Which of a benefits administrator's employee health-benefit and retirement plan administration services are subject to Texas sales and use tax?

Plain-English summary

The Texas Comptroller sorted a benefits-administration company's services into taxable and nontaxable buckets, turning on whether a service investigates someone's eligibility for insurance/benefits (taxable insurance service) or merely processes data to administer an existing benefit (nontaxable, even though it uses computers).

Not taxable — Flex Spending Account (FSA/HRA) administration and COBRA administration. Both involve heavy computer use (entering claims, tracking elections, billing and collecting premiums, online reporting), which technically fits the definition of "data processing." But Texas Administrative Code Rule 3.330(a) excludes data processing that merely facilitates another, non-listed service. Since administering an existing reimbursement plan or an existing insurance continuation isn't itself a taxable service, the computer work behind it doesn't become taxable either. The ruling also confirms that plain billing-and-collection-of-premiums activity, by itself, isn't taxable, citing a 2003 Comptroller letter.

Taxable as insurance services — ACA Comprehensive compliance and dependent Eligibility Verification audits. These both involve evaluating whether a specific individual actually qualifies for coverage (full-time/part-time eligibility analysis, dependent eligibility audits under ERISA/Sarbanes-Oxley). That's the statutory definition of "insurance investigation" under § 151.0039, so these are taxable — unless performed for an employer's self-insured plan, which Rule 3.355(b) exempts.

Taxable as data processing — ACA Reporting-Only. This service just generates, prints, distributes, and files IRS Forms 1094-C/1095-C from the employer's data, with no eligibility judgment involved — squarely "data processing" under § 151.0035, similar to filing payroll taxes or preparing W-2s. Only 80% of the charge is taxable, because § 151.351 exempts 20% of data processing charges across the board.

Not taxable — Retirement Plan Administration and 401(k) Recordkeeping. Even though these involve compiling account data, tracking eligibility, and producing statements, the Comptroller treated them like accounting/financial-consulting services requiring professional judgment (plan design, actuarial work, fiduciary compliance) rather than mere data processing, citing a 1988 STAR ruling on comparable pension administration and a 2006 Comptroller decision on benefits determinations.

What this means for you

Employee benefits administrators and TPAs

The taxability line isn't "do you touch a computer" — it's whether you're investigating someone's eligibility for insurance/benefits versus administering a plan they're already enrolled in. FSA, HRA, COBRA, and retirement/401(k) recordkeeping services can stay untaxed even though they involve extensive data handling, as long as that data work supports (not stands alone as) the underlying administrative service.

HR and benefits departments buying these services

Expect your ACA compliance-tracking and dependent-eligibility-audit invoices to carry sales tax (unless your plan is self-insured), while your FSA, COBRA, and retirement-plan administration invoices generally should not. ACA reporting-only services should show tax on 80% of the charge, not the full amount.

Third-party administrators for self-insured employer plans

Insurance services performed for a self-insured plan, or by a TPA distributing funds under one, are not taxable under Rule 3.355(b) — even if the same service would be taxable insurance investigation when performed for a fully-insured plan.

Accountants and tax professionals

This ruling is a useful map of where Texas draws the insurance-service/data-processing/nontaxable-service lines for HR benefits outsourcing. The § 151.351 20%-exemption on data processing charges applies broadly — remember to apply it whenever a service is taxed as data processing rather than as one of the other enumerated taxable services.

Common questions

Q: Is COBRA administration taxable in Texas?
A: No. Administering an existing insurance continuation right — including billing, collecting, and remitting premiums — is not a taxable insurance or data processing service, even though it involves recordkeeping and online reporting.

Q: Is ACA compliance tracking taxable?
A: The comprehensive service that evaluates employee eligibility for ACA coverage is taxable as an insurance service, unless it's performed for a self-insured employer plan. A reporting-only service that just files IRS forms without an eligibility evaluation is taxed differently, as data processing.

Q: What percentage of an ACA Reporting-Only invoice is taxable?
A: 80%. Texas exempts 20% of data processing service charges under Tax Code § 151.351.

Q: Is retirement plan or 401(k) recordkeeping taxable?
A: No, per this ruling — the Comptroller treated these as financial/accounting-type services requiring professional judgment, not enumerated taxable services, even though they involve compiling and storing account data.

Q: Can I rely on this ruling for my own benefits-administration business?
A: Only if you're the taxpayer it was issued to. It binds the Comptroller solely as to that taxpayer's specific services and facts and can't be relied on by others, though it shows how the Comptroller currently classifies comparable benefits-administration offerings.

