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The Affordable Care Act added a patient-centered outcomes research (PCOR) fee on health plans to support clinical effectiveness research. The PCOR fee applies to plan years ending on or after Oct. 1, 2012, and before Oct. 1, 2019. The PCOR fee is due by July 31 of the calendar year following the close of the plan year. For plan years ending in 2014, the fee is due by July 31, 2015.


PCOR fees are required to be reported annually on Form 720, Quarterly Federal Excise Tax Return, for the second quarter of the calendar year. The due date of the return is July 31. Plan sponsors and insurers subject to PCOR fees but not other types of excise taxes should file Form 720 only for the second quarter, and no filings are needed for the other quarters. The PCOR fee can be paid electronically or mailed to the IRS with the Form 720 using a Form 720-V payment voucher for the second quarter. According to the IRS, the fee is tax-deductible as a business expense.


The PCOR fee is assessed based on the number of employees, spouses and dependents that are covered by the plan. The fee is $1 per covered life for plan years ending before Oct. 1, 2013, and $2 per covered life thereafter, subject to adjustment by the government. For plan years ending between Oct. 1, 2014, and Sept. 30, 2015, the fee is $2.08. The Form 720 instructions are expected to be updated soon to reflect this increased fee.

This chart summarizes the fee schedule based on the plan year end and shows the Form 720 due date. It also contains the quarter ending date that should be reported on the first page of the Form 720 (month and year only per IRS instructions). The plan year end date is not reported on the Form 720.

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Who pays the fee

For insured plans, the insurance company is responsible for filing Form 720 and paying the PCOR fee. Therefore, employers with only fully- insured health plans have no filing requirement.


If an employer sponsors a self-insured health plan, the employer must file Form 720 and pay the PCOR fee. For self-insured plans with multiple employers, the named plan sponsor is generally required to file Form 720. A self-insured health plan is any plan providing accident or health coverage if any portion of such coverage is provided other than through an insurance policy.


Since the fee is a tax assessed against the plan sponsor and not the plan, most funded plans subject to ERISA must not pay the fee using plan assets since doing so would be considered a prohibited transaction by the U.S. Department of Labor (DOL). The DOL has provided some limited exceptions to this rule for plans with multiple employers if the plan sponsor exists solely for the purpose of sponsoring and administering the plan and has no source of funding independent of plan assets.


Plans subject to the fee

Plans sponsored by all types of employers, including tax-exempt organizations and governmental entities, are subject to the PCOR fee. Most health plans, including major medical plans, prescription drug plans and retiree-only plans, are subject to the PCOR fee, regardless of the number of plan participants. The special rules that apply to Health Reimbursement Accounts (HRAs) and Health Flexible Spending Accounts (FSAs) are discussed below.


Plans exempt from the fee include:

  • A dental or vision plan with a separate insurance policy or employee election
  • An employee assistance program (EAP), disease management program, or wellness program if the program does not provide significant medical care or treatment
  • Plans that primarily cover individuals working outside the United States
  • Health Savings Accounts (HSAs)
  • Certain HRAs and FSAs


If a plan sponsor maintains more than one self-insured plan, the plans can be treated as a single plan if they have the same plan year. For example, if an employer has a self-insured medical plan and a separate self-insured prescription drug plan with the same plan year, each employee, spouse and dependent covered under both plans is only counted once for purposes of the PCOR fee.


The IRS has created a helpful chart showing how the PCOR fee applies to common types of health plans.


Special rules for Health Reimbursement and Health Flexible Spending Accounts

Health Reimbursement Accounts (HRAs) - Nearly all HRAs are subject to the PCOR fee because they do not meet the conditions for exemption. An HRA will be exempt from the PCOR fee if it provides benefits only for dental or vision expenses, or it meets the following three conditions:


  1. Other group health plan coverage is offered to HRA participants
  2. The maximum benefit payable under the HRA to any participant for a year does not exceed $500
  3. The maximum reimbursement available under the HRA is less than 500 percent of the value of the HRA coverage


Health Flexible Spending Accounts (FSAs) - A health FSA is exempt from the PCOR fee if it satisfies an availability condition and a maximum benefit condition.


  • Availability condition . The availability condition will be met if other group health plan coverage, such as major medical, is offered to FSA participants. It is unclear whether the eligibility requirements and the entry dates for the health FSA and the other group health plan must be exactly the same in order to meet the availability condition. Thus, professional assistance should be obtained if they are different.


  • Maximum benefit condition . The maximum benefit condition is met if the maximum benefit payable under the health FSA to any participant for a year does not exceed the greater of (1) two times the participant’s annual salary reduction election, or (2) the amount of the participant’s salary reduction election plus $500.


