Reminder: PCORI filing is due by July 31

The Patient-Centered Outreach Research Institute (PCORI) fee is a temporary charge on both fully insured and self-funded healthcare plans, applicable for policy years from 2012 to 2029. This fee funds the Patient-Centered Outcomes Research Institute, an independent, non-profit organization established by the Affordable Care Act (ACA) to conduct research on improving healthcare outcomes for patients and caregivers.

The PCORI filing and payment to the IRS is due by July 31, 2024, and is required for policy and plan years that ended during the 2023 calendar year. For plan years ending before Oct. 1, 2023, the fee is $3.00 per covered life. For plan years ending on or after Oct. 1, 2023, and before Oct. 1, 2024, the fee is $3.22 per covered life.

Insurers report on and pay the fee for fully insured group medical plans. Self-insured plan sponsors must file Form 720 and pay the fee with the 720-V payment voucher. Although Form 720 is a quarterly return, the PCORI fee is only filed annually, by July 31. The updated Form 720 can be found here (opens a new window), (opens a new window) and the PCORI fee reporting can be found under Part II Line 133. Third-party reporting and fee payment (for example, by the self-insured plan sponsor’s third-party claim payor) is not permitted.

An employer that sponsors a self-insured health reimbursement arrangement (HRA) along with a fully insured medical plan must pay PCORI fees based on the number of employees (dependents are not included in this count) participating in the HRA, while the insurer pays the PCORI fee on the individuals (including dependents) covered under the insured plan. Where an employer maintains an HRA along with a self-funded medical plan, and both have the same plan year, the employer pays a single PCORI fee based on the number of covered lives in the self-funded medical plan only (e.g., the HRA is disregarded).

Lockton comment: A qualified small employer health reimbursement arrangement (QSEHRA) is an applicable self-insured health plan subject to PCORI fees. Since QSEHRAs are maintained by small employers without an offer of a group health plan, they do not benefit from the rule that allows multiple self-insured plans to be treated as one plan for PCORI fee purposes. However, QSEHRAs are allowed to treat each participant as only one life, and disregard spouses and dependent children from the fee calculation.

Calculating the PCORI fee

The PCORI fee is calculated by multiplying the applicable fee by the number of covered lives. IRS regulations provide three methods for determining the average number of covered lives: actual count method, snapshot method, and Form 5500 method. As a reminder, covered lives include spouses, covered children, retirees and COBRA participants. Lockton account service teams can help you determine which of these methods is most appropriate on a client-by-client basis.

Actual count method: The average daily number of covered lives during the plan year. The plan sponsor takes the sum of covered lives on each day of the plan year and divides the number by the days in the plan year.

Snapshot method: The sum of the number of lives covered on a date during the first, second, or third month in each quarter of the policy year, and divide by four. Here, the sponsor may calculate the actual number of covered lives, or it may take the sum of (i) individuals with self-only coverage, and (ii) the number of enrollees with coverage other than self-only (employee-plus one, employee-plus family, etc.), and multiply by 2.35. The regulations do not require that a specific date be used for each month or quarter, but similar dates must be used each month or quarter. For example, each date used for the second, third, or fourth quarters must be within three days of the date that would correspond with the first quarter. The 30th and 31st days of the month are both treated as the last day of the month when determining the corresponding snapshot day in a month that has fewer than 31 days.

Form 5500 method: If the plan offers family coverage, the sponsor simply reports and pays the fee on the sum of the participants as of the first and last days of the year without dividing by two (recall that dependents are not reflected in the participant count on the Form 5500). There is no averaging. In short, the sponsor is multiplying its participant count by two to roughly account for covered dependents.

Lockton comment: To use the Form 5500 method, the plan sponsor must have filed the Form 5500 by the due date for the PCORI fee for that year. If the plan sponsor files an extension, it may not be able to use this method.

The U.S. Department of Labor (DOL) says the PCORI fee cannot be paid from ERISA plan assets, except for union-affiliated multiemployer plans. In other words, the PCORI fee must be paid by the plan sponsor; it cannot be paid in whole or part by participant contributions or from a trust holding ERISA plan assets. The PCORI expense should not be included in the plan’s cost when computing the plan’s COBRA premium. The IRS has indicated the fee is, however, a tax-deductible business expense for sponsors of self-funded plans.

Lockton comment: Although the DOL’s position relates to ERISA plans, please note the PCORI fee applies to non-ERISA plans as well and to plans to which the ACA’s market reform rules don’t apply, like retiree-only plans.

How to file IRS Form 720

The filing and remittance process to the IRS is straightforward and unchanged from last year. On Page 2 of Form 720, under Part II, Line 133, the employer designates the average number of covered lives under its “applicable self-insured plan.” As described above, the number of covered lives is multiplied by the applicable per-covered-life rate (depending on when in 2023 the plan year ended) to determine the total fee owed to the IRS.

The payment voucher (720-V) at the bottom of Form 720 should indicate the tax period for the fee is “2nd Quarter.”

Lockton comment: Failure to properly designate “2nd Quarter” on the voucher will result in the IRS’ software generating a tardy filing notice, with all the incumbent aggravation on the employer to correct the matter with IRS.

You missed a past PCORI payment. Now what?

An employer that overlooks reporting and payment of the PCORI fee by its due date should immediately, upon realizing the oversight, file Form 720 and pay the fee (or file a corrected Form 720 to report and pay the fee if the employer timely filed the form for other reasons but neglected to report and pay the PCORI fee). Remember to use Form 720 for the appropriate tax year to ensure that the appropriate fee per covered life is noted.

The IRS might levy interest and penalties for a late filing and payment, but it has the authority to waive penalties for good cause. The IRS’s penalties for failure to file or pay are described here (opens a new window). (opens a new window)

Lockton comment: We have seen the IRS specifically audit employers for PCORI fee payment and filing obligations. If you are filing with respect to a self-funded program, be sure to retain documentation establishing how you determined the amount payable and how you calculated the participant count for the applicable plan year.

Not legal advice: Nothing in this alert should be construed as legal advice. Lockton may not be considered your legal counsel, and communications with Lockton's Compliance Consulting group are not privileged under the attorney-client privilege.

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