Internal Revenue Bulletin 2013-19 (PDF rendition): IRS Notices

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Bulletin No. 201
3-19
May 6, 2013
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
T.D. 9615, page 1026.
These final and temporary regulations eliminate one of the ex-
ceptions to the coordination rule governing the overlap of the
asset transfer and indirect stock transfer rules, and provide
certain technical changes to the rules governing the transfers
of stock or securities in a section 361 exchange.
REG–132702–10, page 1042.
This notice of proposed rulemaking cross-references tempo-
rary regulations that eliminate one of the exceptions to the
coordination rule governing the overlap of the asset transfer
and indirect stock transfer rules, and provide certain technical
changes to the rules governing the transfers of stock or secu-
rities in a section 361 exchange.
EMPLOYEE PLANS
REG–122706–12, page 1043.
This document proposes amendments to regulations, consis-
tent with the Affordable Care Act, concerning the 90-day waiting
period limitation for group health coverage as well as amend-
ments to existing requirements such as preexisting condition
limitations and other portability provisions added by HIPAA and
implementing regulations.
Notice 2013–28, page 1039.
This notice contains updates for the corporate bond weighted
average interest rate for plan years beginning in April 2013; the
24-month average segment rates; the funding transitional seg-
ment rates applicable for April 2013; and the minimum present
value transitional rates for March 2013. The rates in this notice
reflect certain changes implemented by the Moving Ahead for
Progress in the 21st Century Act, Pub. L. 112–141 (MAP–21).
Finding Lists begin on page ii.

The IRS Mission
Provide Americ
a’s taxpayers top-quality service by helping
them understa
nd and meet their tax responsibilities and en-
force the law wi
th integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly.
It is the poli
cy of the Service to publish in the Bulletin all sub-
stantive ru
lings necessary to promote a uniform application of
the tax laws
, including all rulings that supersede, revoke, mod-
ify, or amen
d any of those previously published in the Bulletin.
All publish
ed rulings apply retroactively unless otherwise indi-
cated. Pro
cedures relating solely to matters of internal man-
agement ar
e not published; however, statements of internal
practices
and procedures that affect the rights and duties of
taxpayers
are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The cont
ents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
May 6, 20132013–19 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 367.—Foreign
Corpora
tions
26 CFR 1.367(a)–1: Transfers to foreign corpora-
tions subject to section 367(a): In general
T.D. 9615
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Indirect Stock Transfers
and the Coordination Rule
Exceptions; Transfers of Stock
or Securities in Outbound
Asset Reorganizations
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains final
and temporary regulations. These regula-
tions eliminate one of two exceptions to
the coordination rule between asset trans-
fers and indirect stock transfers for certain
outbound asset reorganizations. The regu-
lations also modify the third exception to
the coordination rule for certain outbound
exchanges so that this exception is con-
sistent with the remaining asset reorgani-
zation exception. In addition, the regula-
tions modify, in various contexts, proce-
dures for obtaining reasonable cause re-
lief. Finally, the regulations implement
certain changes with respect to transfers of
stock or securities by a domestic corpora-
tion to a foreign corporation in a section
361 exchange. The regulations primar-
ily affect domestic corporations that trans-
fer property to foreign corporations in cer-
tain outbound nonrecognition exchanges.
The text of these temporary regulations
serves as the text of the proposed regula-
tions (REG–132702–10) published in this
issue of the Bulletin.
DATES:Effective Date:The final and
temporary regulations are effective on
March 19, 2013.
ApplicabilityDate:For
datesofapplicability,see
§1.367(a)–3T(g),§1.367(a)–6T(e)(4),
1.367(a)–7T(e)(2)(iv),
1.1248(f)–3T(a)(3),
and 1.6038B–1T(f)(3)(iii).
FOR FURTHER INFORMATION
CONTACT: Robert B. Williams, Jr., (202)
622–3860 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in the regulations have been re-
viewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)) under control number
1545–2183.
The collections of information are in
§§1.367(a)–3(d)(2), 1.367(a)–3T(e)(3)
and (e)(6), 1.367(a)–7T(e), 1.1248(f)–3T,
and 1.6038–1T(f). The collections of
information are mandatory. The likely
respondents are domestic corporations.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless it displays
a valid control number.
Books and records relating to a collec-
tion of information must be retained as
long as their contents might become ma-
terial in the administration of any internal
revenue law. Generally, tax returns and tax
return information are confidential, as re-
quired by 26 U.S.C. 6103.
Background
On August 20, 2008, the Department of
the Treasury (Treasury Department) and
the Internal Revenue Service (IRS) issued
proposed regulationsunder sections 367,
1248, and 6038B of the Internal Revenue
Code (Code) (2008 proposed regulations)
concerning transfers of property by a
domestic corporation to a foreign corpo-
ration in an exchange described in section
361(a) or (b) (section361 exchange), and
certain nonrecognition distributions of
stock of a foreign corporation by a do-
mestic corporation (REG–209006–89, 73
FR 49278; 2008–41 I.R.B. 867). A cor-
rection to the 2008 proposed regulations
was published in theFederal Register
on September 26, 2008; 73 FR 56535
(2008–41 I.R.B. 867). No public hear-
ing on the 2008 proposed regulations
was requested or held; however, com-
ments were received. All comments are
available atwww.regulations.govor upon
request. Based, in part, on comments
received, the Treasury Department and the
IRS adopt portions of the 2008 proposed
regulations, with modifications, as final
regulations elsewhere in this issue of the
Bulletin. A portion of the 2008 proposed
regulations is adopted, with modifications,
in this Treasury decision as temporary
regulations.
On February 11, 2009, the Treasury De-
partment and the IRS issued final regula-
tions under section 367 (2009 final regula-
tions) concerning gain recognition agree-
ments with respect to certain transfers of
stock or securities by United States per-
sons to foreign corporations (T.D. 9446, 74
FR 6952; 2009–9 I.R.B. 607). A correc-
tion to the 2009 final regulations was pub-
lished in theFederal Registeron March
27, 2009 (74 FR 13340; 2009–13 I.R.B.
731). The 2009 final regulations included
regulations addressing the transfer of stock
or securities by a domestic corporation to
a foreign corporation in a section 361 ex-
change. The portion of the 2009 final reg-
ulations concerning outbound transfers of
stock or securities in a section 361 ex-
change is withdrawn, revised, and issued
in this Treasury decision as temporary reg-
ulations.
Explanation of Provisions
A.Coordination Rule and Exceptions —
In General
Section 1.367(a)–3(d)(2)(vi)(A) (coor-
dination rule) provides that if in connec-
tion with an indirect stock transfer, as de-
fined in §1.367(a)–3(d)(1), a U.S. person
transfers assets to a foreign corporation
(direct asset transfer) in an exchange de-
scribed in section 351 or section 361, the
rules of section 367 and the regulations un-
der that section apply first to the direct as-
set transfer and then to the indirect stock
transfer. There are three exceptions to the
2013–19 I.R.B.1026May 6, 2013

coordination rule, as described in this pre-
amble.
Two exceptions to the coordination
rule provide that section 367(a) and (d)
do not apply to any assets transferred
by a domestic acquired corporation to a
foreign acquiring corporation in an as-
set reorganization that are re-transferred
to a domestic corporation that is con-
trolled by the foreign acquiring corpo-
ration (domestic controlled corporation).
These exceptions only apply, however,
if the domestic controlled corporation’s
basis in the re-transferred assets is not
greater than the domestic acquired cor-
poration’s basis in such assets (the basis
comparison rule), and the conditions de-
scribed in §1.367(a)–3(d)(2)(vi)(B)(1)(i)
(section 367(a)(5) exception) or
(d)(2)(vi)(B)(1)(ii) (indirect domestic
stock transfer exception) are satisfied.
See §1.367(a)–3(d)(2)(vi)(B)(1). The
section 367(a)(5) exception applies only
if the reorganization satisfies the condi-
tions described in section 367(a)(5) and
any regulations issued pursuant to sec-
tion 367(a)(5). For example, the domestic
acquired corporation must be controlled
(within the meaning of section 368(c))
by 5 or fewer domestic corporations, and
basis adjustments must be made to the
stock of the foreign acquiring corpora-
tion received in the reorganization. See
§1.367(a)–7(c).
The indirect domestic stock transfer
exception applies only if the requirements
of §1.367(a)–3(c)(1)(i), (c)(1)(ii), and
(c)(1)(iv) are satisfied with respect to the
indirect stock transfer of stock in the do-
mestic acquired corporation, and certain
filing requirements are satisfied.
The third exception (section 351 ex-
ception) to the coordination rule applies
if a U.S. person (U.S. transferor) trans-
fers assets to a foreign corporation in a
section 351 exchange, to the extent that
such assets are transferred by such for-
eign corporation to a domestic corporation
in another section 351 exchange. See
§1.367(a)–3(d)(2)(vi)(B)(2). Consistent
with the section 367(a)(5) exception and
the indirect domestic stock transfer ex-
ception, the section351 exception only
applies if the domestic transferee’s basis
in the assets is not greater than the basis
that the U.S. transferor had in such assets.
B.Notice 2008–10 and 2008 Proposed
Regulations
On December 28, 2007, the Treasury
Department and the IRS issued Notice
2008–10 (2008–1 C.B. 277) in response to
outbound asset reorganization transactions
that relied on the section 367(a)(5) ex-
ception to repatriateearnings of a foreign
corporation without the recognition of a
corresponding amount of gain or income
inclusion. Notice 2008–10 announced that
the section 367(a) exception would be re-
vised to clarify that any adjustment to basis
required under section 367(a)(5) can only
be made to stock of the foreign acquiring
corporation received by the controlling
domestic corporate shareholders in the as-
set reorganization. In addition, the notice
states that the revised regulations would
confirm that to the extent the appropriate
amount of built-in gain in the property
transferred by the domestic acquired cor-
poration cannot be preserved in the stock
received by the controlling domestic cor-
porate shareholders in the reorganization,
the domestic acquired corporation’s trans-
fer of property to the foreign acquiring
corporation is subject to section 367(a)
and (d) (see §601.601(d)(2)(ii)(b)).
The 2008 proposed regulations would
amend the current regulations to incorpo-
rate, with modifications, the clarifications
to the section 367(a)(5) exception an-
nounced in Notice 2008–10. In addition,
the preamble to the 2008 proposed regula-
tions states that the Treasury Department
and the IRS continueto study transactions
that have the effect of repatriating earnings
and profits of a foreign corporation with-
out the recognition of gain or a dividend
inclusion.
The 2008 proposed regulations also
would modify the section 367(a)(5) ex-
ception and the indirect domestic stock
transfer exception to provide that for
purposes of determining whether the do-
mestic controlled corporation’s basis in
the re-transferred assets is not greater
than the domestic acquired corporation’s
basis in such assets, any increase in ba-
sis that results from gain recognized by
the domestic acquired corporation on the
transfer of the re-transferred assets to the
foreign acquiring corporation is not taken
into account.
C.Elimination of Section 367(a)(5)
Exception
The Treasury Department and the IRS
have become aware of additional trans-
actions involving outbound asset reorga-
nizations that involve the repatriation of
earnings and profits of a foreign corpo-
ration where taxpayers take the position
that the transaction does not require the
recognition of gain or a dividend inclu-
sion. These transactions, which rely on the
section 367(a)(5) exception and are struc-
tured to avoid gain recognition under sec-
tion 367(a), may not be affected by the
clarifications made to the section 367(a)(5)
exception in Notice 2008–10. In one such
transaction, for example, the foreign ac-
quiring corporation issues stock and prop-
erty other than qualified property (within
the meaning of section 361(c)(2)(B)) in
the reorganization and transfers property
that is not eligible for an exception to sec-
tion 367(a)(1) (such as property used in
the United States) to a domestic controlled
corporation. The amount of stock issued
by the foreign acquiring corporation is suf-
ficient to preserve the built-in gain in the
property transferred to it by the domestic
acquired corporation in the section 361 ex-
change. Thus, the parties take the posi-
tion that the section367(a)(5) exception
applies and that no gain is recognized on
the transfer under section 367(a).
Although these types of transactions are
not directly covered by Notice 2008–10,
they give rise to thesame repatriation con-
cerns that the notice was intended to ad-
dress.
The Treasury Department and the IRS
have, over time, clarified and modified
the coordination rule exceptions to address
various transactions that give rise to pol-
icy concerns. See, for example, T.D. 9243
(2006–1 C.B. 475) and Notice 2008–10.
These transactions typically do not involve
transactions with unrelated parties, but in-
stead arise in connection with transactions
with affiliates that appear to be primarily
motivated to achieve U.S. tax benefits. Af-
ter studying these issues further, includ-
ing in light of the transactions discussed
above, the Treasury Department and the
IRS no longer believe the section 367(a)(5)
exception is appropriate. As a result, the
section 367(a)(5) exception is eliminated
by the temporary regulations. The indirect
domestic stock transfer exception, how-
May 6, 201310272013–19 I.R.B.

ever, which involves transactions between
unrelated parties, is retained.
The Treasury Department and the IRS
continue to study nonrecognition transac-
tions that are intended to repatriate earn-
ings and profits of foreign corporations
without the recognition of gain or a divi-
dend inclusion.
D.Domestic Transferee’s Basis in Assets
for Purposes of the Section 351 Exception
In response to a comment, the tempo-
rary regulations modify the basis compar-
ison rule in the section 351 exception so
that it is consistent with the basis com-
parison rule in the indirect domestic stock
transfer exception, as modified by the 2008
proposed regulations. Thus, the section
351exceptionismodifiedinthetemporary
regulations to provide that for purposes of
determining whether the domestic trans-
feree’s basis in the assets is not greater than
the U.S. transferor’s basis in the assets, any
increase in basis that results from gain rec-
ognized by the U.S. transferor with respect
to such assets in the initial section 351 ex-
change is not taken into account.
E.Transfers of Stock or Securities in an
Outbound Section 361 Exchange
The current final regulations under
§1.367(a)–3(e) provide the general rule
that the outbound transfer of stock or secu-
rities in a section 361 exchange is subject
to section 367(a)(1), unless specified con-
ditions are satisfied. One condition is that
the requirements of section 367(a)(5) and
any regulations thereunder must be satis-
fied. Another condition is that any control
group member that owns (with attribution)
five percent or more of the stock (by vote
or value) of the transferee foreign corpo-
ration immediately after the transaction
must enter into a gain recognition agree-
ment with respect to the control group
member’s share of the gain (based on its
ownership interest in the U.S. transferor)
(GRA requirement).
In connection with final regulations un-
der section 367(a)(5), published in T.D.
9614, 2013–17 I.R.B. 947, these tempo-
rary regulations make conforming modifi-
cations to the GRA requirement such that
the five-percent ownership threshold is de-
termined by reference to the U.S. trans-
feror’s ownership of the transferee foreign
corporation (rather than by reference to
ownership of the transferee foreign cor-
poration by control group members). For
this purpose, ownership is determined im-
mediately after the U.S. transferor’s trans-
fer of the stock or securities to the trans-
feree foreign corporation in the section 361
exchange, but prior to and without taking
into account the U.S. transferor’s distribu-
tion under section 361(c) of the stock re-
ceived. If the U.S. transferor meets the
five-percent ownership threshold with re-
spect to the transferee foreign corporation,
then two conditions must be satisfied in
order to be eligible to file a GRA. The
first condition is that each shareholder of
the U.S. transferor that is a “qualified U.S.
person” (generally, any U.S. person except
domestic partnerships or special corporate
entities that are not subject to tax) and sat-
isfies the five-percent ownership threshold
must enter into a gain recognition agree-
ment, unless the amount of gain that would
otherwise be subject to the gain recogni-
tion agreement is zero. The gain recogni-
tion agreement is subject to rules in addi-
tion to those required under §1.367(a)–8,
including special rules for determining the
amount of gain subject to the gain recog-
nition agreement. The second condition
is that the U.S. transferor must recognize
gain realized on the transferred stock or
securities attributable to shareholders that
are not qualified U.S. persons or do not sat-
isfy the five-percent ownership threshold.
The Treasury Department and the
IRS believe that applying the five-per-
cent ownership threshold at the U.S.
transferor-level ismore consistent with
the policy underlying gain recognition
agreements. In addition, this change
is consistent with the application of
§1.367(b)–4(b)(1) to outbound transfers
of foreign stock in a section 361 exchange.
See §1.367(b)–4(b)(1)(iii),Example 4.
Other changes to the current final
regulations under §1.367(a)–3(e) con-
form the rules under §1.367(a)–3T(e)
with other provisions, such as the fi-
nal regulations under §§1.367(a)–7,
1.367(b)–4, 1.1248(f)–1, and 1.1248(f)–2.
For example, the regulations provide that
§1.367(a)–3T(e) is applied prior to taking
into account gain or deemed dividends
under any other provisions of section 367,
such as under §§1.367(a)–6T, 1.367(a)–7,
or 1.367(b)–4.
The other requirements necessary for
nonrecognition under the current final reg-
ulations of §1.367(a)–3(e) are generally re-
tained, with certain modifications. For ex-
ample, if the transferred stock or securities
are of a domestic corporation, the report-
ing requirements under§1.367(a)–3(c)(6)
must be satisfied, in addition to the re-
quirements under §1.367(a)–3(c)(1)(i),
(c)(1)(ii), and (c)(1)(iv).
F.Coordination of Gain Recognition
Rules
In connection with final regulations un-
der section 367(a)(5), published in T.D.
9614, 2013–17 I.R.B. 947, these tempo-
rary regulations make a conforming mod-
ification to the current temporary regula-
tions under §1.367(a)–6T by adding a sen-
tence providing that the amount of gain
recognized under the branch loss recap-
ture rules is determined prior to determin-
ing the amount of any gain recognized un-
der §1.367(a)–7. Accordingly, any gain
recognized under the branch loss recapture
rules is taken into account in determining
the amount of any gain recognized under
§1.367(a)–7.
G.Reasonable Cause Relief Procedures
The 2008 proposed regulations con-
tain reasonable cause relief provisions
in §1.367(a)–7(e)(2), §1.1248(f)–3, and
§1.6038B–1(f)(3) (reasonable cause pro-
cedures), pursuant to which a taxpayer’s
failure to timely comply with certain re-
quirements will be deemed not to have
occurred if the failure was due to reason-
able cause and not willful neglect. These
reasonable cause procedures include a
provision that a taxpayer will be deemed
to have established that the failure to com-
ply was due to reasonable cause and not
willful neglect if the taxpayer requesting
relief is not notified by the IRS within 120
days of IRS acknowledgement of receipt
of the request. The Treasury Department
and the IRS do not believe that the IRS’s
processing time with respect to a relief
request should be a determining factor in
whether a taxpayer hassatisfied its filing
obligations. Accordingly, these tempo-
rary regulations eliminate the 120-day
provision from the reasonable cause pro-
cedures. Other than the elimination of the
120-day provision, the reasonable cause
2013–19 I.R.B.1028May 6, 2013

