Patient-Centered Outcomes Research Institute (PCORI) fees are due by July 31, 2014 for plan years ending on or after October 1, 2013 and before January 1, 2014. For plan years ending in 2014, the PCORI fees are not due until July 31, 2015, so many off-calendar year plans will have a reprieve. The PCORI fee is $2 per “covered life” for plan years ending on or after October 1, 2013 and before October 1, 2014.
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.
Last year 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 (Quarterly Federal Excise Tax Return), on the second quarter filing (even though this form is otherwise used for quarterly filings). As noted above, the annual PCORI fee deadline is July 31 of the calendar year immediately following the last day of the policy or plan year. For example, for a plan year ending on or before December 31, 2013 the form must be filed (and the fee paid) by July 31, 2014. However, for a plan year ending in 2014 (e.g., plan year end March 31, 2014), the PCORI fee and Form 720 are not due until July 31, 2015. This is because the calendar year immediately following March 31, 2014 is the 2015 calendar year.
For self-funded plans, the plan sponsor is responsible to pay the fee. The plan sponsor may have a third party calculate the amount due (and 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.
Note that a self-funded plan is referred to in Form 720 and the Instructions as an “applicable self-insured health plan.”
For insured plans, the carrier is the responsible party to pay the fees. The 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 e-File program (www.irs.gov/efile).
- Private Delivery Services. Instructions are available at http://www.irs.gov/uac/Private-Delivery-Services-(PDS).
Plan sponsors and issuers are not required to pay deposits for the PCORI fee, so they are not required to pay the fee using Electronic Federal Tax Payment System (EFTPS). However, if the fee is paid using EFTPS, the payment should be applied to the second quarter.
Employer must pay the fee, and cannot pass the PCORI fee through to the participants via employee contributions
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 (e.g., not from participant contributions or trust assets), because ERISA’s prohibited transaction rules prohibit the use of plan assets to pay expenses that are the employer’s obligation.
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.
How to Calculate the Number of “Covered Lives”
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.
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.
2) Snapshot method
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 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 policy year or plan year.
If a plan uses multiple dates for the first quarter, the issuer or plan sponsor must use dates in the second, third, and fourth quarters that correspond to each of the dates used for the first quarter or are within three days of such corresponding dates, and all dates used must fall within the same policy year or plan year.
There are two types of snapshot methods.
- Snapshot factor method: The sum of:
- the number of participants with self-only coverage on the selected date(s), plus
- 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
This number is derived from the number of total participants reported on the Form 5500. It is only allowed as long as the 5500 is filed no later than the July 31 PCORI fee due date.
- 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), divided 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.
Which Health Plans and Policies are Subject to the PCORI Fee
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. Some HRAs are subject to PCORI, as specified below in item #3.
Not Subject to the fee: The 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 must be under a separate contract from insured medical benefits, or
- 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 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 but we have not had many questions on these plans:
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.
For a list of plans that are subject (and not subject) to the PCORI fee, see http://www.irs.gov/uac/Application-of-the-Patient-Centered-Outcomes-Research-Trust-Fund-Fee-to-Common-Types-of-Health-Coverage-or-Arrangements