Who is responsible to file IRS Form 720 and pay the tax?
- Employers that sponsor self-funded group health plans.
- Insurers for fully-insured group health plans.
They will need to file and pay by July 31 their first round of federal comparative effectiveness research fees imposed under the Affordable Care Act. ACA established the annual fee, which is known as the "PCORI fee", in order to fund comparative clinical effectiveness research to be conducted by the newly-established, non-profit Patient-Centered Outcomes Research Institute.
The amount of the fee is $1 for each individual covered under the group health plan, for the first plan year ending on or after October 1, 2012 (i.e., 2012, for a calendar-year plan), and must be reported on IRS Form 720 and paid by no later than July 31 of the calendar year following the end of the relevant plan year (i.e., by July 31, 2013, for a calendar-year plan). The amount of the fee will increase to $2 per covered individual for the following plan year, and will be increased further for inflation in subsequent years.
The fee is scheduled to expire with the last plan year ending before October 1, 2019, meaning the last fee for a calendar-year plan will need to be filed and paid (for the 2018 plan year) by July 31, 2019. The IRS Office of Chief Counsel recently confirmed that PCORI fees paid by an employer or insurer are tax-deductible, as ordinary and necessary business expenses, under section 162 of the Internal Revenue Code.
We understand that there has been some confusion among employers regarding the application of the PCORI fee to health flexible spending arrangements and health reimbursement arrangements.
As an initial matter, most employer-sponsored health FSAs (but not necessarily HRAs) qualify as "HIPAA-excepted," and are therefore exempt from the PCORI fee. But in some instances -- generally, where the employer makes additional, substantial "non-elective" or "matching" contributions to its employees' health FSAs (or does not offer its employees a primary, major medical plan option in addition to the health FSA) -- the HIPAA-excepted exemption does not apply, meaning the fee will be imposed on the health FSA (perhaps subject to additional, special rules set forth below).
Where an employer offers a fully-insured primary group health plan along with an "integrated" HRA (or non-HIPAA-excepted health FSA), two separate PCORI fees will be imposed: the employer/plan sponsor will owe one fee for the HRA or health FSA, and the health insurer will owe a separate fee for the fully-insured primary plan. By contrast, where an employer offers a self-insured group health plan along with an integrated HRA (or non-HIPAA-excepted health FSA), a single fee will generally be imposed on the employer, for each employee covered under both the primary plan and the HRA (or health FSA), provided that the primary plan and HRA (or health FSA) have the same plan year.
The IRS recently updated the Form 720 (and related instructions) -- which some employers already file, on a quarterly basis, to report certain federal excise taxes -- to reflect the PCORI fee. Third party service providers, such as third party administrators, will not be allowed to file the Form 720 on behalf of a responsible entity. Therefore, employers sponsoring calendar year, self-funded group health plans (and insurers of calendar-year, fully-insured plans) must be prepared to complete and file the Form 720, and pay their first round of PCORI fees, by July 31.