procedures are retained in the temporary
regulations.
Effective/Applicability Dates
The regulations apply to transactions
occurring on or after March 18, 2013.
Effect on Other Documents
The following publication is obsolete as
of March 18, 2013:
Notice 2008–10 (2008–1 CB 277).
Special Analyses
It has been determined that these tem-
porary regulations are not a significant reg-
ulatory action as defined in Executive Or-
der 12866. Therefore, a regulatory assess-
ment is not required. It is hereby certified
that the collections of information con-
tained in these regulations will not have
a significant economic impact on a sub-
stantial number of small entities. Accord-
ingly, a regulatory flexibility analysis is
not required. These regulations primar-
ily will affect United States persons that
are large corporations engaged in corpo-
rate transactions among their controlled
corporations. Thus, the number of affected
small entities—in whichever of the three
categories defined in the Regulatory Flex-
ibility Act (small businesses, small organi-
zations, and small governmental jurisdic-
tions)—will not be substantial. The IRS
and the Treasury Department estimate that
small organizationsand small governmen-
tal jurisdictions are likely to be affected
only insofar as they transfer the stock of
a controlled corporation to a related cor-
poration. While a certain number of small
entities may engage in such transactions,
the IRS and the Treasury Department do
not anticipate the number to be substantial.
Pursuant to section 7805(f) of the Code,
this regulation has been submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Drafting Information
The principal author of these reg-
ulations is Robert B. Williams, Jr., of
the Office of Associate Chief Counsel
(International). However, other personnel
from the Treasury Department and the IRS
participated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.367(a)–3T is also issued un-
der 26 U.S.C. 367(a).
Par. 2. Section 1.367(a)–3 is amended
by:
1. Revising paragraph (d)(2)(vi)(B).
2. Revising paragraph (d)(3)Examples
6B, 6C, and 9.
3. Revising paragraph (e).
4. Revising paragraph (g)(1)(vii)(A).
5. Adding paragraph (g)(1)(ix).
6. Adding paragraph (k).
The revisions and additions read as fol-
lows:
§1.367(a)–3 Treatment of transfers of
stock or securities to foreign corporations.
*****
(d) * * *
(2) * * *
(vi) * * *
(B) [Reserved]. For further guidance,
see §1.367(a)–3T(d)(2)(vi)(B).
*****
(3) * * *
Example 6B. [Reserved]. For further
guidance, see §1.367(a)–3T(d)(3),Exam-
ple 6B.
Example 6C. [Reserved]. For further
guidance, see §1.367(a)–3T(d)(3),Exam-
ple 6C.
*****
Example 9. [Reserved]. For further
guidance, see §1.367(a)–3T(d)(3),Exam-
ple 9.
*****
(e) [Reserved]. For further guidance,
see §1.367–3T(e).
*****
(g) * * *
(1) * * *
(vii)(A) [Reserved]. For further guid-
ance, see §1.367–3T(g)(1)(vii)(A).
*****
(ix) [Reserved]. For further guidance,
see §1.367–3T(g)(1)(ix).
*****
(k) [Reserved]. For further guidance,
see §1.367–3T(k).
Par. 3. Section 1.367(a)–3T is added to
read as follows:
§1.367(a)–3T Treatment of transfers of
stock or securities to foreign corporations
(temporary).
(a) through (d)(2)(vi)(A) [Re-
served].—For further guidance, see
§1.367(a)–3(a) through (d)(2)(vi)(A).
(B)Exceptions.(1) If a transaction
is described in paragraph (d)(2)(vi)(A) of
this section, section 367(a) and (d) will not
apply to the extent a domestic corporation
(domestic acquired corporation) transfers
assets to a foreign corporation (foreign ac-
quiring corporation) in an asset reorgani-
zation, and those assets (re-transferred as-
sets) are transferred to a domestic corpo-
ration (domestic controlled corporation) in
a controlled asset transfer, provided that
each of the following conditions is satis-
fied:
(i) The domestic controlled corpora-
tion’s adjusted basis in the re-transferred
assets is not greater than the domestic
acquired corporation’s adjusted basis in
those assets. For this purpose, any in-
crease in basis in the re-transferred assets
that results because the domestic acquired
corporation recognized gain or income
with respect to the re-transferred assets in
the transaction is not taken into account.
(ii) The domestic acquired corporation
includes a statement described in para-
graph (d)(2)(vi)(C) of this section with its
U.S. income tax return for the taxable year
of the transfer; and
(iii) The requirements of paragraphs
(c)(1)(i), (c)(1)(ii), (c)(1)(iv), and (c)(6) of
this section are satisfied with respect to the
indirect transfer of stock in the domestic
acquired corporation.
(2) Sections 367(a) and (d) shall not
apply to transfers described in paragraph
(d)(1)(vi) of this section if a U.S. person
transfers assets to a foreign corporation in
a section 351 exchange, to the extent that
such assets are transferred by such foreign
corporation to a domestic corporation in
another section 351 exchange, but only if
May 6, 201310292013–19 I.R.B.

the domestic transferee’s adjusted basis in
the assets is not greater than the adjusted
basis that the U.S. person had in such as-
sets. Any increase in adjusted basis in the
assets that results because the U.S. person
recognized gain or income with respect to
such assets in the initial section 351 ex-
change is not taken into account for pur-
poses of determining whether the domes-
tic transferee’s adjusted basis in the as-
sets is not greater than the U.S. person’s
adjusted basis in such assets. This para-
graph (d)(2)(vi)(B)(2) will not, however,
apply to an exchange described in section
351 that is also an exchange described in
section 361(a) or (b). An exchange de-
scribed in section 351 that is also an ex-
change described insection 361(a) or (b)
is only eligible for the exception in para-
graph (d)(2)(vi)(B)(1) of this section.
(C) through (d)(3),Example 6A[Re-
served]. For further guidance, see
§1.367(a)–3(d)(2)(vi)(C) through (d)(3),
Example 6A.
Example 6B.Section 368(a)(1)(C) reorganization
followed by a controlled asset transfer to a domestic
controlled corporation
—(i)Facts. The facts are the
same as in paragraph (d)(3),
Example 6Aof this sec-
tion, except that R is a domestic corporation.
(ii)
Result. As in paragraph (d)(3)Example 6A
of this section, the outbound transfer of the Busi-
ness A assets to F is not affected by the rules of
§1.367–3(d) and is subject to the general rules under
section 367. Subject to the conditions and require-
ments of section 367(a)(5) and §1.367(a)–7(c), the
Business A assets qualify for the section 367(a)(3) ac-
tive trade or business exception and are not subject to
section 367(a)(1). The Business B and C assets are
part of an indirect stock transfer under §1.367–3(d),
but must first be tested under section 367(a) and (d).
The Business B assets qualify for the active trade or
business exception under section 367(a)(3); the Busi-
ness C assets do not. However, pursuant to paragraph
(d)(2)(vi)(B)(
1) of this section, the Business B and C
assets are not subject to section 367(a) or (d), pro-
vided that the basis of the Business B and C assets
in the hands of R is not greater than the basis of the
assets in the hands of Z, the requirements of para-
graphs (c)(1)(i), (c)(1)(ii), (c)(1)(iv), and (c)(6) of this
section are satisfied, and Z attaches a statement de-
scribed in paragraphs (d)(2)(vi)(C) of this section to
its U.S. income tax return for the taxable year of the
transfer. V also is deemed to make an indirect trans-
fer of Z stock under the rules of paragraph (d) of this
section to the extent the assets are transferred to R.
To preserve non-recognition treatment, and assuming
the other requirements of paragraph (c) of this sec-
tion are satisfied, V must enter into a gain recognition
agreement in the amount of $50, which equals the ag-
gregate gain in the Business B and C assets, because
the transfer of those assets by Z was not taxable un-
der section 367(a)(1) and constitute an indirect stock
transfer.
Example 6C.Section 368(a)(1)(C) reorganization
followed by a controlled asset transfer to a domestic
controlled corporation
—(i)Facts. The facts are the
same as in
Example 6B, except that Z is owned by
U.S. individuals, none of whom qualify as five-per-
cent target shareholders with respect to Z within the
meaning of paragraph (c)(5)(iii) of this section. The
following additional facts are present. No U.S. per-
sons that are either officers or directors of Z own any
stock of F immediately after the transfer. F is engaged
in an active trade or business outside the United States
that satisfies the test set forth in paragraph (c)(3) of
this section.
(ii)
Result. The Business A assets transferred to
F are not re-transferred to R and therefore Z’s trans-
fer of these assets is not subject to the rules of para-
graph (d) of this section. However, gain must be
recognized on the transfer of those assets under sec-
tion 367(a)(1) because the section 367(a)(3) active
trade or business exception is inapplicable pursuant
to section 367(a)(5) and §1.367(a)–7(b). The Busi-
ness B and C assets are part of an indirect stock trans-
fer under paragraph (d) of this section, but must first
be tested with respect to Z under section 367(a) and
(d), as provided in paragraph (d)(2)(vi) of this sec-
tion. The transfer of the Business B assets (which
otherwise would satisfy the section 367(a)(3) active
trade or business exception) generally is subject to
section 367(a)(1) pursuant to section 367(a)(5) and
§1.367(a)–7(b). The transfer of the Business C assets
generally is subject to section 367(a)(1) because these
assets do not qualify for the active trade or business
exception under section 367(a)(3). However, pur-
suant to paragraph (d)(2)(vi)(B) of this section, the
transfer of the Business B and C assets is not sub-
ject to sections 367(a)(1) and (d), provided the basis
of the Business B and C assets in the hands of R is
no greater than the basis in the hands of Z and cer-
tain other requirements are satisfied. Z may avoid
immediate gain recognitionunder section 367(a) and
(d) on the transfers of the Business B and Business C
assets to F if, pursuant to paragraph (d)(2)(vi)(B) of
this section, the indirect transfer of Z stock satisfies
the requirements of paragraphs (c)(1)(i), (c)(1)(ii),
(c)(1)(iv), and (c)(6) of this section, and Z attaches a
statement described in paragraph (d)(2)(vi)(C) of this
section to its U.S. income tax return for the taxable
year of the transfer. In general, the statement must
contain a certification that, if F disposes of the stock
of R (in a recognition or nonrecognition transaction)
and a principal purpose of the transfer is the avoid-
ance of U.S. tax that would have been imposed on
Z on the disposition of the Business B and C assets
transferred to R, then Z (or F on behalf of Z) will file
a return (or amended return as the case may be) recog-
nizing gain ($50), as if, immediately prior to the reor-
ganization, Z transferred the Business B and C assets
to a domestic corporation in exchange for stock in a
transaction treated as a section 351 exchange and im-
mediately sold such stock to an unrelated party for its
fair market value. A transaction is deemed to have a
principal purpose of U.S. tax avoidance if F disposes
of R stock within two years of the transfer, unless Z
(or F on behalf of Z) can rebut the presumption to
the satisfaction of the Commissioner. See paragraph
(d)(2)(vi)(D)(
2)ofthissection. Withrespecttothe
indirect transfer of Z stock, assume the requirements
of paragraphs (c)(1)(i), (c)(1)(ii), and (c)(1)(iv) of this
section are satisfied. Thus, assuming Z attaches the
statement described in paragraph (d)(2)(vi)(C) of this
section to its U.S. income tax return and satisfies the
reporting requirements of paragraph (c)(6) of this sec-
tion, the transfer of Business B and C assets is not
subject to immediate gain recognition under section
367(a) or (d).
Example 7throughExample 8(C)
[Reserved]. For further guidance, see
§1.367(a)–3(d)(3),Example 7through
(d)(3),Example 8(C).
Example 9.Indirect stock transfer by reason of
a controlled asset transfer
—(i)Facts. The facts are
the same as in paragraph (d)(3)
Example 8of this
section, except that R transfers the Business A assets
to M, a wholly owned domestic subsidiary of R, in a
controlled asset transfer. In addition, V’s basis in its
Z stock is $90.
(ii)
Result. Pursuant to paragraph (d)(2)(vi)(B) of
this section, sections 367(a) and (d) do not apply to
Z’s transfer of the Business A assets to R if M’s basis
in the Business A assets is not greater than the basis of
the assets in the hands of Z, the requirements of para-
graphs (c)(1)(i), (c)(1)(ii), (c)(1)(iv), and (c)(6) of this
section are satisfied, and Z includes a statement de-
scribed in paragraph (d)(2)(vi)(C) of this section with
its U.S. income tax return for the taxable year of the
transfer. Subject to the conditions and requirements
of section 367(a)(5) and §1.367(a)–7(c), Z’s transfer
of the Business B assets to R (which are not re-trans-
ferred to M) qualifies for the active trade or business
exception under section 367(a)(3). Pursuant to para-
graphs (d)(1) and (d)(2)(vii)(A)(
1)ofthissection,V
is generally deemed to transfer the stock of a foreign
corporation to F in a section 354 exchange subject
to the rules of paragraphs (b) and (d) of this section,
including the requirement that V enter into a gain
recognition agreement and comply with the require-
ments of §1.367(a)–8. However, pursuant to para-
graph (d)(2)(vii)(B), paragraph (d)(2)(vii)(A) of this
section does not apply to the extent of the transfer
of business A assets by R to M, a domestic corpo-
ration. As a result, to the extent of the business A
assets transferred by R to M, V is deemed to transfer
the stock of Z (a domestic corporation) to F in a sec-
tion 354 exchange subject to the rules of paragraphs
(c) and (d) of this section. Thus, with respect to V’s
indirect transfer of stock of a domestic corporation to
F, such transfer is not subject to gain recognition un-
der section 367(a)(1) if the requirements of paragraph
(c) of this section are satisfied, including the require-
ment that V enter into a gain recognition agreement
(separate from the gain recognition agreement de-
scribed above with respect to the deemed transfer of
stock of a foreign corporation to F) and comply with
the requirements of §1.367(a)–8. Under paragraphs
(d)(2)(i) and (d)(2)(ii) of this section, the transferee
foreign corporation is F and the transferred corpora-
tion is R (with respect to the transfer of stock of a
foreign corporation) and M (with respect to the trans-
fer of stock of a domestic corporation). Pursuant to
paragraph (d)(2)(iv) of this section, a disposition by
F of the stock of R would trigger both gain recogni-
tion agreements. In addition, a disposition by R of the
stock of M would trigger the gain recognition agree-
ment filed with respect to the transfer of the stock of
a domestic corporation. To determine whether there
is a triggering event under §1.367(a)–8(j)(2)(i) for
the gain recognition agreement filed with respect to
2013–19 I.R.B.1030May 6, 2013

the transfer of stock of the domestic corporation, the
Business A assets in M must be considered. To deter-
mine whether there is such a triggering event for the
gain recognition agreement filed with respect to the
transfer of stock of the foreign corporation, the Busi-
ness B assets in R must be considered.
Example 10throughExample 16
[Reserved]. For further guidance, see
§1.367(a)–3(d)(3),Example 10through
Example 16.
(e)Transfers of stock or securities by
a domestic corporation to a foreign cor-
poration in a section 361 exchange—(1)
Overview—(i)Scope and definitions.This
paragraph (e) applies to a domestic cor-
poration (U.S. transferor) that transfers
stock or securities of a domestic or foreign
corporation (transferred stock or secu-
rities) to a foreign corporation (foreign
acquiring corporation) in a section 361
exchange. Except as otherwise provided
in this paragraph (e), paragraphs (b) and
(c)ofthissectiondonotapplytothe
U.S. transferor’s transfer of the transferred
stock or securities in the section 361 ex-
change. For purposes of this paragraph
(e), the definitions ofcontrol group,con-
trol group member,andnon-control group
memberin §1.367(a)–7(f)(1),ownership
interest percentagein §1.367(a)–7(f)(7),
section 361 exchangein §1.367(a)–7(f)(8),
andU.S. transferor shareholderin
§1.367(a)–7(f)(13), shall apply.
(ii)Ordering rules. Except as otherwise
provided, this paragraph (e) shall apply to
the transfer of the transferred stock or se-
curities in the section 361 exchange prior
to the application of any other provision
of section 367 to such transfer. Further-
more, any gain recognized (including gain
treated as a deemed dividend pursuant to
section 1248(a)) by the U.S. transferor
under this paragraph (e) shall be taken
into account for purposes of applying
any other provision of section 367 (in-
cluding §§1.367(a)–6T, 1.367(a)–7, and
1.367(b)–4) to the transfer of the trans-
ferred stock or securities.
(2)General rule. Except as provided in
paragraph (e)(3) of this section, the trans-
fer by the U.S. transferor of the transferred
stock or securities tothe foreign acquiring
corporation in thesection 361 exchange
shall be subject to section 367(a)(1), and
therefore the U.S. transferor shall recog-
nize any gain (but not loss) realized with
respect to the transferred stock or securi-
ties. Realized gain is recognized pursuant
to the prior sentence notwithstanding that
the transfer is described in any other non-
recognition provision enumerated in sec-
tion 367(a)(1) (such as section 351 or 354).
(3)Exception. The general rule of para-
graph (e)(2) of this section shall not apply
if the conditions of paragraphs (e)(3)(i),
(e)(3)(ii), and (e)(3)(iii) of this section are
satisfied.
(i) The conditions set forth in
§1.367(a)–7(c) are satisfied with respect
to the section 361 exchange.
(ii) If the transferred stock or securi-
ties are of a domestic corporation, the U.S.
target company (as defined in paragraph
(c)(1) of this section) complies with the
reporting requirements of paragraph (c)(6)
of this section, and the conditions of para-
graphs (c)(1)(i), (c)(1)(ii), and (c)(1)(iv) of
this section are satisfied with respect to the
transferred stock or securities.
(iii) If the U.S. transferor owns (apply-
ing the attribution rules of section 318, as
modified by section 958(b)) five percent or
more of the total voting power or the total
value of the stock of the transferee foreign
corporation immediately after the trans-
fer of the transferred stock or securities in
the section 361 exchange, then the condi-
tions set forth in paragraphs (e)(3)(iii)(A),
(e)(3)(iii)(B), and (e)(3)(iii)(C) of this sec-
tion are satisfied.
(A) Except as otherwise provided in this
paragraph (e)(3)(iii)(A), each U.S. trans-
feror shareholder that is a qualified U.S.
person (as defined in paragraph (e)(6)(vii)
of this section) owning (applying the attri-
bution rules of section 318, as modified by
section 958(b)) five percent or more of the
total voting power or the total value of the
stock of the transferee foreign corporation
immediately after the reorganization enters
into a gain recognition agreement that sat-
isfies the conditions of paragraph (e)(6) of
this section and §1.367(a)–8. A U.S. trans-
feror shareholder is not required to enter
into a gain recognition agreement pursuant
to this paragraph if the amount of gain that
would be subject to the gain recognition
agreement (as determined under paragraph
(e)(6)(i) of this section) is zero.
(B) With respect to non-control group
members that are not described in para-
graph (e)(3)(iii)(A) of this section, the
U.S. transferor recognizes gain equal to
the product of the aggregate ownership
interest percentageof such non-control
group members multiplied by the gain re-
alized by the U.S. transferor on the transfer
of the transferred stock or securities.
(C) With respect to each control group
member that is not described in paragraph
(e)(3)(iii)(A) of this section, the U.S. trans-
feror recognizes gain equal to the prod-
uct of the ownership interest percentage of
such control group member multiplied by
the gain realized by the U.S. transferor on
the transfer of the transferred stock or se-
curities.
(4)Application of certain rules at U.S.
transferor-level. For purposes of para-
graphs (c)(5)(iii), (e)(3)(ii), and (e)(3)(iii)
of this section, ownership of the stock of
the transferee foreign corporation is de-
termined by reference to stock owned by
the U.S. transferor immediately after the
transfer of the transferred stock or securi-
ties to the foreign acquiring corporation in
the section 361 exchange, but prior to and
without taking into account the U.S. trans-
feror’s distribution under section 361(c)(1)
of the stock received.
(5)Transferee foreign corporation—(i)
General rule. Except as provided in para-
graph (e)(5)(ii) of this section, the trans-
feree foreign corporation for purposes of
applying paragraph (e) of this section and
§1.367(a)–8 shall be the foreign corpo-
ration that issues stock or securities to
the U.S. transferor in the section 361 ex-
change.
(ii)Special rule for triangular as-
set reorganizations involving the re-
ceipt of stock or securities of a domes-
tic corporation. In the case of a tri-
angular asset reorganization described
in §§1.358–(6)(b)(2)(i), (b)(2)(ii) or
(b)(2)(iii), or §1.358–6(b)(2)(v) (triangu-
lar asset reorganization) in which the U.S.
transferor receives stock or securities of
a domestic corporation that is in control
(within the meaning of section 368(c))
of the foreign acquiring corporation, the
transferee foreign corporation shall be the
foreign acquiring corporation.
(6)Special requirements for gain recog-
nition agreements
. A gain recognition
agreement filed by a U.S. transferor share-
holder pursuant to paragraph (e)(3)(iii)(A)
of this section is, in addition to the terms
and conditions of §1.367(a)–8, subject to
the conditions of this section (e)(6).
(i) The amount of gain subject to the
gain recognition agreement shall equal
the product of the ownership interest per-
centage of the U.S. transferor shareholder
May 6, 201310312013–19 I.R.B.

