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June 7, 2022

Annual PCORI Fee is Due July 31

The Affordable Care Act created the Patient Centered Outcome Research Initiative (PCORI) to evaluate and compare health outcomes. The annual PCORI fee partially funds this initiative. The fee applies to all health plans that provide coverage to employees, including church and government plans.

This Alert addresses:

  • Which group health plans are subject to the PCORI fee;
  • How to calculate the fee; and
  • Who is responsible for reporting and paying the applicable fee.

Time to File and Submit Payment for the PCORI Fee

The Affordable Care Act (ACA) created the Patient Centered Outcome Research Initiative (PCORI) to evaluate and compare health outcomes. The annual PCORI fee partially funds this initiative. The fee applies to all health plans that provide coverage to employees, including church and government plans.

How much?

The indexed fee schedule is based on the month the plan year ends and is described below.

For Plan Years…

Fee per Covered Life

Ending on or after October 1, 2020 and before October 1, 2021

$2.66

Ending on or after October 1, 2021 and before October 1, 2022

$2.79

Who and when?

  1. If a group health plan is fully insured, the insurance carrier is responsible for reporting and paying the PCORI fee. Insurance carriers typically pass the fee along to covered employers through higher premiums, but no further action is required by the covered employer.
  2. The employer as plan sponsor is responsible for reporting and paying the PCORI fee for self-insured group health plans. A third party administrator or other vendor may assist with the calculation, but the plan sponsor must file the IRS Form 720 and pay the applicable fee. If multiple employers participate in the plan, each participating employer must file separately unless the plan document designates one employer as the plan sponsor.
  3. IRS Form 720 and the PCORI fee are due by July 31, 2022 for plan years that ended in 2021.

 Which plans are subject to the PCORI fee?

Most types of group health plans are subject to the PCORI fee, including group health plans that are “grandfathered” under the ACA, as well as retiree-only plans. It is easier to describe the excluded plans.

Plans Excluded from the PCORI Fee

Plans considered “excepted” benefits under HIPAA, including:

  • Most health care flexible spending arrangements (HCFSAs) so long as:
    • the employer also offers traditional medical coverage to HCFSA participants; and
    • the maximum annual HCFSA reimbursement is limited to the greater of the participant’s contribution plus $500 or twice the participant’s contribution[1]
  • Dental or vision-only coverage (or HCFSAs and health reimbursement arrangements (HRAs) limited to reimbursements for dental and vision expenses)
  • Employee assistance programs (EAPs), disease management, wellness plans, etc. if they do not provide significant medical benefits

Expatriate insurance plans if the plan primarily covers employees working and residing outside the United States

Stop-loss or indemnity reinsurance policies

Non-group health coverage (e.g., life, disability, AD&D)

How do you calculate the PCORI fee?

The fee depends upon the number of covered lives under a plan (i.e., employees, retirees, COBRA participants, and covered spouses and dependents). There are several options for calculating the fee, and employers may choose the option that best suits their circumstances. 

The goal is to find the method resulting in the lowest fee owed. An employer must use the same method throughout a reporting year, but it may change methods from year to year.

  • Actual Count Method. Count the covered lives on each day of the plan year and average the result. For example, a calendar year plan will add the covered lives on each day of the plan year and divide the result by 365.
  • Snapshot Count Method. Determine the number of covered lives on the same day (plus or minus 3 days) of each quarter or month, and average the result.
  • Snapshot Factor Method. Using the same day (plus or minus 3 days) of each quarter or month, multiply the number of employees, retirees and COBRA participants who have elected a coverage tier other than self-only coverage by 2.35 (rather than actually counting dependents) and add that to the number of employees, retirees and COBRA participants with self-only coverage. Average the result.
  • Form 5500 Method. Determine the number of participants at the beginning and end of the plan year as reported on Form 5500.
    • If dependents are covered, add the participant counts for the beginning and end of the plan year together.
    • If dependents are not covered, add the participant counts for the beginning and end of the plan year together and divide by two.
    • The Form 5500 must actually be filed by July 31st for this option to be available.

If there are multiple self-insured plans with the same plan year, such as a self-insured medical plan with an integrated HRA, only one fee applies per covered life. In other words, there is no need to double-count the participants for overlapping coverage. Separate PCORI fees apply to self-insured benefits with different plan years.

For short plan years, the number of covered lives will be averaged over the duration of the short plan year and multiplied by the applicable fee based on the date that short plan year ends.

Example: ABC Co. had a self-insured plan with a June 1 plan year, but changed to a calendar year plan as of January 1, 2022. In 2022, ABC would owe PCORI fees for two plan years that ended in 2021 (June 1, 2020-May 31, 2021 and a short plan year, June 1, 2021-December 31, 2021). The fee for the June 1, 2020-May 31, 2021 plan year will be based on the average number of covered lives during that plan year multiplied by $2.66. To calculate the fee due for the short plan year, ABC will take the total covered lives from June through December of 2021 and divide that number by the seven months in plan year.[2] That average number of covered lives would then be multiplied by $2.79, since the plan year ended after October 1, 2021 and before October 1, 2022.

If the plan sponsor owes the fee for a HCFSA or HRA because it is offered on a standalone basis or because it is integrated with fully insured coverage (such as a fully insured medical plan), the fee may be calculated by counting only covered employees. In other words, spouses and dependents do not count.

How do you report and pay?

Plan sponsors report the PCORI fee annually on IRS Form 720 by July 31st. Form 720 itself is a quarterly return, but employers who only need Form 720 for PCORI reporting purposes only file it once per year at the end of the second quarter. The IRS instructions are here.

Note: Government, church and nonprofit employers are subject to the PCORI fee and required to file Form 720 if they sponsor a self-insured group health plan.

An employer only needs to complete certain portions of Form 720 for PCORI purposes.

  • Identifying information at the beginning of the form:
  • Part II, line 133 (self-insured plans complete the “Applicable self-insured plans” line; the “Specified health insurance policies” line is completed by insurance carriers for fully insured policies):
  • Part III, lines 3 and 10 and the signature section:
  • Payment can be made electronically using the Electronic Federal Tax Payment System or by check or money order using the 720-V payment voucher found near the end of the Form 720 and mailed to:

Department of the Treasury

Internal Revenue Service

Ogden, UT 84201-0009

The fee is tax-deductible.

 

[1] This effectively means an employer cannot contribute more than $500 toward an HCFSA if the employee elects $0 in order for the HCFSA to qualify as an excepted benefit. An HCFSA with a 1:1 employer matching contribution also qualifies as an excepted benefit HCFSA. Employer contributions do not count toward the employee HCFSA annual contribution limit.

[2] The quarterly snapshot/snapshot factor methods would not be available in this case since the short plan year begins in the middle of a calendar quarter. If the short plan year were from July 1-December 31, ABC could use quarterly enrollment numbers for its covered lives calculation.