt governmental program” as (A) any insurance program
established under title XVIII of the Social Security Act (42 U.S.C. 1395 et seq.)
(Medicare), (B) the medical assistance program established by title XIX of the Social
Security Act (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), (C) any program
established by Federal law for providing medical care (other than through insurance
policies) to individuals (or their spouses and dependents) by reason of the individuals
being members of the Armed Forces of the United States or veterans, and (D) any
program established by Federal law for providing medical care (other than through
insurance policies) to members of Indian tribes (as defined in § 4(d) of the Indian Health
Care Improvement Act, 25 U.S.C. 1603).
.14 Section 4377(c) provides that, for purposes of subtitle F of the Code, the
fees imposed by §§ 4375 and 4376 are treated as if they were taxes.
Data Reported on the NAIC Supplemental Health Care Exhibit
.15 State insurance departments currently require issuers operating in their
jurisdictions to provide a primary financial report referred to as an Annual Statement.
The format of the Annual Statement and the rules to be followed in preparing it are
established by the National Association of Insurance Commissioners (NAIC). After the
Affordable Care Act was enacted, the NAIC developed a Supplemental Health Care
Exhibit (Exhibit) for the purpose of collecting comprehensive major medical data by

8
company, state, and market. Information collected on the Exhibit includes the number
of individual policies (for individual and association business) or certificates issued to
individuals covered under a group policy in force as of the end of the reporting period
and the total number of lives insured, including dependents, under individual policies
and group certificates as of the end of the reporting period. Many issuers of specified
health insurance policies are required by one or more state insurance commissioners to
file the Exhibit.
Section 3. REQUEST FOR COMMENTS
Treasury and the Service anticipate proposing regulations under §§ 4375 and
4376. To inform the development of the proposed regulations, Treasury and the
Service request comments on the following topics:
Average Number of Lives Covered Under the Policy Under § 4375
.01 The fee imposed by § 4375(a) on specified health insurance policies is
based on the “average number of lives covered under the policy.” Treasury and the
Service invite comments on reasonable methods an issuer may use to determine the
average number of lives covered under the policy for purposes of § 4375. Under any
such method other than the safe harbor described below, it is contemplated that issuers
that are required to file the NAIC Supplemental Health Care Exhibit would be expected
to be able to account for any differences between the numbers computed under the
alternative method and the data reported on the Exhibit.
.02 Treasury and the Service also invite comments on whether guidance should
provide a safe harbor for issuers that are required to report the number of lives covered

9
on the NAIC Supplemental Health Care Exhibit. For example, a safe harbor might
provide that the Service will not challenge an issuer’s calculation of the fee based on the
number of lives reported on the most recently filed Exhibit, or based on the average of
the number of lives reported on the most recently filed Exhibit and the Exhibit filed one
year before the most recently filed Exhibit. Comments are requested on the scope and
operation of a safe harbor rule, including comments on the circumstances, if any, under
which amounts so determined may be too unrepresentative to form a sufficiently reliable
basis for calculating the fee.
Applicable Self-Insured Health Plan Under § 4376
.03 Under § 4376(c), an applicable self-insured health plan is a plan that
provides “accident and health coverage” any portion of which is provided other than
through an insurance policy and that meets certain other conditions. 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 § 4375(c)). Section 4375(c)(2) provides that a specified health insurance
policy does not include any insurance if substantially all of its coverage is of excepted
benefits described in § 9832(c). Benefits provided under a health flexible spending
arrangement (health FSA), as described in § 106(c)(2), are excepted benefits for
purposes of § 9832(c) if:
(1) Other group health plan coverage, not limited to excepted benefits, is
made available to the eligible class of participants; and
(2) The arrangement is structured so that the maximum benefit payable to

10
any eligible participant cannot exceed two times the participant’s salary
reduction election (or, if greater, $500 plus the amount of the salary
reduction election).
See § 54.9831-1(c)(3)(v) of the regulations relating to group health plans. Because
coverage under a health FSA that satisfies these requirements is treated as excepted
benefits for purposes of § 9832(c), such coverage would not, if provided by an
insurance policy, cause the policy to be a “specified insurance policy,” as defined in
§ 4375(c). Accordingly, the coverage under a health FSA that satisfies these
requirements is not “accident and health coverage” within the meaning of § 4377(a)(1),
and such a health FSA is not an “applicable self-insured health plan” within the meaning
of § 4376(c).
With respect to health FSAs that do not satisfy the requirements to be treated as
an excepted benefit, comments are invited on the variations that exist and which types
would be excluded from the definition of an applicable self-insured health plan under
§ 4376 because they provide a type of coverage that, if provided by an insurance policy,
would not be treated as a specified health insurance policy (as defined in § 4375(c)).
.04 Treasury and the Service invite comments on the type or types of health
reimbursement arrangements (HRAs), as described in Notice 2002-45, 2002-2 C.B. 93,
that would be excluded from the definition of applicable self-insured health plan under
§ 4376 because they provide a type 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 § 4375(c)). If so, what would be the basis for reaching such a conclusion?