multiplied by the gain realized by the U.S.
transferor on the transferofthetransferred
stock or securities, reduced (but not below
zero) by the sum of the amounts described
in paragraphs (e)(6)(i)(A), (e)(6)(i)(B),
(e)(6)(i)(C), and (e)(6)(i)(D) of this sec-
tion.
(A) Gain recognized by the U.S. trans-
feror with respect to the transferred stock
or securities under section 367(a)(1) (in-
cluding any portion treated as a deemed
dividend under section 1248(a)) that is
attributable to such U.S. transferor share-
holder pursuant to §1.367(a)–7(c)(2) or
§1.367(a)–7(e)(5).
(B) A deemed dividend included in
the income of the U.S. transferor with
respect to the transferred stock under
§1.367(b)–4(b)(1)(i) that is attributable to
such U.S. transferor shareholder pursuant
to §1.367(a)–7(e)(4).
(C) If the U.S. transferor share-
holder is subject to an election under
§1.1248(f)–2(c)(1), a deemed dividend
included in the income of the U.S. trans-
feror pursuant to §1.1248(f)–2(c)(3) that
is attributable to the U.S. transferor share-
holder.
(D) If the U.S. transferor share-
holder is not subject to an election un-
der §1.1248(f)–2(c)(1), the hypotheti-
cal section 1248 amount (as defined in
§1.1248(f)–1(c)(4)) with respect to the
stock of each foreign corporation trans-
ferred in the section 361 exchange attrib-
utable to the U.S. transferor shareholder.
(ii) The gain recognition agreement
shall include the election described in
§1.367(a)–8(c)(2)(vi).
(iii) The gain recognition agreement
shall designate the U.S. transferor share-
holder as the U.S. transferor for purposes
of §1.367(a)–8.
(iv) If the transfer of the transferred
stock or securities in the section 361 ex-
change is pursuant to a triangular asset
reorganization, the gain recognition agree-
ment shall include appropriate provisions
that are consistent with the principles of
§1.367(a)–8 for gain recognition agree-
ments involving multiple parties. See
§1.367(a)–8(j)(9).
(v) The gain recognition agreement
shall not be eligible for termination
upon a taxable disposition pursuant to
§1.367(a)–8(o)(1) unless the value of the
stock or securities received by the U.S.
transferor shareholder in exchange for the
stock or securities of the U.S. transferor
under section 354 or 356 is at least equal
to the amount of gain subject to the gain
recognition agreement filed by such U.S.
transferor shareholder.
(vi) Except as otherwise provided in
this paragraph (e)(6)(vi), if gain is sub-
sequently recognized by the U.S. trans-
feror shareholder under the terms of the
gain recognition agreement pursuant to
§1.367(a)–8(c)(1)(i), the increase in stock
basis provided under §1.367(a)–8(c)(4)(i)
with respect to the stock received by the
U.S. transferor shareholder shall not ex-
ceed the amount of the stock basis adjust-
ment made pursuant to §1.367(a)–7(c)(3)
with respect to the stock received by the
U.S. transferor shareholder. This para-
graph (e)(6)(vi) shall not apply if the
U.S. transferor shareholder and the U.S.
transferor are members of the same con-
solidated group at the time of the reorga-
nization.
(vii) For purposes of this section, a
qualified U.S. personmeans a U.S. per-
son, as defined in §1.367(a)–1T(d)(1),
but for this purpose does not include do-
mestic partnerships, regulated investment
companies (as defined in section 851(a)),
real estate investment trusts (as defined
in section 856(a)), and S corporations (as
defined in section 1361(a)).
(7)Gain subject to section 1248(a).If
the U.S. transferor recognizes gain under
paragraphs (e)(3)(iii)(B) or (e)(3)(iii)(C)
of this section with respect to transferred
stock that is stock in a foreign corporation
to which section 1248(a) applies, then the
portion of such gain treated as a deemed
dividend under section 1248(a) is the prod-
uct of the amount of the gain multiplied
by the section 1248(a) ratio. The section
1248(a) ratio is the ratio of the amount that
would be treated as a deemed dividend un-
der section 1248(a) if all the gain in the
transferred stock were recognized to the
amount of gain realized in all the trans-
ferred stock.
(8)Examples. The following exam-
ples illustrate the provisions of paragraph
(e) of this section. Except as otherwise
indicated: US1, US2, and UST are do-
mestic corporations that are not members
of a consolidated group; X is a United
States citizen; US1, US2, and X are un-
related parties; CFC1, CFC2, and FA
are foreign corporations; each corpora-
tion described herein has a single class
of stock issued and outstanding and a tax
year ending on December 31; the sec-
tion 1248 amount (within the meaning of
§1.367(b)–2(c)) with respect to the stock
of CFC1 and CFC2 is zero; Asset A is
section 367(a) property that, but for the
application of section 367(a)(5), would
qualify for the active foreign trade or busi-
ness exception under §1.367(a)–2T; the
requirements of §1.367(a)–7(c)(2) through
1.367(a)–7(c)(5) aresatisfied with respect
to a section 361 exchange; the provisions
of §1.367(a)–6T (regarding branch loss
recapture) are not applicable; and none of
the foreign corporations in the examples
is a surrogate foreign corporation (within
the meaning of section 7874) as a result of
the transactions described in the examples
because one or more of the conditions of
section 7874(a)(2)(B) is not satisfied.
Example 1.U.S. transferor owns less than 5%
of stock of transferee foreign corporation
.(i)Facts.
US1,US2,andXown80%,5%,and15%,re-
spectively, of the stock of UST with a fair market
value of $160x, $10x, and $30x, respectively. UST
has two assets, Asset A and 100% of the stock of
CFC1. UST has no liabilities. Asset A has a $150x
basis and $100x fair market value (as defined in
§1.367(a)–7(f)(3)), and the CFC1 stock has a $0x
basis and $100x fair market value. UST transfers
Asset A and the CFC1 stock to FA solely in exchange
for $200x of FA voting stock in a reorganization
described in section 368(a)(1)(C). UST’s transfer
of Asset A and the CFC1 stock to FA qualifies as a
section 361 exchange. UST distributes the FA stock
received in the section 361 exchange to US1, US2,
and X pursuant to the plan of reorganization, and
liquidates. US1 receives $160x of FA stock, US2 re-
ceives $10x of FA stock,and X receives $30x of FA
stock in exchange for the UST stock. Immediately
after the transfer of Asset A and the CFC1 stock
to FA in the section 361 exchange, but prior to and
without taking into account UST’s distribution of the
FA stock pursuant to section 361(c)(1), UST does not
own (applying the attribution rules of section 318, as
modified by section 958(b)) five percent or more of
the total voting power or the total value of the stock
of FA.
(ii)
Result. (A) UST’s transfer of the CFC1 stock
to FA in the section 361 exchange is subject to the
provisions of this paragraph (e), and this paragraph
(e) applies to the transfer of the CFC1 stock prior
to the application of any other provision of section
367 to such transfer. See paragraphs (e)(1)(i) and
(e)(1)(ii) of this section. Pursuant to the general rule
of paragraph (e)(2) of this section, UST must recog-
nize the gain realized of $100x on the transfer of the
CFC1 stock (computed as the excess of the $100x fair
market value over the $0x basis) unless the require-
ments for the exception provided in paragraph (e)(3)
of this section are satisfied. In this case, the require-
ments of paragraph (e)(3) of this section are satisfied.
First, the requirement of paragraph (e)(3)(i) of this
section is satisfied becausethe control requirement of
§1.367(a)–7(c)(1) is satisfied, and a stated assump-
2013–19 I.R.B.1032May 6, 2013

tion is that the requirements of §§1.367(a)–7(c)(2)
through 1.367(a)–7(c)(5) will be satisfied. The con-
trol requirement is satisfied because US1 and US2,
each a control group member, own in the aggregate
85% of the stock of UST immediately before the re-
organization. Second, the requirement of paragraph
(e)(3)(ii) of this section is not applicable because that
paragraph applies to the transfer of stock of a domes-
tic corporation and CFC1 is a foreign corporation.
Third, paragraph (e)(3)(iii) of this section is not appli-
cable because immediately after the section 361 ex-
change, but prior to and without taking into account
UST’sdistributionoftheFAstockpursuanttosec-
tion 361(c)(1), UST does not own (applying the at-
tribution rules of section 318, as modified by section
958(b)) 5% or more of the total voting power or the
total value of the stock of FA. See paragraph (e)(4)
of this section. Accordingly, UST does not recognize
the$100xofgainrealizedintheCFC1stockpursuant
to this section.
(B) In order to meet the requirements of
§1.367(a)–7(c)(2)(i), UST must recognize gain
equal to the portion of the inside gain (as defined in
§1.367(a)–7(f)(5)) attributable to non-control group
members (X), or $7.50x. The $7.50x of gain is
computed as the product of the inside gain ($50x)
multiplied by X’s ownership interest percentage
in UST (15%). Pursuant to §1.367(a)–7(f)(5), the
$50x of inside gain is the amount by which the
aggregate fair market value ($200x) of the section
367(a) property (as defined in §1.367(a)–7(f)(10),
or Asset A and the CFC1 stock) exceeds the sum
of the inside basis ($150x) of such property and the
product of the section 367(a) percentage (as defined
in §1.367(a)–7(f)(9), or 100%) multiplied by UST’s
deductible liabilities (as defined in §1.367(a)–7(f)(2),
or $0x). Pursuant to §1.367(a)–7(f)(4), the inside
basis equals the aggregate basis of the section 367(a)
property transferred in the section 361 exchange
($150x), increased by any gain or deemed dividends
recognized by UST with respect to the section 367(a)
property under section 367 ($0x), but not includ-
ing the $7.50x of gain recognized by UST under
§1.367(a)–7(c)(2)(i). Pursuant to §1.367(a)–7(e)(1),
the $7.50x of gain recognized by UST is treated as
recognized with respect to the CFC1 stock and Asset
A in proportion to the amount of gain realized in
each. However, because there is no gain realized by
UST with respect to Asset A, all $7.50x of the gain
is allocated to the CFC1 stock. Furthermore, FA’s
basis in the CFC1 stock, as determined under section
362 is increased by the $7.50x of gain recognized by
UST. See §1.367(a)–1(b)(4)(i)(B).
(C) The requirement to recognize gain under
§1.367(a)–7(c)(2)(ii) is notapplicable because the
portion of the inside gain attributable to US1 and
US2 (control group members) can be preserved in
thestockreceivedbyeachsuchshareholder. As
described in paragraph (ii)(B) of this
Example 1,
the inside gain is $50x. US1’s attributable inside
gain of $40x (equal to the product of $50x inside
gain multiplied by US1’s 80% ownership interest
percentage, reduced by $0x, the sum of the amounts
described in §1.367(a)–7(c)(2)(ii)(A)(
1) through
(c)(2)(ii)(A)(
3)) does not exceed $160x (equal to the
product of the section 367(a) percentage of 100%
multiplied by $160x fair market value of FA stock re-
ceived by US1). Similarly, US2’s attributable inside
gain of $2.50x (equal to the product of $50x inside
gain multiplied by US2’s 5% ownership interest
percentage, reduced by $0x, the sum of the amounts
described in §1.367(a)–7(c)(2)(ii)(A)(
1) through
(c)(2)(ii)(A)(
3))) does not exceed $10x (equal to the
product of the section 367(a) percentage of 100%
multiplied by $10x fair market value of FA stock
received by US2).
(D) Each control group member (US1 and US2)
must separately compute any required adjustment to
stock basis under §1.367(a)–7(c)(3).
Example 2.U.S. transferor owns 5% or more of
the stock of the transferee foreign corporation
.(i)
Facts. The facts are the same as inExample 1, except
that immediately after the section 361 exchange, but
prior to and without taking into account UST’s distri-
bution of the FA stock pursuant to section 361(c)(1),
UST owns (applying the attribution rules of section
318, as modified by section 958(b)) 5% or more of the
total voting power or value of the stock of FA. Fur-
thermore, immediately after the reorganization, US1
and X (but not US2) each own (applying the attri-
bution rules of section 318, as modified by section
958(b)) five percent or more of the total voting power
or value of the stock of FA.
(ii)
Result. (A) As is the case withExample 1,
UST’s transfer of the CFC1 stock to FA in the sec-
tion 361 exchange is subject to the provisions of this
paragraph (e), and this paragraph (e) applies to the
transfer of the CFC1 stock prior to the application of
any other provision of section 367 to such transfer.
See paragraphs (e)(1)(i) and (e)(1)(ii) of this section.
In addition, UST must recognize the gain realized of
$100x on the transfer of the CFC1 stock (computed
as the excess of the $100x fair market value over the
$0x basis) unless the requirements for the exception
provided in paragraph (e)(3) of this section are sat-
isfied. For the same reasons provided in
Example 1,
the requirement in paragraph (e)(3)(i) of this section
is satisfied and the requirement of paragraph (e)(3)(ii)
of this section is not applicable.
(B) Unlike
Example 1,however,USTowns5%
or more of the voting power or value of the stock
of FA immediately after the transfer of the CFC1
stock in the section 361 exchange, but prior to and
without taking into account UST’s distribution of the
FA stock under section 361(c)(1). As a result, para-
graph (e)(3)(iii) of this section is applicable to the
section 361 exchange of the CFC1 stock. Accord-
ingly, in order to meet the requirements of paragraph
(e)(3)(iii)(A) of this section US1 and X must enter
into gain recognition agreements that satisfy the re-
quirements of paragraph (e)(6) of this section and
§1.367(a)–8. See paragraph (ii)(G) of this
Example
2
for the computation of the amount of gain subject
to each gain recognition agreement.
(C) In order to meet the requirements of para-
graph (e)(3)(iii)(C) of this section, UST must recog-
nize $5x of gain attributable to US2 (computed as the
product of the $100x of gain realized with respect
to the transfer of the CFC1 stock multiplied by the
5% ownership interest percentage of US2). The $5x
of gain recognized is not included in the computa-
tion of inside basis (see §1.367(a)–7(f)(4)(i)), but
reduces (but not below zero) the amount of gain
recognized by UST pursuant to §1.367(a)–7(c)(2)(ii)
that is attributable to US2. Furthermore, FA’s basis
in the CFC1 stock as determined under section 362
is increased for the $5x of gain recognized. See
§1.367(a)–1(b)(4)(i)(B). Assuming US1 and X enter
into the gain recognition agreements described in
paragraph(ii)(B)ofthis
Example2, and UST recog-
nizes the $5x of gain described in this example, the
requirements of paragraph (e)(3) are satisfied and,
accordingly, UST does not recognize the remaining
$95x of gain realized in the CFC1 stock pursuant to
this section.
(D) As described in paragraph (ii)(B) of
Exam-
ple 1
, UST must recognize $7.50xofgainpursuantto
§1.367(a)–7(c)(2)(i), the amount of the $50x of inside
gain attributable to X. Pursuant to §1.367(a)–7(e)(1),
the $7.50x of gain recognized by UST is treated as
recognized with respectto the CFC1 stock and As-
set A in proportion to the amount of gain realized in
each. However, because there is no gain realized by
UST with respect to Asset A, all $7.50x of the gain is
allocated to the CFC1 stock. Furthermore, FA’s basis
in the CFC1 stock as determined under section 362
is increased for the $7.50x of gain recognized. See
§1.367(a)–1(b)(4)(i)(B).
(E) As described in paragraph (ii)(C) of
Exam-
ple 1
, the requirement to recognize gain pursuant
to §1.367(a)–7(c)(2)(ii)is not applicable because
the attributable inside gain of US1 and US2 can be
preserved in the stock received by each shareholder.
However, if UST were required to recognize gain
pursuant to §1.367(a)–7(c)(2)(ii) for inside gain
attributable to US2 (for example, if US2 received
solely cash rather than FA stock in the reorganiza-
tion), the amount of such gain would be reduced (but
not below zero) by the amount of gain recognized
by UST pursuant to paragraph (e)(3)(iii)(C) of this
section that is attributable to US2 (computed as
$5x in paragraph (ii)(C) of this
Example 2). See
§1.367(a)–7(c)(2)(ii)(A)(
1).
(F) Each control group member (US1 and US2)
must separately compute any required adjustment to
stock basis under §1.367(a)–7(c)(3).
(G) The amount of gain subject to the gain recog-
nition agreement filed by each of US1 and X is deter-
mined pursuant to paragraph (e)(6)(i) of this section.
With respect to US1, the amount of gain subject to
the gain recognition agreement is $80x. The $80x is
computed as the product of US1’s ownership interest
percentage (80%) multiplied by the gain realized by
UST in the CFC1 stock as determined prior to tak-
ing into account the application of any other provi-
sion of section 367 ($100x), reduced by the sum of the
amounts described in paragraphs (e)(6)(i)(A) through
(e)(6)(i)(D) of this section attributable to US1 ($0x).
With respect to X, the amount of gain subject to the
gain recognition agreement is $7.50x. The $7.50x
is computed as the product of X’s ownership inter-
est percentage (15%) multiplied by the gain realized
by UST in the CFC1 stock as determined prior to tak-
ing into account the application of any other provi-
sion of section 367 ($100x), reduced by the sum of the
amounts described in paragraphs (e)(6)(i)(A) through
(e)(6)(i)(D) of this section attributable to X ($7.50x,
as computed in paragraph (ii)(D) of this
Example 2).
(H) In order the meet the requirements of para-
graph (e)(6)(ii) of this section, each gain recognition
agreement must include the election described in
§1.367(a)–8(c)(2)(vi). Furthermore, pursuant to
paragraph (e)(6)(iii) of this section, US1 and X must
be designated as the U.S. transferor on their respec-
tive gain recognition agreements for purposes of
§1.367(a)–8.
May 6, 201310332013–19 I.R.B.

