On December 6, 2012, the Internal Revenue Service (“IRS”) published final regulations detailing how employers and insurers will calculate a new fee imposed under the Patient Protection and Affordable Care Act (now called the “ACA” by regulators). The new fee, called the patient-centered outcomes research trust fund fee (“PCORI Fee” or “Fee”), will directly apply to employers offering self-funded major medical plans and certain other self-funded plans (such as some — but not all — health reimbursement arrangements (“HRA”)). In addition, the new fee will apply to insurance issuers with respect to fully insured health policies, including a health maintenance organization (“HMO”) contract. The fee is rather modest, starting at $1 per covered life per year. The final regulations generally track the previous, proposed regulations from April 2012.

Effective Date of Regulations. The regulations are effective immediately and will apply when employers determine the PCORI Fee for the current plan year. The first PCORI Fee applies to the first plan year which ends on or after October 1, 2012. For example, a calendar year plan will end on December 31, 2012. The PCORI Fee must be paid by July 31 of the year following the last day of the policy or plan year. Thus, a calendar year plan must pay its first PCORI Fee by July 31, 2013.

Use of Fee Revenue. The ACA contains provisions intended to improve the quality of health care. One provision establishes a private, nonprofit corporation called the Patient-Centered Outcomes Research Institute (the “Institute”). The Institute will help evaluate the quality and effectiveness of various medicines and treatments. The PCORI Fee will help fund the Institute.

Plans Subject to Fee. The PCORI Fee generally will apply to major medical benefits. Many other benefits — such as dental plans, vision plans and health flexible spending arrangements (“Health FSAs”) — will often be “excepted benefits” and therefore usually not subject to the PCORI Fee (see below for test). The following chart discusses how the PCORI Fee applies to various benefits that may be offered by an employer. See below for an important “non-duplication” rule, which can reduce the Fee owed by an employer.  

Click here to view table.

Non-Duplication Rule. An employer may offer two or more self-funded health plans. If both the plans have the same plan year, an employer may treat them as a single health plan for purposes of calculating the PCORI Fee. If so, the same “life” (i.e., enrollee) covered under each arrangement would count as only one “covered life,” not two covered lives.  

Example of Non-Duplication Rule. Suppose an employer offers major medical benefits and a separate prescription drug benefit. Both benefits are self-funded and have the same plan year. The medical plan has 1,000 lives covered under it while the prescription drug plan has 800 lives covered under it. Of the prescription drug plan enrollees, 700 are also covered by the major medical plan, while 100 are covered only by the prescription drug plan. For simplicity, assume that no employees or dependents terminate coverage during the year and that no new employees or dependents begin participating during the year.

If both plans were considered separately, the employer generally would owe $1,800 ($1,000 for the major medical plan and $800 for the prescription drug plan). Under the non-duplication rule, the employer would consider the number of unique lives covered under both plans. Here, there are 1,100 unique lives (1,000 from the medical plan and 100 who are covered under the prescription drug plan, but not the medical plan). Thus, the employer generally would owe $1,100 (not $1,800), which is $1 per unique covered life.

 Who is Responsible for Fee? For a fully-insured health plan, the insurance issuer is responsible for the PCORI Fee. For a self-funded plan, the “plan sponsor” is responsible for the PCORI Fee. The “plan sponsor” is generally the employer that established or maintains the plan. The regulations provide other rules for other types of plans. For example, the board of trustees is the plan sponsor of a multiemployer plan, and the committee is the plan sponsor of a multiple employer welfare arrangement.

Calculating “Covered Lives. The regulations contain detailed guidance on how an employer with a self-funded plan calculates the average number of covered lives under the plan. The determination is made once per year, after the end of the plan year. Methods for Calculating “Covered Lives.” An employer must use one of three methods provided in the regulations to determine the average number of covered lives. Each method is described in more detail below. The regulations provide examples to illustrate how to employ each method.  

  • The Actual Count Method – To calculate average covered lives using this method, add the total lives covered for each day of the plan year and divide that total by the number of days in the plan year.
  • The Snapshot Method – To calculate average covered lives using this method, add the total lives covered on a date during the first, second or third month of each quarter of the plan year, and then divide that total by the number of dates on which a count was made. Each date used in the second, third and fourth quarter must be within three days of the corresponding date chosen in the first quarter. For example, if an employer chooses January 7 as the counting date in the first quarter, the employer may use any date from April 4-10 as the counting date for the second quarter.

An employer may actually count each individual with coverage. Alternatively, an employer can determine the number of individuals with other than self-only coverage and multiply that number by 2.35. The employer would then add that number to the number of individuals with self-only coverage.

  • The Form 5500 Method – Under this method, the average number of covered lives is determined based on the number reported on the Form 5500 or Form 5500-SF. Employers may use this method provided the Form 5500 was filed no later than July 31 of the year following the last day of the plan year.

Transitional Rule. For a plan year beginning before July 11, 2012 and ending on or after October 1, 2012, a plan sponsor may determine the average number of lives covered under the plan using any “reasonable method.” However, since the term “reasonable method” is not defined, we expect that plan sponsors will likely use one of the three prescribed (and better-defined) methods.

Individuals Residing in United States. The PCORI Fee applies with respect to individuals residing in the United States. The plan sponsor may rely on the most recent address on file when making this determination. The “United States” includes American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, the Virgin Islands, and any other possession of the United States.

Future Changes. The $1 per covered life fee increases to $2 for plan years ending on or after October 1, 2013 and before October 1, 2014. The $2 fee increases in future years based on certain health expenditure data. The fee ceases in approximately 2019.

Payment of Fee. As noted previously, the PCORI Fee must be paid by July 31 of the calendar year immediately following the last day of the plan year. Thus, an employer with a calendar year plan will pay its first PCORI Fee by July 31, 2013. Employers will file IRS Form 720. While the PCORI regulations do not contain specific recordkeeping requirements, IRS Form 720 does contain some recordkeeping requirements. Third parties (such as a third party administrator) will not be able to report and pay the Fee on behalf of a plan sponsor. Future Department of Labor guidance is expected to provide that the fee generally cannot be paid from plan assets.

Links to Further Guidance. The regulations can be found here.