Plan sponsors of self-funded health plans and insurers of insured health plans must pay a fee to help fund the Patient-Centered Outcomes Research Trust Institute. The Patient-Centered Outcomes Research Trust Institute (PCORI) fee is based on the average number of lives covered by the plan. The IRS issued final regulations on December 6, 2012, providing guidance on which policies, plans and plan sponsors are subject to the fee; how the fee is to be calculated; and, rules for depositing, paying, and return filing including electronic filing of returns.
The PCORI fee will be imposed for each plan year ending on or after September 30, 2012, and before October 1, 2019.The PCORI fee is a specified dollar amount times the average number of lives covered under the plan for the plan year. For plan years ending after September 30, 2012 and before October 1, 2013, the specified dollar amount is $1; for plan years ending after September 30, 2013 before October 1, 2014, the specified dollar amount is $2; for plan years ending after October 1, 2014, the $2 amount will be increased each year based on the percentage increase in the projected per capita amount of National Health Expenditures.
The PCORI fee does not apply to HIPAA Excepted Benefits, such as stand-alone dental and vision plans and most Health FSAs. The fee also does not apply to Health Savings Accounts, Health Reimbursement Arrangements (HRAs) integrated with other self-insured coverage offered by the same sponsor, and, Employee Assistance Programs (EAPs), disease management programs and wellness programs that do not provide significant benefits in the nature of medical care or treatment. To learn more about which benefits qualify as HIPAA Excepted, click here.
The PCORI fee must be paid for each "applicable self-insured health plan", which includes any plan providing accident or health coverage, regardless of size. This includes ERISA plans, and plans sponsored by church employers, federal, State and local government employers and Indian tribal government employers. HRA plans not integrated with another applicable self-insured health plan that provides major medical coverage, and a Health FSA that does not satisfy the requirements to be treated as an Excepted benefit are subject to the PCORI fee. Significantly, stand-alone plans that only cover retirees are subject to the PCORI fee, even though retiree-only plans are otherwise exempt from the Health Care Reform law requirements.
The PCORI fee is reported and paid to the IRS once per year on the Form 720. Plan sponsors of self-insured plans must file by July 31st for the plan year ending during the preceding calendar year. Full payment of the PCORI fee is required by the July 31st due date of the Form 720. For IRS instructions, click here. To obtain the Form 720, click here.
For plan years beginning before July 11, 2012 and ending on or after October 1, 2012, the final regulations indicate that a plan sponsor may use "any reasonable method" to determine the average number of covered lives. For all other plan years, the final regulations identify three methods for determining the average number of covered lives:
- The "actual count" method. Add the number of covered lives for each day of the plan year, then divide by the number of days in the plan year.
- The "snapshot" method. Using similar dates in each quarter (or more frequently), determine the number of covered lives, then divide by the number of dates on which a count was made. Sponsors may count covered lives on each snapshot date using either the actual count method (see above), or a factor method – the number of participants on each snapshot date with self-only coverage PLUS the number of participants on each snapshot date with coverage other than self-only coverage times 2.35.
- The "Form 5500" method. For a plan providing only self-only coverage, add the Form 5500-reported total participants at the beginning and end of the plan year (in effect, using a factor of 2.0). The final regulations provide that a plan sponsor may not use this counting method for a plan year unless the Form 5500 for that plan year was actually filed on or before the following July 31st. In other words, if a plan sponsor with a calendar year plan requests a Form 5500 filing extension for the 2013 plan year and does not actually file the Form 5500 before July 31, 2014, it may not use the Form 5500 method for the 2013 plan year.
The final regulations establish similar rules for health insurance carriers covering members under an insured policy. If an employer has fully-insured coverage, the carrier and not the plan sponsor is responsible for determining and paying the PCORI fees for members covered under the insurance policy.
PCORI FAQ's & Hot Topics
- What is the PCORI fee?