Citations and references

Statutes and rules:

• Tex. Tax Code § 151.051 (Sales Tax Imposed)
• Tex. Tax Code § 151.010 (Taxable Item)
• Tex. Tax Code § 151.0035 (Data Processing Service — definition)
• Tex. Tax Code § 151.0039 (Insurance Services — definition, incl. insurance investigation)
• Tex. Tax Code § 151.0101(a)(9), (12) (Taxable Services — insurance, data processing)
• Tex. Tax Code § 151.054
• Tex. Tax Code § 151.351 (Information Services and Data Processing Services — 20% exemption)
• 34 Tex. Admin. Code § 3.330(a)(1) (Data Processing Services — facilitation exclusion)
• 34 Tex. Admin. Code § 3.355(a)(6), (b) (Insurance Services — investigation definition, self-insured plan exclusion)
• STAR Accession No. 200304838L (April 14, 2003) (billing/collection of current amounts not taxable)
• STAR Accession No. 8801L0900D01 (Jan. 28, 1988) (pension administration comparable to nontaxable accounting)
• Comptroller's Decision No. 43,965 (2006) (benefit determinations not data processing)

Source

• STAR search: https://star.comptroller.texas.gov/search?doc_type_code=L&tax_type_code=SST
• Opinion: https://star.comptroller.texas.gov/view/202308020L

Original ruling text

August 21, 2023

RE: Private Letter Ruling No. 20220222104614

Dear **:

We issue this private letter ruling in accordance with Rule 3.1, Private Letter Rulings and General Information Letters. [ENDNOTE 1] We are responding to your request dated Feb. 4, 2022, along with additional plan agreement materials provided on April 22, 2022, and emailed clarification provided on May 11, 2023. Detrimental reliance relief is provided in accordance with Rule 3.10, Taxpayer Bill of Rights.

You requested guidance on the taxability of various employee health benefit and retirement administration services.

Facts Presented

The relevant facts are based on information provided in your request, Taxpayer’s websites, [ENDNOTE 2] and sample contracts for the various services that are discussed below.

** (Taxpayer) is a large independent employment benefit recordkeeping services provider, retirement plan third-party administrator, and government savings facilitator in the United States. Taxpayer’s services include various employee benefit and retirement plan administration services.

Employee Benefit Administration

Taxpayer offers several services to streamline employee health benefit administration for employers. These include services such as administering employee health reimbursement accounts (HRAs) and flex spending accounts (FSAs) and administering, tracking, and monitoring compliance with the Affordable Care Act (ACA) and the Consolidated

Omnibus Budget Reconciliation Act (COBRA). Taxpayer provided information related to the activities performed for the services listed below.

Flex Spending Account Service: HRAs and FSAs allowed under Internal Revenue Code (IRS) Sections 105 and 125 enable employees to receive tax free Reimbursements for certain expenses including health and dependent care. Through third party administrators, Taxpayer provides the administration of these reimbursement plans for employers (plan sponsors) that offer this benefit to their employees. The service consists of:

plan design and document services;

plan installation and implementation;

plan enrollment including benefit fairs and online enrollment; and

plan administration including:

entry of claims submitted by participants;

online access to information such as claim status, account balances, and employee statements;

issuing reimbursements; and

online reporting for the plan sponsor.

COBRA Administration: COBRA allows workers and their families to continue to receive health insurance benefits for a limited period after certain events such as a job loss, a reduction in hours, or the transition to a new job. For employees that choose to maintain coverage through COBRA, Taxpayer manages notifications to employees and processes premiums for employers. The activities performed for this service include:

initial notification to eligible employees;

tracking election periods;

qualifying event and update notifications to covered employees;

billing, collection, and remittance of premiums to the plan sponsor;

maintaining records of all notices;

notifying the plan sponsor of discrepancies discovered as well as of changes or updates relating to compliance with the law.

ACA Comprehensive: This service ensures employees are in compliance with the ACA minimum coverage requirements. The service includes:

employee eligibility analysis based on full-time/part-time status;

tracking coverage affordability to ensure ACA compliance;

automated production and distribution of IRS Forms 1094-C and 1095-C; and

alerts to employers of eligibility status changes.

ACA Reporting-Only: Taxpayer offers a reporting only service for ACA administration. This service provides the automated generation, printing, distribution, and filing for IRS Forms 1094-C and 1095-C.

Eligibility Verification Services: Under the Employee Retirement Income Security Act (ERISA) and the Sarbanes-Oxley Act, only eligible individuals may receive retirement or health care benefits. Taxpayer provides dependent eligibility audits to identify ineligible individuals for removal from an employer’s plans.

