The Patient Protection and Affordable Care Act (“PPACA”) added Sections 4375-4377 to the Internal Revenue Code (“Code”) to require certain issuers of health insurance policies and employers sponsoring self-funded health plans to pay a fee to fund the Patient-Centered Outcomes Research Institute that was established under PPACA (“PCORI Fee”). For plans and policies with years that ended between October 1, 2012, and December 31, 2012, the first PCORI Fee must be paid by July 31, 2013. For other self-funded plans and health insurance policies, the first PCORI Fee payment is due by July 31, 2014. Insurers and plan sponsors with July 31, 2013, payment dates must move quickly to collect the necessary data and determine the applicable PCORI Fee.

Plans and Policies Subject to PCORI Fee

The PCORI Fee applies to “specified health insurance policies” and “applicable self-insured health plans.” These policies and plans include most typical self-funded and insured health plans, health maintenance organization contracts (“HMOs”), retiree-only plans and COBRA coverage. However, the PCORI Fee does not apply to the following policies and arrangements:

  • Plans and policies that provide “excepted benefits,” as defined under Health Insurance Portability and Accountability Act (HIPAA), such as standalone vision plans, dental plans, and most health flexible spending accounts (“FSAs”). 
  • Health reimbursement arrangements (“HRAs”) integrated with a self-funded health plan.
  • Plans and policies designed primarily to cover employees working and residing outside the U.S.
  • Stop loss and indemnity reinsurance policies.
  • Employee assistance programs (“EAPs”), disease management programs, or wellness programs, if these programs do not provide significant benefits in the nature of medical care or treatment.
  • Certain exempt governmental programs (e.g., Medicare, Medicaid, CHIP, and TRICARE).

See the IRS PCORI applicability chart, at http://www.irs.gov/uac/Application-of-the-Patient-Centered-Outcomes-Research-Trust-Fund-Fee-to-Common-Types-of-Health-Coverage-or-Arrangements, for additional information.

Responsibility for Payment of PCORI Fee

Who pays the PCORI Fee depends on whether a health plan is fully-insured, self-funded, or contains a mix of benefits:

  • Fully-insured health plans. The PCORI Fee on a fully-insured health plan (i.e., on the underlying insurance policy) is paid by the policy issuer.
  • Self-funded health plans. The PCORI Fee on self-funded health plans is paid by the employer sponsoring the plan. A single PCORI Fee applies based on the total number of lives covered under all self-funded benefit programs of one employer with the same plan year. 
  • Plans with a mix of self-funded and insured benefits (where, for example, an employer maintains both an HRA and an insured health plan). The PCORI Fee for the lives covered under the plan’s insurance policy are paid by the policy issuer, while the PCORI Fee for the lives covered under the self-funded portion are paid by the plan sponsor. If the same employee is covered under both portions of a plan, the insurer and plan sponsor will both have to pay the PCORI Fee for that employee (because there is no set-off in these circumstances). However, lives covered only under the insured portion are not counted in determining the PCORI Fee for the self-funded portion.

Due Date for PCORI Fee

The PCORI Fee first applies to health insurance policies and self-funded health plans with policy or plan years ending on or after October 1, 2012. It must be reported and paid by July 31 of the calendar year immediately following the last day of the plan or policy year. Therefore, the PCORI Fee on plans and policies with years that ended between October 1 and December 31, 2012 must be reported and paid by July 31, 2013.

Calculating PCORI Fee

The PCORI Fee for a plan or policy year is equal to the applicable dollar amount for the year multiplied by the average number of covered lives during the plan or policy year.

Applicable Dollar Amount 

The applicable dollar amount varies year-to-year as follows:

Click here to view table.

Number of Covered Lives

Generally, all individuals who are covered during the policy year or plan year (including the covered employee and the employee’s covered dependents) must be counted. Three alternative counting methods are available to determine the number of covered lives. A method, once elected, must be used consistently for the duration of the year.

Alternative Counting Methods

  • Actual Count Method. Add the number of covered lives on each day of the plan or policy year and divide the total by the number of days in the plan or policy year.
  • Snapshot Method. Add the number of covered lives on a selected day (or days) in each plan or policy quarter and divide the total by the number of days on which the count was made. The count must be performed within three days of the same date(s) in each quarter. Alternatively, a plan may use the “snapshot factor method”: the number of covered lives on a date is equal to the sum of (1) the number of participants with self-only coverage on that date and (2) the number of participants with coverage other than self-only coverage on the date multiplied by 2.35.
  • Form 5500 Method. If a plan offers exclusively self-only coverage, add the total number of participants at the beginning and end of the plan year, as reported on the plan’s Form 5500, and divide by two. If a plan offers additional coverage options (e.g., employee plus spouse), then simply add the total number of participants covered at the beginning and the end of the plan year, as reported on the plan’s Form 5500 (i.e., do not divide by two). The Form 5500 method is not workable for plans that file Forms 5500, on extension, after the PCORI Fee due date.

Special Rule for First Year 

For plan years beginning before July 11, 2012, and ending on or after October 1, 2012, any reasonable method may be used to determine the average number of covered lives.

Special Rule for Non-Excepted Health FSAs and HRAs

If a plan sponsor maintains only an HRA or health FSA, then only the covered employees (and not their spouses or dependents) are counted. If another self-funded health plan subject to the PCORI Fee is maintained, in addition to the health FSA or HRA, then this special rule applies only to participants in the health FSA or HRA who do not participate in the other plan.

Reporting and Paying PCORI Fee

Issuers and plan sponsors must file IRS Form 720 by July 31 to report and pay the PCORI Fee. Electronic filing is available. Payment is due on the same date the Form 720 is due. The revised Form 720 and instructions are available, at http://www.irs.gov/uac/Form-720,-Quarterly-Federal-Excise-Tax-Return. The PCORI Fee is a deductible business expense under Code Section 162.

The Internal Revenue Service has provided a Q&A on the PCORI Fee, available at http://www.irs.gov/uac/Patient-Centered-Outcomes-Research-Trust-Fund-Fee:-Questions-and-Answers.