Employers that sponsor self-insured group health plans, including level funded plans and health reimbursement arrangements (HRAs), have until July 31, 2020 to pay the Patient-Centered Outcomes Research Institute (PCORI) fee. This year, employers will pay the PCORI fee for plan years ending in 2019.
The PCORI Fee was previously set to expire in 2020 and the last payment for calendar year plans was supposed to be on July 31, 2019; however, in late 2019, Congress extended the fee for another 10 years. This means employers with calendar year and non-calendar year self-insured group health plans that ended in 2019 are required to pay the fee by July 31, 2020.
- Employers who sponsor self-insured plans (including level funded plans and HRAs) must pay the PCORI fee, which is determined by the number of covered lives under an employer’s self-insured health plan and the plan year end date;
- Employers must report and pay their fees using IRS Form 720 through the Electronic Federal Tax Payment System by July 31, 2020;
- Employers who only sponsor “fully insured” plans do not pay the PCORI fee.
Frequently Asked Questions
What is the PCORI Fee?
The PCORI fee was established as part of the Affordable Care Act (ACA) to fund research to evaluate the effectiveness of medical treatments, procedures and strategies that treat, manage, diagnose or prevent illness or injury. The ACA requires certain carriers and health plan sponsors (i.e. employers) to pay the PCORI fee annually.
Which employers need to pay the PCORI fee?
Insurance carriers are responsible for paying PCORI fees on behalf of fully insured plans; whereas employers are responsible for paying the fee on behalf of self-insured plans.
Employers who sponsor any self-insured plan must pay the PCORI fee. The following types of insurance coverage are subject to the PCORI fee:
- Accident and health coverage or major medical insurance coverage;
- Retiree-only health or major medical coverage;
- Health or major medical coverage under multiple policies or plan;
- COBRA coverage;
- HRA (unless it is an excepted benefits HRA – meaning separately offered, limited-scope dental or vision only benefits); and
- State and local government health or major medical plans for employees and/or retirees.
Special Rule for healthcare FSAs: Generally, healthcare flexible spending accounts (FSAs) are considered self-insured plans. However, health FSAs that are considered “excepted benefits” are exempt for paying PCORI Fees. In order for a health FSA to be considered an “excepted benefit” two requirements must be met:
- The employer must offer group health plan coverage to employees who participate in the health FSA (most employers already do this); and
- If the employer makes contributions to employees’ health FSAs, they do not contribute more than 2x of employees’ election or $500 more than employees’ election, whichever is greater. Since most employers choose not to make contributions toward employees’ healthcare FSAs (or they limit the contribution to $500), this requirement is usually satisfied.
Most employers sponsor health FSAs that are considered excepted benefits and therefore will not be responsible for making PCORI Fee payments for their health FSA.
How is the PCORI Fee Calculated?
The PCORI fee is determined by the number of covered lives under each self-insured health plan and the rate per covered life (as determined by a plan year’s end date), as summarized below:
PCORI Fee = Rate Per Covered Life x # of Covered Lives Under the Self-Insured Plan
Rate Per Covered Life
The IRS increases the rate per covered life each year depending on the value of national healthcare expenditures. The IRS publishes the applicable rates here.
The applicable rate per covered life is determined by a plan year’s end date. This year, employers will pay the fee for plan years ending in 2019. The rate per covered life for plan years ending in 2019 are as follows:
- For plan year START dates that begin February 1, 2018, through October 1, 2018 (otherwise known as plans that END January 2019 through September 2019), the fee is $2.45 per covered life and is due by July 31, 2020.
- For plan year START dates that begin November 1, 2018, through January 1, 2019 (otherwise known as plans that END October 2019 through December 2019), the IRS has not yet released the rate per covered life. Absent any announcement to the contrary, the fee will still be due for these plans by July 31, 2020.
Number of Covered Lives
Plan sponsors may choose from three methods when determining the average number of lives covered by their plans.
- Actual Count method: Plan sponsors may calculate the sum of the lives covered for each day in the plan year and then divide that sum by the number of days in the plan year. In practice, data is usually provided on a monthly, not daily, basis. As such, employers may decide to add the average lives for each month and divide by the number of months in the plan year.
- Snapshot method: Plan sponsors may calculate the sum of the lives covered on one date in each quarter of the year (or an equal number of dates in each quarter) and then divide that number by the number of days on which a count was made.
- Snapshot Factor method: Add the number of participants with self-only coverage plus 2.35 times the number of participants with “other than” self-only coverage (this method should not be used for HRA plans).
- Form 5500 method: Sponsors of plans offering self-only coverage may add the number of employees covered at the beginning of the plan year to the number of employees covered at the end of the plan year, as reported on Form 5500, and divide by 2. For plans that offer more than self-only coverage, sponsors may simply add the number of employees covered at the beginning of the plan year to the number of employees covered at the end of the plan year, as reported on Form 5500.
Special rules for HRAs.
- Self-insured health plans with an HRA: Two or more applicable self-insured health plans may be combined and treated as one plan for purposes of calculating the PCORI fee if the plans both have the same plan sponsor and the same plan year. In other words, the same life covered under each plan would count as only one covered life for purposes of calculating the fee.
- Fully insured health plans with an HRA: Employers with fully insured plans that also sponsor a separate medical HRA must pay the PCORI fee for the HRA, while the insurer pays the fee for the fully-insured plan. In this situation, the underlying fully insured plan and the HRA are treated separately with respect to the PCORI fee.
How do employers pay the PCORI fee?
- Employers must report and pay PCORI fees using IRS Form 720, Quarterly Federal Excise Tax Return. Employers can refer to the IRS instructions on how to complete Form 720.
- Employers may pay through the Electronic Federal Tax Payment System (EFTPS) and the payment should be applied to the second quarter (in EFTPS, select Q2 for the Quarter under Tax Period on the “Business Tax Payment” page).
Employer Action Items
- Determine whether you sponsor any applicable self-insured plans;
- Calculate the PCORI fee;
- Important Note for Sequoia Clients: Your Client Service Manager will reach out to provide assistance with your PCORI fee calculations.
- Report and pay the PCORI fees using IRS Form 720 through EFTPS by July 31, 2020.
- IRS information on how to calculate the PCORI fee
- IRS PCORI Fee FAQs
- IRS PCORI Fee Application Chart
- IRS PCORI Fee Filing Due Dates and Rates
- IRS Form 720
- Instructions for IRS Form 720
The information and materials on this blog are provided for informational purposes only and are not intended to constitute legal or tax advice. Information provided in this blog may not reflect the most current legal developments and may vary by jurisdiction. The content on this blog is for general informational purposes only and does not apply to any particular facts or circumstances. The use of this blog does not in any way establish an attorney-client relationship, nor should any such relationship be implied, and the contents do not constitute legal or tax advice. If you require legal or tax advice, please consult with a licensed attorney or tax professional in your jurisdiction. The contributing authors expressly disclaim all liability to any persons or entities with respect to any action or inaction based on the contents of this blog.