Retirement Administration

Taxpayer also offers employers services to develop and administer retirement plans for their employees. These services may involve actuarial analysis to create financially sound plans, valuing accounts, preparing and distribution statements, regulatory compliance and reporting, and processing distributions. Taxpayer provided information regarding the activities performed for two specific services.

Retirement Plan Administration: This service operates through third party administrators to provide retirement plan design and guidance, actuarial and fiduciary services, and IRS and Department of Labor compliance. The service includes:

custom plan design;

fiduciary services to handle retirement plan responsibilities including payroll, distribution of statements, and eligibility tracking;

actuarial services;

client onboarding;

Employee Retirement Income Security Act (ERISA) compliance; and

IRS Form 5500 preparation.

401(k) Plan Recordkeeping: This service provides retirement plan documentation and administration. The service includes:

performing eligibility calculations;

providing enrollment confirmation notices and notifications of termination;

maintaining records of all participants and notices;

preparation of participant statements;

valuation of participant accounts; and

calculation of payouts for terminated employees and retirees; and

processing plan distributions.

Questions, Rulings, and Analysis

Your questions are shown below, followed by our responses and analysis.

Question One: Are Taxpayer’s employee benefit administration services subject to Texas sales and use tax?

Ruling One: Taxpayer’s Flex Spending Account and COBRA Administration service are not taxable services.

The ACA Comprehensive and Eligibility Verification Audit services are taxable insurance services.

The ACA Reporting-Only service is a taxable data processing service.

Analysis: Texas imposes a sales tax on each sale of a taxable item in this state. Section 151.051 (Sales Tax Imposed). “Taxable item” includes tangible personal property and taxable services. Section 151.010 (Taxable Item). Section 151.0101 (Taxable Services) includes insurance and data processing services in the list of services subject to Texas sales and use tax. Sections 151.0101(a)(9), (12).

Section 151.0039 (Insurance Services) defines an insurance service as insurance loss or damage appraisal, insurance inspection, insurance investigation, insurance actuarial analysis or research, insurance claims adjustment or claims processing, or insurance loss prevention service. Insurance investigation is defined as “any activity performed to evaluate an individual's eligibility or qualifications for insurance coverage, or for the payment of benefits, or any other similar activity. For example, the assembly or evaluation of information for the purpose of determining whether to issue a life insurance policy to a specific individual would be considered an insurance investigation.” Rule 3.355(a)(6) (Insurance Services)

Section 151.0035 (Data Processing Service) defines data processing services to include word processing, data entry, data retrieval, data search, information compilation, payroll and business accounting data production, and other computerized data and information storage or manipulation. Rule 3.330(a)(1) (Data Processing Services) further defines data processing services to include the processing of information for the purpose of compiling and producing records of transactions, maintaining information, and entering and retrieving information and includes services such as filing payroll tax returns and preparing W-2 forms.

Flex Spending Account Service

Taxpayer’s Flex Spending Account service involves the implementation and administration of reimbursement programs for employees’ eligible expenses. Taxpayer administers the reimbursement of employee funds in compliance with guidelines set forth by the federal government. The service does not require an investigation into the eligibility for insurance coverage or the processing of claims and is not an insurance service under Section 151.0039.

The service includes providing and maintaining online access to employee claim information, account balances and statements, and providing reporting to the plan sponsor. These activities are computerized storage and manipulation of data and meet the definition of data processing provided by Section 151.0035.

However, as explained in Rule 3.330(a), data processing does not include the use of a computer by a provider of other services when the computer is used to facilitate the performance of the service or the application of the knowledge of the physical sciences, accounting principles, and tax laws.

Taxpayer’s service to administer HRAs and FSAs does not fall under the services listed as taxable services in Section 151.0101. Taxpayer’s data processing activities are to facilitate that health benefit administration service. Therefore, the Flex Spending Account service is not subject to Texas sales and use tax.

COBRA Administration

Taxpayer’s COBRA administration service involves the implementation and administration of a customer’s existing insurance policy when continuation coverage must be offered for a temporary period to workers and their families. The administration of continuation of an insurance policy is not an evaluation of eligibility for insurance or the adjustment or processing of insurance claims. The COBRA Administration service is not an insurance service under Section 151.0039.

Taxpayer’s service includes the billing and collection of premiums from participants and the remittance of those premiums to employers. The Comptroller’s office has determined that services to bill and collect current amounts are not taxable. See STAR Accession No. 200304838L (April 14, 2003).

