A new fee enacted to help fund the Patient-Centered Outcomes Research Institute (PCORI) must be paid by certain employers who sponsor self-insured health plans by July 31.
The PCORI was created by the Affordable Care Act (ACA) and is meant to help patients, clinicians, purchasers and policy-makers make 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 PCORI is funded by the Patient-Centered Outcomes Research Trust Fund, which is financed in part by the new PCORI fee on health insurance companies and employers who sponsor self-insured plans. For fully-insured health plans, the PCORI fee is paid by the insurance company that issues the insurance policy. For self-insured plans, the PCORI fee is paid by the employer.
Filing and payment requirements
The PCORI fee must be reported on Form 720, Quarterly Federal Excise Tax Return. It is an annual fee, so only one Form 720 is filed per year to pay the fee. The fee is reported on the second calendar quarter Form 720, and must be filed by the Form 720 deadline for that quarter, which is July 31. Advance deposits are not required. Instead, the PCORI fee is paid when Form 720 is filed. Form 720 is used to pay many other taxes, but an employer who files Form 720 only to report the PCORI fee should not file Form 720 for the first, third or fourth quarters of the year. Form 720 and the instructions may be accessed on the IRS website.
The PCORI fee is paid for each plan year ending on or after Oct. 1, 2012, and before Oct. 1, 2019 (a total of seven years). The due date for filing Form 720 and paying the PCORI fee is based on the plan year-end. Specifically, the filing and payment deadline is no later than July 31 of the year following the last day of the plan year.
The table on the following page shows the first plan year for which the PCORI fee is due and the payment due date for the first plan year, along with the last plan year for which the PCORI fee is due and the payment due date for the last plan year.
Calculating the fee
The PCORI fee is calculated by multiplying a specified fee amount by the average number of covered lives in the plan for the plan year. All of the employees, spouses and dependents who are covered under a plan are counted in determining the number of covered lives.
The following table shows the specified fee amount per covered life:
Tax treatment of fee
In an Office of Chief Counsel memorandum (AM 2013-002), the IRS concluded that the PCORI fee is an ordinary and necessary business expense that is deductible for income tax purposes under Section 162.
Identifying self-insured plans
Employers with only fully-insured plans do not need to file Form 720 and pay the PCORI fee, since it is solely the obligation of the insurance company to do so. Employers who maintain one or more self-insured plans must file Form 720 and pay the PCORI fee.
A health plan is self-insured if any portion of the coverage is provided through any other means than an insurance policy. To count the number of covered lives subject to the PCORI fee, an employer must first identify all of its self-insured plans. If an individual is covered by more than one self-insured plan maintained by an employer, the employer must pay the PCORI fee related to the individual for each plan. In other words, the same individual is subject to the PCORI fee multiple times if the individual is covered by more than one plan. Fortunately, if two or more self-insured plans are maintained by the same employer and have the same plan year, the plans are treated as a single plan for purposes of calculating the PCORI fee. For example, if an employer maintains a self-insured plan that provides major medical benefits and a separate self-insured plan with the same plan year that provides prescription drug benefits, the two plans are treated as one plan. This means that the same life covered under each plan counts as only one covered life for purposes of calculating the PCORI fee. In contrast, if an individual is covered by both a fully-insured plan and a self-insured plan maintained by an employer, the insurance company must pay the PCORI fee for the fully-insured plan, and the employer must pay the PCORI fee for the self-insured plan, resulting in two PCORI fees for the same covered life. This is the case even if the fully-insured plan and the self-insured plan have the same plan year.
Both a health flexible spending arrangement (FSA) and a health reimbursement arrangement (HRA) are generally treated as a self-insured health plan for PCORI fee payments. However, an FSA and an HRA do not necessarily give rise to additional PCORI fees, given the rule that two or more self-insured plans that are maintained by the same employer with the same plan year are treated as a single plan. If an employee is covered only by a health FSA and/or an HRA and not by any other self-insured plans maintained by the employer, the employer may treat the employee's health FSA and HRA as covering one life for purposes of calculating the PCORI fee. It's important to note that an FSA is exempt from the PCORI fee if certain conditions are satisfied, and most FSAs are likely to qualify for the exemption. Please see Tax Flash 2013-08, for more information on the applicability of PCORI fees to FSAs.