As part of Health Care Reform, Plan sponsors of self-funded plans and insurers of insured plans must pay a fee to help fund the Patient-Centered Outcomes Research Institute (PCORI) based on the average number of covered lives participating in the plan. The fee generally applies to major medical plans and it does not apply to HIPAA excepted benefits. For plan years ending after September 30, 2012, the fee is $1 per year times the average number of lives covered by the plan. Each year the fee is set to increase and no fee will be due for plans years ending after September 30, 2019.
- How does this impact Health Flexible Spending Accounts?
Health Flexible Spending Accounts (Health FSAs) are generally considered HIPAA excepted benefits and, therefore, are not subject to the PCORI fee. However, there are certain criteria that a Health FSA must meet to be considered a HIPAA excepted benefit. If the Health FSA is not a HIPAA excepted benefit, the employer-plan sponsor may owe a PCORI fee for the “class of participants” for which the Health FSA is not a HIPAA excepted benefit.
- How do I know if an employer’s FSA is a HIPAA excepted benefit
A Health FSA must meet all of the following to be a HIPAA excepted benefit:
- Participants must be offered other major medical coverage in addition to the Health FSA. (For example, if an employer allows all employees to participate in the Health FSA but only full-time employees may enroll in major medical coverage, the Health FSA would not be a HIPAA excepted benefit for the part-time employees.)
- Employer contributions to the Health FSA may generally not exceed $500.
- If an employer offers Section125 flex credits that an employee may contribute to a Health FSA, 50% or more must be available for a cash-out option.
- If the Health FSA qualifies as a HIPAA excepted benefit, what now?
No PCORI fee is due.
- If the Health FSA does not meet the HIPAA excepted benefit criteria, what now?
If the number of Health FSA participants for whom the Health FSA is not a HIPAA excepted benefit is not “substantial,” then no PCORI fee is due for the FSA (Note that “substantial” was not defined in the PCORI guidance, but an employer may want to use 5% as a guideline, which is how “substantial” is defined for purposes of the Free Rider Penalty).
If the number of Health FSA participants for whom the Health FSA is not a HIPAA excepted benefit is “substantial,” then a PCORI fee is due for the average number of Health FSA participants for whom the Health FSA is not a HIPAA excepted benefit (Note that the fee is not due for all employees who were eligible for the Health FSA, but rather just for those who chose to participate in the Health FSA and for whom the Health FSA is not a HIPAA excepted benefit).
- If an employer owes a PCORI fee for their Health FSA, when is it first due?
For 12-month plan years that end October 1, 2012 through December 31, 2012, the first PCORI fee is due by July 31, 2013. For 12-month plan years that end January 1, 2013 through September 30, 2013, the first PCORI fee is due by July 31, 2014.
- How does the employer pay the fee?
The employer is required to file Tax Form 720 and make a payment to the IRS for the amount due.
- Where can the employer get Tax Form 720?
- What are the next steps?
Review your health plan to confirm whether your Health FSAs are HIPAA excepted benefits.If your Health FSA is a HIPAA excepted benefit , no PCORI fee is due for the Health FSA. If not, as the employer, you will need to file Tax Form 720 and pay the fee for the average number of Health FSA participants for whom the Health FSA is not a HIPAA excepted benefit.
If the Health FSA is not a HIPAA excepted benefit, you may want to amend the eligibility for the Health FSA to match the eligibility for major medical coverage and/or reduce the amount of employer contributions to the Health FSA to ensure the Health FSA is a HIPAA excepted benefit. In some states this may be subject to collective bargaining guidelines. You can work with the American Fidelity 125/Flex Department on the amendment. You can contact that department at 1-888-306-8424.
If, as the employer, you do not choose to amend your plans to ensure your Health FSA is a HIPAA excepted benefit, we will be asking you to sign a form acknowledging that you will be responsible for any additional compliance obligations that exist for Health FSAs that are not HIPAA excepted benefits.
- How does this affect AFA products?
AFA products are all HIPAA excepted benefits and are not subject to the PCORI fee. Therefore, the eligibility requirements to purchase AFA products do not need to change.
- Who do we contact for more information?
You can contact our Section 125/Flex Department at 1-888-306-8424.
American Fidelity Assurance Company does not provide tax or legal advice.