The PCOR fee is due Tuesday, July 31, 2018, for all plan years that ended in 2017. The fee is generally due on July 31 of the year following the plan year end date. Please keep in mind that the PCOR fee applies to plan years ending on or after Oct. 1, 2012, and before Oct. 1, 2019. So, the end of the PCOR fee era is near.
Insurers are generally responsible for the PCOR fee payment and filing for fully insured plans; whereas the employer is generally responsible for the PCOR fee payment and filing for self-insured plans. Special rules apply for determining who is responsible in the situation of an association plan, MEWA or VEBA. The IRS has a helpful chart to remind employers which types of plans are subject to the fee. The requirement to pay the fee will remain in place until the plan years ending before Oct. 1, 2019.
The general rule is that the PCOR fee is based on the average number of covered lives during the plan year. Importantly, this includes not only employees, but also dependents (spouses, children and others) as well as former employees still receiving coverage under the plan (former employees on disability who are still covered, retirees, COBRA participants, etc.). The IRS allows employers to use any one of four methods for calculating lives, as described below:
- Actual Count Method: Calculate the sum of the lives covered for each day of the plan year and divide that sum by the number of days in the plan year.
- Snapshot Method: Add the total number of lives covered on any date (or more dates, if an equal number of dates are used for each quarter) during the same corresponding month in each of the four quarters of the benefit year (provided that the date used for the second, third and fourth quarters must fall within the same week of the quarter as the corresponding date used for the first quarter). Divide that total by the number of dates on which a count was made.
- Snapshot Factor Method: The calculation is the same as the snapshot method, except that the number of lives covered on a date is calculated by adding the number of participants with self-only coverage on the date to the product of the number of participants with coverage other than self-only coverage on the date and a factor of 2.35. For this purpose, the same months must be used for each quarter (for example, January, April, July and October).
- Form 5500 Method: The plan may use the data reported on the most recent Form 5500. A plan may only use this method if it filed the Form 5500 by July 31. A plan filing an extension for the Form 5500 would have to use another calculation method. If a plan covers only employees, then the plan sponsor would add the number of participants at the beginning of the plan year and at the end of the plan year and divide by two. If the plan covers dependents, the plan sponsor would add the number of participants reported for the beginning of the plan year and the number of participants at the end of the plan year, and report this total.
Employers may switch methods from one year to the next, and should calculate the average number of lives under all four methods and choose the one that is most favorable. For example, a plan that has many covered dependents (employees generally cover three or more dependents) may find that the snapshot factor method is advantageous, since it allows employers to disregard actual dependent count and instead assume 2.35 lives per covered employee. Similarly, if the employer hires more individuals at the end of quarters, the snapshot method may allow an employer to use a date early in each quarter to make a count, which may be advantageous.
The PCOR fee is filed and paid via IRS Form 720, Quarterly Federal Excise Tax Return. The PCOR fee is reported in Part II of that form, which also includes the amount of the fee (based on when in 2017 the plan year ended). Employers should work with their advisors and tax advisers in ensuring proper filing and payment of the fee.
The PCOR fee is treated as a tax. As such, it is generally assessed, collected and enforced in the same manner by the IRS as other taxes. We know of no amnesty or leniency for noncompliance with the PCOR fee filing.
Specifically, the fee is found in the excise tax portion of the IRC, and since the fee is reported on IRS Form 720, there are general penalties that apply for failure to file a return or pay a tax. Those are found in IRC Section 6651 and the penalties vary based on the amount failed to be reported or paid.
The general penalty would be up to 25 percent for a failure that is beyond five months. Like any other tax payment failures, there is also the risk of interest on top of the required amount. There are additional penalties if the failure was due to willful neglect, which means that the employer knew about the requirement but did nothing about it. So, there is definitely a risk involved with not filing and paying the PCOR.
There is no specific guidance on how to correct a failure. Ultimately the employer will want to consult their tax advisor as soon as the problem has been identified. However, as with other tax form and payment failures, it seems prudent and appropriate to come into compliance as soon as possible. Most likely, the employer could start by filing a Form 720 for past years as soon as possible. Generally speaking, the employer needs to file a separate Form 720 for each year, but could file multiple at the same time. Ideally, the employer should consult their tax adviser for advice on precisely how to proceed.
Here are some helpful IRS links:
IRS PCOR Fee Landing Page »
IRS PCOR Fee FAQs »
IRS Form 720 »
IRS Form 720 Instructions »