Employee Benefits Compliance, PCORI Fee, Taxes, Fees & Penalties

ALERT! Self-Funded Plans: PCORI Fees Due by July 31st

WHO & WHAT?  Employers who sponsor self-funded health plans must pay a PCORI fee ($2.08 per “covered life”) by July 31, 2015 for plan years ending on or after October 1, 2014 and before January 1, 2015. Major medical plans are subject to the PCORI fee, including plans that are insured, self-funded, PPOs, HMOs, retiree-only medical plans, and HRAs that are bundled with insured plans.

WHY? The fee is used to help fund the Patient-Centered Outcomes Research Institute (PCORI), which was created by the Affordable Care Act (ACA) to fund research to compare the clinical effectiveness of various treatments and services.

WHEN?  For plan years ending in 2015, the PCORI fees are not due until July 31, 2016, so many off-calendar year plans will have a reprieve. For example, the PCORI fee for a plan with an April 1, 2014 – March 31, 2015 plan year is not due until July 31, 2016. See matrix below that shows various plan years, PCORI fee due dates, and fee amounts.

HOW?  Employers who sponsor self-funded health plans must calculate and pay the fees using federal tax Form 720 (the Quarterly Federal Excise Tax Return, which has been revised for use in payment of annual PCORI fees also.)

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 no doubt pass forward the cost to plan sponsors.

In prior years we received a flurry of questions as the July 31 deadline approached. This Bulletin addresses the following issues for sponsors of self-funded plans:

  • How and When the Fee is Paid
  • How to Determine the Number of “Covered Lives” on which the Fee is Based
  • Which Plans are Subject to the PCORI Fee

How and When the Fee is Paid

The fee is paid only once a year, using Tax Form 720.  The annual PCORI fee deadline is July 31 of the calendar year immediately following the last day of the ERISA plan year (or policy year, for small plans that have not specified a different plan year).   For example, for a plan year ending on or before December 31, 2014 the form must be filed (and the fee paid) by July 31, 2015.   However, for a plan year ending in 2015 (e.g., plan year end March 31, 2015), the PCORI fee and Form 720 are not due until July 31, 2016.  This is because the calendar year immediately following March 31, 2015 is the 2016 calendar year.

For self-funded plans, the plan sponsor is responsible to pay the fee.  TPAs generally will calculate the number of “covered lives” under the various methods summarized below (and may even prepare the Form 720), but the employer must actually file the Form 720 and is ultimately liable for ensuring the correct amount is timely paid. Late fees that apply for late filing and/or payment may be waived if the issuer or plan sponsor has reasonable cause and the failure was not due to willful neglect. Fees may not be waived for inadvertent error.

For insured plans, the carrier is the responsible party to pay the fees. Plan sponsors are not required to take any action, but the PCORI fee was no doubt included in your rates.

IRS Form 720. The IRS instructions for Form 720 PCORI fee reporting are fairly clear:  See Part II (Pages 8-9) of the instructions. The Form 720 is filed with the IRS as follows:

  • By Mail. Mail to Department of Treasury, Internal Revenue Service, Cincinnati, OH 45999-0009.
  • Electronically. Using the Electronic Federal Tax Payment System (EFTPS). Note that plan sponsors are not required to pay the PCORI fee electronically. See page 9 of Form 720 Instructions.
  • Private Delivery Services. Instructions are available at http://www.irs.gov/uac/Private-Delivery-Services-(PDS). Private delivery services is discussed on page 2.


PCORI Fee is an employer expense, not a plan expense

PCORI fees are not a permissible “plan expense” under ERISA, because by law they are imposed on the plan sponsor and not on the plan itself.  This means that the PCORI fee must be paid by the plan sponsor and not from plan assets, because ERISA’s prohibited transaction rules prohibit the use of plan assets to pay expenses that are the employer’s obligation.  Plan assets would include participant pre-tax contributions and trust assets. Some experts say employers can pass the PCORI fee on to participants by requiring them to pay it on an after-tax basis. This may be an administrative burden, if employees pay pre-tax for their premiums. In lieu of directly passing on the PCORI fee to enrollees, some plan sponsors simply reduce their contribution rate by $2.08 per enrollee or by an equivalent percentage amount.

An exception to the ERISA plan assets rule is that the PCORI fee may be paid from plan assets of a multiemployer plan because the plan sponsor liable for the plan’s PCORI fee is a joint Board of Trustees, which has no funding source other than the plan assets.


Employer may treat the PCORI fee as a tax deductible expense

In June 2013 the IRS issued a legal opinion that the PCORI fee is a tax-deductible expense (under Code section 162(a)) for self-insured plan sponsors and for health insurers.  (This only applies to amounts the employer paid.)

How to Calculate the Number of “Covered Lives” for sponsors of self-insured plans

Sponsors of self-insured plans may use any one of the following three methods to determine the average number of covered lives on which the fee is calculated. “Covered lives” includes not only employees, but also covered spouses, dependents, retirees and COBRA qualified beneficiaries. 

