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Upcoming Health-Care Reform Tax

By Amy Zell


The Patient Protection and Affordable Care Act (PPACA) created the Patient Centered Outcomes Research Institute (PCORI), a nonprofit corporation which will, according to regulations, “assist patients, clinicians, purchasers, and policy-makers in making informed health decisions by advancing the quality and relevance of evidence-based medicine through the synthesis and dissemination of comparative clinical effectiveness research findings.” So, what does that mean? Essentially, the PCORI was designed to advance research on prevention, diagnosis, treatment, monitoring, and management of health conditions.

To fund the PCORI, the IRS will begin collecting a fee from health plans and insurance companies. The IRS issued final regulations on Dec. 6, 2012, and recently issued a revised IRS Form 720, which parties will use to report the fee. While the Form 720 is the existing excise-tax reporting form that is filed quarterly, for PCORI purposes, parties will file that form only once each year by July 31.

The PCORI fee applies to group accident and health plans, both self-funded and fully insured. Excepted benefits such as stand-alone vision and dental plans and most health flexible-spending accounts will be excluded from the calculation. However, there is no exception for stand-alone retiree plans or COBRA coverage. The fee applies to governmental entities as well, but not exempt governmental programs such as Medicare.  Stop-loss policies are not subject to the fee. Self-funded plans specifically designed to cover employees who work and reside in another country are also exempt.   

The fee will apply to plan years ending on or after Oct. 1, 2012, and before Oct. 1, 2019. The fee is $1 multiplied by the average number of lives covered under the health plan for plan years ending before Oct. 1, 2013. The fee will increase to $2 for plan years ending before Oct. 1, 2014. And, for plan years ending on or after Oct. 1, 2014, the fee increases based on the projected per-capita amount of national health expenditures.

The party responsible for paying the fee is the policy-issuer in the case of a fully insured plan, or the plan sponsor in the case of a self-funded plan. Plan sponsors and issuers will report and pay the fee on IRS Form 720, by July 31 of the calendar year following the last day of the plan year. That means, for calendar-year plans or policies that ended Dec. 31, 2012, the filing deadline is July 31, 2013. Plan years ending in 2013 will report and pay the fee on July 31, 2014, and so on. 

There are four permissible methods in which insurers can determine the average number of covered lives: (1) the actual count method; (2) the snapshot method; (3) the member-months method; or (4) the state-form method. Sponsors of self-funded plans may use one of three alternative methods: (1) the actual count method; (2) the snapshot method; or (3) the Form 5500 method. The final regulations also permit self-funded plans to use any reasonable approach to determine the average number of lives covered under the plan for plan years beginning before July 11, 2012, and ending on or after Oct. 1, 2012. However, the regulations require both plan sponsors and insurers to apply the same method for the duration of the plan or policy year.

Employers self-funding, multiple-plan arrangements may treat such plans as a single plan for purposes of calculating the fee, provided the plans have the same plan year and the same plan sponsor. For example, if an employer sponsors a self-funded medical plan and a health-reimbursement arrangement (HRA), and both plans have the same plan year, participants enrolled in both plans will only count once for purposes of calculating the fee. This would not be the case if the HRA was offered with a fully insured medical plan.

Finally, after some apparent indecision on the part of regulators, the IRS released a memorandum on June 7, 2013, stating that the PCORI fee is deductible as an ordinary and necessary business expense.


Amy Zell is staff attorney and plan-benefit analyst for POMCO Group. Contact her at or view her blog posts on health-care reform at




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