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July 31 Payment Deadline For Some Self-Insured Health Plan Sponsors

Employers with self-insured health plans must make seven annual payments to finance the Patient-Centered Outcomes Research Institute (PCORI), a nonprofit corporation established under the Affordable Care Act. (Insured plans are also subject to PCORI fees, but the insurers are responsible for those payments). July 31, 2013 is the initial deadline for sponsors of "applicable self-insured health plans" with plan years that ended on or between October 1 and December 31, 2012. For applicable plans with plan years ending on or between January 1 and September 30, 2013, the initial deadline is July 31, 2014.

Self-insured Plans Subject to PCORI Fees

The general definition of an "applicable self-insured health plan" includes any plan that provides health coverage "if any portion of the coverage is provided other than through an insurance policy." That includes not only the self-insured medical plans sponsored by many larger employers, but also some flexible spending arrangements (FSAs) and all health reimbursement arrangements (HRAs). However, PCORI fees do not apply to limited scope dental and vision plans, employee assistance plans (EAPs), wellness programs or the funding of health savings accounts (HSAs).

An HRA is automatically subject to PCORI fees because all benefits are paid by the employer. Although an employer or its agent may also pay benefits or reimbursements under the health FSA component of the cafeteria plan, a health FSA will not be subject to PCORI fees if two conditions are satisfied. First, the employer must also offer the participants a group health plan that is not restricted to "excepted benefits," such as limited scope dental or vision benefits. Second, the arrangement must not allow a participant to receive a benefit greater than two times his or her salary reduction election for the year (or, if greater, the sum of $500 plus his or her salary reduction election). Most health FSAs will satisfy this second condition because they are funded exclusively by employees' payroll deductions.

Calculating the fee

The PCORI fee for each year is determined by multiplying the average number of individuals covered for the year by a specified amount. The fees for the first and second years are $1.00 and $2.00 per person, respectively, and the rates for the four remaining years will be indexed. In most cases, the average number of covered individuals includes not only plan participants but also beneficiaries, such as covered family members.

As always, there are exceptions. If the employer sponsors two or more applicable self-insured health plans that have a common plan year, the plans are treated as a single plan so that no individual counts more than once. Also, if an employer does not maintain an applicable self-insured health plan other than an HRA or a health FSA, the average number of covered individuals includes only the participants, not their dependents.

There are three ways to determine the average number of covered individuals.

Actual Method. 

The sponsor adds the number of covered individuals on each day in the plan year and then divides the sum by the number of days in that year.

Snapshot Method. 

The sponsor may average counts from as few as four days if it picks similar ones in all four quarters of the plan year. For example, if the employer chooses the first day of the first quarter it will also have elected the first days of the other three quarters, but it has the flexibility to adjust any of those dates by as many as three calendar days. Furthermore, if the sponsor wishes to count only participants, it can do so if every participant with coverage for at least one dependent is counted as 2.35 covered individuals.

5500 Method. 

This last alternative is only available if Form 5500 or Form 5500-SF is filed for the applicable year by the July 31 deadline for paying that year's PCORI fee. If the plan provides only "self-only" coverage, the employer can average the numbers of participants reported as of the beginning and end of the plan year. Otherwise, the participant counts on those two days are added together--but not divided by two--to account for the coverage available for dependents.

Reporting and Paying the fee

Even though an employer pays PCORI fees only once each year, it does so with IRS Form 720 (Quarterly Federal Excise Tax Return). The form and payment can be mailed or filed electronically. The fee cannot be paid with plan assets, if any. Instead, it must be paid by the employer, which can claim it as a deductible expense.

Copyright © 2020 Godfrey & Kahn S.C.National Law Review, Volume III, Number 206

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About this Author

John Donahue Tax & Employee Benefits Attorney
Shareholder

John Donahue is a shareholder in the Tax and Employee Benefits Practice Group. He works in the Milwaukee office.

John’s practice includes tax, employment and corporate law with a primary emphasis on employee benefits. He advises businesses and their owners regarding the design, installation, maintenance and termination of pension plans, 401(k) programs, employee stock ownership plans and other benefit programs. John provides guidance on the employee benefit aspects of mergers and acquisitions, and he assists clients in responding to regulatory inquiries and disputed benefit claims....

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