Example 3.U.S.transferorowns5%ormoreof
the stock of the transferee foreign corporation; inter-
action with section 1248(f)
.(i)Facts. US1, US2,
and X own 50%, 30%, and 20%, respectively, of the
stock of UST. The UST stock owned by US1 has a
$180x basis and $200x fair market value; the UST
stock owned by US2 has a $100x basis and $120x
fair market value; and the UST stock owned by X
has a $80x fair market value. UST owns Asset A,
and all the stock of CFC1 and CFC2. UST has no
liabilities. Asset A has a $10x basis and $200x fair
market value. The CFC1 stock is a single block of
stock (as defined in §1.1248(f)–1(c)(2)) with a $20x
basis, $40x fair market value, and $30x of earnings
and profits attributable to it for purposes of section
1248 (with the result that the section 1248 amount (as
defined in §1.1248(f)–1(c)(9)) is $20x). The CFC2
stock is also a single block of stock with a $30x ba-
sis, $160x fair market value, and $150x of earnings
and profits attributable to it for purposes of section
1248 (with the result that the section 1248 amount
is $130x). On December 31, Year 3, in a reorgani-
zation described in section 368(a)(1)(D), UST trans-
fers the CFC1 stock, CFC2 stock, and Asset A to FA
in exchange for 60 shares of FA stock with a $400x
fair market value. UST’s transfer of the CFC1 stock,
CFC2 stock, and Asset A to FA in exchange for the
60 shares of FA stock qualifies as a section 361 ex-
change. UST distributes the FA stock received in the
section 361 exchange to US1, US2, and X pursuant to
section 361(c)(1). US1, US2, and X exchange their
UST stock for 30, 18, and 12 shares, respectively, of
FA stock pursuant to section 354. Immediately after
the reorganization, FA has 100 shares of stock out-
standing, and US1 and US2 are each a section 1248
shareholder with respect to FA.
(ii)
Result. (A) UST’s transfer of the CFC1 stock
and CFC2 stock to FA in the section 361 exchange
is subject to the provisions of this paragraph (e), and
this paragraph (e) applies to the transfer of the CFC1
stock and CFC2 stock prior to the application of any
other provision of section 367 to such transfer. See
paragraphs (e)(1)(i) and (e)(1)(ii) of this section. Pur-
suant to the general rule of paragraph (e)(2) of this
section, UST must recognize the gain realized of $20x
on the transfer of the CFC1 stock (the excess of $40x
fair market value over $20x basis) and the gain re-
alized of $130x on the transfer of the CFC2 stock
(the excess of $160x fair market value over $30x ba-
sis), subject to the application of section 1248(a), un-
less the requirements for the exception provided in
paragraph (e)(3) of this section are satisfied. In this
case, the requirement of paragraph (e)(3)(i) of this
section is satisfied because the control requirement of
§1.367(a)–7(c)(1) is satisfied, and a stated assump-
tion is that the requirements of §§1.367(a)–7(c)(2)
through 1.367(a)–7(c)(5) will be satisfied. The con-
trol requirement is satisfied because US1 and US2,
each a control group member, own in the aggregate
80% of the UST stock immediately before the reorga-
nization. The requirement of paragraph (e)(3)(ii) of
this section is not applicable because that paragraph
applies to the transfer of stock of a domestic corpo-
ration, and CFC1 and CFC2 are foreign corporations.
UST owns 5% or more of the total voting power or
value of the stock of FA (60%, or 60 of the 100 shares
of FA stock outstanding) immediately after the trans-
fer of the CFC1 stock and CFC2 stock in the section
361 exchange, but prior to and without taking into ac-
count UST’s distribution of the FA stock under sec-
tion 361(c)(1). As a result, paragraph (e)(3)(iii) of
this section is applicable to the section 361 exchange
of the CFC1 stock and CFC2 stock. US1, US2, and
X each own (applying the attribution rules of section
318, as modified by section 958(b)) 5% or more of
the total voting power or value of the FA stock im-
mediately after the reorganization, or 30%, 18%, and
12%, respectively. Accordingly, in order to meet the
requirements of paragraph (e)(3)(iii)(A) of this sec-
tion, US1 and US2 must enter into gain recognition
agreements with respect tothe CFC1 stock and CFC2
stock that satisfy the requirements of paragraph (e)(6)
of this section and §1.367(a)–8. X is not required
to enter into a gain recognition agreement because
the amount of gain that would be subject to the gain
recognition agreement is zero. See paragraph (ii)(J)
of this
Example 3for the computation of the amount
of gain subject to each gain recognition agreement.
Assuming US1 and US2 enter into the gain recogni-
tions agreements described above, the requirements
of paragraph (e)(3) are satisfied and accordingly, UST
does not recognize the gain realized of $20x in the
stock of CFC1 or the gain realized of $130x in the
stockofCFC2pursuanttothissection.
(B) UST’s transfer of the CFC1 stock and CFC2
stock to FA pursuant to the section 361 exchange
is subject to §1.367(b)–4(b)(1)(i), which applies
prior to the application of §1.367(a)–7(c). See para-
graph (e)(1) of this section. UST (the exchanging
shareholder) is a U.S. person and a section 1248
shareholder with respect to CFC1 and CFC2 (each
a foreign acquired corporation). However, UST
is not required to include in income as a deemed
dividend the section 1248 amount with respect to
the CFC1 stock ($20x) or CFC2 stock ($130x) un-
der §1.367(b)–4(b)(1)(i) because, immediately after
UST’s section 361 exchange of the CFC1 stock and
CFC2 stock for FA stock (and before the distribution
of the FA stock to US1, US2, and X under section
361(c)(1), FA, CFC1, and CFC2 are controlled for-
eign corporations as to which UST is a section 1248
shareholder. See §1.367(b)–4(b)(1)(ii)(A). However,
if UST were required to include in income as a
deemed dividend the section 1248 amount with re-
spect to the CFC1 stock or CFC2 stock (for example,
if FA were not a controlled foreign corporation), such
deemed dividend would be taken into account prior
to the application of §1.367(a)–7(c). Furthermore,
because US1, US2, and X are all persons described
in paragraph (e)(3)(iii)(A) of this section, any such
deemed dividend would increase inside basis. See
§1.367(a)–7(f)(4).
(C) In order to meet the requirements of
§1.367(a)–7(c)(2)(i), UST must recognize gain
equal to the portion of the inside gain attributable
to non-control group members (X), or $68x. The
$68x of gain is computed as the product of the inside
gain ($340x) multiplied by X’s ownership interest
percentage in UST (20%), reduced (but not below
zero) by $0x, the sum of the amounts described in
§1.367(a)–7(c)(2)(i)(A) through (c)(2)(i)(C). Pur-
suant to §1.367(a)–7(f)(5), the $340x of inside gain
is the amount by which the aggregate fair market
value ($400x) of the section 367(a) property (Asset
A, CFC1 stock, and CFC2 stock) exceeds the sum
of the inside basis ($60x) and $0x (the product of
the section 367(a) percentage (100%) multiplied
by UST’s deductible liabilities ($0x)). Pursuant to
§1.367(a)–7(f)(4), the inside basis equals the aggre-
gate basis of the section 367(a) property transferred
in the section 361 exchange ($60x), increased by
any gain or deemed dividends recognized by UST
with respect to the section 367(a) property under
section 367 ($0x), but not including the $68x of
gain recognized by UST under §1.367(a)–7(c)(2)(i).
Under §1.367(a)–7(e)(1), the $68x gain recognized
is treated as being with respect to the CFC1 stock,
CFC2 stock, and Asset A in proportion to the amount
of gain realized by UST on the transfer of the prop-
erty. The amount treated as recognized with respect
to the CFC1 stock is $4x ($68x gain multiplied by
$20x/$340x). The amount treated as recognized
with respect to the CFC2 stock is $26x ($68x gain
multiplied by $130x/$340x). The amount treated as
recognized with respect to Asset A is $38x ($68x
gain multiplied by $190x/$340x). Under section
1248(a), UST must include in gross income as a
dividend the $4x gain recognized with respect to
the CFC1 stock and the $26x gain recognized with
respect to CFC2 stock. Furthermore, FA’s basis in the
CFC1 stock, CFC2 stock, and Asset A, as determined
under section 362, is increased by the amount of gain
recognized by UST with respect to such property.
See §1.367(a)–1(b)(4)(i)(B). Thus, FA’s basis in the
CFC1 stock is $24x ($20x increased by $4x of gain),
the CFC2 stock is $56x ($30x increased by $26x of
gain), and Asset A is $48x ($10x increased by $38x
of gain).
(D) The requirement to recognize gain under
§1.367(a)–7(c)(2)(ii) is not applicable because the
portion of the inside gain attributable to US1 and
US2 (control group members) can be preserved in
the stock received by each such shareholder. As
described in paragraph (ii)(C) of this
Example 3,
the inside gain is $340x. US1’s attributable inside
gain of $170x (equal to the product of $340x inside
gain multiplied by US1’s 50% ownership interest
percentage, reduced by $0x, the sum of the amounts
described in §1.367(a)–7(c)(2)(ii)(A)(
1) through
(c)(2)(ii)(A)(
3)) does not exceed $200x (equal to the
product of the section 367(a) percentage of 100%
multiplied by $200x fair market value of FA stock re-
ceived by US1). Similarly, US2’s attributable inside
gain of $102x (equal to the product of $340x inside
gain multiplied by US2’s 30% ownership interest
percentage, reduced by $0x, the sum of the amounts
described in §1.367(a)–7(c)(2)(ii)(A)(
1) through
(c)(2)(ii)(A)(
3)) does not exceed $120x (equal to the
product of the section 367(a) percentage of 100%
multiplied by $120x fair market value of FA stock
received by US2).
(E) Each control group member (US1 and US2)
separately computes any required adjustment to stock
basis under §1.367(a)–7(c)(3). US1’s section 358
basis in the FA stock received of $180x (equal to
US1’s basis in the UST stock exchanged) is reduced
to preserve the attributable inside gain with respect
to US1, less any gain recognized with respect to US1
under §1.367(a)–7(c)(2)(ii). Because UST does not
recognize gain on the section 361 exchange with re-
spect to US1 under §1.367(a)–7(c)(2)(ii) (as deter-
mined in paragraph (ii)(D) of this
Example 3), the at-
tributable inside gain of $170x with respect to US1
is not reduced under §1.367(a)–7(c)(3)(i)(A). US1’s
outside gain (as defined in §1.367(a)–7(f)(6)) in the
FA stock is $20x, the product of the section 367(a)
percentage (100%) multiplied by the $20x gain (equal
2013–19 I.R.B.1034May 6, 2013

to the difference between $200x fair market value
and $180x section 358 basis in the FA stock). Thus,
US1’s $180x section 358 basis in the FA stock must
be reduced by $150x (the excess of $170x attribut-
able inside gain, reduced by $0x, over $20x outside
gain) to $30x. Similarly, US2’s section 358 basis in
the FA stock received of $100x (equal to US2’s ba-
sis in the UST stock exchanged) is reduced to pre-
serve the attributable inside gain with respect to US2,
less any gain recognized with respect to US2 under
§1.367(a)–7(c)(2)(ii). Because UST does not recog-
nize gain on the section 361 exchange with respect
to US2 under §1.367(a)–7(c)(2)(ii) (as determined in
paragraph (ii)(D) of this
Example 3), the attributable
inside gain of $102x with respect to US2 is not re-
duced under §1.367(a)–7(c)(3)(i)(A). US2’s outside
gain in the FA stock is $20x, the product of the sec-
tion 367(a) percentage (100%) multiplied by the $20x
gain (equal to the difference between $120x fair mar-
ket value and $100x section 358 basis in FA stock).
Thus, US2’s $100x section 358 basis in the FA stock
must be reduced by $82x (the excess of $102x attrib-
utable inside gain, reduced by $0x, over $20x outside
gain) to $18x.
(F) UST’s distribution of the FA stock to
US1, US2, and X under section 361(c)(1) (new
stock distribution) is subject to §1.1248(f)–1(b)(3).
Except as provided in §1.1248(f)–2(c), under
§1.1248(f)–1(b)(3) UST must include in gross in-
come as a dividend the total section 1248(f) amount
(as defined in §1.1248(f)–1(c)(14)). The total section
1248(f) amount is $120x, the sum of the section
1248(f) amount (as defined in §1.1248(f)–1(c)(10))
with respect to the CFC1 stock ($16x) and CFC2
stock ($104x). The $16x section 1248(f) amount
with respect to the CFC1 stock is the amount that
UST would have included in income as a dividend
under §1.367(b)–4(b)(1)(i) with respect to the CFC1
stock if the requirements of §1.367(b)–4(b)(1)(ii)(A)
had not been satisfied ($20x), reduced by the amount
of gain recognized by UST under §1.367(a)–7(c)(2)
allocable to the CFC1 stock and treated as a dividend
under section 1248(a) ($4x, as described in paragraph
(ii)(C) of this
Example 3). Similarly, the section
1248(f) amount with respect to the CFC2 stock is
$104x ($130x reduced by $26x).
(G) If, however, UST along with US1 and US2
(each a section 1248 shareholder of FA immediately
after the distribution) elect to apply the provisions of
§1.1248(f)–2(c) (as provided in §1.1248(f)–2(c)(1)),
the amount that UST is required to include in income
as a dividend under §1.1248(f)–1(b)(3) ($120x to-
tal section 1248(f) amount as computed in paragraph
(ii)(F) of this
Example 3) is reduced by the sum of the
portions of the section 1248(f) amount with respect
to the CFC1 stock and CFC2 stock that is attributable
(under the rules of §1.1248(f)–2(d)) to the FA stock
distributed to US1 and US2. Assume that the election
is made to apply §1.1248(f)–2(c).
(
1) Under §1.1248(f)–2(d)(1), the portion of the
section 1248(f) amount with respect to the CFC1
stock that is attributed to the 30 shares of FA stock
distributed to US1 is equal to the hypothetical sec-
tion 1248 amount (as defined in §1.1248(f)–1(c)(4))
with respect to the CFC1 stock that is attributable to
US1’s ownership interest percentage in UST. US1’s
hypothetical section 1248 amount with respect to
the CFC1 stock is the amount that UST would have
included in income as a deemed dividend under
§1.367(b)–4(b)(1)(i) with respect to the CFC1 stock
if the requirements of §1.367(b)–4(b)(1)(ii)(A) had
not been satisfied ($20x) and that would be attrib-
utable to US1’s ownership interest percentage in
UST (50%), reduced by the amount of gain recog-
nized by UST under §1.367(a)–7(c)(2) attributable
to US1 and allocable to the CFC1 stock, but only to
the extent such gain is treated as a dividend under
section 1248(a) ($0x, as described in paragraphs
(ii)(C)and(D)ofthis
Example 3). Thus, US1’s
hypothetical section 1248 amount with respect to
the CFC1 stock is $10x ($20x multiplied by 50%,
reduced by $0x). The $10x hypothetical section
1248 amount is attributed
pro rata(based on relative
values) among the 30 shares of FA stock distributed
to US1, and the attributable share amount (as defined
in §1.1248(f)–2(d)(1)) is $.33x ($10x/30 shares).
Similarly, US1’s hypothetical section 1248 amount
with respect to the CFC2 stock is $65x ($130x mul-
tiplied by 50%, reduced by $0x), and the attributable
share amount is $2.17x ($65x/30 shares). Similarly,
US2’s hypothetical section 1248 amount with respect
to the CFC1 stock is $6x ($20x multiplied by 30%,
reduced by $0x), and the attributable share amount is
also $.33x ($6x/18 shares). Finally, US2’s hypothet-
ical section 1248 amount with respect to the CFC2
stock is $39x ($130x multiplied by 30%, reduced by
$0x), and the attributable share amount is also $2.17x
($39x/18 shares). Thus, the sum of the portion of
the section 1248(f) amount with respect to the CFC1
stock and CFC2 stock attributable to shares of stock
of FA distributed to US1 and US2 is $120x ($10x
plus $65x plus $6x plus $39x).
(
2)IfthesharesofFAstockaredividedinto
portions, §1.1248(f)–2(d)(2) applies to attribute
the attributable share amount to portions of shares
of FA stock distributed to US1 and US2. Under
§1.1248(f)–2(c)(2) each share of FA stock received
by US1 (30 shares) and US2 (18 shares) is divided
into three portions, one attributable to the single
block of stock of CFC1, one attributable to the single
block of stock of CFC2, and one attributable to Asset
A. Thus, the attributable share amount of $.33x with
respect to the CFC1 stock is attributed to the portion
of each of the 30 shares and 18 shares of FA stock
received by US1 and US2, respectively, that relates
to the CFC1 stock. Similarly, the attributable share
amount of $2.17x with respect to the CFC2 stock is
attributed to the portion of each of the 30 shares and
18 shares of FA stock received by US1 and US2,
respectively, that relates to the CFC2 stock.
(
3) The total section 1248(f) amount ($120x) that
UST is otherwise required to include in gross income
as a dividend under §1.1248(f)–1(b)(3) is reduced by
$120x, the sum of the portions of the section 1248(f)
amount with respect to the CFC1 stock and CFC2
stock that are attributable to the shares of FA stock
distributed to US1 and US2. Thus, the amount DC
is required to include in gross income as a dividend
under §1.1248(f)–1(b)(3) is $0x ($120x reduced by
$120x).
(H) As stated in paragraph (ii)(G)(
2)ofthis
Example 3, under §1.1248(f)–2(c)(2) each share of
FA stock received by US1 (30 shares) and US2 (18
shares) is divided into three portions, one attrib-
utable to the CFC1 stock, one attributable to the
CFC2 stock, and one attributable to Asset A. Under
§1.1248(f)–2(c)(4)(i), the basis of each portion is
the product of US1’s and US2’s section 358 basis in
the share of FA stock multiplied by the ratio of the
section 362 basis of the property (CFC1 stock, CFC2
stock, or Asset A, as applicable) received by FA in
the section 361 exchange to which the portion relates,
to the aggregate section 362 basis of all property
received by FA in the section 361 exchange. Under
§1.1248(f)–2(c)(4)(ii), the fair market value of each
portion is the product of the fair market value of the
share of FA stock multiplied by the ratio of the fair
market value of the property (CFC1 stock, CFC2
stock, or Asset A, as applicable) to which the portion
relates, to the aggregate fair market value of all prop-
erty received by FA in the section 361 exchange. The
section 362 basis of the CFC1 stock, CFC2 stock,
and Asset A is $24x, $56x, and $48x, respectively,
foranaggregatesection362basisof$128x. See
paragraph (ii)(C) of this
Example 3. The fair market
value of the CFC1 stock, CFC2 stock, and Asset A is
$40x, $160x, and $200x, for an aggregate fair market
value of $400x. Furthermore, US1’s 30 shares of FA
stock have an aggregate fair market value of $200x
and section 358 basis of $30x (resulting in aggregate
gain of $170x), and US2’s 18 shares of FA stock
have an aggregate fair market value of $120x and
section 358 basis of $18x (resulting in aggregate gain
of $102x). See paragraph (ii)(E) of this
Example 3.
(
1) With respect to US1’s 30 shares of FA stock,
the portions attributable to the CFC1 stock have
an aggregate basis of $5.63x ($30x multiplied by
$24x/$128x) and fair market value of $20x ($200x
multiplied by $40x/$400x), resulting in aggregate
gain in such portions of $14.38x (or $.48x gain in
each such portion of the 30 shares). The portions
attributable to the CFC2 stock have an aggregate
basis of $13.13x ($30x multiplied by $56x/$128x)
and fair market value of $80x ($200x multiplied by
$160x/$400x), resulting in aggregate gain in such
portions of $66.88x (or $2.23x in each such por-
tion of the 30 shares). The portions attributable to
Asset A have an aggregate basis of $11.25x ($30x
multiplied by $48x/$128x) and fair market value of
$100x ($200x multiplied by $200x/$400x), resulting
in aggregate gain in such portions of $88.75x (or
$2.96x in each such portion of the 30 shares). Thus,
the aggregate gain in all the portions of the 30 shares
is $170x ($14.38x plus $66.88x plus $88.75x).
(
2) With respect to US2’s 18 shares of FA stock,
the portions attributable to the CFC1 stock have
an aggregate basis of $3.38x ($18x multiplied by
$24x/$128x) and fair market value of $12x ($120x
multiplied by $40x/$400x), resulting in aggregate
gain in such portions of $8.63x (or $.48x in each such
portion of the 18 shares). The portions attributable
to the CFC2 stock have an aggregate basis of $7.88x
($18x multiplied by $56x/$128x) and fair market
value of $48x ($120x multiplied by $160x/$400x),
resulting in aggregate gain of $40.13x (or $2.23x
in each such portion of the 18 shares). The por-
tions attributable to Asset A have an aggregate
basis of $6.75x ($18x multiplied by $48x/$128x)
and fair market value of $60x ($120x multiplied by
$200x/$400x), resulting in aggregate gain of $53.25x
(or $2.96x in each such portion of the 18 shares).
Thus, the aggregate gain in all the portions of the 18
shares is $102x ($8.63x plus $40.13x plus $53.25x).
(
3) Under §1.1248–8(b)(2)(iv), the earnings and
profits of CFC1 attributable to the portions of US1’s
30 shares of FA stock that relate to the CFC1 stock
is $15x (the product of US1’s 50% ownership inter-
May 6, 201310352013–19 I.R.B.

