Articles & E-Books


Health Care Reform – The New Patient Centered Outcomes Research Fee

May 01, 2013

The Patient Protection and Affordable Care Act (PPACA) created a nonprofit entity, the Patient-Centered Outcomes Research (PCOR) Institute, to support clinical effectiveness research. The intent of this entity is to assist patients and health care providers and policy makers by advancing evidence-based medicine through gathering and disseminating clinical research findings.

Reporting and the Fee/Tax

The entity is funded in part by fees paid by insurers and sponsors of self-insured health plans. The IRS issued final regulations regarding the fees in December, 2012. The fees apply to policy and plan years ending after October 1, 2012, and before October 1, 2019 (i.e., for seven full policy/plan years). For calendar year plans, the fees apply for plan years 2012–2018.

Insurers will pay the fees on behalf of employers utilizing fully insured health plans. An employer that has a self-insured health plan will be responsible for payment of the fee. (Note that certain Health Reimbursement Arrangements [HRAs] and Health Flexible Spending Accounts [HFSAs] are subject to the fee also if they do not qualify as “excepted benefits” under the Health Insurance Portability and Accountability Act of 1996 [HIPAA].) 

Fees are reported and paid once a year, even though they are reported on IRS Form 720 (Quarterly Federal Excise Tax Return). The fees will be assessed, collected, and enforced as a tax. IRS Form 720 is due July 31 for each year. 

The fee was $2.17 times the number of covered lives under the policy/plan (employee PLUS dependents included in the coverage) for 2015. The fee for subsequent years will be indexed for inflation, based on the percentage increase in the projected per capita amount of National Health Expenditures (as published by the IRS).  So it will be increased by the rate of medical inflation each year.

What Is Included

Key questions answered by the final regulations:

  1. Covered lives include active employees, former employees, and COBRA beneficiaries.
  2. Governmental employers are subject to the fee, unless they qualify as an “exempt governmental program.” This includes federally recognized Indian tribal governments.
  3. Retiree-only plans are subject to the fee, unless they cover dental and/or vision benefits only.
  4. Employee assistance, disease-management, and wellness programs are exempt from the fee, provided that the program does not provide “significant” benefits in the nature of medical care or treatment. 
  5. Stop-loss and reinsurance policies are not subject to the fee. (The employer pays the fee on the self-funded portion of the plan.)
  6. HRAs and HFSAs are subject to the fee if they do not qualify as “excepted benefits” (more on that below).

Determining Covered Lives

The fee imposed is based on the average number of lives covered under the policy or plan. The regulations provide insurers with four alternative methods of calculating the average number of lives covered under the policy, which will be selected by the insurer for fully insured plans.

Self-insured plans are provided three alternative methods to calculate lives covered:

  1. Actual count method—An average of the lives covered on each day of the plan year.
  2. Snapshot method—An average of the lives covered on a selected date in each quarter of the plan year (i.e., an average of four dates, such as the last day of each quarter).
  3. Form 5500 method—A simple average of the participant count on the first and last day of the plan year if the plan provides only single coverage. If the plan offers single coverage along with other coverage (i.e., family coverage), the total number of lives is determined by adding the total participant counts at the beginning and end of the year, without dividing by two. This method may be used only if the Form 5500 is filed by the plan sponsor no later than the due date for the fee imposed for that plan year. It is important to note that the plan sponsor must use a single method in determining the number of lives covered under the plan for the entire year. However, a plan sponsor is not mandated to use the same method from one plan year to the next.

Payment of the Fee

The DOL has indicated that this fee/tax is imposed on the plan sponsor and, as such, is not a permissible plan expense under ERISA and therefore cannot be paid from plan assets. Thus, trust assets or participant contributions should not be used to pay the fee/tax.

Excepted Benefits under HIPAA

If a plan is not designed as an excepted benefit, it will be subject to the PCORI fee. Thus, it is important to understand the requirements to qualify as an excepted benefit. The following three conditions must be met: 

  1. The maximum reimbursement available must be less than 500% of the value of the coverage;
  2. The maximum benefit payable to a participant for a year cannot exceed two times the employee’s salary reduction election under the HFSA for the year (or, if greater, the amount of the employee’s salary reduction election for the HFSA for the year, plus $500); and
  3. Other non-excepted group health plan coverage (i.e., major medical coverage) must be made available for the year to participants.

Note that a limited-scope HRA or HFSA that provides reimbursement for dental or vision benefits only is not subject to HIPAA or the PCORI fee.

HRAs and HFSAs

HRAs are considered self-funded health coverage and are therefore subject to the PCORI fee, unless reimbursements are limited to excepted benefits. Most HRAs will not be excepted benefits because they are 100% funded by employer contributions. If the HRA provides more than $500 of reimbursement in a plan year, it would not meet the condition in #2 above and thus would not qualify as an excepted benefit.

HFSAs are also subject to the fee, unless the HFSA is designed to be an excepted benefit. Most HFSAs will meet all of the conditions listed above because most are funded solely by salary reduction contributions and are paired up with a major medical plan. 

If an employer maintains an HRA or an HFSA in addition to self-insured major medical coverage, the arrangements can be treated as a single self-insured health plan, if the arrangements have the same plan year for purposes of calculating the fee. (Similarly, if an employer has self-insured medical coverage and separate self-insured prescription drug coverage, the two arrangements can be treated as one plan). Note that an employer cannot integrate an HRA with their fully insured coverage for purposes of calculating the fee, since the insurer pays the fee on behalf of the fully insured plan. The employer will be responsible for payment of the fee on the HRA.

The employer is able to assume one covered life per employee for purposes of the fee on HRA or HFSAs covering non-excepted benefits, even if they cover spouses and dependents. 

Act Now

Form 720 is due July 31 for all plan years. If you have a self-funded medical plan, an HRA, and/or an HFSA, contact your relationship executive to ascertain your filing obligation and assure the return will be prepared for you in a timely manner. For additional questions or information, contact Pam BranshawTom Krieg, or Bob Buss.


Note that this fee applies regardless of how many employees you have. It is not subject to the 50-employee threshold like the Play or Pay penalties for employers.