The Affordable Care Act (ACA) added Internal Revenue Code §§ 4375 and 4376, which respectively impose an annual fee on issuers of accident and health insurance policies for individuals residing in the U.S. and plan sponsors of applicable self-insured health plans to fund the Patient-Centered Outcomes Research Institute (PCORI). The PCORI fee applies to policy or plan years ending on or after October 1, 2012, and before October 1, 2019. Fees are due by July 31 each year (unless July 31 is a Saturday or Sunday). This Alert also reviews answers to questions our clients have had regarding the PCORI fee rules.

Actions Needed Now: Sponsors of plans subject to the PCORI fee need to determine the average number of covered lives and file IRS Form 720 by August 1, 2016 with payment of the required fee. The fee is calculated by multiplying the "applicable dollar amount" by the "average number of covered lives" for the plan year. The following chart shows the applicable dollar for plan years ending in 2015.

In addition, sponsors that elect to use the Form 5500 method for counting lives must file their respective 2015 Forms 5500 by August 1, 2016.

FAQs for Self-Insured Plans

Treasury regulations, issued December 6, 2012, provide guidance on the fees imposed by the ACA on plan sponsors of certain self-insured health plans to fund the Patient-Centered Outcomes Research Trust Fund.¹ The following Q&As summarize the key rules applicable to sponsors of self-insured plans, i.e., coverage provided other than through an insurance policy.

• Which plans are subject to the PCORI fee? Self-insured health plans subject to the fee include:
  • accident and health coverage or major medical coverage;
  • retiree-only health or major medical coverage;
  • health or major medical coverage under multiple plans;
  • COBRA coverage;
  • health reimbursement arrangement (HRA), including a premium-only HRA, unless the HRA qualifies as an excepted benefit;
  • flexible spending arrangement (FSA), unless the FSA qualifies as an excepted benefit; and
  • state and local government health or major medical plans for employees and/or retirees.

  The fee does not apply to employee assistance programs (EAPs), disease management programs, or wellness programs, unless such programs provide significant benefits in the nature of medical care or treatment. In addition, stand-alone dental or vision plans, hospital indemnity, specified illness benefits, health saving arrangements (HSAs), Archer medical savings accounts, and plans specifically designed to cover employees working and residing outside the U.S. are exempted.

• Who is responsible for payment? The plan sponsor is responsible for payment of the PCORI fee for a self-insured plan. (The insurer is responsible for an insured plan.)

• How is the average number of covered lives determined? Except for HRAs and FSAs (see the special rules below), all individuals who are covered during the plan year (including retirees and individuals enrolled in Medicare) must be counted in computing the average number of lives covered for that year. Thus, for example, a plan must count an employee and his or her dependent child as two separate covered lives.

Plan sponsors can use the actual count method, the snapshot method, or the Form 5500 method to determine the average number of lives covered during a plan year.² Plan sponsors must use the same method of calculating the average number of lives covered under a plan consistently for the duration of a plan year, but may use a different method from one plan year to the next. Entities that sponsor more than one plan (e.g., file more than one Form 5500) may use a different method for each plan.

• Actual count method: The sponsor calculates the sum of the lives covered for each day of the plan year and divides that sum by the number of days in the plan year.
• Snapshot method: A plan sponsor can use a snapshot count method or snapshot factor method to determine the number of lives covered on a designated date.
• Snapshot count: The sponsor adds the total of lives covered on a date (or dates) during the first, second, or third month of each quarter of the plan year and divides that total by the number of dates on which a count is made. For example, if one date is selected from each quarter, the total number of lives is divided by 4.
• Snapshot factor method: The number of lives covered on a date is equal to the sum of (i) the number of participants with self-only coverage on that date, plus (ii) the number of participants with coverage other than self-only coverage on that date multiplied by 2.35.
• The Form 5500 method: This method allows plan sponsors to use the participant counts reported on Form 5500 (or Form 5500-SF) to determine the average number of covered lives for a plan year, provided the Form 5500 is filed by the Form 5500 due date (generally July 31 for a calendar year plan).
  • For a plan offering self-only coverage, the average number of lives for a plan year equals the sum of the total participants reported on the Form 5500 as covered at the beginning of the plan year and the end of the plan year, divided by 2.
  • For a plan offering coverage levels in addition to self-only coverage, the average number of lives equals the sum of the total participants reported as covered at the beginning of the plan year and at the end of the plan year. Note this method is not available for plans that are not required to file Form 5500, such as governmental plans and non-electing church plans.

In addition, the following special rules apply for self-insured health plans:

• Fully insured lives: If a self-insured plan provides coverage through fully-insured options and self-insured options, the plan sponsor is permitted to disregard the lives that are covered solely under the fully-insured options.
• HRAs and FSAs: Plan sponsors can assume one covered life for each employee enrolled in an HRA or each employee enrolled in an FSA. Accordingly, there is no requirement to count spouses or other dependents covered under the HRA or FSA.
• The "Multiple Self-Insured Arrangements Maintained by the Same Plan Sponsor" rule: Two or more self-insured health plans (including self-funded pharmacy benefit plans) may be combined and treated as a single applicable self-insured health plan for purposes of calculating the PCORI fee, provided that the plans have the same plan sponsor and the same plan year. Note: There is no similar aggregation rule for lives covered by more than one insurance policy subject to the PCORI fee.
• Example: An HRA that may be used to pay deductibles and copays under a self-insured health plan is not subject to a separate fee (and the fee will apply only to the self-insured health plan) if both the HRA and the self-insured health plan have the same plan sponsor and the same plan year. However, if amounts in an HRA may be used to pay deductibles and copays under a fully-insured health plan, both the self-insured HRA and fully-insured health plan will be subject to separate PCORI fees.

• How is the fee paid? The PCORI fee is reported and paid annually by filing the second quarter Form 720 (Quarterly Federal Excise Tax Return) by July 31³ of the calendar year immediately following the last day of the plan year. The Form 720 instructions provide guidance on how to fill out the form and calculate the fee.

• What are the penalties for failure to pay on time? The penalty for late filing of Form 720 or late payment of the PCORI fee is the full amount of the fee itself, with the possibility of an excise tax ranging from 0.5% to 25% of the fee. However, regulations under § 6651 provide that the penalty may be waived or abated if the plan sponsor can show reasonable cause and the failure was not due to willful neglect.

• How can a sponsor correct a previously filed Form 720? The final PCORI regulations provide that sponsors may use Form 720X, "Amended Quarterly Federal Excise Tax Return," to make adjustments to liabilities reported on a previously filed Form 720, including adjustments that result in an overpayment.

CHEIRON OBSERVATIONS: Plan sponsors should determine which method of counting covered lives is most advantageous.

Cheiron health consultants can assist with your determination of covered lives and calculation of the PCORI fee due for 2015.

Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Accordingly, we do not provide legal services or tax advice.

¹ A copy of the final regulations is at this link.

² Note the available methods for determining the average number of covered lives differ between insured plans and self-insured plans. Insurers can use the actual count method, the snapshot method, and the member months method and its companion state form method.

³ Note, because July 31, 2016 falls on a Sunday, the due date for 2015 reporting is August 1, 2016.