est percentage in UST multiplied by $30x of earn-
ings and profits attributable to the CFC1 stock before
the section 361 exchange, reduced by $0x of dividend
included in UST’s income with respect to the CFC1
stock under section 1248(a) attributable to US1). The
earnings and profits of CFC2 attributable to the por-
tions of US1’s 30 shares of FA stock that relate to
the CFC2 stock is $75x (the product of US1’s 50%
ownership interest percentage in UST multiplied by
$150x of earnings and profits attributable to the CFC2
stock before the section361 exchange, reduced by
$0x of dividend included in UST’s income with re-
spect to the CFC2 stock under section 1248(a) attrib-
utable to US1). Similarly, the earnings and profits of
CFC1 attributable to the portions of US2’s 18 shares
of FA stock that relate to the CFC1 stock is $9x (the
product of US2’s 30% ownership interest percentage
in UST multiplied by $30x of earnings and profits at-
tributable to the CFC1 stock before the section 361
exchange, reduced by $0x of dividend included in
UST’s income with respect to the CFC1 stock un-
der section 1248(a) attributable to US2). Finally, the
earnings and profits of CFC2 attributable to the por-
tions of US2’s 18 shares of FA stock that relate to
the CFC2 stock is $45x (the product of US2’s 30%
ownership interest percentage in UST multiplied by
$150x of earnings and profits attributable to the CFC2
stock before the section361 exchange, reduced by
$0x of dividend included in UST’s income with re-
spect to the CFC2 stock under section 1248(a) attrib-
utable to US2).
(I) Under §1.1248(f)–2(c)(3), neither US1 nor
US2 is required to reduce the aggregate section 358
basis in the portions of their respective shares of FA
stock, and UST is not required to include in gross
income any additional deemed dividend.
(
1) US1 is not required to reduce the aggregate
section 358 basis of the portions of its 30 shares
of FA stock that relate to the CFC1 stock because
the $10x section 1248(f) amount with respect to
the CFC1 stock attributable to the portions of the
shares of FA stock received by US1 (as computed
inparagraph(ii)(G)ofthis
Example 3) does not
exceed US1’s postdistribution amount (as defined
in §1.1248(f)–1(c)(6), or $14.38x) in those portions.
The $14.38x postdistribution amount equals the
amount that US1 would be required to include in
income as a dividend under section 1248(a) with
respect to such portion if it sold the 30 shares of FA
stock immediately after the distribution in a transac-
tion in which all realized gain is recognized, without
taking into account basis adjustments or income in-
clusions under §1.1248(f)–2(c)(3) ($20x fair market
value, $5.63x basis, and $15x earnings and profits
attributable to the portions for purposes of section
1248). Similarly, US1 is not required to reduce the
aggregate section 358 basis of the portions of its 30
shares of FA stock that relate to the CFC2 stock be-
cause the $65x section 1248(f) amount with respect
to the CFC2 stock attributable to the portions of the
shares of FA stock received by US1 (as computed
inparagraph(ii)(G)ofthis
Example 3) does not
exceed US1’s postdistribution amount ($66.88x) in
those portions. The $66.88x postdistribution amount
equals the amount that US1 would be required to in-
clude in income as a dividend under section 1248(a)
with respect to such portion if it sold the 30 shares
of FA stock immediately after the distribution in a
transaction in which all realized gain is recognized,
without taking into account basis adjustments or
income inclusions under §1.1248(f)–2(c)(3) ($80x
fair market value, $13.13x basis, and $75x earnings
and profits attributable to the portions for purposes
of section 1248).
(
2) US2 is not required to reduce the aggregate
section 358 basis of the portions of its 18 shares
of FA stock that relate to the CFC1 stock because
the $6x section 1248(f) amount with respect to the
CFC1 stock attributable to the portions of the shares
of FA stock received by US2 (as computed in para-
graph(ii)(G)ofthis
Example 3) does not exceed
US2’s postdistribution amount ($8.63x) in those
portions. The $8.63x postdistribution amount equals
the amount that US2 would be required to include
in income as a dividend under section 1248(a) with
respect to such portion if it sold the 18 shares of FA
stock immediately after the distribution in a transac-
tion in which all realized gain is recognized, without
taking into account basis adjustments or income in-
clusions under §1.1248(f)–2(c)(3) ($12x fair market
value, $3.38x basis, and $9x earnings and profits
attributable to the portions for purposes of section
1248). Similarly, US2 is not required to reduce the
aggregate section 358 basis of the portions of its 18
shares of FA stock that relate to the CFC2 stock be-
cause the $39x section 1248(f) amount with respect
to the CFC2 stock attributable to the portions of the
shares of FA stock received by US2 (as computed
inparagraph(ii)(G)ofthis
Example 3)doesnot
exceed US1’s postdistribution amount ($40.13x) in
those portions. The $40.13x postdistribution amount
equals the amount that US2 would be required to in-
clude in income as a dividend under section 1248(a)
withrespecttosuchportionifitsoldthe18shares
of FA stock immediately after the distribution in a
transaction in which all realized gain is recognized,
without taking into account basis adjustments or
income inclusions under §1.1248(f)–2(c)(3) ($48x
fair market value, $7.88x basis, and $45x earnings
and profits attributable to the portions for purposes
of section 1248).
(J) The amount of gain subject to the gain recog-
nition agreement filed by each of US1 and US2 is
determined pursuant to paragraph (e)(6)(i) of this
section. The amount of gain subject to the gain
recognition agreement filed by US1 with respect
to the stock of CFC1 and CFC2 is $10x and $65x,
respectively. The $10x and $65x are computed as
the product of US1’s ownership interest percentage
(50%) multiplied by the gain realized by UST in the
CFC1 stock ($20x) and CFC2 stock ($130x), respec-
tively, as determined prior to taking into account
the application of any other provision of section
367, reduced by the sum of the amounts described
in paragraphs (e)(6)(i)(A), (e)(6)(i)(B), (e)(6)(i)(C),
and (e)(6)(i)(D) of this section with respect to the
CFC1 stock and CFC2 stock attributable to US1
($0x with respect to the CFC1 stock, and $0x with
respect to the CFC2 stock). The amount of gain
subject to the gain recognition agreement filed by
US2withrespecttothestockofCFC1andCFC2is
$6x and $39x, respectively. The $6x and $39x are
computed as the product of US2’s ownership interest
percentage (30%) multiplied by the gain realized
by UST in the CFC1 stock ($20x) and CFC2 stock
($130x), respectively, as determined prior to taking
into account the application of any other provision
of section 367, reduced by the sum of the amounts
described in paragraphs (e)(6)(i)(A), (e)(6)(i)(B),
(e)(6)(i)(C), and (e)(6)(i)(D) of this section with
respect to the CFC1 stock and CFC2 stock attribut-
able to US2 ($0x with respect to the CFC1 stock,
and $0x with respect to the CFC2 stock). X is not
required to enter into a gain recognition agreement
because the amount of gain that would be subject to
the gain recognition agreement is $0x with respect to
the CFC1 stock, and $0x with respect to the CFC2
stock, computed as X’s ownership percentage (20%)
multiplied by the gain realized in the stock of CFC1
($20x multiplied by 20%, or $4x) and CFC2 ($130x
multiplied by 20%, or $26x), reduced by the amount
of gain recognized by UST with respect to the stock
of CFC1 and CFC2 that is attributable to X pursuant
to §1.367(a)–7(c)(2) ($4x and $26x, respectively, as
determined in paragraph (ii)(C) of this
Example 3).
Pursuant to paragraph (e)(6)(ii) of this section, each
gain recognition agreement must include the election
described in §1.367(a)–8(c)(2)(vi). Furthermore,
pursuant to paragraph (e)(6)(iii) of this section, US1
and US2 must be designated as the U.S. transferor
on their respective gain recognition agreements for
purposes of §1.367(a)–8.
(9)Illustration of rules.Forrulesre-
lating to certain distributions of stock
of a foreign corporation by a domes-
tic corporation, see section 1248(f) and
§§1.1248(f)–1 through 1.1248(f)–3.
(f) through (g)(1)(vi) [Reserved]. For
further guidance, see §§1.367(a)–3(f)
through (g)(1)(vi).
(vii)(A) Except as provided in this para-
graph (g)(1)(vii), the rules of paragraph (e)
of this section apply to transfers of stock
or securities occurring on or after April 17,
2013. For matters covered in this section
for periods before April 17, 2013, but on or
after March 13, 2009, see §1.367(a)–3(e)
as contained in 26 CFR part 1 revised as
of April 1, 2012. For matters covered in
this section for periods before March 13,
2009, but on or after March 7, 2007, see
§1.367(a)–3T(e) ascontainedin26CFR
part 1 revised as of April 1, 2007. For mat-
ters covered in this section for periods be-
fore March 7, 2007, but on or after July
20, 1998, see §1.367(a)–8(f)(2)(i) as con-
tained in 26 CFR part 1 revised as of April
1, 2006.
(g)(1)(vii)(B) through (g)(1)(viii)
[Reserved]. For further guidance see
§1.367(a)–3(g)(vii)(B) through (g)(viii).
(ix) Paragraphs (d)(2)(vi)(B) and
(d)(3),Example 6B,Example 6C,andEx-
ample 9of this section apply to transfers
that occur on or after March 18, 2013. See
paragraphs (d)(2)(vi)(B) and (d)(3),Ex-
ample 6B,Example 6C,andExample 9of
this section, as contained in 26 CFR part
1 revised as of April 1, 2012, for transfers
2013–19 I.R.B.1036May 6, 2013

that occur on or after January 23, 2006,
and before March 18, 2013.
(g)(2) through (j) [Reserved]. For
further guidance, see §1.367(a)–3(g)(2)
through (j).
(k)Expiration date.Paragraphs
(d)(2)(vi)(B), (d)(3),Example 6B,Exam-
ple 6C,andExample 9, and paragraph (e)
of this section expire on March 18, 2016.
Par. 4. Section 1.367(a)–6T is amended
by:
1. Adding a sentence at the end of the
paragraph (e)(4).
2. Adding paragraph (j).
The additions to read as follows:
§1.367(a)–6T Transfer of foreign
branch with previously deducted losses
(temporary).
*****
(e) * * *
(4)***Fortransactions occurring
on or after April 17, 2013,notwithstand-
ing the prior sentence, this paragraph
(e)(4) shall apply before the rules of
§1.367(a)–7(c).
*****
(j)Expiration date. The second sen-
tence of paragraph (e)(4) of this section ex-
pires on March 18, 2016.
Par. 5. Section 1.367(a)–7T is added to
read as follows:
§1.367(a)–7T Outbound transfers of
property described in section 361(a) or
(b).
(a) through (e)(1) [Reserved].For fur-
ther guidance, see §1.367(a)–7(a) through
(e)(1).
(2)Reasonable cause for failure to
comply (temporary)—(i)Request for re-
lief. A control group member’s failure to
timely comply with any requirement of
this section shall be deemed not to have
occurred if the control group member is
able to demonstrate that the failure was
due to reasonable cause and not will-
ful neglect using theprocedure set forth
in paragraph (e)(2)(ii) of this section.
Whether the failure to timely comply was
due to reasonable cause and not willful
neglect will be determined by the Director
of Field Operations International, Large
Business & International (or any successor
to the roles and responsibilities of such
person) (Director) based on all the facts
and circumstances.
(ii)Procedures for establishing that a
failure to timely comply was due to reason-
able cause and not willful neglect—(A)
Time of submission. A control group mem-
ber’s statement that the failure to timely
comply was due to reasonable cause and
not willful neglect will be considered
only if, promptly after the control group
member becomes aware of the failure, an
amended return is filed for the taxable year
to which the failure relates that includes
the information that should have been in-
cluded with the original return for such
taxable year or that otherwise complies
with the rules of this section, and that in-
cludes a written statement explaining the
reasons for the failure to timely comply.
(B)Notice requirement. In addition to
the requirements of paragraph (e)(2)(ii)(A)
of this section, a control group member
must comply with the notice requirements
of this paragraph (e)(2)(ii)(B). If any tax-
able year of the control group member is
under examination when the amended re-
turn is filed, a copy of the amended re-
turn and any information required to be in-
cluded with such return must be delivered
to the Internal Revenue Service personnel
conducting the examination. If no taxable
year of the control group member is under
examination when the amended return is
filed, a copy of the amended return and any
informationrequiredtobeincludedwith
such return must be delivered to the Direc-
tor.
(iii)Cross-reference for reasonable
cause relief requests by U.S. transferor.
If the U.S. transferor fails to timely com-
ply with any requirement of this sec-
tion, the U.S. transferor will be treated
as having timely complied with the re-
quirement if the U.S. transferor (or the
foreign acquiring corporation on behalf
of the U.S. transferor) satisfies the rea-
sonable cause requirements described in
§1.6038B–1T(f)(3).
(iv)Effective/applicability date.The
rules of paragraphs (e)(2)(i) through
(e)(2)(iii) of this section shall apply to
transactions occurring on or after April
17, 2013.
(v)Expiration date.Paragraphs
(e)(2)(i) through (e)(2)(iv) of this section
expire on March 18, 2016.
(e)(3) through (j) [Reserved]. For
further guidance, see §1.367(a)–7(e)(3)
through (j).
Par. 6. Section 1.1248(f)–3T is added
to read as follows:
§1.1248(f)–3T Reasonable cause and
effective/applicability dates (temporary).
(a)Reasonable cause for failure to
comply—(1)Request for relief.Ifan
80-percent distributee, a distributee that
is a section 1248 shareholder, or the do-
mestic distributing corporation (reporting
person) fails to timely comply with any re-
quirement under §1.1248(f)–2, the failure
shall be deemed not to have occurred if
the reporting person isable to demonstrate
that the failure was due to reasonable cause
and not willful neglect using the procedure
set forth in paragraph (a)(2) of this section.
Whether the failure to timely comply was
due to reasonable cause and not willful
neglect will be determined by the Director
of Field Operations International, Large
Business & International (or any successor
to the roles and responsibilities of such
person) (Director) based on all the facts
and circumstances.
(2)Procedures for establishing that a
failure to timely comply was due to rea-
sonable cause and not willful neglect—(i)
Time of submission. A reporting person’s
statement that the failure to timely com-
ply was due to reasonable cause and not
willful neglect will be considered only if,
promptly after the reporting person be-
comes aware of the failure, an amended
return is filed for the taxable year to which
the failure relates that includes the infor-
mation that should have been included
with the original return for such taxable
year or that otherwise complies with the
rules of this section, and that includes a
written statement explaining the reasons
for the failure to timely comply.
(ii)Notice requirement. In addition to
the requirements of paragraph (a)(2)(i)
of this section, the reporting person must
comply with the notice requirements of
this paragraph (a)(2)(ii). If any taxable
year of the reporting person is under exam-
ination when the amended return is filed, a
copy of the amended return and any infor-
mationrequiredtobeincludedwithsuch
return must be delivered to the Internal
Revenue Service personnel conducting
the examination. If no taxable year of
May 6, 201310372013–19 I.R.B.

the reporting person is under examination
when the amended return is filed, a copy
of the amended return and any information
required to be included with such return
must be delivered to the Director.
(3)Effective/applicability date.This
section applies to distributions occurring
on or after April 17, 2013.
(4)Expiration date. Paragraphs (a)(1)
through(a)(3)ofthis section expire on
March 18, 2016.
Par. 7. Section 1.6038B–1T is
amended by revising paragraph (f) to read:
§1.6038B–1T Reporting of certain
transfers to foreign corporations.
*****
(f)(1) through (f)(2) [Reserved]. For
further guidance, see §1.6038B–1(f)(1)
through (f)(2).
(3)Reasonable cause for failure to
comply—(i)Request for relief.Ifthe
U.S. transferor fails to comply with any
requirement of section 6038B and this
section, the failure shall be deemed not to
have occurred if the U.S. transferor is able
to demonstrate that the failure was due to
reasonable cause and not willful neglect
using the procedure set forth in paragraph
(f)(3)(ii) of this section. Whether the
failure to timely comply was due to rea-
sonable cause and notwillful neglect will
be determined by the Director of Field
Operations International, Large Business
& International (or any successor to the
roles and responsibilities of such person)
(Director) based on all the facts and cir-
cumstances.
(ii)Procedures for establishing that a
failuretotimelycomplywasduetorea-
sonable cause and not willful neglect—(A)
Time of submission. A U.S. transferor’s
statement that the failure to timely com-
ply was due to reasonable cause and not
willful neglect will be considered only if,
promptly after the U.S. transferor becomes
aware of the failure, an amended return
is filed for the taxable year to which the
failure relates that includes the information
that should have been included with the
original return for such taxable year or that
otherwise complies with the rules of this
section, and that includes a written state-
ment explaining the reasons for the failure
to timely comply.
(B)Notice requirement. In addition to
the requirements of paragraph (f)(3)(ii)(A)
of this section, the U.S. transferor must
comply with the notice requirements of
this paragraph (f)(3)(ii)(B). If any taxable
year of the U.S. transferor is under exami-
nation when the amended return is filed, a
copy of the amended return and any infor-
mationrequiredtobeincludedwithsuch
return must be delivered to the Internal
Revenue Service personnel conducting the
examination. If no taxable year of the
U.S. transferor is under examination when
the amended return is filed, a copy of the
amended return and any information re-
quired to be included with such return must
be delivered to the Director.
(iii)Effective/applicability date.This
section applies to distributions occurring
on or after April 17, 2013.
(iv)Expiration date. Paragraphs
(f)(3)(i) through (f)(3)(iii) of this section
expire on March 18, 2016.
(f)(4) [Reserved]. For further guidance,
see §1.6038B–1T(f)(4).
PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par.8. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805 * * *
Par.9. In §602.101, the table in para-
graph (b) is amended by adding the follow-
ing entry numerical order:
§602.101 OMB Control numbers.
*****
(b) * * *
CFR part or section where
Identified and described
Current OMB
control No.
*******
1.367(a)–3T...........................................................
1545–2183
*******
1.367(a)–7T...........................................................
1545–2183
*******
1.1248(f)–3T...........................................................
1545–2183
*******
1.6038B–1T...........................................................
1545–2183
*******
*****
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
Approved February 19, 2013.
Mark J. Mazur,
Assistant Secretary
oftheTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on March 18,
2013, 8:45 a.m., and published in the issue of the Federal
Register for March 19, 2013, 78 F.R. 17053)
2013–19 I.R.B.1038May 6, 2013

