Texas Letter Ruling 9209L1195D07: Self — Insured Or Self — Funded Plans

Subject

Self — Insured Or Self — Funded Plans

Plain-English summary

The Texas Comptroller ruled that a self-funded (also called "self-insured") employee benefit plan does not owe Texas sales tax on two kinds of services, no matter whether the plan has purchased stop-loss coverage or not.

The taxpayer was a corporation acting as a third-party administrator (TPA) that handled both claims and billing administration by distributing funds for employee benefit plans regulated under an unidentified law. The plans were established by Texas employers for the benefit of their Texas employees, were commonly called "self-funded" by both the insurance industry and the Texas Department of Insurance, and were funded through employer-funded reserve accounts used to pay employee benefits. Most of the plans also carried "stop-loss" insurance, which protects the employer against catastrophic losses.

The Comptroller answered five questions, all "No" (no tax due):

1. A self-funded plan without stop-loss coverage owes no sales tax on cost-containment services performed by a utilization review company that pre-certifies the need for recommended medical treatment or hospitalization.
2. A self-funded plan with stop-loss coverage also owes no sales tax on those same utilization review services.
3. A self-funded plan without stop-loss coverage owes no sales tax on the services the plan's third-party administrator provides for handling and distributing plan funds.
4. A self-funded plan with stop-loss coverage also owes no sales tax on those same TPA fund-handling and distribution services.
5. Since no tax was found due in any scenario, there was no need to allocate any tax between self-funded risk and stop-loss-covered risk.

The Comptroller noted the opinion was based on the facts presented, and that the opinion could change if the facts were different or additional facts came to light.

What this means for you

Third-party plan administrators

If you administer claims and handle fund distribution for a Texas employer's self-funded employee benefit plan, this ruling states that your fund handling and distribution services are not subject to Texas sales tax — whether or not the plan carries stop-loss insurance.

Utilization review companies

If your company performs cost-containment services such as pre-certifying the medical necessity of recommended treatment or hospitalization for a self-funded plan, this ruling states those services are not subject to Texas sales tax, again regardless of whether the plan has stop-loss coverage.

Employers sponsoring self-funded plans

If you sponsor a self-funded (self-insured) employee benefit plan for your Texas employees, this ruling indicates that sales tax does not apply to the utilization review and third-party administration services associated with running the plan.

Accountants and tax professionals

This is a facts-based letter ruling addressed to a single taxpayer; the Comptroller expressly stated the conclusion rests on the facts presented and could change with different facts. No statutes or rules are cited in the letter itself, so the reasoning behind the "No" answers is not spelled out in the text available here.

Common questions

Q: Does a self-funded employee benefit plan owe Texas sales tax on utilization review services?
A: No. The ruling states that cost-containment services performed by a utilization review company that pre-certifies medical treatment or hospitalization are not taxable, whether or not the plan has stop-loss coverage.

Q: Does having stop-loss insurance change whether the plan owes sales tax on these services?
A: No. The Comptroller reached the same "No tax due" answer for both plans without stop-loss coverage and plans with stop-loss coverage, for both the utilization review services and the third-party administrator's fund-handling services.

Q: Are a third-party administrator's fund handling and distribution services taxable?
A: No. The ruling states these services are not subject to Texas sales tax for self-funded plans, regardless of stop-loss coverage.

Q: Can other taxpayers rely on this letter?
A: Only the taxpayer to whom it was directly issued can treat it as a basis for detrimental reliance. Other taxpayers can use it only as an indication of the Comptroller's reasoning, and it may not reflect current policy.

Citations and references

No statutes, rules, or other authorities are cited in the text of this letter.

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/9209L1195D07

Original ruling text

September 28, 1992

Dear **:

Thank you for your recent letter asking for a position statement on insurance
services. The facts and questions you presented are restated below with our
responses.

FACTS: The Corporation is a third party administrator providing both claims and
billing administration by distributing funds of employee benefit plans
regulated by **. The * plans have been established by
Texas employers, and they benefit employees that work in the State of Texas.
All of the * plans are commonly referred to as being "self-funded"
by the industry and by the Texas Department of Insurance. The employers fund
reserve accounts that are used to pay employee benefits. Most of the
**** plans also purchase what is commonly referred to as "stoploss"
insurance that indemnifies the employer against catastrophic loss.

Question 1. Would a self-funded ** plan that has not purchased
stop-loss coverage owe sales tax on costcontainment services performed by a
utilization review company that pre-certifies the need for recommended medical
treatment or hospitalization?

Response:No.

Question 2. Would a self-funded ** plan that has purchased stop-loss
coverage owe sales tax on costcontainment services performed by a utilization
review company that pre-certifies the need for recommended medical treatment or
hospitalization?

Response:No.

Question 3. Would a self-funded ** plan that has not purchased
stop-loss coverage have to pay sales tax on services provided by the plan's
third-party administrator for the handling and distribution of funds under the
plan?

Response:No.

Question 4. Would a self-funded ** plan that has purchased stop-loss
coverage have to pay sales tax on services provided by the plan's third-party
administrator for the handling and distribution of funds under the plan?

Response:No.

Question 5. If the Comptroller were to take the position that **
plans with stop-loss coverage are liable for the sales tax on the insurance
services, how would such services be allocated between self-funded risks and
stop-loss covered risks?

Response:No tax due. See previous responses.

This opinion is based on the facts presented. If there are additional or
different facts, the opinion may change.

If you have any questions or need more information, you may call me toll free
at 1-800-252-5555, extension 3-4633. The regular number is 512/463-4633. You
may also write to the Tax Administration Division.

Sincerely,

Wanda Hutcheson
Tax Administration Division