If you own your business and have at least one employee, a great way to obtain the maximum tax deductions possible for health care insurance and other medical expenses is to establish a health reimbursement arrangement for your employees, which can include you and/or your spouse. There are three types:

1. Section 105 Health Reimbursement Arrangements (105-HRAs), which are available where your spouse is your only employee.

2. Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs).

3. Individual Coverage Health Reimbursement Arrangements (ICHRAs).

All three types of HRAs come with a pesky annual filing requirement: each year, you (the plan sponsor) must file IRS Form 720 and pay a Patient-Centered Outcomes Research Institute (PCORI) fee.

But there is a limited exception: you need not pay the PCORI fee if your HRA is an “excepted benefit” plan. This is the case if the HRA reimburses employees for only limited-scope dental and vision expenses or long-term care coverage and is not integrated with a group health plan. The odds of you having such a stand-alone plan are slim.

The PCORI fee is quite small—so small that it makes little sense to pay a tax professional to help you file the form. (Albeit you may not want the hassle or it could otherwise be worthwhile to have your tax professional do this for you.)

If you are in for doing it on your own, filing the form is relatively simple. You can easily do it yourself.

What Is the PCORI Fee For?

Sponsors of group health plans and self-insured plans are required to pay an annual fee to help support PCORI.

The PCORI is a non-profit institute created as part of the Affordable Care Act (ACA). It funds research on the comparative effectiveness of medical treatments.

The PCORI fee, adopted as part of the ACA legislation, was originally scheduled to expire after 2019. But on December 20, 2019, lawmakers extended the fee through October 1, 2029.

How Much Is the Fee?

Currently, the PCORI fee for a plan year ended December 31, 2025 (likely your plan year) is $3.84 times the “average number of lives covered” by your HRA.

To determine the lives covered, count each participating employee as a covered life. Don’t count dependents. If you operate your business as a sole proprietor and your spouse is your only employee and you cover your spouse with a family plan, your spouse counts as one life covered.

If you operate your business as a C corporation and you’re the only employee, or if your spouse is the only employee, there is only one life covered by your HRA. Your PCORI fee is $3.84 x 1 = $3.84.

If you have multiple employees, there are three ways to determine the average number of lives covered:

1. Actual count method. Add the total number of lives covered for each day of the previous plan year, and divide the total by the number of days in the plan year.

2. Snapshot method. Add the total number of lives covered on a date during the first, second, or third month of each quarter of the plan year, and divide the total by four; the dates in each quarter must be within three days of the dates for corresponding quarters—for example, January 15, April 16, July 14, October 15.

3. Form 5500 method. Take the number of participants reported on IRS Form 5500, Annual Return/Report of Employee Benefit Plan, at the beginning of the plan year, plus the number reported at the end of the plan year, and divide by two. Form 5500 need only be filed if your plan has 100 or more participants.

You can use a different method from one year to the next. If you have a small number of employees, the snapshot method is the easiest to use.

Example. ABC Inc. has an ICHRA for its employees. It uses the snapshot method to determine the lives covered. It had six covered employees on February 1, four employees on May 1, four employees on August 1, and two employees on November 1. Sixteen total employees divided by four = four total lives covered. ABC’s PCORI fee is 4 x $3.84 = $13.88.

How to Pay the PCORI Fee

You report the PCORI fee by filing IRS Form 720, Quarterly Federal Excise Tax Return.

You must file Form 720 by July 31 of the calendar year immediately following the last day of your HRA plan year.

Example. If your plan year ends December 31, 2025, then Form 720 must be filed by July 31, 2026.

Form 720 is used to pay various types of excise taxes and is generally filed quarterly. But if you use it to pay only the PCORI fee, you file it just once each year.

If the PCORI fee is the only Form 720 tax or fee that applies to you, and if your plan year ended December 31, 2025, fill out the form as follows:

  ■ List the average number of lives covered by your HRA on line 133(d). (The line numbers are not in sequence. You find line 133 at the beginning of Part II.)

  ■ Multiply the number of lives covered by $3.84, and list the total in line 133(d) in the “Fee” column and also in the “Tax” column.

  ■ List the fee amount in the total at the bottom of Part II.

  ■ List this same amount as the total tax in Part III, line 3, box 3.

  ■ Enter the tax due in line 10.

  ■ Sign at the bottom.

  ■ Complete the payment voucher (720-V) at the end of Form 720, and include it with your payment.

Be sure to fill in the circle in Section 3 of the payment voucher, indicating that the tax period for the fee is the second quarter. If you don’t do this, IRS computers will generate a late filing notice.

Advance deposits aren’t required for the PCORI fee. Thus, you are not required to pay it electronically using the IRS Electronic Federal Tax Payment System (EFTPS). You may pay it by check with your completed Form 720.

If you do pay the fee electronically through EFTPS or other electronic method, it should be applied to the second quarter. In EFTPS, select Q2 for the Quarter under Tax Period on the “Business Tax Payment” page.

Alert. As we publish this, you can’t file Form 720 because it is currently incorrect and you have wait for the correct form. Not to worry, this will happen sometime in June. See this Loom for details.

Tax-Deductible

Unlike most taxes and fees imposed by the ACA, the PCORI fee is a tax-deductible business expense.

Why Pay It?

The PCORI fee is tiny. Why pay it or even worry about it?

  ■ Paying the PCORI adds proof you have a medical plan.

  ■ Paying the PCORI keeps the IRS at bay over the fee should you come to the IRS’s attention. (The less you have to communicate with the IRS, the better.)

  ■ Paying the fee contributes to important medical research that can lead to improvements in health care delivery and outcomes.

Takeaways

Small-business owners and the self-employed who have established 105-HRAs, QSEHRAs, and ICHRAs to reimburse their employees for medical expenses need to pay an annual fee to help support the PCORI.

But for tax purposes, the real reason to pay it is to help prove that your health reimbursement plan is a valid plan.

  ■ The fee is due by July 31 of the calendar year following each plan year.

  ■ The fee is small—currently $3.84 per covered employee.

  ■ The fee is paid by filing Form 720 with the IRS.

  ■ The fee is tax-deductible.