Jessica Waltman – Principal of Forward Health Consulting
The Internal Revenue Service recently announced that the Patient-Centered Outcomes Research Institute fee (PCORI fee) will rise to $2.66 per covered life for policy years and plan years that end on or after October 1, 2020. For group health plans with policy years and plan years that ended before October 1, the rate is $2.54 per covered life.
Knowing what the fee amount will be for the coming year is essential information for any benefits broker to have filed away. However, it’s always to know the why and how behind the requirements. For example…
What is the PCORI Fee for Anyway?
As it turns out, the PCORI fee funds some pretty critical research that helps Americans access better quality medical care. The Patient-Centered Outcomes Research Institute (PCORI) is an independent nonprofit, nongovernmental organization in Washington, D.C. The Affordable Care Act created it. Its mission is to improve the quality and relevance of medical evidence available to help patients, caregivers, clinicians, employers, insurers, and policymakers make better-informed health decisions. So, pretty important stuff! The organization funds both comparative clinical effectiveness research studies and studies to create more clinical effectiveness research methods. However, they need money to accomplish all of that. Rather than relying on an annual federal appropriation, the ACA established funding for the PCORI through a small federal assessment on private health plans, AKA the PCORI fee.
In addition to understanding why the PCORI fee exists, there are three other critical things most brokers need to know about the PCORI fee.
- How to tell which group clients need to pay it directly and which do not need to worry about it;
- How to figure out how much the fee will be for each affected employer plan each year;
- How and when to pay the fee.
The answer to number one is pretty straightforward. Health insurance carriers are responsible for making payments on behalf of all fully-insured health plan participants, and self-funded plans pay the fee themselves. Clients who only offer fully-insured coverage do not need to worry about payment, other than knowing that the cost is part of their premium rate.
All employers operating self-insured medical plans must pay the PCORI fee directly. Of course, there are a few nuances involved. The IRS takes the term “self-funded plan” very literally, and so some group coverage offerings that an employer might not think of as “self-funded” really are for PCORI fee purposes. Plans that must pay their fee directly include:
- Traditional self-funded major medical plans
- Level-funded plans
- Health Flexible Spending Accounts (FSAs) that do not qualify as an excepted benefit plans, level-funded plans
- Health Reimbursement Arrangements (unless they only reimburse for excepted benefit coverage not integrated with the group health plan). If an HRA integrates with a fully-insured major medical plan, the employer must still pay the HRA’s fee.
The second thing brokers need to know about the PCORI fee is how to figure out how much it will be for each affected employer plan each year. A simple multiplication problem using the total number of people covered by each group plan, not just the number of covered employees, determines the tax amount. But how do you count the number of people covered by the group plan? As it turns out, the federal government has four different counting methods available for affected employer plans. Group plan sponsors can pick the one that works best for them. The choices are:
- Actual Count Method: A plan sponsor may determine the average number of lives covered under a plan for a plan year by adding the totals of lives covered for each day of the plan year and dividing that total by the total number of days in the plan year.
- Snapshot Method: A plan sponsor may determine the average number of lives covered for a plan year based on the total number of lives covered on one date (or more dates if an equal number of dates is used in each quarter) during the first, second or third month of each quarter, and dividing that total by the number of dates on which the employer bases the count.
- Snapshot Factor Method: The snapshot factor count method is very similar to the snapshot formula. However, instead of looking at the exact number of people covered by the plan on specific dates of the year, the plan sponsor reviews how many people chose self-only coverage versus other coverage on the selected dates. Then they use a factor of 2.35 to multiply for each employee who has selected anything other than single coverage.
- Form 5500 Method: An eligible plan sponsor may determine the average number of lives covered under a plan for a plan year based on the number of participants reported on the Form 5500, Annual Return/Report of Employee Benefit Plan, or the Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan.
How and when do you pay? Finally, knowing how actually to pay the @#$! fee is pretty critical! Applicable employer plan sponsors must document their calculation and pay their fee using IRS Form 720 by July 31, 2021. For self-funded plans, paying the tax is the employer’s direct responsibility, rather than a task completed by a third-party administrator. Form 720 is the IRS’s general quarterly excise tax filing form, so if an affected business doesn’t need to pay other excise taxes, it will file Form 720 in the second quarter for PCORI fee purposes only. Brokers and employers with detailed questions about the PCORI fee will likely find the IRS’s PCORI fee frequently asked questions (FAQ) page very helpful. You also can always reach out to us at email@example.com if you need any help or want to run something by us!