Trends & Developments - June 2013 - Action Required: IRS Form 720 and the PCORI Fee Due July 31, 2013...
Background and Effective Dates
The Patient Protection and Affordable Care Act of 2010 (the "Affordable Care Act") established the Patient-Centered Outcomes Research Institute (the "PCORI") to "assist patients, clinicians, purchasers, and policy-makers in making informed health decisions." The Affordable Care Act also created the Patient-Centered Outcomes Research Trust Fund to financially support the PCORI. To fund the trust, Congress amended the Internal Revenue Code ("IRC") to impose an annual fee on plan sponsors of "applicable self-insured health plans." This means that employers with self-insured health plans including certain HRA, FSA and post-retirement medical arrangements are subject to the fee.
On December 6, 2012, the IRS and Treasury published final regulations to provide guidance on the applicability, liability, calculation, payment, and reporting of the fee. The PCORI fee applies to plan years ending after September 30, 2012 and on or before September 30, 2019.
Reporting and Timing
The PCORI fee must be paid and reported annually on Form 720, Quarterly Federal Excise Tax Return, by July 31 of the calendar year immediately following the last day of the applicable plan year. The first due date for filing Form 720 and paying the fee is July 31, 2013, and is for plan years ending after September 30, 2012 and on or before December 31, 2012
Applicable Self-Insured Health Plans Subject to the PCORI Fee
The fee applies to plan sponsors of "applicable self-insured health plans" (also commonly referred to as self-funded or self-insured plans). Self-insured plans include any plan offering health or accident coverage that is not provided by an insurance company, is funded by employer and/or employee contributions and payments, and is established and maintained by one or more employers for the benefit of current or former employees. It also applies to self-insured health or accident coverage provided by multiemployer plans, multiple-employer welfare arrangements ("MEWAs"), voluntary employees' beneficiary associations ("VEBAs"), rural electric cooperatives, and certain not-for-profit organizations such as business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues.
Plans established and designed specifically to primarily cover employees who are working and residing outside the United States are not subject to PCORI fees.
The PCORI fees do not apply if substantially all of the coverage under a plan is for excepted benefits. Excepted benefits include, for example:
- Accident-only coverage
- Stand-alone dental and vision plans, long-term care, nursing home care, home health care, and community-based care
- Disability income insurance
- Liability insurance (including general liability insurance and automobile liability insurance)
- Workers' compensation
- Automobile medical payment insurance
- Credit-only insurance
- Coverage for on-site medical clinics
In addition, the PCORI fees do not apply to health savings accounts ("HSAs").
Health Flexible Spending Arrangements
A health flexible spending account ("FSA") qualifies as an excepted benefit, and is not subject to the PCORI fees, if: (1) other group health plan coverage that is not an excepted benefit is made available to the eligible class of employees, and (2) the maximum benefit payable under the FSA to any employee does not exceed two times the employee's salary reduction election (or if greater, $500 plus the amount of the salary reduction election.)
Health FSAs funded, for example, exclusively by employee salary reduction contributions will by definition satisfy the second requirement. If the health FSAs include employer contributions, the second requirement will also be satisfied as long as the employer contribution to the health FSA does not exceed the greater of the employee's salary reduction election or $500.
Retiree medical plans and retiree-only plans are treated as self-insured plans for the purpose of the PCORI fees.
Health Reimbursement Arrangements
Stand-alone health reimbursement arrangements ("HRAs") are subject to the PCORI fees. However, the PCORI fees will not apply to an HRA that is integrated with another self-insured medical plan provided the HRA and the self-insured plan are established and maintained by the same plan sponsor and have the same plan year.
Employee Assistance, Disease Management, and Wellness Programs
Employee assistance programs ("EAPs"), disease management programs, and wellness programs that do not provide significant benefits in the nature of medical care or treatment are not subject to PCORI fees.
Calculation of the Fee
For plan years ending on or before September 30, 2013, the plan sponsor must pay $1 per person for the "average number of lives covered." The fee increases to $2 per person for the plan year ending after September 30, 2013. Under current rules, the fee will no longer apply to plan years ending after September 30, 2019.
Determination of "Average Number of Lives Covered"
The regulations require consistency in use of a method. Plan sponsors must use the same method consistently during a plan year. However, a plan sponsor may use a different method from one plan year to the next.
Plan sponsors may choose from one of four methods to calculate the average number of lives covered under a self-insured plan:
1. Actual Count Method: The plan sponsor calculates the sum of the lives covered for each day of the of the plan year and divides this sum by the number of days in the plan year.
2. Snapshot Count Method: The plan sponsor calculates the sum of the total number of lives covered on one date in each calendar quarter of the plan year, or on an equal number of dates for each quarter, and divides the total by the number of dates on which a count was made.
3. Snapshot Factor Method: The same as the Snapshot Method described above, except that the number of lives covered on a given day is equal to the sum of the number of participants with self-only coverage on that date, plus the product of 2.35 and the number of participants with coverage other than self-only coverage on the date.
4. Form 5500 Method: The plan sponsor calculates the average number of lives covered based on the number of participants reported on Form 5500 (Annual Return/Report of Employee Benefit Plan) for the applicable self-insured health plan for that plan year. For a plan offering self-only coverage, the average number of covered lives is the sum of the total participants reported at the beginning and end of the plan year, in each case as reported on Form 5500, divided by two. For a plan offering self-only coverage and coverage other than self-only coverage, the average number of lives equals the sum of total participants reported on Form 5500 at the beginning and end of the plan year.
A special counting rule applies to a health FSA that is not an excepted benefit and to HRAs. This rule permits the plan sponsor to treat each participant's health FSA or HRA as covering a single life (and therefore the plan sponsor is not required to include as lives covered any spouse, dependent, or other beneficiary of the individual participant in the health FSA or HRA, as applicable.)
When accident and health coverage is provided to one individual through more than one self-insured arrangement, special rules clarify how the fee applies.
Multiple self-insured arrangements established and maintained by the same plan sponsor and with the same plan year are subject to a single fee. For example, if an employee is covered under an HRA which is integrated with another self-insured health plan of the plan sponsor under which the employee is also covered, the plan sponsor pays a single fee with respect to that employee for both plans. This may also apply to an umbrella cafeteria plan that includes various self-insured arrangements. However, a single fee does not apply if the arrangements or plans have different plan years or different plan sponsors.
- The fee applies to retiree-only specified health insurance policies and applicable self-insured plans that provide accident and health coverage, even though such plans may be exempted from other requirements under the Affordable Care Act.
- The fee applies to COBRA continuation coverage that provides accident and health coverage.
- An exception from the fee applies to any self-insured plan that provides stand-alone dental or vision coverage.
- An exception from the fee applies to any self-insured plan that provides for an employee assistance program, disease management program, or wellness program that does not provide significant benefits in the nature of medical care or treatment.
- An exception from the fee applies to Health Savings Accounts (HSAs).
- An exception from the fee applies to most typical flexible spending accounts (FSAs) that satisfy the requirements of an excepted benefit. For example, health FSAs funded exclusively by employee salary reduction contributions will not be subject to the fee.
- An exception from the fee applies to any self-insured plan if the facts and circumstances show that the plan was designed specifically to cover primarily employees who are working and residing outside of the United States.
Plan sponsors of self-insured health plans should take an inventory of their plans, determine which plans have plan years ending between October 1, 2012 and December 31, 2012, and determine which plans are subject to the PCORI Fee due by July 31, 2013. Next, the plan sponsor should determine the average number of lives covered. Finally, the plan sponsor should complete and file Form 720 and with the fee by July 31, 2013.
Trends & Developments - June 2013 Issue