Part III. Administrative, Procedural, and Miscellaneous
Update for Weighted Average
Interest Rates, Yield Curves,
and Segment Rates
Notice 2013–28
This notice provides guidance on the
corporate bond monthly yield curve (and
the corresponding spot segment rates), and
the 24-month average segment rates under
§ 430(h)(2) of the Internal Revenue Code.
In addition, this notice provides guidance
as to the interest rate on 30-year Trea-
sury securities under § 417(e)(3)(A)(ii)(II)
as in effect for plan years beginning be-
fore 2008, the 30-year Treasury weighted
average rate under § 431(c)(6)(E)(ii)(I),
and the minimum present value segment
rates under § 417(e)(3)(D) as in effect for
plan years beginning after 2007. These
rates reflect certain changes implemented
by the Moving Ahead for Progress in the
21st Century Act, Public Law 112–141
(MAP–21). MAP–21 provides that for
purposes of § 430(h)(2), the segment rates
are limited by the applicable maximum
percentage or the applicable minimum per-
centage based on the average of segment
rates over a 25 year period.
YIELD CURVE AND SEGMENT
RATES
Generally, except for certain plans
under sections 104 and 105 of the Pen-
sion Protection Act of 2006, § 430 of
the Code specifies the minimum funding
requirements that apply to single em-
ployer plans pursuant to § 412. Section
430(h)(2) specifies the interest rates that
must be used to determine a plan’s target
normal cost and funding target. Under
this provision, present value is generally
determined using three 24-month average
interest rates (“segment rates”), each of
which applies to cash flows during speci-
fied periods. To the extent provided under
§ 430(h)(2)(C)(iv), these segment rates are
adjusted by the applicable percentage of
the 25-year average segment rates for the
period ending September 30 of the year
preceding the calendar year in which the
plan year begins. However, an election
may be made under § 430(h)(2)(D)(ii) to
use the monthly yield curve in place of the
segment rates.
Notice 2007–81, 2007–44 I.R.B. 899,
provides guidelines for determining the
monthly corporate bond yield curve, and
the 24-month average corporate bond seg-
ment rates used to compute the target nor-
mal cost and the funding target. Pursuant
to Notice 2007–81, the monthly corporate
bond yield curve derived from March 2013
data is in Table I at the end of this notice.
The spot first, second, and third segment
rates for the month of March 2013 are,
respectively, 0.97, 3.82, and 5.11. For
plan years beginning on or after January 1,
2012, the 24-month average segment rates
determined under § 430(h)(2)(C)(iv) must
be adjusted by the applicable percentage
of the corresponding 25-year average seg-
ment rates. The 25-year average segment
rates for plan years beginning in 2012 and
for plan years beginning in 2013 were pub-
lished in Notices 2012–55 and 2013–11,
respectively. The three 24-month average
corporate bond segment rates applicable
for April 2013 without adjustment, and
the adjusted 24-month average segment
rates taking into account the applicable
percentages of the corresponding 25-year
average segment rates, are as follows:
24-Month Average Segment Rates
Not Adjusted
Adjusted 24-MonthAverage Segment
Rates, Based on Applicable Percentage
of 25-Year Average Rates
For Plan
Years
Beginning
In
Applicable
Month
First
Segment
Second
Segment
Third
Segment
First
Segment
Second
Segment
Third
Segment
2012April2013
1.50
4.22
5.265.546.857.52
2013April2013
1.50
4.22
5.26
4.94
6.15
6.76
30-YEAR TREASURY SECURITIES
INTEREST RATES
Generally for plan years beginning
after 2007, § 431 specifies the mini-
mum funding requirements that apply to
multiemployer plans pursuant to § 412.
Section 431(c)(6)(B)specifies a minimum
amount for the full-funding limitation
described in section 431(c)(6)(A), based
on the plan’s current liability. Section
431(c)(6)(E)(ii)(I) provides that the inter-
est rate used to calculate current liability
for this purpose must be no more than 5
percent above and no more than 10 percent
below the weighted average of the rates
of interest on 30-year Treasury securities
during the four-year period ending on the
last day before the beginning of the plan
year. Notice 88–73, 1988–2 C.B. 383,
provides guidelines for determining the
weighted average interest rate. The rate of
interest on 30-year Treasury securities for
March 2013 is 3.16 percent. The Service
has determined this rate as the average
of the daily determinations of yield on
the 30-year Treasury bond maturing in
February 2043. The following rates were
determined for plan years beginning in the
month shown below.
May 6, 201310392013–19 I.R.B.

For Plan Years
Beginning inPermissible Ran
ge
MonthYear
30-Year
Treasury
Weighted
Average90%to105%
April2013
3.52
3.173.69
MINIMUM PRESENT VALUE
SEGMENT RATES
In general, the applicable interest rates
under § 417(e)(3)(D) are segment rates
computed without regard to a 24-month
average. Notice 2007–81 provides guide-
lines for determining the minimum present
value segment rates. Pursuant to that no-
tice, the minimum present value transi-
tional segment rates determined for March
2013 are as follows:
First
Segment
Second
Segment
Third
Segment
0.973.82
5.11
DRAFTING INFORMATION
The principal author of this notice is
Tony Montanaro of the Employee Plans,
Tax Exempt and Government Entities
Division. Mr. Montanaro may be e-mailed
atRetirementPlanQuestions@irs.gov.
2013–19 I.R.B.1040May 6, 2013

Table I
Monthly Yield Curve for March 2013
Derived from March 2013 Data
Maturity YieldMaturity YieldMaturity YieldMaturity YieldMaturity Yield
0.5
0.31
20.5
4.78
40.55.1560.55.2980.55.36
1.00.4721.04.7941.0
5.16
61.0
5.29
81.0
5.36
1.5
0.63
21.5
4.81
41.55.1661.55.3081.55.36
2.00.7722.04.8342.0
5.17
62.0
5.30
82.0
5.36
2.5
0.90
22.5
4.84
42.55.1762.55.3082.55.37
3.01.0323.04.8543.05.1863.05.3083.05.37
3.5
1.16
23.5
4.87
43.55.1863.55.3083.55.37
4.01.3124.04.8844.0
5.19
64.0
5.31
84.0
5.37
4.5
1.47
24.5
4.89
44.55.1964.55.3184.55.37
5.0
1.64
25.0
4.90
45.05.2065.05.3185.05.37
5.5
1.83
25.5
4.91
45.55.2065.55.3185.55.37
6.02.0226.04.9346.05.2066.05.3186.05.37
6.5
2.22
26.5
4.94
46.55.2166.55.3286.55.38
7.02.4327.0
4.95
47.0
5.21
67.0
5.32
87.0
5.38
7.5
2.62
27.5
4.96
47.55.2267.55.3287.55.38
8.02.8228.04.9748.0
5.22
68.0
5.32
88.0
5.38
8.5
3.00
28.5
4.98
48.55.2268.55.3288.55.38
9.03.1829.04.9949.05.2369.05.3389.05.38
9.53.3529.55.0049.55.2369.55.3389.55.38
10.0
3.50
30.0
5.0150.05.23
70.0
5.33
90.0
5.38
10.5
3.64
30.55.0250.55.2470.55.3390.55.38
11.03.7731.0
5.0351.05.24
71.0
5.33
91.0
5.39
11.5
3.89
31.55.0451.55.2471.55.3391.55.39
12.04.0032.05.0452.05.2572.05.3492.05.39
12.5
4.10
32.55.0552.55.2572.55.3492.55.39
13.04.1933.0
5.0653.05.25
73.0
5.34
93.0
5.39
13.5
4.26
33.55.0753.55.2673.55.3493.55.39
14.04.3334.0
5.0754.05.26
74.0
5.34
94.0
5.39
14.5
4.39
34.55.0854.55.2674.55.3494.55.39
15.04.4535.05.0955.05.2675.05.3595.05.39
15.54.5035.55.1055.55.2775.55.3595.55.39
16.0
4.54
36.0
5.1056.05.27
76.0
5.35
96.0
5.39
16.54.5836.55.1156.55.2776.55.3596.55.40
17.04.6137.0
5.1157.05.27
77.0
5.35
97.0
5.40
17.5
4.64
37.55.1257.55.2877.55.3597.55.40
18.04.6738.05.1358.05.2878.05.3598.05.40
18.5
4.70
38.55.1358.55.2878.55.3698.55.40
19.04.7239.0
5.1459.05.28
79.0
5.36
99.0
5.40
19.5
4.74
39.55.1459.55.2979.55.3699.55.40
20.04.7640.0
5.15
60.0
5.29
80.0
5.36
100.0
5.40
May 6, 201310412013–19 I.R.B.

Part IV. Items o
fGeneralInterest
Notice of Prop
osed
Rulemaking
Indirect Stoc
k Transfers
and Coordinat
ion Rule
Exceptions;
Transfers of Stock
or Securitie
s in Outbound
Asset Reorg
anizations
REG–132702
–10
AGENCY: Int
ernal Revenue Service
(IRS), Tre
asury.
ACTION: No
tice of proposed rulemaking
by cross-r
eference to temporary regula-
tions.
SUMMARY: I
n this issue of the Bulletin,
the IRS and
the Treasury Department
are issui
ng temporary regulations that
eliminat
e one of two exceptions to the
coordina
tion rule between asset transfers
and indir
ect stock transfers for certain out-
bound ass
et reorganizations. The tempo-
rary reg
ulations also modify the exception
to the co
ordination rule for certain out-
bound ex
changes so that it is consistent
with the
remaining asset reorganization
excepti
on. In addition, the regulations
modify
, in various contexts, procedures for
obtain
ing reasonable cause relief. Finally,
the tem
porary regulations implement cer-
tain ch
anges with respect to transfers of
stock o
r securities by a domestic corpora-
tion t
o a foreign corporation in a section
361 ex
change. The regulations primarily
affec
t domestic corporations that transfer
prope
rty to foreign corporations in certain
outbo
und nonrecognition exchanges. The
text
of the temporary regulations published
in th
is issue of the Bulletin also serves as
the t
ext of these proposed regulations.
DATE
S: Comments and requests for a
publ
ic hearing must be received by June
17, 2
013.
ADDR
ESSES: Send submissions to:
CC:
PA:LPD:PR (REG–132702–10), room
520
5, Internal Revenue Service, P.O. Box
760
4, Ben Franklin Station, Washing-
ton
, DC 20044. Submissions may be
han
d-delivered Monday through Friday
bet
ween the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:
PR (REG–132702–10),
Courier’s Des
k, Internal Revenue Ser-
vice, 1111 Con
stitution Avenue NW,
Washington, D
C, or sent electroni-
cally via the F
ederal eRulemaking Por-
tal athttp:/
/www.regulations.gov(IRS
REG–132702–
10).
FOR FURTHER I
NFORMATION
CONTACT: Con
cerning the proposed reg-
ulations, Ro
bert B. Williams, Jr., (202)
622–3860; c
oncerning submissions of
comments or
requests for a public hearing,
Oluwafunmi
layo Taylor, (202) 622–7180
(not toll-f
ree numbers).
SUPPLEMENT
ARY INFORMATION:
Background
and Explanation of
Provision
s
Temporary
regulations in the Rules and
Regulatio
ns section of this issue of the
Federal Re
gisteramend the Income Tax
Regulatio
ns (26 CFR part 1) under section
367 of the I
nternal Revenue Code (Code).
The text o
f those regulations also serves as
the text o
f these proposed regulations. The
preamble
to the temporary regulations ex-
plains th
e amendments.
Special A
nalyses
It has bee
n determined that this notice
of propo
sed rulemaking is not a signifi-
cant reg
ulatory action as defined in Ex-
ecutive
Order 12866. Therefore, a reg-
ulatory
assessment is not required. It is
hereby c
ertified that the collections of in-
formati
on contained in these regulations
will no
t have a significant economic im-
pact on
a substantial number of small en-
tities
. Accordingly, a regulatory flexibility
analys
is is not required. These regulations
primar
ily will affect United States persons
that a
re large corporations engaged in cor-
porat
e transactions among their controlled
corpo
rations. Thus, the number of affected
small
entities—in whichever of the three
categ
ories defined in the Regulatory Flex-
ibil
ity Act (small businesses, small organi-
zati
ons, and small governmental jurisdic-
tion
s)—will not be substantial. The IRS
and t
he Treasury Department estimate that
smal
l organizations and small governmen-
tal
jurisdictions are likely to be affected
onl
y insofar as they transfer the stock of
acontrolledc
orporation to a related cor-
poration. Whi
le a certain number of small
entities may e
ngage in such transactions,
the IRS and the
Treasury Department do
not anticipat
e the number to be substantial.
Pursuant to s
ection 7805(f) of the Code,
this regulat
ion has been submitted to the
Chief Counse
l for Advocacy of the Small
Business Adm
inistration for comment on
its impact o
n small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations
are adopted as final regulations, con-
sideration will be given to any com-
ments that are submitted timely to the
IRS as prescribed in this preamble un-
der “Addresses” heading. The IRS and
the Treasury Department request com-
ments on all aspects of the proposed
rules. All comments will be available
atwww.regulations.govor upon request.
A public hearing will be scheduled if
requested in writing by any person that
timely submits written comments. If a
public hearing is scheduled, notice of the
date, time, and place for the public hearing
will be published in theFederal Register.
Draftin
g Information
The principal author of these regu-
lations is Robert B. Williams, Jr. of
the Office of Associate Chief Counsel
(International). However, other personnel
from the IRS and the Treasury Department
participated in their development.
*****
Propo
sed Amendments to the
Regul
ations
Accordingly, 26 CFR part 1 is proposed
to be amended as follows:
PART 1—INCOME TAXES
Parag
raph 1. The authority citation for
part
1 continues to read as follows:
Autho
rity:26U.S.C.7805***
Par. 2
. Section 1.367(a)–3 is amended
by:
1. Rev
ising paragraphs (d)(2)(vi)(B),
(d)(
3)Example 6B,Example 6C,andEx-
ampl
e9.
2013–19 I.R.B.1042May 6, 2013

2. Revising paragraph (e).
3. Adding paragraphs (g)(1)(vii)(A)
and (g)(1)(ix) .
The revisions and additions to read as
follows:
§1.367(a)–3 Treatment of transfers of
stock or securities to foreign corporations.
*****
(d) * * *
(2) * * *
(vi) * * *
(B) [The text of proposed
§1.367(a)–3(d)(2)(vi)(B) is the same as
the text of §1.367(a)–3T(d)(2)(vi)(B)
published elsewhere in this issue of the
Bulletin.
*****
(3) * * *
Example 6B. [The text of proposed
§1.367(a)–3(d)(3)Example 6Bis the same
as the text of §1.367(a)–3T(d)(3)Example
6Bpublished elsewhere in this issue of the
Bulletin.
Example 6C. [The text of proposed
§1.367(a)–3(d)(3)Example 6Cis the same
as the text of §1.367(a)–3T(d)(3)Example
6Cpublished elsewhere in this issue of the
Bulletin.
*****
Example 9. [The text of proposed
§1.367(a)–3(d)(3)Example 9is the same
as the text of §1.367(a)–3T(d)(3)Example
9published elsewhere in this issue of the
Bulletin.
*****
(e) [The text of proposed
§1.367(a)–3(e) is the same as the text of
§1.367(a)–3T(e) published elsewhere in
this issue of the Bulletin.
*****
(g)* * *(1)* * *
(vii)(A) [The text of proposed
§1.367(a)–3(a)(1)(vii)(A) is the same as
the text of §1.367(a)–3T(g)(1)(vii)(A)
published elsewhere in this issue of the
Bulletin.
*****
(ix) [The text of proposed
§1.367(a)–3(g)(1)(ix) is the same as the
text of §1.367(a)–3T(g)(1)(ix) published
elsewhere in this issue of the Bulletin.
*****
Par. 3. Section 1.367(a)–6 is amended
by revising paragraph (e)(4) to read as fol-
lows:
§1.367(a)–6 Transfer of foreign branch
with previously deducted losses.
*****
(e) * * *
(4) * * * [The text of the final sen-
tence of proposed §1.367(a)–6(e)(4) is the
same as the text of the final sentence of
§1.367(a)–6T(e)(4) published elsewhere
in this issue of the Bulletin.
Par. 4. Section 1.367(a)–7 is amended
by revising paragraph (e)(2) to read as fol-
lows:
§1.367(a)–7 Outbound transfers of
property described in section 361(a) or
(b).
*****
(e) * * *
(2) [The text of proposed
§1.367(a)–7(e)(2) is the same as the text of
§1.367(a)–7T(e)(2) published elsewhere
in this issue of the Bulletin.
*****
Par. 5. Section 1.1248(f)–3 is amended
by revising paragraph (a) to read as fol-
lows:
§1.1248(f)–3 Reasonable cause and
effective/applicability dates.
(a) [The text of proposed §1.1248(f)–3
is the same as the text of proposed
§1.1248(f)–3T published elsewhere in this
issue of the Bulletin.
*****
Par. 6. Section 1.6038B–1 is amended
by revising paragraph (f)(3) to read as fol-
lows:
§1.6038B–1 Reporting of certain transfers
to foreign corporations.
*****
(f) * * *
(3) [The text of proposed
§1.6038B–1(f)(3) is the same as the text of
§1.6038B–1T(f)(3) published elsewhere
in this issue of the Bulletin.
*****
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on March 18,
2013, 8:45 a.m., and published in the issue of the Federal
Register for March 19, 2013, 78 FR 17066)
Notice of Proposed
Rulemaking
Ninety-Day Waiting Period
Limitation and Technical
Amendments to Certain Health
Coverage Requirements
Under the Affordable Care Act
REG–122706–12
AGENCIES:Internal Revenue Service,
Department of the Treasury; Employee
Benefits Security Administration, Depart-
ment of Labor; Centers for Medicare &
Medicaid Services, Department of Health
and Human Services.
ACTION:Proposed rules.
SUMMARY:These proposed rules imple-
ment the 90-day waiting period limitation
under section 2708 of the Public Health
Service Act, as added by the Patient Pro-
tection and Affordable Care Act (Afford-
able Care Act), as amended, and incor-
porated into the Employee Retirement In-
come Security Act of 1974 and the In-
ternal Revenue Code. They also propose
amendments to regulations to conform to
Affordable Care Act provisions already in
effect as well as those that will become
effective beginning 2014. The proposed
conforming amendments make changes to
existing requirements such as preexisting
condition limitations and other portabil-
ity provisions added by the Health Insur-
ance Portability and Accountability Act of
1996 (HIPAA) and implementing regula-
tions because they have become moot or
need amendment due to new market
reform
protections under the Affordable Care Act.
DATES:Comments are due on or before
May 20, 2013.
ADDRESSES:Written comments may be
submitted to the Department of Labor as
specified below. Any comment that is sub-
mitted will be shared with the other De-
partments and will also be made available
to the public. Warning: Do not include any
personally identifiable information (such
May 6, 201310432013–19 I.R.B.

