Quick Summary
- The PCORI fee applies to covered health plans with plan or policy years ending after Sept. 30, 2012, and before Oct.1, 2019.
- For plan years ending in 2017, plan sponsors of self-funded health plans (including level-funded plans) must pay a PCORI fee by July 31, 2018.
- Use the IRS Form 720 to make the payment.
- The annual PCORI fee amount varies depending on when the plan year ended.
- $2.39 per “covered life” for plan years ending on or after October 1, 2017 and before December 31, 2017 (e.g., 2017 calendar year plan)
- $2.26 per “covered life” for plan years ending on or after January 1, 2017 and before October 1, 2017.
- “Covered lives” includes not only employees but also dependents and former employees still covered under the plan, except that for HRAs it includes only the covered employee.
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PCORI stands for the Patient-Centered Outcomes Research Institute, an entity created by the Affordable Care Act (ACA) to compile and distribute comparative clinical effectiveness research findings. The fees paid by plans are used to fund the Institute. The fees are called PCORI fees or CERF fees (Comparative Effectiveness Research Fees).
Employers who sponsor insured health plans are not required to take any action to pay the PCORI fees; instead, health insurers will pay the fee and factor in the cost in setting insurance rates.
For additional details, see the IRS PCORI Fee webpage at https://www.irs.gov/uac/patient-centered-outcomes-research-trust-fund-fee-questions-and-answers.
What Types of Plans ARE Subject to the PCORI Fee?
Plan sponsors of self-insured medical plans are responsible to report and pay the fee, for plans that provide health or accident benefits primarily to individuals living in the U.S. Examples of plans subject to the PCORI fee include:
- Major medical – including retiree-only and COBRA continuation coverage
- “Level-funded” plans
- Health Reimbursement Accounts (HRAs) that are not integrated with an underlying self-insured medical plan*
- “Minimum essential coverage” (MEC) plans that provide more than just excepted benefits
* Note regarding HRAs: An HRA is required to pay the PCORI fee if it is a stand-alone HRA or is integrated with an insured major medical plan (the carrier pays the PCORI fee for the underlying insured plan). However, an HRA is not required to pay the PCORI fee for individuals who are covered under both the HRA and a self-insured major medical group health plan with the same plan year.
What Types of Plans are NOT Subject to the PCORI Fee?
- “Excepted” benefits such as stand-alone dental or vision plans,
- HRAs that are integrated with self-funded plans with the same plan year
- HSAs (but the underlying high deductible health plan would be subject to the fee),
- Most Health FSAs, and
- Employee Assistance Programs (EAPs), disease management and wellness programs (as long as they do not provide significant benefits in the nature of medical care or treatment)
Reporting the PCORI Fee
Sponsors of self-funded plans must file the second quarter Form 720 annually (by July 31) to report and pay the fee for the prior plan year. In Section II, line/section 133: report the average number of lives covered in column (a), apply the applicable rate, listed in column (b), and enter the fee due in column (c). The form does not automatically calculate.
Covered lives. Covered lives includes not only employees but also dependents and former employees still covered under the plan. The exception, as noted initially, is that an HRA’s covered lives will be determined using the one life per participant rule. An important note for employers who change plan type mid-year, from insured to self-funded: the number of covered lives is based on the average number of enrollees for the plan or policy year, whether that is a full 12-month year or a short plan or policy year. Thus, if an employer offers an insured plan with a policy renewal date of January 1, but as of October 1 changes to a self-funded or level-funded plan, the insurer will pay the PCORI fee for the January 1 – September 1 policy year, and the plan sponsor will pay the PCORI fee for the plan year that begins October 1, whether that is a full or short plan year. If the plan continues as a calendar year plan, this means the PCORI fee will be double for the calendar year in which the plan changes from insured to self-funded: the insurer will pay the fee for the policy year January 1 – September 1, and the plan sponsor will pay the fee for the short period October 1 – December 31.
Reporting due date. For some non-calendar year plans the deadline will be later than for calendar year plans, because the due date is July 31 of the calendar year immediately following the last day of the policy year or plan year to which the fee applies. For a plan year ending on or before July 31, the PCORI fee will not be due until July 31 of the following calendar year.
