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We all celebrated the end of the PCORI fee [1] only to have it sneak back in under the cover of the elimination of the Cadillac tax (and some other fees on health plans) in 2019. The PCORI fee filing and payment deadline recently passed, but if you missed it or made a mistake, what should you do?

Employers with certain self-insured healthcare plans must pay the PCORI fee (the insurance carriers pay the fees for fully insured plans), which is calculated on and submitted with IRS Form 720 for the second calendar quarter each year. Instructions and links to the form can be found here. The deadline for filing and paying the fee this year was July 31, (but because that was a Saturday this year, the actual due date was the following Monday, Aug. 2, 2021). Lockton published our annual reminder about the fee and the filing in June.

What do you do if your Form 720 was late? What do you do if you’ve filed your Form 720, but realize you made a mistake? What hope do you have of correctly calculating the amount due?

First, what employers can do about mistakes

If you discover you’ve made an error on your Form 720 – errors are easy to make, as the instructions for calculating and paying the fee are complicated – the IRS has a Form 720-X that can be used to correct a prior filing.

Your first decision upon discovering an error is whether to correct it or wait for the IRS to discover it and contact you. Correcting it, of course, at least demonstrates your good faith. If you fail to correct, it’s possible the IRS will discover the error and contact you, at which point you can choose to contest the IRS’s determination or pay the billed amount (which might come with a penalty). At that time, you can provide the IRS the explanation of reasonable cause that could reduce or eliminate the penalty. According to the instructions for Form 720:

Penalties and Interest
If you receive a notice about a penalty after you file this return, reply to the notice with an explanation and we will determine if you meet reasonable-cause criteria. Don’t include an explanation when you file your return.

Second, dealing with a failure to file

On the other hand, if you discover you’ve failed to timely file Form 720, the prudent practice would be to file as soon as you can, albeit late. Filing a late Form 720 – as opposed to not filing at all – might help your argument later that you did not willfully neglect to file and might reduce any ultimate late filling penalty (the penalties may be worse if the IRS concludes you willfully failed to file). The penalty for failure to file can be as high as 5% of the amount due per month (with a cap of 25% of the amount due).

The downside to voluntarily filing late is that there is no direction on the methodology, nor is it clear how the IRS handles the late filing. The Form 720-X does not appear available to remedy a failure to file; the instructions to Form 720-X explicitly note that it is used “to make adjustments to liability reported on Forms 720 you have filed for previous quarters.” There is no indication that it can be used to file late.

Correctly calculating the amount due: A near hopeless exercise?

Employers should, of course, do their best to determine the precise PCORI fee that is owed. After all, there are potential penalties for underpaying the amount owed. But calculation errors are common, and we think the better part of valor is to do your best but not agonize over the calculation. Make your best calculation, file the Form 720 and pay the amount timely. If the IRS disagrees with your calculation, it will contact you and you can pay or contest any discrepancy later.

Calculating the PCORI fee involves one of the Tax Code’s more Byzantine calculations.

First, the fee is due by July 31 of each year, no matter when the employer’s plan year ends. Second, the fee payable by any given July 31 is due for the plan year that ended in the prior calendar year.

Third, although the due date doesn’t depend on when in the prior calendar year the employer’s plan year ended, the amount of the fee does; if the plan year ending in 2020 ended prior to Oct. 1, the PCORI rate is $2.54, but if it ended after Sept. 30, the rate is $2.66.

Still with me? That rate is then applied to the average number of individuals – not merely participants, or covered employees – enrolled in the self-funded plan. The number of those individuals is determinable in one of three ways, with the easiest method unavailable to many self-funded plan sponsors simply because they request an extension of their plans’ Form 5500 due date. The three methods are:

  1. The “actual count method” – This method requires self-funded plan sponsors to look at the actual number of covered individuals on every day of the plan year, add those daily totals and divide the sum by the number of days in the year. It is the rare employer that has direct access to daily enrollee counts or is willing to track them daily!
  2. The “snapshot method” – This method permits self-funded plan sponsors to choose one or more dates in each quarter of the plan year, aggregate the counts of covered individuals on those dates, and divide by the total number of dates used. The sponsor must use the same number of dates in each quarter, and, with minor exceptions, those dates must fall on the same day of the relevant months. Self-funded plan sponsors using the snapshot method can use the actual number of covered individuals on each of those snapshot dates, or on each snapshot date use the sum of (i) the participants with self-only coverage plus (ii) the participants with “other than” self-only coverage multiplied by 2.35. There are additional rules to make sure the employers do not game the system.
  3. The “5500 method” – While this method is conceptually the simplest, it is not available to many self-funded plan sponsors. Under this method, the plan sponsor takes the sum of the participants (i.e., covered employees, as a general rule) on the first and last days of the plan year. In the unlikely event the plan offers only self-only coverage to employees, that sum would then be divided by two. But to use this option the Form 5500 for the year in question must be filed no later than July 31. So, if the 5500 for a calendar year plan, for example, is filed timely, then the plan sponsor may use the 5500 method when calculating the plan’s PCORI fee, but if the sponsor files the Form 5500 after July 31, even with an extension, the 5500 method is not available.

There are other wrinkles. In an ironic twist, employers that maintain a health reimbursement arrangement (HRA) must pay a separate fee for the HRA unless the employer also maintains another self-funded medical plan for which the fee is payable, and the plan and the HRA have the same plan year. Special rules apply to determining covered individuals under the HRA. Health flexible spending accounts (FSAs) might – but usually won’t – also have their own payment and filing obligations.

What are the stakes?

With all the nuance involved and precision required in calculating a self-funded plan’s PCORI fee, you might assume that we are talking about an effort with large stakes for employers. However, that is not the case. The amounts involved seem paltry compared to the efforts required of self-funded plan sponsors.

The PCORI fee per enrollee is extremely modest compared to the average cost of coverage per enrollee; by our back-of-the-envelope calculation, the fee typically amounts to about 3.5/100 of a percent of the total cost of coverage for a single individual for an average plan. The maximum penalty for a failure to file is 25% of that number, or only about .9/100 of a percent. [Warning: rant alert!] Why, then, are we spinning our wheels for such a relatively small number? Certainly, the Institute that spends the fee believes it to be worthwhile (and they seem to be funding some worthwhile research), but from the perspective of self-funded employers, the juice is not remotely worth the squeeze.


Employers should certainly take the time and effort to calculate their PCORI fees and file timely. However, given the stakes and risks, they need to be cognizant of the appropriate amount of effort and resources to allocate to that effort.

[1] The fee applies to specified health insurance policies and applicable self-insured health plans. This post is addressing the issue from the perspective of an employer-sponsored, self-insured health plan.