The Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act (collectively, the “Affordable Care Act”), established the Patient-Centered Outcomes Research Institute (“the Institute”) to conduct research to provide information about the best available evidence to help patients and their health care providers make more informed decisions. The Institute is funded, in part, by fees to be paid by health insurance issuers and sponsors of self-insured health plans (“PCORI Fees”).
The Department of Treasury and Internal Revenue Service (“IRS”) issued final regulations on December 6, 2012, which provide guidance on how to calculate, report and pay the PCORI Fees. The final regulations generally adopted the provisions of the proposed regulations. The PCORI Fees apply to policy and plan years ending on or after October 1, 2012 and before October 1, 2019 (e.g., for a calendar year plan, the PCORI Fees apply for the 2012-2018 plan years).
For insured policies, health insurance issuers are responsible for reporting and paying the PCORI Fees. For self-insured plans, plan sponsors are responsible for reporting and paying the PCORI Fees. This newsletter focuses primarily on the requirements that apply to plan sponsors of self-insured plans.
Self-Insured Plans Subject to the PCORI Fees
PCORI Fees generally apply to self-insured plans established or maintained by one or more employers that provide accident and health coverage to employees or former employees. This includes the following self-insured plans:
- Medical plans;
- Retiree-only plans;
- Health reimbursement arrangements (“HRAs”);
- Dental and vision plans, unless they satisfy the requirements of an “excepted benefit” under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”);
- Health flexible spending accounts (“health FSAs”), unless they satisfy the requirements of an “excepted benefit” under HIPAA; and
- Employee assistance plans, disease-management programs or wellness programs, if the program provides significant benefits in the nature of medical care or treatment.
PCORI Fees do not apply to coverage that is considered an “excepted benefit” under HIPAA, expatriate plans that are designed specifically to cover primarily employees who are working and residing outside the United States, and stop loss or indemnity reinsurance policies.
The final regulations clarify that COBRA continuation coverage or similar continuation coverage under state or other federal law must be taken into account in determining the PCORI Fee, unless the arrangement is otherwise excluded.
Calculating PCORI Fees
The PCORI Fee for a plan year is equal to the average number of lives covered under the plan multiplied by an applicable dollar amount. For plan years ending before October 1, 2013, the amount is $1. The amount increases to $2 for plan years ending before October 1, 2014. For plan years ending on or after October 1, 2014, increases are based on increases in the projected per capita amount of National Health Expenditures released by the Department of Health and Human Services.
Covered lives include the covered employee and all covered dependents. A special rule applies to health FSAs that are not HIPAA excepted benefits and HRAs, where only covered employees are counted.
Determining Covered Lives
Plan sponsors of self-insured plans have three alternatives for calculating the number of covered lives.
Actual Count Method. Plan sponsors can add the total lives covered for each day of the plan year and divide the total by the number of days in the plan year.
Snapshot Methods. Plan sponsors can add the total lives covered on one date during the first, second or third month of each quarter (or more dates if an equal number of dates is used for each quarter) and divide that total by the number of dates on which a count is made. Each date used for the second, third and fourth quarters must be within three days of the date in that quarter that corresponds to the date used for the first quarter, and all dates used must fall within the same plan year. The 30th and 31st day of a month are treated as the last day of the month for purposes of determining the corresponding date for any month that has fewer than 31 days. There are two snapshot methods:
- Snapshot Count Method. The number of covered lives is determined by actually counting the number of lives on the designated dates.
- Snapshot Factor Method. The number of covered lives is determined by adding the number of participants with self-only coverage on the designated date to the number of participants with other than self-only coverage on that date multiplied by 2.35.
Form 5500 Method. For plans that offer self-only coverage, plan sponsors can add the total participants covered at the beginning and the end of the plan year, as reported on the Form 5500, and divide the total by two. For plans that cover spouses or dependents, plan sponsors can add the total participants covered at the beginning and the end of the plan year, as reported on the Form 5500. The final regulations provide that this method can only be used if the Form 5500 is filed no later than the due date for paying the PCORI Fee for that plan year, which limits the usefulness of this method. For example, plan sponsors with calendar year plans that rely on the 2½ month extension to file the Form 5500 will not be able to use this method to determine covered lives because the Form 5500 is filed after the PCORI Fees are due.
