On April 12, the IRS released proposed regulations regarding the collection of the fee for the Patient-Centered Outcomes Research Trust Fund (the “Fund”) under the Patient Protection and Affordable Care Act (“PPACA”). The Fund will be used to pay for the Patient-Centered Outcomes Research Institute which has the goal of helping health care providers and consumers make informed health decision by synthesizing research comparing the outcome effectiveness of various treatments.

Who Pays for This

Here’s the kicker: insurers and self-insured health plans get to pay for this, along with multiemployer plans, state and local governmental plans, stand-alone VEBAs and other health plans. We focus primarily on private employer plans, but many of the rules apply similarly to other types of plans.

How Much

Initially, the fee is $1 per covered life. It will first apply for plan or policy years ending between October 1, 2012 and October 1, 2013, which means it is coming soon. After October 1, 2013, it increases to $2 per covered life until October 1, 2014. After that, it is indexed based on projected increases in per capita medical expenditures. It is set to expire on October 1, 2019. The tax return to pay the fee is generally due by the end of July following the end of the applicable plan or policy year.

Overview and “Gotchas”

Generally, the proposed regulations provide that the fees apply to policies or plans that provide medical coverage. Insurers pay the fee on behalf of insured plans, although plan sponsors of insured plans will likely see this cost passed along to them in the form of higher premiums. The plan sponsor generally pays the fee on behalf of self-funded plans. However, within that deceptively simple broad framework, there are several nuances and some potential “gotchas” that may surprise those familiar with other PPACA requirements, such as:

  • Retiree-only plans are subject to the fee (even though they are generally exempt from the rest of health reform).
  • Insurance policies that are designed and issued primarily to cover employees outside the US (e.g., expat policies) are excluded.
  • “Excepted benefits” are exempt (for example, separate vision and dental policies, or vision and dental coverage that requires a separate election and separate premium), including health FSAs so long as the sponsor has other group health coverage and the maximum reimbursement for any year does not exceed the greater of (1) two times the participant’s salary reduction or (2) the amount of the participant’s salary reduction plus $500.
  • Health FSAs that are not excepted benefits because they do not meet the requirements described above, and all HRAs, are subject to the fee with the following modifications:
    • If the plan sponsor offers other self-insured coverage, it can treat the HRA or health FSA as a single, integrated self-insured plan with its major medical self-insured coverage for purposes of the fee.
    • However, if an employer has an insured medical plan with an HRA or non-exempt health FSA, then the employer, as plan sponsor, has to pay the fee for employees covered by the health FSA or HRA, but there will be only one fee for any employee who participates in both.
    • The regulations do allow plan sponsors to assume only one covered life per participant in these plans. (The fee is generally based on covered lives, which would include participants and dependents, but the IRS was sympathetic to the idea that plan sponsors may not know how many dependents are having expenses reimbursed from these plans.)
  • A self-insured plan sponsored by multiple members of a controlled group is not considered a single-employer plan for this purpose (yes, you read that correctly). However, this should have little practical impact. For this purpose the “plan sponsor” for a self-insured plan is generally the entity designated as such in the plan documents (usually this is either the parent company or the primary operating first-tier subsidiary). If the plan document does not designate a plan sponsor (which would be odd, but not out of the question), then each member of the controlled group has to file separately. Employers can avoid this by making sure their documents specify a plan sponsor by the deadline for filing the tax return.

Counting Lives

Insurers have some special simplifying assumptions they may use to count lives, which we won’t summarize here. Self-funded plans have some similar, and some different, potential simplifying assumptions as well. The four methods a self-funded plan can use to determine covered lives are:

  • an average, daily covered lives calculation,
  • the average number of covered lives for a single day (or multiple days) in each calendar quarter,
  • the average of (1) number of covered employees with self-only coverage, plus (2) the number of employees with non-self-only coverage multiplied by 2.35 each measured on a single day (or multiple days) in each calendar quarter, or
  • the average of the number of participants at the beginning and the end of the plan year (as reported on the Form 5500 for that year) (if a plan only offers self-only coverage, that number can be divided by 2).

The regulations also provide special rules for determining this fee for the first and last years of the program.


The above rules offer some good simplification of the life counting requirement. However, some of the nuances are sufficiently subtle to virtually guarantee non-compliance by at least some plan sponsors. To some extent, the IRS was understandably constrained by the statutory framework in issuing these regulations, but plan sponsors should consult with experienced tax advisors to make sure they are reporting these fees correctly. (That is, assuming health reform survives the Supreme Court challenge, as discussed in some of our prior posts.)

Related Links

Pre-Publication Version of the Proposed Regulations

Patient-Centered Outcomes Research Institute Website

GAO Webiste on PCORI Board Appointments

IRS Notice 2011-35

Updated (4/17/12 9 AM) to add a link to the Federal Register version of the regulations.