Practical Tip: If plan enrollees with other-than-self-only coverage often cover more than two family members, the employer will likely pay a lower PCORI fee by using the snapshot factor method explained below. Most TPAs will provide the “covered lives” count using all or most of the methods below, so be sure to choose the one that yields the lowest PCORI fee amount

1) Actual count method

Add the number of lives covered for each day of the plan year, and divide the total by the number of days in the plan year.  E.g., the number of lives on each of 365 days / 365 = the actual count.

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 method

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.

  • Snapshot factor method:  The sum of:
    1. the number of participants with self-only coverage on the selected date(s), plus
    2. the number of participants with coverage other than self-only coverage on the same date(s), multiplied by 2.35
  • Snapshot count method:  The number of lives equals the actual number of lives covered on the designated date or dates.  This includes employees, spouses, other dependents, retirees and COBRA qualified beneficiaries.

3)  Form 5500 method

An employer can use this 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 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 the 5500), and divide by two.
  • If the plan offers coverage other than self-only: add the number of plan participants reported on the 5500 at the beginning and end of the plan year and do not divide by two.

Which Health Plans are Subject to the PCORI Fee

The PCORI fee applies to major medical plans, including insured and self-insured, PPOs, HMOs, high-deductible health plans (HDHPs), retiree-only coverage, and some Health Reimbursement Accounts (HRAs). It does not apply to “excepted benefits.”
Subject to the fee:  Plan sponsors only need to count “covered lives” in the plans that are subject to the PCORI fee.

Plans subject to the fee are:  plans that provide accident or health coverage primarily for individuals living in the U.S., including HMOs and retiree-only health plans.  HRAs that are bundled with underlying insured medical plans are subject to PCORI, as specified below in the third bullet point.

Not Subject to the fee:  The PCORI fee does not apply to the following plans or policies:

  • Limited-scope dental and vision benefits that are “excepted benefits”— which means they must meet one of the following two tests:
    • Insured benefits: Dental and/or vision benefits must be under a separate contract from insured medical benefits.
    • Self-insured benefits: Medical plan participants must be able to elect not to receive the limited scope benefits. (There is no longer a requirement that participants who elect to receive them must pay an additional amount for them.)
  • Health FSAs that are “excepted benefits”–  which means the following two tests must be met:
    • The maximum benefit for the year does not exceed two times the participant’s salary reduction election for the year, or, if greater, the participant’s salary reduction election plus $500; and
    • The employee has other regular medical coverage (that is not an excepted benefit) available under a group health plan of that employer for that year (not just coverage available under a spouse’s plan).
  • An HRA that is bundled with, and has the same plan year as, a self-insured major medical plan (e.g., PPO or HDHP) is not subject to a separate fee (because the HRA is self-insured, so is included with the underlying self-insured plan).  However, an HRA that is bundled with a fully-insured major medical plan is subject to a separate fee (calculated by including only employees—not dependents—in the total participant count). This is because the insurer pays the PCORI fee for the underlying insured plan, so the plan sponsor must pay a separate PCORI fee for the self-insured HRA.

The following types of plans also are NOT subject to the PCORI fee:

Health Savings Accounts (HSAs);  Accident and disability benefits; Workers’ compensation; On-site medical clinics; Long-term care benefits; Employee assistance programs, disease management programs and wellness programs that do not provide significant medical benefits;  Expatriate policies;  Stop-loss or indemnity reinsurance policies.

Recordkeeping Requirements

The IRS may request documentation of how PCORI fees were calculated, so employers should keep records to show how they determined the number of covered lives and the fee amount to apply. There is no specific guidance on record retention for PCORI fees, but the Form 720 instructions do 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. For the transitional reinsurance fee, HHS requires plan sponsors to keep records of enrollee counts for ten years, so employers may want to apply the ten-year rule to PCORI fee documentation as well (since the enrollee count methods are so similar).

PCORI Fee Amounts and Due Dates, for Various Plan Years

For some plans that must pay the PCORI fee by July 31, 2015, the fee per covered life will be $2, while for others it will be $2.08. This is because the PCORI fee changes based on whether a plan year ends before  October 1.  However, the due date for the payment changes based on whether the plan year ends by December 31. See page 9 of the Form 720 Instructions for a Worksheet to calculate the amount due.

Plan Year end dateFee per “covered life”When fee must be paid
October 1, 2013–December 31, 2013$231-Jul-14
January 1, 2014–September 30, 2014$231-Jul-15
October 1, 2014–December 31, 2014$2.0831-Jul-15
January 1, 2015–September 30, 2015$2.0831-Jul-16
October 1, 2015–December 31, 2015Rate increases based on increase in per capita National Health Expenditures, published annually by HHS.31-Jul-16