as name, address, or other contact informa-
tion) or confidentialbusiness information
that you do not want publicly disclosed.
AllcommentsmaybepostedontheIn-
ternet and can be retrieved by most Inter-
net search engines. No deletions, mod-
ifications, or redactions will be made to
the comments received, as they are pub-
lic records. Comments may be submitted
anonymously.
Comments, identified by “Waiting Peri-
ods”, may be submitted by one of the fol-
lowing methods:
FederaleRulemakingPortal:
http://www.regulations.gov. Follow the
instructions for submitting comments.
Mail or Hand Delivery:Officeof
Health Plan Standards and Compliance
Assistance, Employee Benefits Secu-
rity Administration, Room N–5653, U.S.
Department of Labor, 200 Constitution
Avenue NW, Washington, DC 20210,At-
tention: Waiting Periods.
Comments received will be posted
without change towww.regulations.gov
and available for public inspection
at the Public Disclosure Room,
N–1513, Employee Benefits Security
Administration, 200 Constitution Avenue,
NW, Washington, DC 20210, including
any personal information provided.
FOR FURTHER INFORMATION
CONTACT:AmyTurneror
Elizabeth Schumacher,Employee
Benefits Security Administration,
Department of Labor, at (202) 693–8335;
Karen Levin or Kathryn Johnson,
Internal Revenue Service, Department
of the Treasury, at (202) 927–9639;
or Cam Moultrie Clemmons, Centers
for Medicare & Medicaid Services,
Department of Health and Human
Services, at (410) 786–1565.
Customer service information: Indi-
viduals interested inobtaining infor-
mation from the Department of Labor
concerning employment-based health
coverage laws may call the EBSA
Toll-Free Hotline at 1–866–444–EBSA
(3272) or visit the Department of La-
bor’s website (www.dol.gov/ebsa). In
addition, information from HHS on
private health insurance for consumers
can be found on the Centers for Medicare
& Medicaid Services (CMS) website
(www.cciio.cms.gov/) and information
on health reform can be found at
www.HealthCare.gov.
SUPPLEMENTARY INFORMATION:
I. Background
The Patient Protection and Affordable
Care Act, Pub. L. 111–148, was enacted
on March 23, 2010, and the Health Care
and Education Reconciliation Act, Pub. L.
111–152, was enacted on March 30, 2010.
(They are collectively known as the “Af-
fordable Care Act”.) The Affordable Care
Act reorganizes, amends, and adds to the
provisions of part A of title XXVII of the
Public Health Service Act (PHS Act) re-
lating to group health plans and health in-
surance issuers in the group and individual
markets. The term “group health plan” in-
cludes both insured and self-insured group
health plans.
1
The Affordable Care Act
adds section 715(a)(1) to the Employee
Retirement Income Security Act (ERISA)
and section 9815(a)(1) to the Internal Rev-
enue Code (the Code) to incorporate the
provisions of part A of title XXVII of the
PHS Act into ERISA and the Code, and
to make them applicable to group health
plans and health insurance issuers provid-
ing health insurance coverage in connec-
tion with group health plans. The PHS Act
sections incorporated by these references
are sections 2701 through 2728.
PHS Act section 2708, as added by
the Affordable Care Act and incorporated
into ERISA and the Code, provides that
a group health plan or health insurance
issuer offering group health insurance cov-
erage shall not apply any waiting period
(as defined in PHS Act section 2704(b)(4))
that exceeds 90 days. PHS Act section
2704(b)(4), ERISA section 701(b)(4), and
Code section 9801(b)(4) define a waiting
period to be the period that must pass with
respect to an individual before the individ-
ual is eligible to be covered for benefits
under the terms of the plan. In 2004 regu-
lations implementing the Health Insurance
Portability and Accountability Act of 1996
(HIPAA) portability provisions (2004
HIPAA regulations), the Departments of
Labor, Health and Human Services, and
the Treasury (the Departments) defined
a waiting period to mean the period that
must pass before coverage for an employee
or dependent who is otherwise eligible to
enroll under the terms of a group health
plan can become effective.
2
PHS Act sec-
tion 2708 applies to both grandfathered
and non-grandfathered group health plans
and group health insurance coverage for
plan years beginning on or after January
1, 2014.
PHS Act section 2708 does not require
an employer to offer coverage to any par-
ticular employee or class of employees,
including part-time employees. PHS Act
section 2708 merely prevents an otherwise
eligible employee (or dependent) from be-
ingrequiredtowaitmorethan90days
before coverage becomes effective. Fur-
thermore, nothing in the Affordable Care
Act penalizes small employers for choos-
ing not to offer coverage, or applicable
large employers, as defined in the em-
ployer shared responsibility provisions un-
der Code section 4980H, for choosing to
limit their offer of coverage to full-time
employees (and their dependents), as de-
fined in the employer shared responsibility
provisions under Code section 4980H.
On February 9, 2012, the Depart-
ments issued guidance
3
outlining various
approaches under consideration with re-
spect to both the 90-day waiting period
limitation and the employer shared re-
sponsibility provisions under Code section
4980H (February 2012 guidance). Public
comments were invited generally, as well
as specifically, regarding how rules re-
lating to the potential look-back/stability
period safe harbor method for determin-
ing the number of full-time employees
under Code section 4980H should be co-
ordinated with the 90-day waiting period
limitation.
On August 31, 2012, following their
review of the comments on the February
2012 guidance, the Departments provided
temporary guidance,
4
to remain in effect
at least through the end of 2014, regard-
1
The term “group health plan” is used in title XXVII of the PHS Act, part 7 of ERISA, and chapter 100 of the Code, and is distinct from the term “health plan,”as used in other provisions of
title I of the Affordable Care Act. The term “health plan” does not include self-insured group health plans.
2
26 CFR 54.9801–3(a)(3)(iii), 29 CFR 2590.701–3(a)(3)(iii), and 45 CFR 146.111(a)(3)(iii).
3
Department of Labor Technical Release 2012–01, IRS Notice 2012–17, and HHS FAQs issued February 9, 2012.
4
Department of Labor Technical Release 2012–02, IRS Notice 2012–59, and HHS FAQs issued August 31, 2012.
2013–19 I.R.B.1044May 6, 2013

ing the 90-day waiting period limitation,
and described the approach they intended
to propose in rulemaking in the future (Au-
gust 2012 guidance). The August 2012
guidance provides that employers, plans,
and issuers may rely on the compliance
guidance at least through the end of 2014
and that, for purposes of enforcement by
the Departments, compliance with the ap-
proach set forth in the August 2012 guid-
ance will be considered compliance with
the provisions of PHS Act section 2708 at
least through the end of 2014.
In general, the August 2012 guidance
provides, among other things, that eligibil-
ity conditions based solely on the lapse of
a time period are permissible for no more
than 90 days. Other conditions for eligi-
bility under the terms of a group health
plan are generally permissible under PHS
Act section 2708, unless the condition is
designed to avoid compliance with the
90-day waiting period limitation. The Au-
gust 2012 guidance further clarifies that
if, under the terms of a plan, an employee
may elect coverage that would begin on a
date that does not exceed the 90-day wait-
ing period limitation, the 90-day waiting
period limitation is considered satisfied
and, accordingly, a plan or issuer will not
be considered to have violated PHS Act
section 2708 solely because employees
may take additional time to elect coverage.
The August 2012 guidance also ad-
dresses the application of PHS Act section
2708 to variable-hour employees in cases
in which a specified number of hours of
service per period is a plan eligibility con-
dition. Specifically, the guidance provides
that if a group healthplan conditions eli-
gibility on an employee regularly working
a specified number of hours per period
(or working full-time), and it cannot be
determined that a newly-hired employee
is reasonably expected to regularly work
that number of hours per period (or work
full-time), the plan may take a reasonable
period of time to determine whether the
employee meets the plan’s eligibility con-
dition, which may include a measurement
period that is consistent with the time-
frame permitted for such determinations
under Code section 4980H.
5
Except in
cases in which a waiting period that ex-
ceeds 90 days is imposed in addition to a
measurement period, the time period for
determining whether such an employee
meets the plan’s eligibility condition will
not be considered to be designed to avoid
compliance with the 90-day waiting period
limitation if coverage is made effective no
later than 13 months from the employee’s
start date, plus if the employee’s start date
is not the first day of a calendar month, the
time remaining until the first day of the
next calendar month.
The August 2012 guidance also ad-
dresses application of the rules to plans
with cumulative hours-of-service require-
ments. The August 2012 guidance in-
cludes an example stating that, if a plan’s
cumulative hours-of-service requirement
is more than 1,200 hours, the Depart-
ments would consider the requirement to
be designed to avoid compliance with the
90-day waiting period limitation.
After consideration of all of the com-
ments received in response to the February
2012 guidance and in response to the Au-
gust 2012 guidance, the Departments are
proposing these regulations. Public com-
ments on these proposed regulations are
invited.
II. Overview of the Proposed
Regulations
A.Prohibition on Waiting Periods That
Exceed 90 Days
These regulations propose that a group
health plan, and a health insurance issuer
offering group health insurance coverage,
not apply any waiting period that exceeds
90 days. (Neither a plan nor an issuer
offering coverage is required to have any
waiting period.) If, under the terms of the
plan, an employee can elect coverage that
becomes effective on adate that does not
exceed the 90-day waiting period limita-
tion, the coverage complies with the wait-
ing period rules, and the plan or issuer
will not be considered to violate the wait-
ing period rules merely because individ-
uals choose to elect coverage beyond the
end of the 90-day waiting period.
In these proposed regulations, the def-
inition of waiting period is the same as
that used in the 2004 HIPAA regulations.
(However, the definition is proposed to
be moved from the section on preexisting
condition exclusions to this section. See
below for an explanation of other techni-
cal and conforming changes proposed to
be made to the 2004 HIPAA regulations.)
Accordingly, under these proposed regu-
lations, waiting period would continue to
be defined as the period that must pass be-
fore coverage for an employee or depen-
dent who is otherwise eligible to enroll un-
der the terms of a group health plan can
become effective. These proposed regu-
lations would also continue to include the
clarification that, if an employee or de-
pendent enrolls as a late enrollee or spe-
cial enrollee, any period before such late or
special enrollment is not a waiting period.
The effective date of coverage for special
enrollees continues to be that set forth in
the Departments’ 2004 HIPAA regulations
governing special enrollment.
6
Paragraph (c) of the proposed regula-
tions sets forth rules governing the rela-
tionship between a plan’s eligibility crite-
ria and the 90-day waiting period limita-
tion. Specifically, this paragraph provides
that being otherwise eligible to enroll in a
plan means having met the plan’s substan-
tive eligibility conditions (such as being in
an eligible job classification or achieving
job-related licensure requirements speci-
fied in the plan’s terms). However, the
90-day waiting period limitation generally
does not require the plan sponsor to of-
fer coverage to any particular employee or
class of employees (including, for exam-
ple, part-time employees). Instead, these
proposed regulations would prohibit re-
quiring otherwise eligible participants and
beneficiaries to wait more than 90 days be-
fore coverage is effective.
7
Under these proposed regulations, eli-
gibility conditions that are based solely on
the lapse of a time period would be per-
missible for no more than 90 days. Other
conditions for eligibility under the terms
5
The August 2012 guidance provides that an employer may use a measurement period that is consistent with Code section 4980H, whether or not it is an applicable large employer subject
to Code section 4980H.
6
26 CFR 54.9801–6, 29 CFR 2590.701–6, and 45 CFR 146.117.
7
While a substantive eligibility condition that denies coverage for employees may be permissible under PHS Act section 2708, an applicable large employer’s denial of coverage to a full-time
employee may, nonetheless, give rise to an assessable payment under section 4980H of the Code and its implementing regulations.
May 6, 201310452013–19 I.R.B.

of a group health plan (i.e., those that are
not based solely on the lapse of a time pe-
riod) are generally permissible under PHS
Act section 2708 and these proposed regu-
lations unless the condition is designed to
avoid compliance with the 90-day waiting
period limitation.
These regulations propose an approach
when applying waiting periods to variable-
hour employees in cases in which a spec-
ified number of hours of service per pe-
riod (such as 30 hours per week or 250
hours per quarter) is a plan eligibility con-
dition. Under these proposed regulations,
if a group health plan conditions eligibility
on an employee regularly having a speci-
fied number of hours of service per period
(or working full-time), and it cannot be
determined that a newly-hired employee
is reasonably expected to regularly work
that number of hours per period (or work
full-time), the plan may take a reasonable
period of time to determine whether the
employee meets the plan’s eligibility con-
dition, which may include a measurement
period of no more than 12 months that be-
gins on any date between the employee’s
start date and the firstday of the first calen-
dar month following the employee’s start
date. (This is consistent with the time-
frame permitted for such determinations
under Code section 4980H and its imple-
menting regulations.) Except for cases in
which a waiting period that exceeds 90
days is imposed in addition to a measure-
ment period, the time period for deter-
mining whether a variable-hour employee
meets the plan’s hours of service per pe-
riod eligibility condition will not be con-
sidered to be designed to avoid compliance
with the 90-day waiting period limitation
if coverage is made effective no later than
13 months from the employee’s start date,
plus if the employee’s start date is not the
first day of a calendar month, the time re-
maining until the first day of the next cal-
endar month.
Some commenters requested clarifica-
tion regarding employees with specific or
unique work schedules, and whether they
would be treated as variable-hour employ-
ees. In this regard, unlike the rules un-
der Code section 4980H, whether an em-
ployee has been appropriately classified
as part-time, full-time,or variable-hour is
of limited application under PHS Act sec-
tion 2708. That is, conditions for eligibil-
ity under the terms of a group health plan
are generally permissible under PHS Act
section 2708, unless based solely on the
lapse of time or designed to avoid compli-
ance with the 90-day waiting period lim-
itation. Accordingly, plan provisions that
base eligibility on whether an employee is,
for example, meeting certain sales goals
or earning a certain level of commission,
are generally substantive eligibility provi-
sions that do not trigger the 90-day wait-
ing period limitation. Some plan eligi-
bility provisions, such as whether an em-
ployee has a specified number of hours
of service per period (such as 30 hours
per week or 250 hours per quarter) nec-
essarily require the passage of time in or-
der to determine whether the plan’s sub-
stantive eligibility provision has been met.
These proposed regulations set forth an ap-
proach under which such plan provisions
will not be considered to be designed to
avoid compliance with the 90-day wait-
ing period limitation. However, whether
a particular employee is classified appro-
priately as part-time, full-time, or variable-
hour is generally not an issue under PHS
Act section 2708, although other provi-
sions of law (such as Code section 4980H,
the HIPAA nondiscrimination provisions,
and other provisions of ERISA) may be ap-
plicable.
Another type of plan eligibility pro-
vision addressed in the August 2012
guidance was cumulative hours-of-service
requirements, which use more than solely
the passage of a time period in determin-
ing whether employees are eligible for
coverage. Specifically, the August 2012
guidance included an example stating that
if a plan’s cumulative hours-of-service re-
quirement were more than 1,200 hours, the
Departments would consider the require-
ment to be designed to avoid compliance
with the 90-day waiting period limita-
tion. Under these proposed regulations,
if a group health plan or health insurance
issuer conditions eligibility on any em-
ployee’s (part-time or full-time) having
completed a numberof cumulative hours
of service, the eligibility condition is not
considered to be designed to avoid com-
pliance with the 90-day waiting period
limitation if the cumulative hours-of-ser-
vice requirement does not exceed 1,200
hours.
8
Under the proposed rules, the
plan’s waiting period must begin once the
new employee satisfies the plan’s cumu-
lative hours-of-service requirement and
may not exceed 90 days. Furthermore, this
provision is designed to be a one-time eli-
gibility requirement only; these proposed
regulations do not permit, for example,
re-application of such a requirement to the
same individual each year.
In response to the August 2012 guid-
ance, some commenters requested clarifi-
cation regarding application of the rule to
plan provisions that require employees to
work sufficient number of hours per mea-
surement period but permit employees, if
they do not have a sufficient number of
hours, to make a self-payment (or buy-in)
equal to the amount which would allow
them to have a sufficient number of hours
within the measurement period. PHS Act
section 2708 and theseproposed regula-
tions do not prohibit plan procedures per-
mitting self-payment (or buy-in) to sat-
isfy any otherwise permissible hours-of-
service requirement.
Some commenters raised concerns
about communication between a plan and
issuer regarding the 90-day limitation on
waiting periods. Commenters stated that
many issuers rely on the plan sponsor for
information about an individual’s eligi-
bility for coverage and that issuers may
not have knowledge of certain plan terms,
such as eligibility conditions and waiting
periods. These commenters expressed
concern that health insurance issuers are
required to comply with the requirements
of PHS Act section 2708, but must rely
on the information plan sponsors and em-
ployers report to them regarding eligibility
information such as an employee’s start
date. At the same time, small employers
purchasing insurance coverage often rely
on their issuers for compliance assistance.
Therefore, while therequirements of PHS
Act section 2708 and these proposed reg-
ulations would be applicable to both the
plan and issuer, to the extent coverage
under a group health plan is insured by a
health insurance issuer, paragraph (f) of
the proposed regulations would provide
that the issuer can rely on the eligibility
8
While a cumulative hours-of-service eligibility condition up to 1,200 hours may be permissible under PHS Act section 2708, an applicable large employer’s denial of coverage to a full-time
employee may, nonetheless, give rise to an assessable payment under section 4980H of the Code and its implementing regulations.
2013–19 I.R.B.1046May 6, 2013

