Patient-Centered Outcomes Research Institute (PCORI) Fee: The Basics

(Filing May Be Due by July 31)

Remy Schneider, Manager, and Stephanie Joyce, Senior Manager, Tax Practice
June 2013

As part of the Affordable Care Act (the “Act”), issuers of specified health insurance policies and plan sponsors of applicable self-insured health plans are subject to a new fee to help fund the Patient-Centered Outcomes Research Institute (PCORI).  Some changes from the Act already have been implemented, and many more will follow this year and in 2014.  However, for many taxpayers, this PCORI fee represents the first action item resulting from the Act, and the initial filing deadline of July 31, 2013 is significant.  Recently the IRS revised Form 720, enabling its use by insurance companies and plan sponsors to report and pay the fee.  This article will describe who is subject to the fee, what types of plans it applies to, and how to calculate and report the fee.

Who has to pay the PCORI fee?
In the case of fully-insured plans, the insurance company pays the fee.  In the case of self-funded or self-insured plans, the plan sponsors (generally the employers) are responsible for the fee.  A self-insured or self-funded plan is one in which the employer or other plan sponsor pays out-of-pocket for each insurance claim as it is incurred, rather than paying a fixed premium to an insurance carrier.  A plan may also be a combination of self-funded and fully insured, in which case both the plan sponsor and insurance provider are responsible for the fee.

To which self-insured plans does the PCORI fee apply?
For filings due on July 31, 2013, the PCORI fee applies to plans with years ending between October 1, 2012 and December 31, 2012. If the plan year ends after December 31, 2012 but on or before September 30, 2013, the employer does not have to pay the fee in 2013, but will be subject to it in 2014. The fee will apply to policy and plan years ending before October 1, 2019.

Plans subject to the fee include (but are not limited to):

  • Accident and health or major medical plans
  • Prescription drug plans
  • Self-insured dental or vision plans, if provided without a separate election or premium charge
  • Health Reimbursement Arrangement (HRAs), including premium-only HRAs
  • Retiree-only health or major medical plans
  • Flexible Spending Accounts (FSAs) that do not meet the exception described below
  • State & local government plans of the kinds listed above
  • COBRA coverage under one of the types of plans listed above

Plans not subject to the fee include (but are not limited to):

  • Separately insured (“stand alone”) dental or vision plans
  • Self-insured dental or vision plans, if subject to separate coverage options and employee contributions
  • Expatriate coverage provided primarily for employees who work and reside outside of the U.S.
  • Health Savings Accounts (HSAs)
  • Archer Medical Savings Accounts (MSAs)
  • FSAs if both of the following conditions are met: (1) the sponsor’s contribution is less than or equal to the employee’s contribution and (2) the sponsor offers health insurance
  • Employee Assistance Programs (EAPs), wellness programs and disease management programs that do not provide “significant benefits in the nature of medical care or treatment”

How is the fee calculated?
The PCORI fee is based on the number of lives covered by the self-insured plans. A “covered life” includes an employee, spouse, partner, and dependent children. If an employer offers multiple self-insured plans, it will only pay one PCORI fee per covered life, rather than per plan. The fee calculation is as follows:

Year 1: $1.00 x average number of covered lives
Year 2: $2.00 x average number of covered lives
Year 3 – Year 7: $2.00 x index based on increases in national health expenditures x average number of covered lives

There are three methods for calculating the average number of covered lives. The same method must be used for all plans in any one year, but can be changed from year to year.

Actual Count Method
Take a count of the actual number of covered lives each day of the plan year and divide by 365 (or 366 in a leap year)

Snapshot General Method
Add the total number of covered lives on one particular day for each quarter of the year. You must use the same day for each quarter, for example, the first day of the quarter, last day of the quarter, first day of each month, etc. Then, divide that total by 4. More dates can be added to the total, if an equal number of days are added per quarter.

Snapshot Factor Method
This is the same as the snapshot general method, except that only employees with single coverage (not family coverage) are counted, and the total is multiplied by 2.35.

Form 5500 Method
If the plan offers family coverage, the number of covered lives is the number of participants reported at the beginning of the year plus the number of participants at the end of the year. The beginning and ending participant totals are added because Forms 5500 do not count family members as participants. If the plan does not offer family coverage, the sum of the beginning and ending amounts is divided by 2 to reflect the average number of participants during the year.

For plan years that begin before July 11, 2012 and end on or after October 1, 2012, “any reasonable method” of determining the average number of covered lives can be used.

The covered life counts for FSAs and HRAs subject to the PCORI fee do not include spouses or dependents, even though these individuals are covered under the plans.

What form to file and when?
The PCORI fee is reported and paid using Form 720, Quarterly Federal Excise Tax Return. Form 720, along with remittance, is due July 31st for all plan years ending in the preceding calendar year. Thus, for plan years ending between October 1 and December 31st of 2012, Form 720 is due July 31, 2013.  The form and its instructions can be found through the links in this sentence or on the IRS website.

If you have any questions, please contact one of the authors, or Drew Cheney, or your regular BNN advisor, at 1-800-244-7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.

Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter.  Please contact us if you wish to have formal written advice on this matter.