By now, employers who sponsor self-insured medical plans are familiar with the fees they must pay to fund Patient-Centered Outcomes Research (“PCORI”) and the Transitional Reinsurance Program. This post describes a detail that can have a significant effect on the amount that each sponsor must pay.
Both fees are calculated as a dollar amount per covered life. The implementing regulations describe three ways to determine the number of covered lives:
- Actual count (averaging), where you count the number of covered lives on each day of a period (a year for the PCORI fee and 9 months for the Reinsurance fee), and then divide by the number of days;
- Snapshot, where you count the number of covered lives on one or more days per calendar quarter and then divide by the number of days; and
- Form 5500, where the number of covered lives is based on the number of participants reported on the plan’s Form 5500.
There are minor differences in the calculations for the PCORI fee and the Reinsurance fee. Those differences and other details are not discussed in this post.
Whereas the actual count and snapshot methods require counting every person in the plan–including employees, spouses, and dependents–the Form 5500 method offers a shortcut that can produce significant savings for large employers. Instead of actually counting covered lives, the plan sponsor simply deems the number of covered lives to be the number of participants at the beginning of the year plus the number of participants at the end of the year.
The reason for this shortcut is that a Form 5500 reports only the number of participants, and not spouses or dependents. The shortcut assumes an average of one spouse or dependent per participant. For plans that have an average of more than one spouse or dependent per participant, this shortcut will result in savings.
For example, suppose a plan has 5,000 employee-participants on the first day of the plan year and the last day of the plan year, and suppose the total number of covered lives using the actual count method is 12,500 (i.e., on average, each participant covers the participant, a spouse, and ½ a dependent). Suppose the Reinsurance fee is $63 per participant.
- Under the actual count method, the total Reinsurance fee would be $787,500 ($63 times 12,500 covered lives).
- Under the Form 5500 method, the assumed number of covered lives would be only 10,000 (5,000 on the first day of the plan year plus 5,000 on the last day of the plan year), and the total PCORI fee would be $630,000 ($63 times 10,000).
In this example, using the Form 5500 method saves $157,500.
The Form 5500 method will not be the best approach for everyone. If your plan has a lot of participants with self-only coverage, the actual number of covered lives might be less than the number produced by the Form 5500 shortcut. In addition:
- For purposes of the Reinsurance fee, the Form 5500 method is not available for any plan that has both insured and self-insured options; and
- If a plan sponsor wishes to use the Form 5500 method for the PCORI fee, the sponsor must file its Form 5500 by July 31st. This is before the October 15th deadline that would otherwise apply (taking into account extensions).
The counting rules generally allow plan sponsors to choose among any of the available counting options on a fee-by-fee, plan-by-plan, and year-by-year basis. A sponsor can mix-and-match methods to get the most favorable dollar amount. (A required aggregation rule applies if a participant is covered by more than one plan. That rule is not discussed here.) As the example above shows, careful planning is worthwhile. The method chosen can have a significant effect on the total cost.