Executive Summary

IRS Notice 2023-70 adjusts the Patient-Centered Outcomes Research Institute (PCORI) fee to $3.22 per covered individual for health plan years ending on or after October 1, 2023 and before October 1, 2024, which includes 2023 calendar plan years. This represents a $0.22 per covered individual increase from last year’s PCORI fee (from $3.00).

The annual PCORI fee must be reported and paid to the IRS by July 31, 2024, via the second quarter Form 720.

What is the PCORI Fee Used For?

The fee is imposed on health insurance issuers and self-insured health plan sponsors to fund the Patient-Centered Outcomes Research Institute (PCORI). The institute is an independent non-profit research organization that seeks to empower patients and others with actionable information about their health and healthcare choices.

The institute maintains a robust portfolio of patient-centered outcomes research that addresses a variety of high priority conditions and topics, including projects targeting racial and ethnic minorities, low socioeconomic status, women, older adults and individuals with multiple chronic conditions. The PCORI website lists current and completed research projects as well as outcomes.

Who Needs to Pay the PCORI Fee?

Fully Insured Medical Plans: Health Insurers are responsible for paying the fee on fully insured health policies. This fee is built into the insurance premium, so there is no action required by employers.

Self-Insured Medical Plans: The plan sponsor (the employer) is responsible for paying the PCORI fee for self-insured health plans. Self-insured plans include “level funded” plans.

• For more details: Newfront Compliance Considerations for Self-Insured Plans Guide

Fully Insured Medical Plan with an HRA: The insurance carrier will pay the PCORI fee for the insured medical plan, and the employer will pay the PCORI fee based on employees enrolled in the HRA. This includes HRAs designed to cover cost-sharing under the major medical plan, specialty HRAs (HRAs designed to cover specific types of medical expenses such as infertility, abortion-related travel assistance, gender affirmation, mental health, and other specific medical expenses), as well as HRAs designed to reimburse individual policy premiums (ICHRAs and QSEHRAs).

Self-Insured Medical Plan with an HRA: As long as the self-insured (including level funded) medical plan and HRA have the same plan year, the employer will pay the PCORI fee only for the self-insured medical plan (not the HRA). This would apply to those employees who are enrolled in the self-insured medical plan and also enrolled in a specialty HRA (such as those designed to cover infertility, abortion-related travel assistance, gender affirmation, mental health and other specific medical expenses).

Action Item: The employer must file the Form 720 and pay the fee for a self-insured or level funded medical plan or HRA.

To Which Plans Does the PCORI Fee Apply?

The PCORI fee generally applies only to major medical plans and health reimbursement arrangements (HRAs). (See below for an exception that applies to many HRAs.)

The PCORI fee does not apply to dental and vision coverage that is an excepted benefit, whether through a stand-alone insurance policy or meeting the “not integral” test for self-insured coverage. Virtually all dental and vision plans are excepted benefits.

The PCORI fee also does not apply to health FSAs (which must be an excepted benefit to comply with the ACA) or HSAs, which are not group health plans.

For a quick reference guide, the IRS has published a table which summarizes the applicability of the fee to common types of health and welfare benefits.

How Does the PCORI Fee Apply to HRAs?

An HRA is a self-insured health plan. This includes HRAs designed to cover cost-sharing under the major medical plan and specialty HRAs such as those designed to cover infertility, abortion-related travel assistance, gender affirmation, mental health, and other specific medical expenses. HRAs need to be “integrated” with an employer sponsored major medical plan in order to avoid a number of ACA requirements. This could be the employer’s group health plan or the group major medical plan of a spouse, domestic partner, or parent.

• For more details: Newfront Fringe Benefits for Employers Guide

The PCORI rules provide an exception to the fee requirement for an HRA where it is offered along with a self-insured major medical plan (including level-funded plans) that has the same plan year as the HRA. This avoids the need to pay the PCORI fee for both the HRA and the self-insured major medical plan (i.e., each person covered by both plans is counted only once for purposes of determining the PCORI fee).

There is no exception from the PCORI fee for an HRA offered along with fully insured major medical coverage. While the insurance carrier is responsible for paying the PCORI fee for the fully insured medical plan, the employer is responsible for paying the PCORI fee on the HRA. The IRS is essentially double-dipping in this scenario by imposing the PCORI fee on the same lives covered by both the major medical and the HRA. In recognition of this, PCORI fee paid by the employer for the HRA is determined by counting only one life per employee participating in the plan (and not dependents).

Employers offering a specialty HRA alongside both a fully insured medical plan and a self-insured (including level funded) medical plan will need to calculate the cost and pay the PCORI fee for the HRA only for those employees who are not enrolled in the self-insured medical plan. For employees enrolled in the self-insured (including level funded) medical plan option and the HRA sharing the same plan year, the PCORI fee will be paid based only on the headcount in the self-insured medical plan.

Note that employers allowing employees who have waived coverage to participate in the HRA by integrating with another employer’s group health plan will need to include these waived employees (but not their dependents) in the head count when calculating the PCORI fee.

