This is the 27th in a series of WorkCite articles concerning the Patient Protection and Affordable Care Act and its companion statute, the Health Care and Education Reconciliation Act of 2010 (referred to collectively as the Act). This article discusses final IRS regulations (the Regulations) released last week to provide guidance on the calculation and payment of fees imposed by the Act to fund the Patient-Centered Outcomes Research Institute (the PCORI), a nonprofit corporation established by the Act. The Regulations generally follow, with some modifications, the provisions of proposed regulations released earlier this year.

PCORI Fees in General

The PCORI was established by the Act to synthesize and publish comparative research studies focused on clinical effectiveness, risks and benefits of certain medical treatments, drugs, procedures and services in order to assist healthcare consumers, clinicians and policymakers in making informed health decisions. Funding for the PCORI comes partly from a fee imposed on health insurers and self-insured health plan sponsors under new Sections 4375 and 4376, respectively, of the Internal Revenue Code of 1986 (the Code).

Section 4375 imposes on each specified health insurance policy for each policy year ending after Sept. 30, 2012, a fee equal to the product of $2 ($1 in the case of policy years ending before Oct. 1, 2013) multiplied by the average number of lives covered under the policy. Section 4376 imposes a fee on the sponsor of an “applicable self-insured health plan” equal to the product of $2 ($1 for plan years ending before Oct. 1, 2013) times the average number of lives covered by the plan in a plan year.

For most insurers and self-insured health plan sponsors, the first payment of the fee will be due July 31, 2013. Under the Act, the fees will not apply in plan years ending after Sept. 30, 2019.

For any plan year that ends in any government fiscal year that begins on or after Oct. 1, 2014, the fee may be increased based on the percentage increase in the projected per-capita amount of “national health expenditures” as most recently published by the Secretary of Health and Human Services before the beginning of such fiscal year.

Employers do not have to pay the fee for their insured health plans, but can expect to see their health insurers try to pass along this new expense. This article primarily focuses on the responsibilities of self-insured plan sponsors for the Section 4376 fee.

Because Sections 4375 and 4376 are found in Subtitle D of the Code dealing with excise taxes, these “fees” are really excise taxes, and will be reported and paid by insurers and plan sponsors on an IRS excise tax form.

Applicable Self-Insured Health Plans

The PCORI fee is applicable to any “applicable self-insured health plan.” This term means a plan that provides for accident and health coverage if any portion of the coverage is provided other than through an insurance policy and the plan is established or maintained by:

  • one or more employers for the benefit of their employees or former employees
  • one or more employee organizations for the benefit of their members or former members
  • one or more employers and one or more employee organizations jointly for the benefit of employees or former employees
  • a voluntary employees’ beneficiary association
  • a business league or other organization described in Code Section 501(c)(6)
  • a multiple employer welfare arrangement, a rural electric cooperative or a rural cooperative association

Plans providing coverage to retirees, including retiree-only plans, are considered applicable self-insured health plans subject to the PCORI fee. In addition, when determining the fee, coverage provided pursuant to COBRA must be taken into account.

Under the Regulations, the following types of plans are not applicable self-insured health plans and their sponsors are therefore not required to pay the PCORI fee:

  • A plan that provides benefits substantially all of which are “excepted benefits,” including the following: (i) coverage only for accident, or disability income insurance; (ii) coverage issued as a supplement to liability insurance; (iii) liability insurance, including general liability insurance and automobile liability insurance; (iv) workers compensation or similar insurance; (v) automobile medical payment insurance; (vi) credit-only insurance; (vii) coverage for on-site medical clinics; and (viii) other similar insurance coverage, specified in regulations, under which benefits for medical care are secondary or incidental to other insurance benefits; (ix) limited scope dental or vision benefits; if offered separately; and (x) benefits for long-term care, nursing home care, home health care or community-based care, if offered separately
  • A plan designed specifically to cover primarily employees working and residing outside the United States; for this purpose, an individual is considered residing in the United States if he has a place of abode in this country
  • Employee assistance plans, disease management programs or wellness programs, if the program does not provide “significant benefits in the nature of medical care or treatment”

Multiple or Overlapping Self-Insured Plans

The Regulations permit a plan sponsor that provides health coverage under two or more self-insured plans to treat them as one plan when calculating the PCORI fee, so long as the programs have the same plan year. For example, if a plan sponsor maintained both a self-insured major medical plan and a self-insured prescription drug plan and an individual benefited under both arrangements, that individual could be counted as only one covered life for purposes of determining the PCORI fee.

If a plan sponsor provides both self-insured and fully-insured options under one applicable self-insured health plan, the Regulations permit the plan sponsor to disregard the lives covered solely under the fully-insured options of the plan.

Calculating the “Average Number of Lives Covered”

The Regulations provide the following alternative methods for the sponsor of a plan to calculate the “average number of lives covered” to determine the PCORI fee for a plan year:

  • Actual Count Method : The sum of lives covered for each day of the plan year, divided by the number of days in the plan year
  • Snapshot Method : In general, the sum of the totals of lives covered on a date during the first, second or third month of each quarter of the plan year (or more dates in each quarter if an equal number of dates is used in each quarter), divided by the number of dates on which a count was made
  • Form 5500 Method : The number of participants reported on the Form 5500, or the Form 5500-SF that is filed for the plan for that plan year, provided that the Form 5500 or Form 5500-SF is filed no later than the due date for the PCORI fee for that plan year

The Regulations provide examples illustrating the application of the three methods and permit plan sponsors to use “any reasonable method” for calculating 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.

Payment of PCORI Fees

Plan sponsors with calendar-year plans must remit the PCORI fees applicable to the 2012 plan year by July 31, 2013. The Regulations indicate that the reporting or payment of PCORI fees cannot be delegated to a third party.

The Department of Labor has clarified that because the plan sponsor, and not the plan, is responsible for the PCORI fee, the fee is not generally a permissible expense of the plan under ERISA. The preamble to the Regulations states that additional guidance from the Department regarding the payment of PCORI fees will be forthcoming on its website, www.dol.gov/ebsa.