- Example: for a plan year ending March 31, 2018, the PCORI fee is not due until July 31, 2019 (because the first calendar year that begins after March 31, 2018 is the 2019 calendar year).
The rate. The applicable rate increases each year and varies depending on when the plan year end.
- Example: The fee for a plan year that ended September 30, 2017, is $2.26 per enrollee, but the fee for a plan year that ended December 31, 2017, is $2.39 per enrollee. Both are due by July 31, 2018. This is clearly shown on the Form 720.
How to Determine the Average Number of Covered Lives
As noted previously, covered lives includes not only employees but also dependents and former employees still covered under the plan (except for HRAs, which use one life per participant rule). A plan may use any of the three counting methods listed below, and may change methods from one year to the next. Self-insured plans should receive or request information from the plan’s third-party administrator (TPA) on the average number of covered lives under the various methods. Select the method that results in the lowest number.
- Practical Tip: If enrolled employees with family coverage often cover more than two family members, the employer will likely pay lower PCORI fees by using the “Snapshot factor” method explained below.
1) Actual count method
Add the number of covered lives for each day of the plan year and divide by that number of days (365, or less for or a short plan year). In practice, if you use this method you probably will be counting the average number of enrollees per month and dividing by 12, since most TPAs report numbers on a monthly basis, not a daily basis.
2) Snapshot methods
There are two types of snapshot methods, explained below. The general methodology is the same under each: add the total number of lives covered on one or more dates in each quarter, and divide by the total number of dates on which the count was made. A plan need not pick exactly the same date or dates in each quarter, but 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 ERISA plan year.
2.A. Snapshot Count Method:
- The number of lives equals the actual number of lives covered on the designated date or dates, divided by the number of dates on which a count was made. This includes enrolled employees, spouses, other dependents, retirees and COBRA qualified beneficiaries.
2.B. Snapshot Factor Method: The number of lives equals:
- the sum of the number of employee participants with self-only coverage on the selected date(s), plus the number of employee participants with coverage other than self-only coverage on the same date(s),
- multiplied by 2.35
As noted previously, this method may result in the lowest PCORI fees if enrolled employees with family coverage often cover more than two family members.
3) Form 5500 method
A calendar year plan can use the 5500 method only if the 5500 is filed no later than the July 31 PCORI fee due date. This means an employer cannot use this method for PCORI if it files for an extension to file the 5500 later than July 31.
- If the plan only provides self-only coverage: add the number of plan participants at the beginning and end of the plan year (as reported on lines 5 and 6(d) of the 5500), and divide by two.
- If the plan also offers coverage other-than-self-only: add the number of plan participants reported on lines 5 and 6(d) at the beginning and end of the plan year and do not divide by two.
Paying the PCORI Fee
Third parties (such as the TPA or broker) may prepare the Form 720, but the form “must be signed by an individual authorized by the entity to sign the return” (per the 2018 Form 720 Instructions, page 3). This probably will be a corporate officer such as the Controller or VP of Finance. If the employer hires a paid preparer, the paid preparer must also sign the form in addition to the employer signing, and the preparer must include his or her Preparer Tax Identification Number (PTIN).
Late fees apply for late filing and/or payment, but the IRS may waive these if the plan sponsor has reasonable cause and the failure was not due to willful neglect. However, the IRS will not waive fees if the failure was due to inadvertent error. See Part II (Pages 8-9) of the IRS instructions. Corrections to a previously-filed Form 720 filings may be made using Form 720X. (See Q/A 16 on the IRS PCORI Fee webpage cited above.)
The Form 720 may be filed with the IRS by U.S. mail, private delivery services, or electronically. Electronic filings are made using the Electronic Federal Tax Payment System (EFTPS). See Form 720 Instructions.
Record-keeping Requirements
The federal government may request documentation of how of the fees were calculated, so employers should keep records to show how they determined the number of covered lives and the fee amount to apply. The Form 720 instructions advise taxpayers to keep their returns and supporting documentation for at least four years from the date the tax return was due, or if later, the date it was paid or file.
A plan sponsor generally should not include the PCORI fee in calculating the premium equivalent rate for self-funded plans, since the PCORI fee is assessed on the plan sponsor of a self-funded plan (not on the plan itself). However, the plan sponsor can include the PCORI fee as a tax-deductible expense.
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