June 9, 2020
The Patient-Centered Outcomes Research Institute (PCORI) fee is back from the dead.
As most will recall, the PCORI fee was set to sunset Sept. 30, 2019, meaning it would no longer apply for policy and plan years ending on or after Oct. 1, 2019. Plan sponsors and insurers for calendar year plans jumped for joy as they filed what they believed to be their final filings on July 31, 2019.
The joy was short lived. Legislation passed in December 2019 included a 10-year extension of the PCORI fee. So, here we are again issuing our reminder that self-funded plan sponsors’ and insurers’ PCORI filings and payments for plan years ending in 2019 are due July 31, 2020.
Lockton comment: In response to the COVID-19 pandemic, the IRS has provided extensions to various corporate and individual tax filings due in 2020. To date, the IRS has not provided any such extension to the Form 720 filings due July 31, 2020.
The PCORI fee is just one of several fees, taxes and other assessments imposed by the Affordable Care Act (ACA) on health insurance companies and sponsors of self-funded health plans. The PCORI fee helps fund research into appropriate standards of care and is due each July 31.
The payment due on any given July 31 covers the plan year ending in the preceding calendar year (e.g., the fee payable by July 31, 2020, is for plan years ending in 2019).
The amount of the fee due this July 31 varies, depending on when in 2019 the payor’s plan year ended. The fee is $2.45 per covered life for plan years ending between Jan. 1 and Sept. 30, 2019, and is $2.54 per covered life for plan years ending between Oct. 1, 2019, and Sept. 30, 2020.
Insurers report on and pay the fee for fully insured medical plans. For self-funded plans, the employer or plan sponsor submits the fee and accompanying paperwork to the IRS. Third-party reporting and payment of the fee (for example, by the self-insured plan sponsor’s third-party claim payor) is not permitted.
Lockton comment: 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 (the HRA is disregarded).
PCORI fee reporting and payment
The IRS collects the fee from the insurer or, in the case of self-funded plans, the plan sponsor in the same way many other excise taxes are collected. The fees are reported on and paid with IRS Form 720. Again, the filing and payment is due by July 31 of the year following the last day of the plan year to which the payment relates.
IRS regulations provide three options for determining the average number of covered lives (actual count, snapshot and Form 5500 method). For more information on these methods, see our alert (opens a new window) on this topic.
The U.S. Department of Labor says the fee cannot be paid from ERISA plan assets (except in the case of 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 (like retiree-only plans) to which the ACA’s market reform rules don’t apply.
How to file IRS Form 720
The filing and remittance process to the IRS is straightforward and largely unchanged from last year. On Page 2 of Form 720, under Part II, the employer designates the average number of covered lives under its “applicable self-insured plan.” The number of covered lives is multiplied by the applicable per-covered-life rate (depending on when in 2019 the plan year ended) to determine the total fee owed to the IRS.
The Payment Voucher (720-V) 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’s software generating a tardy filing notice, with all the incumbent aggravation on the employer to correct the matter with IRS.
You missed the PCORI payment. Now what?
An employer that overlooks reporting and payment of the PCORI fee should immediately 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 but neglected to report and pay the PCORI fee.
The IRS might levy interest and penalties for the 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).
Lockton comment: We have seen the IRS specifically audit employers for PCORI fee payment and filing obligations. Be sure to retain documentation establishing how you determined the amount payable and how you calculated the participant count for the applicable plan year.
Download alert (opens a new window)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 Services group are not privileged under the attorney-client privilege.