Recently, the Department of Treasury issued final regulations on the fees imposed to fund the Patient-Centered Outcomes Research Institute (“PCORI”), a private non-profit corporation that gathers research-based information to assist patients, practitioners and policy makers in making informed health care decisions.  (Our discussion of the proposed regulations is here.) The fees, to be paid by issuers of health insurance policies and sponsors of self-insured health plans, were instituted as part of the Patient Protection and Affordable Care Act (“PPACA” or “Health Care Reform”).  They apply to policy and plan years ending on or after October 1, 2012 and before October 1, 2019.

Although the fee applies to insured and self-insured plans, because the insurance issuer is responsible for paying the fee on insured plans, this post focuses on the fee as applied to self-insured employer-sponsored health plans.

How Much?

The PCORI fee is $2 times the average number of covered lives during the plan year that ends before October 1, 2014 ($1 per covered life for plan years ending before October 1, 2013).  After 2014, the fee will increase based on increases in the projected per capita amount of National Health Expenditures.

Which Self-Insured Plans Are Subject / Exempt?

The fee applies to lives covered under an “applicable self-insured health plan,” which is defined as any plan for providing accident or health coverage if any portion of the coverage is provided other than through an insurance policy, and the plan is established or maintained 1) by one or more employers for the benefit of their employees or former employees, 2) by one or more employee organizations for the benefit of their members or former members, 3) jointly by one or more employers and one or more employee organizations for the benefit of employees or former employees, 4) by a VEBA, 5) by any organization described in Code Section 501(c)(6), or (6) by a MEWA, rural electric cooperative or a rural telephone cooperative association.

Special rules or exemptions are mentioned below:

  • Excepted benefit plans under Code Section 9832(c) – stand-alone dental and vision plans – are exempt from the fee, as are health flexible spending accounts (“health FSAs”) that are excepted benefits.  A health FSA is an excepted benefit if: 1) the maximum benefit that is available to a participant in any given year is not more than two times his or her salary reduction (or, if greater, his or her salary reduction plus $500), and 2) major medical coverage is made available that same year to employees participating in the health FSA.
  • Health Reimbursement Arrangements (“HRAs”) are not exempt. However, the rules provide that when covered lives are counted for purposes of determining the fee under an HRA or a non-exempted health FSA, only the covered employee (and not his or her dependents) must be counted.
  • Employee assistance programs (“EAPs”), wellness programs and disease management programs are exempt if the program does not provide significant benefits in the nature of medical care or treatment.  The regulations don’t define “significant benefits” for this purpose.
  • Retiree-only medical plans are subject to the fee.
  • Federal, State and local governmental health plans offered by employers must pay the fee.  Medicare, Medicaid, CHIP, Federal armed forces or veteran care, and Federal care for Indian tribes are all exempt.
  • Any group plan designed specifically to cover primarily employees working and residing outside the U.S. is exempt.

Who Pays?

The plan sponsor pays the fee.  In general, the plan sponsor is: (1) for a single-employer self-insured plan, the employer, (2) for a MEWA, the plan committee, (3) for a VEBA (other than a VEBA that is the funding vehicle for an employer-sponsored plan), the trustee.

A footnote in the regulations notes that the Department of Labor has advised that because the PCORI fee for self-insured plans is imposed on the plan sponsor instead of the plan, the fee is not a permissible plan expense under ERISA Title I.  The Department of Labor is expected to provide guidance on its website in the future.

What are “Covered Lives”?

The PCORI fee is based on the average number of lives (employees, spouses and dependents) covered during the plan year.  There is no general rule that the fee applies only once with respect to each covered life if a sponsor maintains multiple plans, although there are a few special rules that will help plan sponsors.

A health plan that provides health coverage through fully-insured options and self-insured options can disregard lives that are covered solely under the fully-insured options for purposes of calculating the fee for the self-insured options.

