The Patient Protection and Affordable Care Act imposed a Patient-Centered Outcomes Research Institute (PCORI) fee on plan sponsors and issuers of individual and group policies to support clinical effectiveness research. The research will evaluate and compare health outcomes and the clinical effectiveness, risks, and benefits of two or more medical treatments and/or services. The fee is to be paid by the issuer of fully-insured group health plans (the issuer) and sponsors of applicable self-insured group health plans (the employer), including health reimbursement arrangements (HRAs). The final rule was published on December 6, 2012 (77 Fed. Reg. 22691) however, the IRS updated the Form 720 and instructions in April 2016.
The fee applies to policy/plan years ending on or after October 1, 2012. For a calendar year plan, the fee was first applicable for the 2012 plan year. The fee phases out to policy or plan years ending after September 30, 2019.
Who Pays the Fee
Under the IRS final rule, issuers (health plan) and plan sponsors (employer) are responsible for paying the fee, which is treated as an excise tax by the IRS. A federal excise tax return (Form 720) reporting liability for the fee must be filed by July 31st of the calendar year immediately following the last day of the plan year.
Fully-Insured health plans with an HRA
- Health plan is responsible for filing the Form 720 and paying the health plan fee.
Self-Insured health plans with an HRA
- Employer is responsible for filing the Form 720 and paying the health plan fee.
- Employees with an HRA already counted in the health plan PCORI filing are not subject to an additional PCORI fee.
Calculating the Fee
According to IRS Code §4376, the fee is equal to the average number of covered lives for the policy year multiplied by the applicable dollar amount.
- For policy and plan years ending on or after October 1, 2016 and before October 1, 2017, the applicable dollar amount is $2.26.
- For policy and plan years ending on or after October 1, 2017 and before October 1, 2018, the applicable dollar amount is $2.39.
- For policy and plan years ending on or after October 1, 2018, and before September 30, 2019, the applicable dollar amount is further adjusted to reflect inflation in National Health Expenditures, as determined by the Secretary of Health and Human Services.
Determining Average Number of Covered Lives
Fully Insured Plans
The IRS has provided four methods for determining the average number of covered lives. Issuers must use the same method consistently for the duration of any year and the same method for all policies subject to the fee. (Issuer is responsible for paying the required PCORI fee in the case of fully insured coverage.)
- Actual Count – Count the total number of covered lives for each day of the policy year and divide by the number of days in a year.
- Snapshot Method – Count the number of members on a single day (or days if consistent for each quarter) during a quarter and divide the total by the number of dates on which a count was made. The date used for each quarter must be the same (i.e., the first day, the last day).
- NAIC Member Months Method – The issuer determines the average number of covered lives based on member months reported to the National Association of Insurance Commissioners (NAIC) on the Supplemental Health Care Exhibit for the calendar year. The average number of lives in effect for the calendar year equals member months divided by 12.
- State Form Method – This method is for issuers that are not required to file the NAIC Supplemental Exhibit. These issuers may determine the number of covered lives using a form that is filed with the issuer's state of domicile, if the form reports the number of covered lives in the same manner as the NAIC Supplemental Exhibit.
Self-funded Plans (Including HRAs)
Self-funded plans may determine the average number of covered lives by using any of the following methods. Like fully insured plans, plan sponsors must use the same method consistently for the duration of any year and the same method for all policies subject to the fee.
- Actual Count – Count the total covered lives for each day of the plan year and divide by the number of days in the plan year.
- Snapshot Method – Count the total number of covered lives on a single day in a quarter (or more than one day) and divide the total by the number of dates on which a count was made. (The date or dates must be consistent for each quarter.)
- Snapshot Factor – In the case of self-only coverage, determine the sum of: (1) the number of participants with self-only coverage, and (2) the number of participants with other than self-only coverage multiplied by 2.35.
- Form 5500 Method – For self-only coverage, determine the average number of participants by combining the total number of participants at the beginning of the plan year with the total number of participants at the end of the plan year, as reported on the Form 5500, and divide by 2. In the case of plans with self-only and other coverage, the average number of total lives is the sum of total participants covered at the beginning and the end of the plan year, as reported on the Form 5500.
Special Rule for Health FSAs and HRAs
- If a plan sponsor only maintains a Flexible Spending Account (FSA) or a Health Reimbursement Arrangement (HRA), then the plan sponsor may treat each participant's account as covering a single life. (The plan sponsor is not required to count spouses or other dependents.)
- If the FSA/HRA is sponsored by a plan sponsor that also has an applicable self-funded health plan (that is not an FSA or HRA), the two arrangements may be treated as one plan.
Exceptions to the PCORI Fee
The PCORI fee does not apply to exempt governmental programs, including Medicare, Medicaid, Children’s Health Insurance Program (CHIP) and any program established by federal law for providing medical care (other than through insurance policies) to members of the Armed Forces, veterans and members of Indian tribes (as defined in section 4(d) of the Indian Health Care Improvement Act).
Also, health insurance policies and self-insured plans that provide only excepted benefits, such as plans that offer benefits limited to vision or dental benefits and most flexible spending arrangements (FSAs), are not subject to the PCORI fee. Further, health insurance policies or self-insured plans that are limited to employee assistance programs, disease management programs or wellness programs that do not provide significant benefits in the nature of medical care or treatment are not subject to the PCORI fee.
The PCORI fee only applies to policies and plans that cover individuals residing in the United States. Thus, the PCORI fee does not apply to policies and plans that are designed specifically to cover employees who are working and residing outside the United States.
This information sheet is provided for background only. You should rely on your tax advisor to provide guidance for your specific situation. Additional information can be found HERE.