Health Insurers' Fee Isn't Taxable Business Revenue, Group Says

Dear Commissioner Koskinen:

I am writing on behalf of The National Association of Health Underwriters (NAHU), a professional association representing more than 100,000 licensed health insurance agents, brokers, general agents, consultants and employee benefit specialists nationally. We are pleased to provide comments on the proposed rule regarding the Patient Protection and Affordable Care Act's (ACA) Health Insurance Providers Fee published in the Federal Register on December 9, 2016. The members of NAHU work on a daily basis to help millions of individuals and employers purchase, administer and utilize their health insurance coverage. The range of employers represented by NAHU members span from self-employed individuals and mom-and-pop businesses to Fortune 100 companies, and many of our members are also the owners of independent small businesses.

NAHU members and their employer clients have had longstanding and significant concerns about the health insurance fee addressed in this proposed rule. This fee was imposed on all individual and fully insured group health insurance policies sold in this country from 2014 to 2016 and is scheduled to be reinstated beginning on January 1, 2018. It technically falls on health insurers but, as the Congressional Budget Office predicted when the ACA was being debated by Congress, it is "largely passed through to consumers in the form of higher premiums for private coverage." It has disproportionately impacted small-business owners and the employees of small businesses, and it has increased the cost of healthcare coverage for consumers and employers in every state. NAHU members know all too well that any requirement that increases the cost of health insurance for small-business owners and the self-employed makes offering affordable coverage, or any coverage at all, to employees more difficult.

Since the health insurance provider fee has already had such a negative impact on both individual and small-business consumers of health insurance, NAHU members support the measures outlined in the proposed rule to make the amount of the fee being levied for each issuer more accurate by modifying the current definition of net premiums written to account for premium adjustments related to retrospectively rated contracts and risk-adjustment payments and receipts. It is our hope that these adjustments will reduce the economic impact of the fee on many consumers. For the same reason, NAHU supports the proposal to authorize the IRS to make additional adjustments to net premiums written if they are warranted via guidance to that would be published in the Internal Revenue Bulletin.

In addition to the modifications proposed in this rule to make the definition of net premiums for purposes of fee calculation more accurate, to help reduce the economic impact this fee is having on individuals and small-business owners, NAHU urges the Trump Administration to make an additional critical modification to the way the fee amount is calculated. We propose a clarification that health insurance providers' fee collections will no longer be considered as taxable business revenue of issuers.

Under the ACA statute, the annual fee on health insurance providers is treated, for tax purposes, as a nondeductible excise tax and the ACA specifically referenced the concept of deductibility as it relates to the treatment of the tax. When Congress was considering the ACA statute, the CBO recognized and informed Congress and the president that a large portion of these fees would be passed through to policyholders in the form of higher premiums, and that prediction was borne out when the tax was levied during 2014-2016. When the Obama Administration was promulgating the regulations to effectuate the health insurance provider fee in 2013, NAHU and many other stakeholders argued that, based on long-standing federal income tax principles, final regulations should permit any fees recovered from policyholders to be excluded from the health insurance companies' gross income if the conditions of the tax policy and rules are met. Instead, the Obama Administration, via the final Health Insurance Premium tax rules promulgated in 2013, chose to "tax the tax" and applied federal income tax to the health insurance provider fee premiums that insurers collect and then forward to IRS. This excess taxation represents around one-third of the total premium impact of the tax and is not required under the statute.

Fortunately, NAHU sees a legal path for the Department of Treasury and the IRS under the current presidential administration to significantly reduce the financial impact of the fee on American healthcare consumers in the future. Since there is a direct connection between the fee paid to the government by the insurance companies and the amounts recovered, the payment of the fee and the recovery of the fee amounts should be considered a single integrated transaction. Under the well-established "tax benefit rule," since the fee is not deductible by the insurance company, the Trump Administration would be well within its authority to specify that any future fees recovered from policyholders should not be included in the insurance company's gross income. In short, the ACA's specific reference to the deductibility of the tax is a distinct and different concept under tax principles than how the tax is treated for reporting of gross income.

From a broader policy perspective, excluding the recovered fees from the insurers' gross income would help minimize the impact of the fee on premium costs. Unless the regulations are revised (or the statutory requirement for the tax is repealed), when the tax is reinstituted for the 2018 plan year and beyond, insurance companies will be again required to include the recovered fees in gross income and their recovery of the total cost of the fee would include the additional federal income tax. We know, based on 2014-2016 experiences, that this results in even higher premium costs for affected employers, employees and individual health insurance consumers.

We urge the Department of Treasury to utilize its regulatory flexibility, change course from the Obama Administration's policy and assert that the financial impact of the health insurance providers' fee is to be no more than it has to be under the statute. By clarifying that health insurance providers' fee collections will no longer be taxed as business revenue, you will be following long-standing tax policy principles and will mitigate the unnecessary excess costs that have been previously imposed on business and individual purchasers of fully insured health insurance coverage in the form of higher premiums.

Thank you for your consideration of this important idea. NAHU is grateful for the opportunity to provide comments on the proposed rule. If you have any questions or need additional information, please do not hesitate to contact me at either (202) 595-0787 or jtrautwein@nahu.org.

Sincerely,