First round of employers’ ‘PCORI fees’ due July 31

Originally published July 19, 2013 by Garrett Fenton and Fred Oliphant on

Most employers that sponsor self-funded group health plans, and insurers of fully-insured group health plans, will need to file and pay by July 31 their first round of federal comparative effectiveness research fees imposed under the Affordable Care Act. ACA established the annual fee -- which is known as the “PCORI fee” -- in order to fund comparative clinical effectiveness research to be conducted by the newly-established, non-profit Patient-Centered Outcomes Research Institute.

The amount of the fee is $1 for each individual covered under the group health plan, for the first plan year ending on or after October 1, 2012 (i.e., 2012, for a calendar-year plan), and must be reported on IRS Form 720 and paid by no later than July 31 of the calendar year following the end of the relevant plan year (i.e., by July 31, 2013, for a calendar-year plan). The amount of the fee will increase to $2 per covered individual for the following plan year, and will be increased further for inflation in subsequent years.

The fee is scheduled to expire with the last plan year ending before October 1, 2019, meaning the last fee for a calendar-year plan will need to be filed and paid (for the 2018 plan year) by July 31, 2019. The IRS Office of Chief Counsel recently confirmed that PCORI fees paid by an employer or insurer are tax-deductible, as ordinary and necessary business expenses, under section 162 of the Internal Revenue Code.

The IRS issued final regulations implementing the PCORI fee last December. The regulations include detailed rules regarding the methods by which an employer or insurer may count enrollees under a group health plan for each year, and provide exemptions for certain types of plans and special rules for employers that sponsor multiple plan options. We understand that there has been some confusion among employers regarding the application of the PCORI fee to health flexible spending arrangements and health reimbursement arrangements.

As an initial matter, most employer-sponsored health FSAs (but not necessarily HRAs) qualify as “HIPAA-excepted,” and are therefore exempt from the PCORI fee. But in some instances -- generally, where the employer makes additional, substantial “non-elective” or “matching” contributions to its employees' health FSAs (or does not offer its employees a primary, major medical plan option in addition to the health FSA) -- the HIPAA-excepted exemption does not apply, meaning the fee will be imposed on the health FSA (perhaps subject to additional, special rules set forth below).

Where an employer offers a fully-insured primary group health plan along with an “integrated” HRA (or non-HIPAA-excepted health FSA), two separate PCORI fees will be imposed: the employer/plan sponsor will owe one fee for the HRA or health FSA, and the health insurer will owe a separate fee for the fully-insured primary plan. By contrast, where an employer offers a self-insured group health plan along with an integrated HRA (or non-HIPAA-excepted health FSA), a single fee will generally be imposed on the employer, for each employee covered under both the primary plan and the HRA (or health FSA), provided that the primary plan and HRA (or health FSA) have the same plan year.

The IRS recently updated the Form 720 (and related instructions) -- which some employers already file, on a quarterly basis, to report certain federal excise taxes -- to reflect the PCORI fee. Third party service providers, such as third party administrators, will not be allowed to file the Form 720 on behalf of a responsible entity. Therefore, employers sponsoring calendar year, self-funded group health plans (and insurers of calendar-year, fully-insured plans) must be prepared to complete and file the Form 720, and pay their first round of PCORI fees, by July 31.


IRS Issues Final Rule on Comparative Evidence PCORI Fees

This content was originally published by Stephen Miller on the SHRM website. 

Fees, due by July 31, will be charged to health care insurers, and to sponsors of self-insured health plans, to fund the new Patient-Centered Outcomes Research Institute (PCORI)

Revised Form 720 Issued

For sponsors of self-insured health plans, the IRS posted an updated Form 720 and accompanying instructions on its website. The new Form 720 (with a revision date of April 2013), along with related payment voucher Form 720-V, should be used to report and remit the "PCORI fee" to the IRS. Although the Form 720 is designed for quarterly payments of certain excise taxes, the PCORI fee is paid only annually.

The fee, as described below, is required to be reported annually on the second quarter Form 720 and paid by its due date, July 31, with the first fee payment due July 31, 2013.

PCORI Fee Is Deductible

In another development, the PCORI fee is an “ordinary and necessary business expense paid or incurred in carrying on a trade or business” and as result is tax-deductible, the IRS said in a May 31, 2013, memorandum.

The U.S. Internal Revenue Service issued a final rule on Fees on Health Insurance Policies and Self-Insured Plans for the Patient-Centered Outcomes Research Trust Fund, published in the Federal Register on Dec. 6, 2012.

