As employee benefit offerings continue to change, the individual coverage health reimbursement arrangement (ICHRA) stands out as a versatile choice for employers. However, with this flexibility comes the responsibility of handling compliance that differs from a fully-insured group plan.
Two critical components that employers must be aware of are Form 720 and the Patient-Centered Outcomes Research Institute (PCORI) fee. Form 720 serves as the reporting tool for a variety of federal excise taxes, including the PCORI fee. This fee funds research on the effectiveness of medical treatments.
In this article, we’ll explain how the PCORI fee works and how you can stay compliant with Internal Revenue Service (IRS) requirements.
In this blog post, you’ll learn:
- How PCORI aims to improve health outcomes.
- Who needs to pay PCORI fees.
- How employers can avoid costly penalties.
What are employers offering for ICHRA allowances? Find out in our 2024 ICHRA Report.
What is IRS Form 720?
Employers use Form 720, also known as the Quarterly Federal Excise Tax Return1, to report certain excise taxes to the IRS.
It includes a range of tax categories and fees, including:
- Environmental taxes
- Communications and air transportation taxes
- Fuel taxes
- Retail taxes
- Ship passenger taxes
- Foreign insurance taxes
- Manufacturers taxes
- Other excise taxes
- PCORI fees
The deadline for submitting Form 720 for PCORI purposes is July 31 of the year after the end of the policy or plan year. For example, suppose you have a calendar year individual coverage HRA (ICHRA) that ended on December 31, 2024. In that case, you’ll pay a PCORI fee for that 2024 plan year in July 2025. Payment is also due at this time.
| Plan year | PCORI fee |
| Plan years ending after October 1, 2024, and before October 1, 2025. | $3.47 |
| Plan years ending after October 1, 2023, and before October 1, 2024. | $3.22 |
According to the IRS, failing to report or pay the PCORI fee can result in penalties2 similar to those for not filing a tax return. Under Internal Revenue Code §6651, the penalty amounts to 5% of the excise tax owed for each month, or part of a month, the return is overdue, topping out at 25% of the outstanding tax.
What is PCORI?
ACA healthcare reform initiatives created the Patient-Centered Outcomes Research Institute3 (PCORI) to support clinical effectiveness research. It’s partially funded by PCORI fees paid by specific insurance carriers and plan sponsors of self-insured health plans.
PCORI’s goal is to help patients, healthcare providers, and policymakers make well-informed health choices using evidence-based medicine and clinical research findings.
Connection between Form 720, PCORI fees, and ICHRA
Health insurance companies normally cover PCORI fees with a fully-insured group plan. However, employers offering self-insured health plans, including ICHRAs, must pay it themselves using Form 720.
PCORI fees also apply to employers who offer:
- Qualified small employer HRAs (QSEHRAs)
- Specific fully insured plans
- Self-funded plans, including accident and major medical coverage
- Health flexible spending accounts (FSAs) if employer contributions exceed the greater of either the employee’s contribution or $500
Which health plans are exempt from PCORI fees?
Some employee benefits, such as health savings accounts (HSAs), aren’t subject to the fees.
Health plans exempt from PCORI fees include:
- Government programs, including Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP)
- Wellness programs
- Health insurance policies that only provide excepted benefits, such as vision or dental coverage
- Health insurance policies that solely cover international employees
- Archer medical savings accounts (MSAs)
- Stop-loss or hospital indemnity
- Accident-only coverage
- Workers’ compensation
How to calculate PCORI fees
The IRS provides detailed Form 720 instructions on how to calculate PCORI fees.
Here are the three ways to count the number of covered lives for plan years:
- The actual count method: Add the total of lives covered for each day of the plan year. Then, divide that total by the total number of days in the plan year.
- The snapshot method: Determine the total number of covered lives on a specific date (or multiple dates if an equal number of dates is used each quarter) during the first, second, or third month of each quarter. Then, divide that total by the number of dates used for the count.
- Form 5500 Method: Use the participant count from Form 5500, Annual Return/Report of Employee Benefit Plan, or Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan. Then, add up the total number of covered lives at the start and end of the plan year. After that, divide this amount by two.
Filing Form 720
When filing Form 7204, follow these six steps.
Step 1
Enter your company information at the top of Page 1.
Step 2
On Page 2, Part II:
- Enter your 2025 average employee count on line 133c (if your plan ended before October 1, 2024)
- OR line 133d (if your plan ended between October 1, 2024, and October 1, 2025).
Calculate the fee by multiplying the average lives covered by the applicable rate and enter the amount due.
Step 3
Enter the total tax on Page 3, Part III, lines 3 and 10.
Step 4
Sign and date Form 720 at the bottom of Page 3.
Step 5
Fill out Form 720-V for the 2nd Quarter tax period.
Step 6
Send the completed form, payment voucher, and check to the IRS at:
Department of the Treasury
Internal Revenue Service
Ogden, UT 84201-0009
Ease compliance concerns with Remodel Health
When you use Remodel Health’s ICHRA+ platform, we handle compliance so you can focus on what matters most at your organization. We provide pre-filled Form 720s with calculated PCORI amounts so that you can easily submit your payment to the IRS.
Along with providing necessary data for compliance filings, we handle:
- Health plan design
- Legal plan documents
- AutoPay for employee individual health insurance premiums
- Required ICHRA plan notices
- White-glove customer service for you and your team
Plus, your employees can shop for individual health plans directly through Remodel Health instead of trying to figure out the individual marketplace on their own.
Conclusion
Knowing your PCORI fee obligations is crucial to maintaining compliance and optimizing your benefits strategy. Ensuring that you accurately assess and report these fees can protect your organization from potential penalties while demonstrating a commitment to providing comprehensive health benefits to your workforce.
This article is for informational purposes only. Remodel Health doesn’t provide tax advice. Seek professional guidance from a tax adviser or legal counsel to ensure proper compliance.
- https://www.irs.gov/affordable-care-act/patient-centered-outcomes-research-trust-fund-fee-questions-and-answers
- https://www.irs.gov/pub/irs-pdf/i720.pdf
- https://www.pcori.org/about/about-pcori
- https://www.irs.gov/pub/irs-pdf/f720.pdf
Learn how to offer ICHRA alongside other employee benefit programs.