Form 720 due July 31 for many group health plans
The Patient Protection and Affordable Care Act, as amended ("Affordable Care Act"), added an annual fee on certain health insurance policies (new Section 4375 of the Internal Revenue Code ("Code")) and self-insured group health plans (new Section 4376 of the Code), effective for policy/plan years ending on or after October 1, 2012, and before October 1, 2019. The Patient-Centered Outcomes Research ("PCOR") fees collected will be used to fund the newly established Patient-Centered Outcomes Research Institute (for information, visit the PCOR Institute website).
Amount of the Fee
The initial annual fee equals $1 times the average number of covered lives during the applicable policy/plan year. The fee will increase to $2 times the average number of covered lives starting with the policy/plan year ending on or after October 1, 2013, with indexed increases to apply in subsequent policy/plan years. For this purpose, "covered lives" includes all participants (whether as active employees, retirees, or COBRA qualified beneficiaries) and their covered dependents.
Based on guidance recently issued by the Internal Revenue Service ("IRS"), available here, the IRS appears to be taking the position that the PCOR fees will be tax deductible. According to this Office of Chief Counsel Memorandum, "the PCOR fee will be an ordinary and necessary business expense paid or incurred in carrying on a trade or business and, therefore, will be deductible under [Section 162 of the Code]."
Responsibility for Reporting and Paying the PCOR Fee
For a fully insured plan, the insurer is responsible for reporting and paying the fee.
For a self-insured plan, the plan sponsor is responsible for reporting and paying the fee - reporting and/or payment by a third party on the sponsor's behalf is not permitted.
The remainder of this email provides information about the fee calculation, reporting and payment process for self-insured group health plan sponsors.
How and When to File
The fee is reported and paid annually on IRS Form 720 Quarterly Federal Excise Tax Return. This form is available here (see Part II, IRS No. 133 on page 2), with instructions available here (see pages 8 and 9). The applicable Form 720 must be filed by July 31 of the calendar year immediately following the last day of the applicable plan year.
As mentioned above, for the first filing, the fee will be calculated based on (i.e., $1 times) the average number of lives covered during the plan year ending on or after October 1, 2012. Thus, for a calendar year plan year, the first applicable plan year is January 1 through December 31, 2012, and this filing (with a fee payment based on $1 per covered life) is due July 31, 2013. (For a plan year ending on or after January 1 and before October 1, this filing requirement will generally not first apply until July 31, 2014.)
How the Fee is Calculated
The PCOR fee applies to an "applicable self-insured health plan;" generally, that means accident and health coverage, any portion of which is provided other than through an insurance policy. The PCOR fee does not apply to certain "excepted benefits" (e.g., standalone dental or vision coverage, or onsite medical clinic coverage), employee assistance programs ("EAPs") that do not provide "significant benefits in the nature of medical care or treatment," or plans primarily designed to cover employees working and residing outside the United States. The IRS provides a helpful chart for determining whether the fee applies to a particular coverage or arrangement, available here.
Unlike many other Affordable Care Act requirements, stand-alone retiree only health plans are not exempt from this PCOR fee requirement. Therefore, sponsors of retiree only health plans should be prepared to report the lives covered under such plans.
When the same plan sponsor maintains multiple self-insured coverages, and such coverages are operated on the same plan year, then all such coverages may be treated as one applicable self-insured health plan for PCOR fee purposes; that is, a covered life participating in more than one such coverage need only be counted once for fee calculation purposes.
For example, an employee enrolled in the self-funded medical coverage and enrolled in the same employer sponsor's health reimbursement arrangement ("HRA") and/or health flexible spending arrangement ("health FSA") would be counted as one covered life, as long as the medical coverage, HRA, and/or health FSA all operated on the same plan year. If the same employee enrolled his or her dependents in the medical coverage, those dependents also would be counted as covered lives (on the other hand, dependents are disregarded for the purposes of counting covered lives in HRAs and health FSAs).
Compare an employee enrolled in coverage under fully insured medical coverage and also enrolled in the employer sponsor's HRA and/or health FSA - in this case, the insurer would count that employee (and his or her covered dependents, as applicable) for fee determination purposes based on the employee's enrollment in the insured medical coverage, and the employer sponsor would count that employee for fee determination purposes based on the employee's enrollment in the HRA and/or health FSA.
Methods for Counting Covered Lives
With respect to any applicable plan year, the sponsor must use only one of the following methods for determining the average number of lives covered (although the sponsor is free to change the method in subsequent plan years). The permissible methods are summarized below:
- Actual Count Method: Add the totals of lives covered for each day of the plan year and divide the total by the number of days in the plan year.
- Snapshot Method: Add the totals of lives covered on one (or more) date(s) during the first, second, or third month of each quarter during the plan year and divide the total by the number of dates on which the count was made. The dates used in the second, third, and fourth quarters must be within three days of the corresponding dates used in the first quarter.
Under this method, the average covered lives may be determined by using either:
- the snapshot factor method, based on [the number of participants with only self only coverage] plus [the number of participants with any family coverage times a factor of 2.35] to estimate covered lives; or
- the snapshot count method, based on the actual number of covered lives.
- Form 5500 Method: Although this may provide the easiest method for calculating the PCOR fee, it does have a critical timing limitation: this method is only available if the applicable Form 5500 is filed no later than the July 31 due date for the Form 720.
Use the total number of participants reported on the Form 5500 at both the beginning and end of the year (reported on lines 5 and 6d on page 2 of the Form 5500), and:
- for a plan offering only self only coverage, use the average of those two figures (i.e., the sum of the two figures, divided by two); or
- for a plan offering any family coverage, use the sum of those two figures.
Under each of these methods, any participants covered solely under a fully insured arrangement may be disregarded; however the rules do not provide for any other specific carve-outs when counting covered lives. As a result, we think that the Form 5500 method could very well overstate the covered lives for fee calculation purposes for a wrap plan that provides other welfare coverages (such as life insurance) to a much broader participant population than those covered under the self-insured group health plan(s). However, the simplicity of the Form 5500 method may outweigh the impact of the additional fees for such a wrap plan.
For a sponsor wishing to take advantage of the Form 5500 method for counting covered lives, the Form 5500 must be submitted before the July 31 deadline for filing the Form 720. For a calendar year plan for which the regular Form 5500 filing deadline is July 31 (with an extension available until October 15), the plan’s Form 5500 should be submitted well in time to meet the July 31 deadline for the Form 720 if the reporting sponsor hopes to take advantage of the Form 5500 method.
It should be noted that the final regulations on the PCOR fee (available here) "permit a plan sponsor to use any reasonable method to determine the average number of lives covered under an applicable self-insured health plan for a plan year beginning before July 11, 2012, and ending on or after October 1, 2012." Therefore, for this first reporting year, if the average covered lives cannot be precisely determined using one of the methods above, care should be taken that the counting method used by the sponsor is reasonable. Regardless, the method, data, and calculations used to determine the PCOR fee should be documented in plan records.
Please contact a member of the Employee Benefits team and let us know if we can help you through this new PCOR fee calculation and reporting process or any other Affordable Care Act requirements.