The Patient Protection and Affordable Care Act (PPACA) establishes the nonprofit Patient-Centered Outcomes Research Institute (PCORI) to promote the use of evidence-based medicine by disseminating comparative clinical effectiveness research findings.

To fund the PCORI, the PPACA imposes a fee on health insurers and employer who sponsor self-insured health plans, for each policy or plan year ending on or after Oct. 1, 2012, and before Oct. 1, 2019, with the first fee payment due July 31, 2013. Subsequently, the PCORI fee will be due no later than July 31 following the last day of the plan year.

The fee will be $1 per plan participant for the first plan year ending after Sept. 30, 2012, and $2 per participant in succeeding years. For policy or plan years ending on or after Oct. 1, 2014, the fee will be increased based on increases in the projected per capita amount of national health expenditures.

Scope of Fees Clarified

Among other points, the final rule clarifies that the fee imposed on an employer sponsoring a self-insured health plan is based on the average number of lives covered under the plan during the plan year.

If an employer sponsors more than one self-insured arrangement, those arrangements may be treated as a single plan for purposes of calculating the PCORI fee, but only if the plans have the same plan year.

Several commentators had requested that the final regulations provide that PCORI fees do not apply multiple times if accident and health coverage is provided to one individual through more than one policy or self-insured arrangement (for example, where an individual is covered by a fully insured major medical insurance policy and a self-insured prescription arrangement).

The final rule does not adopt the requested change. For example, for an employee covered by both a group insurance policy and a health reimbursement arrangement (HRA), the group insurance policy falls within the definition of a specified health insurance policy and the fee applies to the insurer, while the HRA falls within the definition of an applicable self-insured health plan, so that the fee applies to the plan sponsor.

The final rule also applies PCORI fees to policies and plans that provide accident and health coverage to retirees, including retiree-only policies and plans. And it states explicitly that COBRA and other types of continuation coverage must be taken into account in determining PCORI fees, unless the arrangement is otherwise excluded.

However, in response to comments, the final rule permits a self-insured health plan that provides accident and health coverage through fully insured options and self-insured options to determine the fee imposed by disregarding the lives that are covered solely under the fully insured options.

What Plans Are Subject to the Comparative Evidence "PCORI" Fee?

Plans subject to the fee:

 Medical plans.

 Prescription drug plans.

 Self-insured dental or vision plans, if provided without a separate election or premium charge.

 Health reimbursement arrangements (HRAs).

 Retiree-only health plans (even though some are exempt from other PPACA mandates).

Plans exempt from the fee:

 Separately insured dental or vision plans.

 Self-insured dental or vision plans, if subject to separate coverage elections and employee contributions.

 Expatriate coverage provided primarily for employees who work and reside outside of the U.S.

 Health savings accounts (HSAs).

 Most flexible spending accounts (FSAs).

 Employee assistance programs (EAPs), wellness programs and disease management programs that do not provide "significant benefits in the nature of medical care or treatment."

Source: Pinnacle Financial Group, Patient-Centered Outcomes Research Fee Overview

Reconsidering Plan Designs

According to an alert from law firm Leonard, Street and Deinard, employers who sponsor multiple self-funded plans with the same plan year ends can aggregate those plans and pay the fee once on overlapping lives. However, because the fee is imposed on the plan sponsor and not on the plan itself, the employer must pay the fee outside the plan, meaning that plan assets cannot be used to pay the fee.

The law firm's alert also notes that:

Employers with self-funded high deductible health plans that are paired with self-funded HRAs can aggregate those plans and pay the fee once with respect to an individual covered by both the high deductible health plan and the HRA. In contrast, an employer that sponsors a fully insured high deductible health plan paired with a self-funded HRA will essentially be required to pay the fee twice on the same lives. The IRS concluded that because separate statutes impose the fee on plan sponsors of self-funded plans and insurance companies issuing fully insured policies, the IRS is unable to permit employers with both types of plans to combine them for purposes of determining the number of covered lives that they have.

Employers who sponsor self-funded HRAs with fully insured medical plans may wish to consider other plan designs to avoid this fee, such as self-funding the high deductible health plan or moving to a plan design that uses HSAs instead of HRAs. Alternatively, if there are relatively few people covered under the HRA and if the HRA has been an effective plan design, employers may simply decide to continue offering the plan and pay the additional fee.