Two or more self-insured arrangements established or maintained by the same plan sponsor that have the same plan year may be treated as a single applicable self-insured health plan for purposes of calculating the fee.  This is true even if the arrangements are considered to be two or more separate ERISA plans.  If the plan sponsor uses the special rule for counting only employees covered under an HRA or non-exempted FSA (see the second bullet point above), it may not simply count employees as covered lives in the major medical plan that has the same year as the HRA or non-exempted FSA.  In other words, the special rule for HRAs and non-exempted FSAs only applies to participants in the HRA or non-exempted FSA that do not also participate in the major medical plan.

Only individuals residing the U.S. must be counted.  If the address on file for the primary covered individual is outside the U.S., the plan sponsor may presume that the spouse and dependents also do not reside in the U.S.

How are Covered Lives Counted?

Self-insured plans may use one of three alternate methods:

  1. The Actual Count Method

The plan sponsor adds the total number of covered lives covered for each day and divides that total by the number of days in the plan year.

  1. The Snapshot Method

Covered lives are counted on at least one date in each quarter of each plan year.  The date or dates used for the second, third and fourth quarters must be within 3 days of the date or dates in that quarter that correspond to the date used for the first quarter, and all dates used must fall within the same plan year.  For example, assume that a plan with a calendar year plan year uses January 7, 2013 as the counting date for the first quarter.  The plan sponsor may use any date beginning with April 4, 2013 and ending with April 10, 2013 as the counting date for the second quarter.  The plan sponsor adds all of the counts for each quarter and divides this total by the number of dates on which a count was made.

To count the number of lives covered on a designated date, the plan sponsor uses either the snapshot factor method or the snapshot count method.

  1. Snapshot factor method – Count the number of participants with self-only coverage on that date plus the number of participants with coverage other than self-only coverage on that date multiplied by 2.35. (This is the method for those who do not wish to count dependents.)
  2. Snapshot count method – Count the actual number of covered lives on the designated date.
  1. Form 5500 Method

This method may only be used if the Form 5500 or Form 5500-SF is filed no later than the due date, without extensions, for the fee imposed for that plan year.  For example, calendar year plans generally must file the Form 5500 by July 31 (also the due date for the fee for calendar year plans); the Form 5500 method may not be used if the plan does not file its 5500 by that date.

If the plan offers only self-coverage (no dependents), the plan sponsor adds the total participants covered at the beginning and the end of the plan year and divides by two.  If the plan offers self-only coverage and coverage other than self-only coverage, the plan sponsor adds the number of participants on the first day of the plan year to the number on the last day of the plan year and does not divide by two.  (That is because for the Form 5500, one does not count covered dependents.)

A plan sponsor must use the same method of calculating the average number of covered lives consistently for the duration of the plan year, but may use a different method from one plan year to the next.

The regulations permit a plan sponsor to use any reasonable method to determine the average number of lives covered under an applicable self-insured health plan for a plan year beginning before July 11, 2012 and ending on or after October 1, 2012.  Details about what constitutes “any reasonable method” are not available.

How Does a Plan Sponsor Report and Pay the Fee?

Plan sponsors must report and pay the fee no later than July 31 of the calendar year following the last day of the plan year.  For example, a return that reports liability for the fee for the plan year ending on January 31, 2013, must be filed by July 31, 2014.  The fee must be reported and paid on the Form 720, “Quarterly Federal Excise Tax Return.”  The regulations themselves don’t address corrections. However, issuers and plan sponsors may use From 720-X, “Amended Quarterly Federal Excise Tax Return” to make adjustments to liabilities reported on a previously filed Form 720.  There are penalties related to late filing of the applicable form or late payment of the fee, which may be waived or abated if the plan sponsor has reasonable cause and the failure was not due to willful neglect.

The final rules do not permit or include rules for third-party reporting or payment of the PCORI fee.

Related Links

Final Rule on Patient-Centered Outcomes Research Institute Fee 

Patient- Centered Outcomes Research Institute Website

GAO List of PCORI Board Members