Employers Be Wary of Upcoming Health Plan Fees

Through the passage of the Patient Protection and Affordable Care Act (“Act”), the Patient-Centered Outcomes Research Institute (“Institute”) was created to promote research to advance the quality of evidence-based medicine.  The Institute is funded through the Patient-Centered Outcomes Research Trust Fund, which is financed, in part, by fees paid by plan sponsors of applicable self-insured health plans and issuers of specified health insurance policies.  For the first year of applicability, the fee is $1 per covered life and increases for later years.

The first deadline for payment of the Patient-Centered Outcomes Research Institute (PCORI) fee is this July 31, 2013.

Governing Law and Who Must Comply:

Internal Revenue Code (“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.  Issuers of specified health insurance policies are liable for the fee imposed under Code section 4375.  Plan sponsors (typically employers) of applicable self-insured health plans are liable for the fee imposed by section 4376.


The final regulations can be found HERE.

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


Which Plans Are Affected:

Each plan sponsor must first determine which plans are subject to the fee.  An “applicable self-insured health plan” is one that provides accident and health coverage if any portion of that coverage is provided other than through an insurance policy and is established or maintained for the benefit of employees, former employees, or other eligible individuals as set forth in the regulations.


Excepted from these reporting requirements are:

  • plans that provide substantially excepted benefits as defined in Code 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; and
  • expatriate plans.


However, if the same plan sponsor establishes and maintains multiple self-funded plans with the same plan year, those plans may be combined and treated as a single applicable self-insured health plan for purposes of the fee.


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: 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:  The 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.  This can be conducted via a “count” method (counting covered lives and dividing by number of dates counted) or a “factor” method (counting participants (and for participants having other than self-only coverage, multiplying by 2.35) and then dividing by the number of dates counted).
  • Form 5500 Method:  The Form 5500 may be used only if the 5500 is filed no later than the PCORI fee due date 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 is 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).

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 based on percentage increases in the projected per capita amount of the 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 and  must be reported and paid on Form 720, “Quarterly Federal Excise Tax Return.”


Other Fees:

The Temporary Reinsurance becomes effective in 2014 and is estimated to cost $63 per covered life, although application of the fee differs from that of the PCORI fee.  Be sure to watch for additional information regarding this fee.


To find out more about the Patient-Centered Outcomes Research Institute, or the passage of the Patient Protection and Affordable Care Act, contact attorney Elizabeth Latchana at elatchana@fraserlawfirm.com, 517-377-0826 or www.fraserlawfirm.com. Elizabeth Latchana is a shareholder at Fraser Trebilcock, specializing in employee health and welfare benefits.

Disclaimer: This information is a brief summary of a complex area of the law and  is provided for informational purposes only. It is not intended to constitute tax advice which may be relied upon to avoid penalties.

Circular 230 Disclosure: Unless expressly stated otherwise, this message is not intended or written to function as a covered opinion under Department of Treasury regulations. Any federal tax advice within this message is not intended or written to be used, and cannot be used, for the purpose of: (1) avoiding penalties that may be imposed, or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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