11
For example, to what extent does a limitation on annual contributions, or the availability
of other employer-sponsored health coverage affect the determination as to whether an
HRA provides coverage that, if provided by an insurance policy, would not cause the
policy to be treated as a specified health insurance policy? Comments are also invited
on whether there are types of HRAs that should be treated as applicable self-insured
health plans under § 4376.
Average Number of Lives Covered Per Applicable Self-Insured Health Plan Under
§ 4376
.05 The fee imposed by § 4376(a) on applicable self-insured health plans is
based on the “average number of lives covered under the plan.” Treasury and the
Service invite comments on how future guidance could reduce administrative burden by
providing for reasonable methods to determine the average number of lives covered
under an applicable self-insured plan; on whether guidance should provide a safe
harbor that would permit sponsors of applicable self-insured health plans to compute
the average number of lives covered 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 actual dependents covered under the plan be
counted; and on formulas and factors that could be used to determine the number of
dependents for applicable self-insured health plans.
Administration of the Fees
.06 Under § 4377(c), the fees imposed by §§ 4375 and 4376 are treated as
taxes for purposes of subtitle F of the Code (§§ 6001-7874). Thus, references in

12
subtitle F to “taxes imposed by this title,” “internal revenue tax,” and similar references
are also references to the fees imposed by §§ 4375 and 4376. For example, the fees
imposed by §§ 4375 and 4376 are assessed (§ 6201), collected (§ 6301), enforced
(§ 7602), and subject to confidentiality rules (§ 6103), in the same manner as taxes
imposed by other sections of the Code.
.07 The deficiency procedures of §§ 6211-6216 apply only to income, estate,
and gift taxes imposed by subtitles A and B and excise taxes imposed by chapters 41,
42, 43, and 44. The fees imposed by §§ 4375 and 4376 are imposed by chapter 34
and, therefore, the deficiency procedures of §§ 6211-6216 do not apply to those fees.
.08 Future proposed regulations could require each issuer and plan sponsor to
report and pay the §§ 4375 and 4376 fees annually as opposed to quarterly. Proposed
regulations might also require the reporting and payment to occur on the same calendar
date regardless of the “policy year” or “plan year” of any individual issuer or plan
sponsor. Comments are invited on this approach and possible alternatives.
Other Issues That Should be Addressed in Guidance
.09 In addition to comments on the topics described above, comments are
invited on the following specific issues:
(1) What transition rules, if any, would be appropriate for the first “policy
year” or first “plan year” ending after September 30, 2012? For example,
would any of the information necessary to determine the average
number of lives covered be unavailable for the first year for which the
fee is in effect?

13
(2) Is guidance needed concerning the definition of “policy year” or “plan
year” for purposes of §§ 4375 and 4376? If so, how should these terms
be defined?
(3) Are there circumstances under which an issuer or plan sponsor might
not know whether a covered individual resides in the United States? If
so, how should those circumstances be addressed? Is guidance needed
on the application of §§ 4375 and 4376 to plans that cover expatriates?
(4) Should future guidance permit all employers treated as a single
employer under § 414 to be treated as a single employer for purposes of
§ 4376(b)? If so, under what conditions?
(5) In the case of the fee imposed on self-insured health plans, what
guidance is needed concerning the ability of a third-party administrator to
act on behalf of a plan sponsor in complying with the § 4376 fee
requirements?
.10 Comments will be considered if submitted in writing by September 6, 2011.
All comments will be available for public inspection and copying. Comments may be
submitted in one of three ways:
(1) By mail to CC:PA:LPD:PR (Notice 2011-35), Room 5203, Internal
Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC
20044.
(2) Electronically to Notice.Comments@irscounsel.treas.gov.
Please
include “Notice 2011-35” in the subject line of any electronic

14
communications.
(3) By hand-delivery Monday through Friday between the hours of 8 a.m.
and 4 p.m. to CC:PA:LPD:PR (Notice 2011-35), Courier’s Desk, Internal
Revenue Service, 1111 Constitution Ave., NW, Washington, DC 20224.
DRAFTING INFORMATION
The principal author of this notice is Rebecca L. Baxter of the Office of Associate
Chief Counsel (Financial Institutions & Products). For further information regarding this
notice contact Ms. Baxter at (202) 622-7117 (not a toll-free call).