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Client Alert: Final PCORI Rules – Payment Due July 31st

Please remember that $1/covered life under your health plans must be reported and paid by July 31, 2013.  This is applicable for any plan with a plan year that ended on or after October 1, 2012.  Please see below for […]


Please remember that $1/covered life under your health plans must be reported and paid by July 31, 2013.  This is applicable for any plan with a plan year that ended on or after October 1, 2012.  Please see below for more details.

Patient-Centered Outcomes Research Institute (PCORI) Fee / Comparative Effectiveness Fee
Code sections 4375 and 4376 impose fees for each policy year / plan year ending on or after October 1, 2012 and before October 1, 2019.  The issuer of a health insurance policy is liable for the fee imposed under Code section 4375.  The plan sponsor (typically the employer) of an applicable self-insured health plan is liable for the fee imposed by section 4376.

As employers of self-funded plans are directly liable for these fees, the focus of this alert is on those plans.

Who Must Comply:
Issuers of health insurance policies and plan sponsors of applicable self-insured health plans with plan years ending on or after October 1, 2012 and before October 1, 2019 must comply.

Which Plans Are Affected:
The first important step is to determine which plans and policies are subject to the fee.  An “applicable self-insured health plan” is one that: (1) provides accident and health coverage if any portion of that coverage is provided other than through an insurance policy, and (2) is established or maintained by:

“(A) By one or more employers for the benefit of their employees or former employees;

(B) By one or more employee organizations for the benefit of their members or former members;

(C) Jointly by one or more employers and one or more employee organizations for the benefit of employees or former employees;

(D) By a voluntary employees’ beneficiary association, as described in section 501(c)(9);

(E) By an organization described in section 501(c)(6); or arrangement (as defined in section 3(40) of the Employee Retirement Income Security Act of 1974 (ERISA)), a rural electric cooperative (as defined in section 3(40)(B)(iv) of ERISA), or a rural cooperative association (as defined in section 3(40)(B)(v) of ERISA).”

See 26 CFR 46.4376-1(b)(1).

Excepted from these reporting requirements are:
-plans that provide substantially excepted benefits as defined in section 9832(c) (however, retiree-only plans are subject to this fee);
-employee assistance programs, disease management programs or wellness programs that do not provide significant benefits in the nature of medical care or treatment; or
-expatriate plans

These is a special rule for multiple plans.  If the same plan sponsor establishes and maintains more than one self-funded plan, those plans that have the same plan year may be combined and treated as a single applicable self-insured health plan for purposes of the fee.

Plan sponsor is also specifically defined in the regulations.  For plans established or maintained by a single employer, the plan sponsor is the employer.  Other situations and arrangements designating the plan sponsor are set forth in the regulations, including for employer organizations, multiple employer plans, MEWAs, rural cooperatives, VEBAs, and other arrangements as set forth in the regulations.  If the situation is not identified by the regulations, the plan document’s designation of plan sponsor controls.  If a plan sponsor is not designated in the written documents, the regulations further explain how a plan sponsor is determined.

How are Participants Counted:
The fee is based on the average number of lives covered under the plan for the plan year, including those on COBRA (or similar continuation coverage under other federal or state law).  There are a number of ways to make this determination:

Actual Count: This method is true to its name.  The plan sponsor would add the total number of lives covered for each day of the plan year and divide that total by the number of days in the plan year.

Snapshot Method:  Using this method, a plan sponsor calculates the covered lives on a quarterly basis.  The dates used for the second, third and fourth quarters must be within three days of the date in that quarter that corresponds to the date used for the first quarter, and all dates must be used in the same plan year.

-Using a snapshot count method, the total number of lives covered is then divided by the number of dates a count was made.

-Using a snapshot factor method, the number of lives covered on a date is the sum of: (a) the number of participants with self-only coverage on that date; plus (b) the number of participants with coverage other than self-only coverage on that date multiplied by 2.35.  These figures are added for each date counted and then divided by the number of dates a count was made.

Form 5500 Method:  The Form 5500 may be used to determine the fee as long as it is filed no later than the due date for the PCOR fee for that plan year.  For a plan offering self-only coverage and coverage other than self-only (i.e., family coverage), the average number of covered lives equals the sum of the total participants covered at the beginning and the end of the plan year as reported on the Form 5500 for that applicable  self-insured health plan.  If the plan offered only self-only coverage, the average number of covered lives would be the total number of participants covered at the beginning and end of the plan year divided by 2.

Special Rule for HRAs and Health FSAs:  HRAs and health FSAs which are not HIPAA excepted benefits, and therefore are subject to these rules, have limited reporting obligations.  If the plan sponsor does not establish or maintain an applicable self-insured health plan other than a health FSA or HRA, each participant under the health FSA or HRA may be treated as a single life (i.e., spouses, dependent or other beneficiaries need not be counted).

If the plan sponsor does maintain another applicable plan that has the same plan year as the health FSA or HRA, the two plans may be treated as a single plan, and participants will be counted as required for the other applicable plan.  The special counting rule described above will only be used for those participants in the health FSA or HRA that do not participate in the other applicable self-insured health plan of the plan sponsor.

If a plan contains both fully insured and self-insured options, lives covered only under a fully insured option are disregarded for purposes of the self-funded PCORI fee.

NOTE: For plan years beginning before July 11, 2012 and ending on or after October 1, 2012 (i.e., the first year the fee is in effect), a plan sponsor must use any reasonable method to calculate the number of covered lives.

Amount of Fee:
$1: For plan years ending on or after October 1, 2012 and before October 1, 2013.
$2: For plan years ending on or after October 1, 2013 and before October 1, 2014.

The amount for later years is the amount from the previous year, plus that same amount including the percentage increase in the projected per capita amount of the most recently released HHS National Health Expenditures.

When and How Must the Fee Be Reported and Paid:
The fee is due no later than July 31st of the year following the last day of the policy or plan year.  So that means that a plan with its year ending April 30th will not have to the first PCORI fee due until July 31, 2014.  “A return that reports liability for the fee imposed by section 4376 for a plan year must be filed by July 31 of the calendar year immediately following the last day of the plan year.  Thus, for example, a return that reports liability for the fee imposed by section 4376 for the plan year ending on January 31, 2013, must be filed by July 31, 2014.”  See 26 CFR 40.6071(a)-1(c)(2) (regarding timing to file the return for self-insured health plans).

The fee must be reported and paid on Form 720, “Quarterly Federal Excise Tax Return.”

If you should have any questions about the PCORI fee and its application to your specific benefit plans, please contact our offices. You can reach attorney Beth Latchana directly at elatchana@fraserlawfirm.com or 517-377-0826.