Plan sponsors must use the same method for the duration of the plan year, but can use different methods in subsequent plan years.
There is also a special rule for the first reporting year. For plan years beginning before July 11, 2012 and ending on or after October 1, 2012, plan sponsors may determine the average number of lives using any reasonable method.
Counting Lives Under Multiple Plans Maintained by One Plan Sponsor
The final regulations continue to provide that if a plan sponsor maintains multiple self-insured plans with the same plan year, the plans may be treated as a single plan so that the same life covered under each plan would only count as one covered life under the combined plan. For example, if a plan sponsor maintains separate self-insured major medical and prescription drug plans with the same plan year, the two plans may be combined and an individual who is covered under both plans would only be counted once. Likewise, if a plan sponsor maintains an HRA and a self-insured medical plan with the same plan year, the plans can be combined and an employee who is covered under the HRA and the self-insured medical plan would only be counted once.
Insured and self-insured plans maintained by the same plan sponsor cannot be combined for purposes of calculating the PCORI Fees. For example, if a plan sponsor maintains an HRA and an insured medical plan, the PCORI Fees will apply to both plans. The plan sponsor remains responsible for reporting and paying the PCORI Fees for covered employees under the HRA, and the issuer remains responsible for paying the PCORI Fees for covered employees and their covered dependents under the medical policy.
However, the final regulations permit a self-insured health plan that provides coverage through both fully-insured and self-insured options to disregard the lives that are covered solely under the fully-insured option.
Reporting and Payment of the PCORI Fees
Plan sponsors must report and pay PCORI Fees by July 31 of the calendar year immediately following the last day of the plan year to which the fee relates. For example, if a plan has a calendar year plan year, the fees for the 2012 plan year must be reported and paid by July 31, 2013. If a plan has a February 1 – January 31 plan year, fees for the plan year ending on January 31, 2013 must be reported and paid by July 31, 2014.
The PCORI Fees must be reported on Form 720, Quarterly Federal Excise Tax Return. The IRS has posted an updated Form 720 and accompanying instructions on its website. Although the Form 720 is generally used to make quarterly payments of certain excise taxes, the instructions clarify that the PCORI Fees are to be reported annually on the 2nd quarter Form 720 and paid by July 31.
Who is Responsible for Reporting and Paying the PCORI Fees?
For self-insured plans maintained by two or more employers that are part of the same controlled group or affiliated service group, each participating employer is responsible for reporting and paying the PCORI Fees with respect to its own employees unless, prior to the date the fees must be reported and paid: (1) the governing plan documents designate one of the participating employers as the plan sponsor (or as the plan sponsor for purposes of reporting and paying the PCORI Fees) and (2) such employer has consented to the designation.
The final regulations continue to provide that the PCORI Fees must be reported by the plan sponsor and not a third party, such as the plan’s third party administrator.
Because the PCORI Fees are imposed on the plan sponsor, and not the plan, the Department of Labor has taken the position that plan assets generally may not be used to pay the fees.
The IRS has confirmed in an Office of Chief Counsel IRS Memorandum AM2013-002, issued on May 31, 2013, that the PCORI Fees are ordinary and necessary business expenses, and thus, are deductible business expenses.
In order to comply with the new PCORI Fee requirements, plan sponsors should consider taking the following steps:
- Identify self-insured plans that are subject to the PCORI Fees.
- Ensure that the plan documents designate a plan sponsor (or a plan sponsor for purposes of paying the PCORI Fees) if the PCORI Fees will be reported and paid by one member of the controlled or affiliated service group.
- Select a method for calculating the number of “covered lives” under the plans and calculate the PCORI Fees.
- Report and pay the PCORI Fees by July 31 of the calendar year immediately following the last day of the plan year to which the PCORI Fees relate.