This service also involves activities such as the maintenance of participant notices and data reporting that meet the definition of data processing in Section 151.0035. However, these activities are again performed to facilitate Taxpayer’s COBRA Administration service and do not cause it to become taxable data processing. The COBRA Administration service is also not a service listed in Section 151.0101 as a taxable service and is not subject to tax.

ACA Comprehensive and Eligibility Verification Services

The ACA Comprehensive service helps employers ensure they maintain ACA compliance. This is based on an analysis of employees’ status as full time or part time to determine their eligibility for health care coverage under the ACA program. The service also involves tracking eligibility and notifying employers of changes in employee eligibility.

These activities are performed to evaluate an individual's eligibility or qualifications for insurance coverage under the ACA and meet the definition of insurance investigation under Section 151.0039 and Rule 3.355(a)(6). The ACA Comprehensive service is therefore taxable as an insurance service.

Similarly, Taxpayer's Eligibility Verification service consists of employee dependent audits to confirm they are eligible for benefits under ERISA and the Sarbanes-Oxley Act. Taxpayer’s verification that a dependent is eligible to participate in a health insurance plan is also an evaluation of an individual's eligibility or qualifications for insurance coverage and thus Taxpayer is performing a taxable insurance investigation service under Sections 151.0101 and 151.054 and Rule 3.355(a)(6).

Rule 3.355(b) provides that insurance services performed pursuant to a self-insured plan or for a third-party administrator handling distribution of funds under a self-insured plan are not taxable. Taxpayer’s ACA Comprehensive and Eligibility Verification services are not taxable if provided to employers administering self-insured benefit plans.

ACA Reporting-Only

Taxpayer's ACA Reporting-Only service provides automated generation, printing, distribution, and filing of IRS Forms 1094-C and 1095-C. This involves the compilation and manipulation of customers’ data as described by Section 151.0035. The service is similar to the filing of payroll taxes and the preparation of W-2 forms included in Rule 3.330(a)(1). The service is therefore taxable as a data processing service under Sections 151.051 and 151.0101(a)(12).

Section 151.351 (Information Services and Data Processing Services) exempts 20 percent of the charge for data processing services. Taxpayer is responsible for collecting and remitting Texas sales and use tax on 80 percent of its charges for the ACA Reporting-Only service.

Question Two: Are Taxpayer’s Retirement Plan Administration and 401(k) Plan Recordkeeping services subject to Texas sales and use tax?

Ruling Two: Taxpayer's Retirement Plan Administration and 401(k) Plan Recordkeeping services are not subject to sales and use tax.

Analysis: Similar to the Flex Spending Account service, Taxpayer’s Retirement Plan Administration and 401(k) Recordkeeping services include activities such as compiling and storing account information, notices, and statements for plan participants. These activities are the storage and manipulation of data described by Section 151.0035. They are similarly performed to facilitate Taxpayer’s retirement administration services.

The Comptroller’s office determined that comparable pension administration services are similar to nontaxable accounting services as they both require professional knowledge of accounting principles or tax law instead of providing mere processing of applications. See STAR Accession No. 8801L0900D01 (Jan. 28, 1988).

Taxpayer’s services are also similar to those addressed in the fourth contention listed in Comptroller’s Decision No. 43,965 (2006). That decision held that the “determination of vested, disability and retiree benefits are not activities among those listed as data processing, even though the consultant had access to claimant’s computerized data system.”

The Retirement Plan Administration and 401(k) Plan Recordkeeping services are financial services to administer retirement plans. They involve the analysis and assessment of financial risk in developing plans to offer to an organization’s employees. They include handling fiduciary responsibilities such as tracking eligibility and distribution of statements. They also include the valuing of investments and the processing of distributions to plan participants. These services do not fall under the services listed as taxable services in Section 151.0101 and are not taxable.

Comptroller’s Decisions and STAR documents cited can be found on the Comptroller’s State Tax Automated Research (STAR) system. The Texas Tax Code, Texas Administrative Code, and the STAR system are accessible at www.comptroller.texas.gov/taxes/.

If you have questions about this private letter ruling, please email us through our website at https://comptroller.texas.gov/web-forms/tax-help/ and reference Private Letter Ruling No. 20220222104614.

Sincerely,

Tax Policy Division – Indirect Taxes

Texas Comptroller of Public Accounts

ENDNOTE

1 Unless otherwise indicated, all references to “Section” are to the Texas Tax Code, and all references to “Rule” are to Title 34 of the Texas Administrative Code.

2 www.**.com, www.**.com, www.**/solutions/retirement, last visited July 10, 2023