On July 31, 2013, a new fee will first become payable by health insurers and certain employers who sponsor self-insured health plans. The fee, known as the comparative effectiveness or PCORI fee, applies to both fully-insured and self-insured plans. Since insurers, however, are responsible for the fee for fully-insured plans, this Advisory will focus on employer responsibility for the fee for self-insured plans.


The Affordable Care Act of 2010 (ACA) as amended by the Health Care and Education Reconciliation Act of 2010 established the Patient Centered Outcomes Research Institute (PCORI). PCORI is a non-profit corporation designed to fund research on the comparative effectiveness of various medical treatments. PCORI is funded by an annual fee on health insurers who provide so-called “specified health insurance policies” (that is, fully-insured plans for employers) and on employers who sponsor “applicable self-insured health plans.”

The PCORI fee applies for each plan year that ends on and after October 1, 2012 and before October 1, 2019. The first year fee for plan years ending on and after October 1, 2012 and before October 1, 2013 is one dollar per covered life. The second year fee for plan years ending on and after October 1, 2013 and before October 1, 2014 is two dollars per covered life. Thereafter, the PCORI fee will be adjusted to increase with the rate of health care inflation until it ceases to apply for plan years beginning after September 30, 2019.

The first fee for plan years ending between October 1, 2012 and December 31, 2012 (that is, calendar year plans) is due on July 31, 2013.

Self-Insured Plans and Exceptions

Under Section 4376 of the Internal Revenue Code (the Code) enacted under ACA, employers who sponsor “applicable self-insured health plans” must pay the PCORI fee. Basically, an applicable self-insured health plan is one that provides health coverage by some means other than through an insurance policy. The coverage may be paid by employer or employee contributions or a combination of both and may be funded from the employer’s general assets or through a trust. If funded other than through an insurance policy, a retiree-only plan is an applicable self-insured health plan and subject to the fee.

The PCORI fee does not apply to HIPAA excepted benefits. HIPAA excepted benefits include:

  • „„ coverage only for accident or disability insurance;
  • „„ liability insurance or a supplemental to liability insurance;
  • „„ worker’s compensation insurance;
  • „„ automobile medical payment insurance;
  • „„ coverage for on-site medical clinics;
  • „„ other similar insurance coverage under which medical care is secondary to other insurance benefits;
  • „„ limited scope dental or vision benefits (see below);
  • „„ most, but not all, medical flexible spending accounts (see below);
  • „„ long-term care benefits under certain conditions; „„
  • coverage only for a specific disease or illness;
  • and „„ hospital indemnity insurance under certain conditions.

In addition, the Internal Revenue Service has clarified that employee assistance, wellness and disease management programs that do not provide substantial medical benefits are not subject to the fee. Neither are expatriate plans designed primarily to cover employees living or working outside of the United States.

Potential Problem Areas

Three types of benefits need close scrutiny to determine whether they are subject to the PCORI fee: limited scope dental and vision benefits, medical flexible spending accounts and HRAs.

Dental and vision benefits are limited scope only if the benefits are substantially all for the treatment of the mouth or eye. Limited scope dental and vision benefits are HIPAA excepted benefits and, hence, not subject to the PCORI fee, only if they are provided under a separate policy or certificate or they are not an integral part of a group health plan. Dental and vision benefits are not an integral part of a group health plan only if the participants may elect to decline coverage and if a participant elects coverage then he or she must pay an additional premium or contribution for that coverage. This analysis is important because self-insured dental and vision plans which do not charge a premium are potentially subject to the PCORI fee.

Similarly, medical flexible spending accounts are excepted benefits only if they meet two conditions. First, other group health plan coverage, not limited to excepted benefits, must be available to participants. Second, the arrangement must be structured so that the maximum benefit payable to any participant for a year cannot exceed two times the participant’s salary reduction election under the arrangement for the year, or, if greater, the amount of salary reduction plus US$500. Thus, for example, if the employer makes more than a dollar for dollar match to the medical flexible spending account and the participant’s salary reduction is greater than US$500, then the medical flexible spending account is not an excepted benefit and is subject to the PCORI fee. HRAs also must be carefully considered. An HRA that is part of a fully-insured plan will be treated as an applicable self-insured health plan. The employer must pay the PCORI fee for the HRA. In contrast, an HRA that is integrated with a self-insured health plan will not be subject to a separate PCORI fee if the same employer sponsors both the selfinsured health plan and the HRA and both the self-insured plan and the HRA have the same plan year.

Determining the Fee

The amount of the PCORI fee is determined based on the average number of lives covered during the plan year. Only individuals resident in the United States are counted. Employers who sponsor applicable self-insured health plans may choose among three methods of counting the average number of covered lives.

  • „„ Actual Count: The employer adds the number of lives covered on each day of the plan year and divides by 365 (or 366 when applicable).
  • „„ Snapshot: The employer chooses a date, or an equal number of multiple dates, in each quarter. The employer adds the number of lives covered on each date and divides by the number of total dates. Each date must be within three days of the corresponding date in the other quarters. However, to count covered lives on the particular dates, one of two methods must be used.

—— Snapshot Count: The employer adds the number of participants and all covered spouses and dependents.

—— Snapshot Factor: The employer adds the number of: 

  • participants with self-only coverage, and 
  • participants with anything other than self-only coverage multiplied by 2.35.

This method is intended to approximate the number of covered spouses and dependents without the employer actually having to do a specific count. „„

  • Form 5500: For plans with dependent coverage, the employer totals the number of participants on the first and last day of the plan year. Though this may appear to be double counting, it is intended to approximate the number of covered dependents who are not reported on the Form 5500. For plans with no dependent coverage, the employer totals the two numbers and then divides by two.

Special Considerations

The PCORI fee applies to participants and all qualified beneficiaries under COBRA and similar state laws. As noted above, the PCORI applies to retiree-only plans. Special rules apply for multiple self-insured arrangements. Specifically, multiple self-insured health plans are treated as a single applicable self-insured health plan if they have both the same employer and the same plan year. So, for example, if a employer maintains a self-insured medical plan and a separate self-insured dental plan that is not HIPAA-excepted each with the same plan year, the two arrangements may be treated as a single plan for purposes of the PCORI fee.

Paying the Fee

As noted above, plans with plan years ending on and after October 1, 2012 and December 31, 2012, must report and pay the fee by July 31, 2013. Employers must use Form 720 (Quarterly Federal Excise Tax Return) for this purpose. Late filing of the form will result in penalties.

The fee generally cannot be paid from plan assets. In the case of a multiemployer plan, however, the fee may be paid from plan assets if the board of trustees of the plan exists only for the purpose of sponsoring and administering the plan and has no source of funding other than plan assets.

Similarly, if the same conditions are met, it appears that in the case of a VEBA the fee may also be paid from plan assets.

Finally, the IRS has specifically indicated that employers must report and transmit the fee themselves: a third party cannot do the filings and pay the fee.