Revised IRS Form 720, Updated For Reporting Patient-Centered Outcomes Research Institute (PCORI) Fees, Now Available: Due By July 31, 2013

by Perkins Coie
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The Affordable Care Act (the ACA) established the Patient-Centered Outcomes Research Institute (the Institute) in order to provide comparative clinical effectiveness research data so that patients, health care providers, purchasers of health care and insurance products and policy-makers can make informed decisions.  To fund the Institute, the ACA created the Patient-Centered Outcomes Research Trust Fund (the Trust Fund) and established fees that provide funding for the Trust Fund.  These fees are to be paid by issuers of health insurance policies and plan sponsors of self-insured health plans and are often referred to as the "PCORI fees." 

The fees apply to plan sponsors of many self-insured health plans for plan years ending after September 30, 2012, and before October 1, 2019.  For calendar year plans, the fees apply to plan years ending December 31, 2012 through December 31, 2018.

Plan sponsors must annually file the revised IRS Form 720 to report and pay the fees.  Although Form 720 must usually be filed quarterly, if a plan sponsor is filing only to report and pay the PCORI fees, then the form need only be filed once a year. The Form 720 and the fees are due by July 31 of the year following the last day of the plan year.

The release of the revised Form 720 has long been anticipated and marks a looming filing deadline of July 31, 2013 for calendar year plans.  This Client Update explains, with respect to plan sponsors of self-insured health plans, how the associated fees are calculated.

Plan Sponsor

The ACA generally defines “plan sponsor” as the employer in the case of a self-insured health plan established or maintained by a single employer, or the employee organization in the case of a plan established or maintained by an employee organization.  The final regulations issued in December of last year also explain who the plan sponsor is in cases involving two or more employers, MEWAs, VEBAs and certain other arrangements.

Self-Insured Health Plans Required to Pay the Fee

In general, self-insured health plans that must pay the fee include (1) accident and health coverage or major medical coverage; (2) retiree-only health or major medical coverage; (3) health or major medical coverage under multiple policies or plans; and (4) COBRA coverage.  Health reimbursement arrangements (HRAs), including premium-only HRAs, and health flexible spending arrangements are also included unless these arrangements satisfy the requirements that allow them to be treated as excepted benefits.  Health savings arrangements, Archer medical savings accounts, stop-loss and indemnity reinsurance, employee assistance programs, disease management programs and wellness programs are generally excluded.

Calculation of Fees

Plan sponsors are required to pay a fee equal to the average number of lives covered under the self-insured health plan during the plan year multiplied by: 

  • $1 for plan years ending after September 30, 2012 and before October 1, 2013;

  • $2 for plan years ending after September 30, 2013 and before October 1, 2014; and

  • An amount adjusted for inflation as determined by the Secretary of Health and Human Services for plan years ending after September 30, 2014 and before October 1, 2019.

Determining Average Number of Lives Covered

The final regulations provide three different methods that sponsors of self-insured health plans can use to determine the average number of lives covered during a plan year.  Although the plan sponsor can change the method used from one plan year to the next, it must use the same method for the duration of any one plan year. 

The final regulations provide that, with respect to the first year that the fee is in effect, any reasonable method may be used by a plan sponsor to determine the average number of lives covered for a plan year that began before July 11, 2012 and ended after September 30, 2012.

Actual Count Method

Under the Actual Count Method, the average number of lives covered is determined by adding the number of covered lives for each day of the plan year, then dividing that total by the number of days in the plan year.

Snapshot Method

Under the Snapshot Method, the average number of lives covered is determined by adding the total number of lives covered on a specified date during each quarter of the plan year, then dividing that total by the number of dates on which the count was made.  More dates can be used in a quarter as long as an equal number of dates is used in each subsequent quarter.  Any date used in the second, third and fourth quarters must fall within three days of the corresponding date used in the first quarter, and all dates must fall within the applicable plan year. 

Under this method, the number of lives covered on a given date may be determined in either of two ways:

  • Snapshot Factor.  The number of lives covered on a specific 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 on that date multiplied by 2.35.

  • Snapshot Count.  The number of lives covered on a specific date is the actual number of covered lives on that date.

Form 5500 Method

Under the Form 5500 Method, the plan sponsor can determine the average number of lives based on the number of participants reported on the plan’s Form 5500 (or Form 5500-SF, if applicable).  This method is only available if the Form 5500 is filed no later than the due date for the fee.  For plans that only offer self-only coverage, the average number of covered lives for the plan year equals the sum of the participants covered at the beginning and at the end of the plan year, as reported on the Form 5500, divided by two.  For plans offering both self-only coverage and coverage other than self-only, the average number of covered lives equals the total number of participants covered at the beginning of the plan year plus the total number at the end of the plan year, as reported on the Form 5500.

Tax Deduction

The IRS’s Office of the Chief Counsel recently released a memorandum stating that the PCORI fees are deductible under Internal Revenue Code Section 162 as ordinary and necessary business expenses.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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