Action Item: The PCORI fee is required for an HRA unless it is paired with a self-insured major medical plan that has the same plan year as the HRA. Where the PCORI fee is required, the employer is responsible for filing the 2^nd Quarter Form 720 and paying the PCORI fee for an HRA solely for the covered employees (not dependents).

How is the PCORI Fee Calculated?

Plan Sponsors of self-insured or level funded health plans (other than an HRA) calculate the fee based on the average number of total lives covered by the plan (both employees and dependents). Plan sponsors of an HRA (including specialty HRAs) alongside a fully insured plan will calculate the fee based only on the number of employees enrolled in the HRA.

Plan Sponsors can use one of three alternative methods which are summarized by the IRS in its PCORI fee homepage and PCORI fee FAQs:

• Actual count method

• Snapshot method

• Form 5500 method

How Much Do I Need to Pay on the July 2024 Form 720?

The PCORI fee is due by the July 31 of the calendar year following the plan year end date is as follows:

• Plan Years Ending January 2023 – September 2023: $3.00 per covered life (including spouses/dependents)

• Plan Years Ending October 2023 – December 2023: $3.22 per covered life (including spouses/dependents)

For calendar plan years, the applicable rate for the 2023 plan year filed by July 31, 2024 is $3.22 per covered life.

Employers filing for a self-insured medical plan should keep in mind that the plan year is the ERISA plan year reflected in the plan document, SPD, and Form 5500 (if applicable). The PCORI fee also applies to short plan years, defined as any plan year less than 12 months.

Examples:

• Employer with a calendar plan year first changed to a self-insured medical plan (including level funded) effective January 1, 2023. Employer must file the first Form 720 to pay the PCORI fee in July of 2024 based on the $3.22 PCORI rate.

• Employer with a calendar plan year first changed to a self-insured medical plan (including level funded) effective January 1, 2024. Employer will file the first Form 720 to pay the PCORI fee in July of 2025.

• Employer with a July 1 plan year first changed to a self-insured medical plan (including level funded) effective July 1, 2023. Employer will file the first Form 720 to pay the PCORI fee of $3.22 per covered life in July of 2025.

• Employer with a self-insured medical plan has short plan year from July 1, 2023 through December 31, 2023 to transition to a calendar plan year as of 2024. Employer must file the Form 720 in July 2024 to pay the PCORI fee for both the full plan year ending June 2023 ($3.00 per covered life) and the short plan year ending December 2023 ($3.22 per covered life). The PCORI fee amount is prorated for the short plan year, as detailed in the IRS PCORI Fee FAQ.

How do we file the PCORI fee?

The PCORI fee is always filed on the second quarter IRS Form 720, regardless of the employer’s plan year. The second quarter Form 720 is due by July 31. Form 720 is used to pay the multiple forms of quarterly federal excise taxes. Employers may want to coordinate with their accounting/tax departments if the company files any other applicable excise taxes. Otherwise, much of the form is irrelevant to the PCORI filing.

Instructions for Completing the PCORI-Related Portions of IRS Form 720

Page 1:

• The employer will complete their name and address and employer identification number at the top of the form.

• Quarter ending will be June 30, and the year in which they are filing (2024).

• Final return will be checked if the employer is going out of business, or no longer has a self-insured medical plan or HRA.

• Address change will be checked if the employer has changed their address since the last filing.

Page 2:

• Skip to Part II, (if no other taxes are being paid on this form) line 133 – Applicable self-insured health plans and choose the plan year ending. Line (c) is for plan years ending before October 1 (non-calendar year plans) and line (d) is for plan years ending on or after October 1 (generally calendar year plans)

• The number of lives will be entered on either line (c) or (d) using one of the methods outlined above. An employer may enter the number of lives on both lines if they are filing for a full 12-month plan year and a short plan year.

• The number of lives in lines (c) or (d) is multiplied by the rate in column b and the result is entered in column (c) Fee

• The total of lines (c) and (d) in the Fee column is brought over to the tax column

• The same total is brough down to line 2 Total.

Page 3:

• Line 3: The same total from Line 2 is brought forward to this line

• Line 10: The amount from line 3 is brought down to line 10

• The form needs to be signed and dated and returned with payment.

Employers paying via check would complete the payment voucher 720-V at the end of the form with their EIN, amount paid, business name and address. The tax period is 2^nd Quarter. Consult the IRS Instructions for Form 720 for additional direction on completing the form (see page 9).

Another July 31 Deadline: Form 5500 Filing

One other deadline looming for calendar year health and welfare plans with 100 or more covered employees at the beginning of the plan year is the Form 5500 filing. The Form 5500 filing is due to the DOL by the end of the 7^th month after the end of the health plan year, normally July 31^st.

Plans are permitted to file a Form 5558 with the IRS for an automatic 2 ½-month extension of this deadline (to October 15, 2024 for calendar plan years).

• For more details: Newfront ERISA for Employers Guide

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).