Health reform fees that health insurers and self-funded plans must pay in order to fund the Patient-Centered Outcomes Research Institute are “ordinary and necessary business expenses,” and therefore qualify as deductible from federal taxes, a recent IRS memo states.
Insurers and health plans will pay the $1 (soon to become $2) per covered life fee for the next seven years, but having the amounts be non-taxable takes some of the sting out of it.
PCORI fees are imposed on sponsors of health plans for each plan year ending on or after Oct. 1, 2012, and before Oct. 1, 2019. Employer sponsors of health plans must count members in retiree-only plans and COBRA-eligible plans for purposes of paying into the PCORI trust fund.
Deduction Applies
Under tax Code Section 162(a), employers may deduct ordinary and necessary expenses incurred in carrying on the employer’s trade or business. “Ordinary and necessary” means that the expense is “normal, usual or customary” in the taxpayer’s trade or business, the IRS memo (AM 2013-002) said, but it need not mean that it is essential to the business in order to be deductible.
The health reform law had not previously specified whether the PCORI fee qualified for a tax exemption.
Some fees imposed by health reform on employers are nondeductible, including the employer play-or-pay penalties (for no coverage, or inadequate/unaffordable coverage), and the excise tax on high cost employer-sponsored health coverage, that takes effect in 2018.
Also, reform’s health-industry specific taxes on drug makers, medical device manufacturers and importers and on health insurers are nondeductible.
Fees must be reported and paid by July 31 of the calendar year immediately following the last day of the plan year. Therefore, PCORI fees are due for 2012 for the first time this summer.
The IRS Form 720, the quarterly form that businesses use to report and pay excise taxes, was just revised for collecting the PCORI fee.
For more information on health reform’s excise taxes, go to Chapter 7 of The Health Reform Law: What Employers Need to Know.