Additional special rules for HRAs and FSAs . Once an employer determines that its HRA or FSA is subject to the PCOR fee, the employer should consider the following special rules:


  1. The PCOR fee for an HRA or FSA is based only on the average number of employees. Spouses and dependents are ignored.
  2. A “stand-alone” HRA or FSA that is not paired with a major medical plan will be subject to the PCOR fee based on the average number of employees participating in the HRA or FSA during the HRA or FSA plan year.
  3. If a major medical plan paired with the HRA or FSA is insured, the insurance company pays a PCOR fee on the major medical plan but the employer pays the PCOR fee on the HRA or FSA. The insurance company will pay the fee based on the average number of employees, spouses and dependents in the insured major medical plan. However, the fee for the HRA or FSA is only based on the number of employees (spouses and dependents are ignored). The government receives a PCOR fee on the employees twice - once under the major medical plan, and once under the HRA or FSA.
  4. If a major medical plan paired with the HRA or FSA is self-insured, the employer is responsible for paying the PCOR fee on each plan. If the major medical plan and the HRA or FSA have different plan years, the fee is calculated on each plan separately. The PCOR fee for the major medical plan is based on the average number of employees, spouses and dependents in the major medical plan. However, the fee for the HRA or FSA is only based on the average number of employees (spouses and dependents are ignored).
  5. If a major medical plan paired with the HRA or FSA is self-insured and has the same plan year as the HRA or FSA, then the major medical plan and the HRA or FSA are treated as a single plan. In this case, the fee is based on the number of employees, spouses and dependents under the major medical plan, plus the number of employees (but not spouses or dependents) who are in the HRA or FSA but are not in the major medical plan (if any).


Determining the covered lives

The IRS provides different rules for determining the average number of covered lives (i.e., employees, spouses and dependents) under insured plans versus self-insured plans. The same method must be used consistently for the duration of any policy or plan year. However, the insurer or sponsor is not required to use the same method from one year to the next.



A plan sponsor of a self-insured plan may use any of the following three methods to determine the number of covered lives for a plan year:


1.       Actual count method. Count the covered lives on each day of the plan year and divide by the number of days in the plan year.



Example: An employer has 900 covered lives on Jan. 1, 901 on Jan. 2, 890 on Jan. 3, etc., and the sum of the lives covered under the plan on each day of the plan year is 328,500. The average number of covered lives is 900 (328,500 ÷ 365 days).


2.       Snapshot method. Count the covered lives on a single day in each quarter (or more than one day) and divide the total by the number of dates on which a count was made. The date or dates must be consistent for each quarter. For example, if the last day of the first quarter is chosen, then the last day of the second, third and fourth quarters should be used as well.



Example: An employer has 900 covered lives on Jan. 15, 910 on April 15, 890 on July 15, and 880 on Oct. 15. The average number of covered lives is 895 [(900 + 910+ 890+ 880) ÷ 4 days].



As an alternative to counting actual lives, an employer can count the number of employees with self-only coverage on the designated dates, plus the number of employees with other than self-only coverage multiplied by 2.35. 



3.       Form 5500 method. If a Form 5500 for a plan is filed before the due date of the Form 720 for that year, the plan sponsor can determine the number of covered lives based on the Form 5500. If the plan offers just self-only coverage, the plan sponsor adds the participant counts at the beginning and end of the year (lines 5 and 6d on Form 5500) and divides by 2. If the plan also offers family or dependent coverage, the plan sponsor adds the participant counts at the beginning and end of the year (lines 5 and 6d on Form 5500) without dividing by 2.



Example: An employer offers single and family coverage with a plan year ending on Dec. 31. The 2013 Form 5500 is filed on June 5, 2014, and reports 132 participants on line 5 and 148 participants on line 6d. The number of covered lives is 280 (132 + 148).


Action steps

To evaluate liability for PCOR fees, plan sponsors should identify all of their plans that provide medical benefits and determine if each plan is insured or self-insured. If any plan is self-insured, the plan sponsor should take the following actions:

  1. Determine the type of plan (major medical, HRA, FSA, etc.) and the plan year end
  2. Determine if any of the plans are exempt from the PCOR fee
  3. Determine if any plans can be aggregated for purposes of counting covered lives because they have the same plan year end
  4. Decide which method for counting covered lives will be used
  5. Count the number of covered lives under each plan (remember to apply the “employee only” counting rule for HRAs and FSAs)
  6. Access Form 720 and the related instructions on the IRS website
  7. Review the Form 720 instructions, including the PCOR fee discussion on pages 8 and 9
  8. Complete Form 720 to reflect the plan sponsor’s name, address and EIN and the quarter ending date (June 2015) in the heading and to report the average number of covered lives under all self-insured plans in Part II (line IRS No. 133(b), Applicable self-insured health plans)
  9. Calculate the fee based on the plan year end
  10. Complete a Form 720-V payment voucher for the second quarter if paying by check or money order
  11. File Form 720 (and Form 720-V if needed) and pay the fee by July 31, 2015
  12. Keep a copy of the Form 720 and supporting documentation for at least four years from the date of filing
  13. Review the IRS PCOR webpage for more information
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