As a small business owner, you may have spent months setting up the perfect Health Reimbursement Arrangement (HRA). Perhaps you have hired your spouse, established a Section 105 plan, and are finally deducting 100% of your family's medical premiums and out-of-pocket costs. It is a brilliant tax-planning move.
But then, a quiet deadline in July approaches that has nothing to do with your income tax return. If you miss it, you aren't just skipping a tiny payment—you are leaving a "paperwork trail" that could allow an IRS auditor to question the validity of your entire health plan.
This is the world of the PCORI fee. It is a small, often ignored charge that applies to almost every small business health plan. While the fee itself might be less than the cost of a gourmet cup of coffee, paying it is one of the most important "compliance handshakes" you can make with the IRS.
The Patient-Centered Outcomes Research Institute (PCORI) fee was created as part of the Affordable Care Act (ACA). Its purpose is to fund research that compares the effectiveness of different medical treatments. While the fee was originally scheduled to sunset, Congress has extended it through October 1, 2029.
Most assume this fee is something only large insurance companies like Blue Cross or Aetna have to worry about. That is true for standard health insurance policies. However, if you "self-insure" your employees through an HRA—whether it is a Section 105 HRA, a Qualified Small Employer HRA (QSEHRA), or an Individual Coverage HRA (ICHRA)—the law views you as the plan sponsor. This makes you directly responsible for calculating the fee and filing the paperwork with the IRS.
Before you reach for your checkbook, determine if your plan is an "excepted benefit." The IRS generally exempts plans that only cover limited-scope benefits, such as a standalone dental or vision plan that isn't integrated with a broader medical plan. However, for most small business owners, an HRA is specifically designed to cover major medical costs and insurance premiums, which means the PCORI fee is almost certainly mandatory.
The PCORI fee is reported once a year on IRS Form 720, Quarterly Federal Excise Tax Return. Even though the form is technically a "quarterly" return, HRA sponsors who only owe the PCORI fee file it just once annually.
The deadline is always July 31 of the calendar year immediately following the last day of your plan year. For example, if your health plan ran from January 1 to December 31, 2025, your Form 720 and the accompanying payment must be submitted to the IRS by July 31, 2026.
The fee is based on the "average number of lives covered" by your plan during the previous year. For the 2026 filing season (covering the 2025 plan year), the fee is $3.84 per covered life.
It can be tempting to ignore a $4 fee, assuming the IRS has bigger priorities. However, there are three major reasons why you should never skip this payment:
Because the fee is so small, many business owners choose to handle the filing themselves rather than paying a CPA hundreds of dollars in prep fees. The process involves:
While you can pay electronically through the EFTPS system, the IRS still accepts traditional paper checks for this specific excise tax.
- IRC § 4375:
Internal Revenue Code section imposing a fee on each specified health insurance policy to fund the Patient-Centered Outcomes Research Trust Fund.- IRC § 4376:
Internal Revenue Code section extending the PCORI fee to self-insured health plans, including most employer HRAs.- Treas. Reg. § 46.4376-1(c)(2):
Treasury Regulation outlining the specific methods for calculating the "average number of lives covered" for self-insured plans.- IRC § 162:
Internal Revenue Code section allowing the PCORI fee to be deducted as an ordinary and necessary business expense.
The "Excepted Benefit" Trap: Many owners assume that because their HRA is "small," it is automatically exempt. This is a costly misconception. The only HRAs exempt from the PCORI fee are those that strictly limit reimbursements to dental and vision care. If your plan allows for the reimbursement of a single bottle of prescription aspirin or a standard doctor's co-pay, you operate a "self-insured health plan" in the eyes of the law and must file Form 720. Skipping the fee because you think you're "too small" is a high-risk move for a very low-cost benefit.
This content is for educational and informational purposes only and does not constitute formal tax, legal, or professional advice. Federal tax laws, including those recently overhauled by the One Big Beautiful Bill Act (OBBBA), are highly technical and subject to frequent change, meaning strategies that work for one business may not be appropriate for another. Readers should always consult with a qualified tax professional to verify how these rules apply to their specific financial situation and to ensure all positions are backed by current primary legal authority, rather than relying on generalized summaries. Furthermore, the IRS strictly requires "contemporaneous" (created at the time) documentation to support any claim; failing to maintain proper records as required by the Internal Revenue Code can result in the complete disallowance of deductions and the imposition of accuracy-related penalties.