The following plans and programs are not subject to the PCORI fee:
- Employee assistance programs, disease management programs and wellness programs unless the programs provide significant benefits in the nature of medical care or treatment
- Plans designed to cover primarily employees working outside the United States
- Dental and vision, long-term care, nursing home care, home health care, and community-based care plans that are offered on a standalone basis
- Coverage for only a specified disease or illness, hospital indemnity and fixed indemnity insurance, if offered as independent benefits that are not coordinated with any other plans maintained by the employer
Calculating the average number of covered lives for a plan year
Except as noted above, all self-insured plans that provide health coverage are subject to the PCORI fee, including plans maintained for the benefit of former employees. The PCORI fee applies to plans that cover active employees and retirees, as well as to retiree-only plans. In calculating the PCORI fee, all covered lives must be counted, including retirees and COBRA beneficiaries.
IRS regulations allow employers to calculate the average number of covered lives by one of three methods. However, under a transition rule, employers may use any reasonable method for the first plan year that the PCORI fee is due, except for plans that have a year-end of July 31, Aug. 31 or Sept. 30, 2013. The employer must apply a single method in determining the average number of lives covered under the plan for the entire plan year. An employer is not required to use the same method from one plan year to the next. The three alternative methods are:
1. Actual count method
2. Snapshot method
3. Form 5500 method
Under the actual count method, the employer determines 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.
Under the snapshot method, the employer determines 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 multiple dates for each quarter, and dividing the total by the number of dates on which a count was made. Each date used for the second, third and fourth quarters must be within three days of the date in that quarter that corresponds to the date used for the first quarter, and all dates used must fall within the same plan year. 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 or the sum of (1) the number of participants with self-only coverage on that date, plus (2) the number of participants with coverage other than self-only cover-age on the date multiplied by 2.35.
Under the Form 5500 method, the employer determines the average number of lives covered under the plan for the plan year based on a formula that uses the number of participants actually reported on Form 5500 (Annual Return/Report of Employee Benefit Plan) or the Form 5500-SF (Short Form Annual Return/Report of Small Employee Benefit Plan) for the self-insured health plan for the plan year. The formula used under the Form 5500 method reflects the fact that the number of participants reported on Form 5500 includes only the employees covered by a plan; it does not include employees' spouses or dependents. For a plan providing only self-only coverage, the employer treats the average number of covered lives under the plan for a plan year for PCORI fee purposes as the sum of the total participants at the beginning and the end of the plan year, as reported on Form 5500, divided by two. For plans that provide coverage not limited to self-only coverage, the employer adds the number of participants reported for the beginning of the plan year on Form 5500 to the number reported for the end of the plan year on Form 5500 to determine the average number of covered lives for the plan year. To use the Form 5500 method, Form 5500 must be filed by the due date of Form 720.
If an employer maintains a health plan that provides coverage through both fully-insured and self-insured options, the employer should take care to exclude from its participant counts any employees, spouses and dependents who are covered under the fully-insured option but not covered under the self-insured option, regardless of the method used to count participants. For example, if the Form 5500 method is used, the participant counts from the Form 5500 that are used to calculate the PCORI fee should be adjusted to exclude individuals who are covered only under the plan's fully-insured option.
The instructions for Form 720 state that employers should keep copies of records to show that the correct tax was paid for at least four years from the later of the date the tax became due or the tax was paid.
Employers should consider taking the following actions regarding PCORI fees:
- Determine whether any self-insured health plans are maintained that are subject to the PCORI fee.
- Determine which plans may be treated as a single plan for purposes of the PCORI fee.
- Determine how the average number of covered lives for each plan will be calculated.
- Determine the due date for filing Form 720 and paying the PCORI fee, based on the plan year-end.
Please contact a local Grant Thornton Compensation and Benefits Consulting professional if you need assistance.
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