information reported to it by an employer
(or other plan sponsor) and will not be
considered to violate the requirements of
these proposed regulations in administer-
ing the 90-day waiting period limitation
if the issuer requires the plan sponsor to
make a representation regarding the terms
of any eligibility conditions or waiting pe-
riods imposed by the plan sponsor before
an individual is eligible to become covered
under the terms of the employer’s plan
(and requires the plan sponsor to update
this representation with any changes), and
the issuer has no specific knowledge of the
imposition of a waiting period that would
exceed the permitted 90-day period.
Paragraph (d) of the proposed regu-
lations clarifies the method for counting
days when applying a 90-day waiting pe-
riod. Some commenters stated that it is
common practice to have a 90-day waiting
period with coverage effective the first
day of the month after the 90-day wait-
ing period and requested flexibility for
administrative ease. Others requested the
Departments to create ade minimisexcep-
tion for the difference between 90 days
and 3 months. Under these proposed regu-
lations, due to the clear text of the statute,
the waiting period may not extend beyond
90 days and all calendar days are counted
beginning on the enrollment date, includ-
ing weekends and holidays. For a plan
with a waiting period, “enrollment date”
is defined as the first day of the waiting
period.
9
If, with respect to a plan or issuer
imposing a 90-day waiting period, the 91
st
day is a weekend or holiday, the plan or
issuer may choose to permit coverage to
be effective earlier than the 91
st
day, for
administrative convenience. However, a
plan or issuer may not make the effective
date of coverage later than the 91
st
day.
The Departments recognize that mul-
tiemployer plans maintained pursuant to
collective bargaining agreements have
unique operating structures and may in-
clude different eligibility conditions based
on the participating employer’s industry or
the employee’s occupation. For example,
some comments received on the August
2012 guidance gave examples of plan
eligibility provisions based on complex
formulas for earnings and residuals. As
discussed earlier, the Departments view
eligibility provisions that are based on
compensation as substantive eligibility
provisions that are not designed to avoid
compliance with the 90-day waiting pe-
riod limitation. In addition, hours banks,
which are common multiemployer plan
provisions that allow workers to bank ex-
cess hours from one measurement period
and then draw down on them to com-
pensate for any shortage in a succeeding
measurement period and prevent lapses in
coverage, function as buy-in provisions,
which were discussed earlier as permissi-
ble. It is the Departments’ view that the
proposed rules provide flexibility to both
multiemployer and single-employer health
plans to meet their needs in defining eli-
gibility criteria, while also ensuring that
employees are protected from excessive
waiting periods. Comments are invited
on these proposed rules and on whether
any additional examples or provisions are
needed to address multiemployer plans.
These proposed regulations generally
would apply for plan years beginning on
or after January 1, 2014, consistent with
the statutory effective date of PHS Act
section 2708. The rules would apply to
both grandfathered and non-grandfathered
group health plans and health insurance is-
suers offering group health insurance cov-
erage. As with the applicability of the
2004 HIPAA regulations, with respect to
individuals who are in a waiting period
for coverage before the applicability date,
beginning on the first day these rules ap-
ply to the plan, any waiting period can no
longer apply in a manner that exceeds 90
days. However, as discussed below, the
proposed amendment to eliminate the re-
quirement to issue a certificate of cred-
itable coverage is proposed to apply De-
cember 31, 2014, so thatindividuals need-
ing to offset a preexisting condition ex-
clusion under a plan that operates with a
plan year beginning later than January 1
would still have access to the certificate for
proof of coverage. Comments are invited
on these proposed applicability dates.
The August 2012 guidance provided
that group health plans and health insur-
ance issuers may rely on the compliance
guidance through at least the end of 2014.
In the Departments’ view, these proposed
regulations are consistent with, and no
more restrictive on employers than, the
August 2012 guidance. Therefore, the
Departments will consider compliance
with these proposedregulations as com-
pliance with PHS Act section 2708 at least
through the end of 2014. (However, for
changes outside of PHS Act section 2708
made to existing HIPAA regulations, such
as the elimination of the requirement to
provide a certificate of creditable cov-
erage, the existing HIPAA regulations
continue to apply until amended in new
final regulations.) To the extent final reg-
ulations or other guidance with respect
to the 90-day waiting period limitation
is more restrictive on plans and issuers
than these proposed regulations, the final
regulations or other guidance will not be
effective prior to January 1, 2015.
B.Conforming Changes to Existing
Regulations
Sections 9801 of the Code and 701 of
ERISA, and section 2701 of the PHS Act
as originally addedbyHIPAAincluded
requirements pertaining to the applica-
tion of preexisting condition exclusions
and waiting periods, as well as methods
of crediting coverage. Final regulations
implementing Code section 9801, ERISA
section 701, and PHS Act section 2701 (as
originally added by HIPAA) were adopted
in 2004. The 2004 HIPAA regulations per-
mit limited exclusions of coverage based
on a preexisting condition under certain
circumstances. PHS Act section 2704,
addedbytheAffordableCareActand
incorporated into ERISA and the Code,
amends the HIPAA requirements relating
to preexisting conditions to provide that a
group health plan and a health insurance
issuer offering group or individual health
insurance coverage may not impose any
preexisting condition exclusion.
10
PHS
Act section 2704 and the interim final
regulations implementing that section are
generally effective with respect to plan
years (in the individual market, policy
years) beginning on or after January 1,
2014, but for enrollees who are under 19
years of age, this prohibition became ef-
fective for plan years (in the individual
9
See26 CFR 54.9801–3(a)(3)(i); 29 CFR 2590.701–3(a)(3)(i); and 45 CFR 146(a)(3)(i), which would be moved under these proposed rules to 26 CFR 54.9801–2;29 CFR 2590.701–2; and
45 CFR 144.103.
10
Affordable Care Act section 1201 also moved those provisions from PHS Act section 2701 to PHS Act section 2704.
May 6, 201310472013–19 I.R.B.

market, policy years) beginning on or after
September 23, 2010.
11
Therefore, these
proposed regulations would amend the
2004 HIPAA regulations implementing
Code sections 9801, ERISA section 701,
and PHS Act section2701 (as originally
added by HIPAA), to remove provisions
superseded by the prohibition on preex-
isting conditions under PHS Act section
2704 and the implementing regulations.
Additionally, these regulations propose to
amendexamplesin26CFRPart54,29
CFR Part 2590, and 45 CFR Parts 144 and
146 to conform to other changes made by
theAffordableCareAct,suchastheelim-
ination of lifetime and annual limits under
PHS Act section 2711 and its implement-
ing regulations,
12
as well as the provisions
governing dependent coverage of children
to age 26 under PHS Act section 2714 and
its implementing regulations.
13
C.Technical Amendment Relating to OPM
Multi-State Plan Program and External
Review
Section 1334 of the Affordable Care
Act creates the Multi-State Plan Pro-
gram (MSPP) to foster competition in
the Affordable Insurance Exchanges (Ex-
changes) and directs the U.S. Office of
Personnel Management (OPM) to contract
with private health insurance issuers to
offer at least two multi-state plans (MSPs)
on each of the Exchanges in the 50 states
and the District of Columbia. Under Af-
fordable Care Act section 1334(a)(4),
OPM is to administer this program “in a
manner similar to the manner in which”
it implements the contracting provisions
of the Federal Employee Health Benefits
Program (FEHBP). OPM has interpreted
Affordable Care Act section 1334(a)(4) to
require implementation of a uniform, na-
tionally applicable external review process
consistent with the requirements of PHS
Act section 2719 for MSPs similar to that
administered by OPM under FEHBP,
14
to ensure that the MSPP contract is ad-
ministered consistently throughout all 51
jurisdictions that would be served by an
MSP (as FEHBP currently does).
The “level playing field” requirement
in section 1324 of the Affordable Care
Act provides that “[n]otwithstanding any
other provision of law,” requirements un-
der State or Federal law in 13 categories
(including appeals) “shall not” apply to
“health insurance offered by a private
health insurance issuer” if the requirement
does not apply to MSPs established under
theAffordableCareAct. Non-grand-
fathered health insurance coverage is
generally required to comply with PHS
Act section 2719 and its implementing
regulations regarding internal claims and
appeals and external review processes.
15
As a result, MSPP plans must also so com-
ply, or other non-grandfathered insurance
coverage would have to be similarly ex-
empted.
16
PHS Act section 2719 and its imple-
menting regulations provide that group
health plans and health insurance issuers
must comply with either a State external
review process or the Federal external
review process. Generally, if a State has
an external review process that meets,
at a minimum, the consumer protections
set forth in the interim final regulations,
then the issuer (or a plan) subject to
the State process must comply with the
State process.
17
For plans and issuers
not subject to an existing State external
review process (including self-insured
plans), a Federal external review process
applies.
18
The statute requires the De-
partments to establish standards, “through
guidance,” governinga Federal external
review process. Among such guidance
that has been issued by the Departments,
HHS has established a Federal external
review process for self-insured nonfederal
governmental health plans, as well as for
plans and issuers in States that do not meet
the minimum consumer protections in the
regulations.
In this rule, the Departments propose
to clarify that MSPs will be subject to
the Federal external review process under
PHS section 2719(b)(2) and paragraph
(d) of the internal claims and appeals
and external review regulations. In do-
ing so, the Departments interpret section
2719(b)(2) to apply to all plansnot subject
to a State’s external review process(em-
phasis added).
19
OPM’s final rule on the
establishment of the multi-State plan pro-
gram
20
requires the MSPP external review
process to meet the requirements of PHS
Act section 2719 and its implementing
regulations.
Additionally, the Departments propose
to clarify that the scope of the Federal
external review process, as described in
paragraph (d)(1)(ii) of the regulations, is
the minimum required scope of claims el-
igible for external review for plans us-
ing a Federal external review process, and
that Federal external review processes de-
veloped in accordance with paragraph (d)
may have a scope that exceeds the min-
imum requirements. For example, OPM
stated that the scopeof the MSP external
review process would allow for appeals
11
75 FR 37188 (June 28, 2010).
12
75 FR 37188 (June 28, 2010).
13
75 FR 27122 (May 13, 2010).
14
OPM published a final rule on establishment of the MSPP on March 11, 2013 at 78 FR 15559.
15
The interim final regulations relating to internal claims and appeals and external review processes are codified at 26 CFR 54.9815–2719T, 29 CFR 2590.715–2719, and 45 CFR 147.136.
These requirements do not apply to grandfathered health plans. The interim final regulations relating to status as a grandfathered health plan are codified at 26 CFR 54.9815–1251T, 29 CFR
2590.715–1251, and 45 CFR 147.140.
16
The amendments in these proposed regulations only seek to address the differences that exist between the proposed MSPP external review process and the external review requirements for
group health plans and health insurance issuers. While MSPP is also required to comply with the requirements related to internal claims and appeals, OPM’s proposed process does not differ
from the internal claims and appeals requirements forgroup health plans and health insurance issuers.
17
More information on the regulatory requirements for State external review processes, including the regulations, Uniform Health Carrier External Review Model Act promulgated by the
National Association of Insurance Commissioners, technical releases, and other guidance, is available athttp://www.dol.gov/ebsaandhttp://cciio.cms.gov.
18
More information on the regulatory requirements for the Federal external review process, including the regulations, technical releases, and otherguidance, is available at
http://www.dol.gov/ebsaandhttp://cciio.cms.gov.
19
We note that this interpretation of section 2719(b)(2) as applicable to MSPs is supported by the fact that Congress directed that the MSPP be implemented by OPM, and OPM is not a state.
20
See 45 CFR 800.115(k) and 45 CFR part 800.
2013–19 I.R.B.1048May 6, 2013

of all disputed claims.
21
This clarification
would reiterate that the proposed exter-
nal review process would meet the mini-
mum requirement for the scope of a Fed-
eral external review process under the reg-
ulations.
III. Economic Impact and Paperwork
Burden
A.Executive Order 12866 and
13563—Department of Labor and
Department of Health and Human
Services
Executive Order 13563 emphasizes the
importance of quantifying both costs and
benefits, of reducing costs, of harmonizing
and streamlining rules, and of promoting
flexibility. It also requires federal agencies
to develop a plan under which the agencies
will periodically review their existing sig-
nificant regulationsto make the agencies’
regulatory programs more effective or less
burdensome in achieving their regulatory
objectives.
Under Executive Order 12866, a regu-
latory action deemed “significant” is sub-
ject to the requirements of the Executive
Order and review by the Office of Man-
agement and Budget (OMB). Section 3(f)
of the Executive Order defines a “signifi-
cant regulatory action” as an action that is
likely to result in a rule (1) having an an-
nual effect on the economy of $100 mil-
lion or more, or adversely and materially
affecting a sector of the economy, produc-
tivity, competition, jobs, the environment,
public health or safety, or State, local or
tribal governments or communities (also
referred to as “economically significant”);
(2) creating serious inconsistency or oth-
erwise interfering with an action taken or
planned by another agency; (3) materially
altering the budgetary impacts of entitle-
ment grants, user fees, or loan programs
or the rights and obligations of recipients
thereof; or (4) raising novel legal or pol-
icy issues arising out of legal mandates, the
President’s priorities, or the principles set
forth in the Executive Order.
These proposed regulations are not eco-
nomically significant within the meaning
of section 3(f)(1) of the Executive Order.
However, OMB has determined that the
actions are significant within the mean-
ing of section 3(f)(4) of the Executive Or-
der. Therefore, OMB has reviewed these
proposed regulations, and the Departments
have provided the following assessment of
their impact.
1.Summary.
As stated earlier in this preamble, these
proposed regulations would implement
PHS Act section 2708, which provides that
a group health plan, and a health insurance
issuer offering group health insurance
coverage, may not apply any waiting pe-
riod that exceeds 90 days. The proposed
regulations define “waiting period” as the
period that must pass before coverage for
an employee or dependent who is other-
wise eligible to enroll under the terms of
a group health plan can become effective,
which is the same definition used in the
2004 HIPAA regulations. The proposed
regulations would generally apply to plan
years beginning on or after January 1,
2014, consistent with the statutory effec-
tive date of PHS Act section 2708.
22
The Departments have crafted these
proposed regulations to secure the protec-
tions intended by Congress in an econom-
ically efficient manner. The Departments
do not have sufficient data to quantify the
regulations’ economic cost or benefits;
therefore, they have provided a qualita-
tive discussion of their economic impacts
and request detailed comment and data
that would allow for quantification of the
costs, benefits, and transfers that would be
brought about by the proposed rule.
2.Estimated Number of Affected Entities.
The Departments estimate that 4.1 mil-
lion new employees receive group health
insurance coverage through private sector
employers and 1.0 million new employ-
ees receive group health insurance cover-
age through public sector employers annu-
ally.
23
The 2012 Kaiser Family Foundation
and Health Research and Education Trust
Employer Health Benefits Annual Survey
(the “2012 Kaiser Survey”) finds that only
eight percent of covered workers were sub-
ject to waiting periods of four months or
more.
24
If eight percent of new employees
receiving health care from their employ-
ers are subject to a waiting period of four
months or more, then 408,000 new em-
ployees (5.1 million x 0.08) would be af-
fected by this rule.
25
However, the Depart-
ments would note that it is unlikely that the
survey defines the term “waiting period” in
the same manner as these proposed regu-
lations. For example, waiting period may
have been defined by reference to an em-
ployee’s start date, and it seems unlikely
that the 2012 Kaiser Survey would have in-
cluded the clarifications included in these
proposed regulations regarding the mea-
surement period for variable-hour employ-
ees or the clarification regarding cumula-
tive hours-of-service requirements.
3.Benefits.
Before Congress enacted PHS Act sec-
tion 2708, federal law did not prescribe any
limits on waiting periods for group health
insurance coverage.
If employees delay health care treat-
ment until the expiration of a prolonged
waiting period, detrimental health effects
can result, especially for employees and
their dependents requiring higher levels of
health care, such as older Americans, preg-
nant women, young children, and those
with chronic conditions. This could lead
to lower work productivity and missed
school days. Low-wage workers also are
vulnerable, because they have less income
to spend out-of-pocket to cover medical
expenses. The Departments anticipate that
these proposed regulations can help reduce
these effects, although the overall benefit
may be limited because—as discussed in
21
45 CFR 800.504 (a). See also 78 FR 15559, 15582–15584 (March 11, 2013), the Preamble to the Patient Protection and Affordable Care Act; Establishment of the Multi-State Plan Program
for the Affordable Insurance Exchanges; Final Rule.
22
As stated earlier, the Departments’ August 2012 guidance provided that group health plans and health insurance issuers may rely on the compliance guidance through at least the end of
2014. In the Departments’ view, these proposed regulations are consistent with, and no more restrictive on employers than, the August 2012 guidance.Therefore, the Departments will
consider compliance with these proposed regulations as compliance with PHS Act section 2708 at least through the end of 2014.
23
This estimate is based upon internal Department of Labor calculations derived from the 2009 Medical Expenditure Panel Survey.
24
See e.g., Kaiser Family Foundation and Health Research and Education Trust,Employer Health Benefits 2012 Annual Survey(2012) available athttp://ehbs.kff.org/pdf/2012/8345.pdf
25
Approximately 331,000 private sector employees and 77,000 state and local public sector employees.
May 6, 201310492013–19 I.R.B.

greater detail below—a small fraction of
employers are expected to offer earlier
health insurance coverage as a result of
these proposed regulations.
As discussed earlier in this preamble,
these proposed regulations would amend
the 2004 HIPAA regulations implement-
ing Code sections 9801, ERISA section
701, and PHS Act section 2701 (as orig-
inally added by HIPAA) to remove pro-
visions superseded by the prohibition on
preexisting conditions under PHS Act sec-
tion 2704 and the implementing regula-
tions. These amendments would provide
a benefit to plans by reducing the burden
associated with complying with the sev-
eral Paperwork Reduction Act information
collections that are associated with the su-
perseded regulations. For a discussion of
the affected information collections and
the estimated cost and burden hour reduc-
tion, please see the Paperwork Reduction
Act section, below.
4.Transfers Associated with the Rule.
The possible transfers associated with
this proposed rule would arise if employ-
ers begin to pay their portion of health in-
surance premiums or contributions sooner
than they did before the enactment of PHS
Act section 2708 and issuance of these pro-
posed regulations. Recipients of the trans-
fers would be covered employees and their
dependents who would, if these proposed
regulations are finalized, not be subject
to excessive waiting periods during which
they must forgo health coverage, purchase
COBRA continuation coverage, or obtain
an individual health insurance policy – all
of which are options that could lead to
higher out-of-pocket costs for employees
to cover their healthcare expenditures. As
discussed above, federal law did not limit
the duration of waiting periods in the group
health plans market before the enactment
of PHS Act section 2708.
The Departments do not believe that
this rule, on its own, will cause more than
a marginal number of employers to offer
coverage earlier to their employees be-
cause this provision on its own does not
require employers to offer coverage and
there is significant flexibility afforded to
employers in these proposed regulations
to maintain or revise their current group
health plan eligibility conditions. For ex-
ample, paragraph (c)(3)(ii) of the proposed
regulations provides that if a group health
plan or health insurance issuer conditions
eligibility on any employee’s (part-time or
full-time) having completed a number of
cumulative hours of service, the eligibility
condition is not considered to be designed
to avoid compliance with the 90-day wait-
ing period limitation if the cumulative
hours-of-service requirement does not
exceed 1,200 hours. This is intended to
provide plan sponsors with flexibility to
continue the common practice of utilizing
a probationary or trial period to deter-
mine whether a new employee will be
able to handle the duties and challenges
of the job, while providing protections
against excessive waiting periods for such
employees. Under these proposed regula-
tions, the plan’s waiting period must begin
once the new employee satisfies the plan’s
cumulative hours-of-service requirement
and may not exceed 90 days.
Therefore, an employee who must meet
a cumulative hours-of-service requirement
of 1,200 hours could be employed for
ten months
26
before their health coverage
becomes effective and only employers
that had a waiting period longer than ten
months before the enactment of PHS Act
section 2708 and these proposed regula-
tions would necessarily incur a transfer
for additional coverage. Because the 2012
Kaiser Survey reports that just eight per-
cent of covered workers are in plans with
waiting periods of four months or more
and the overall average waiting period
is just 2.3 months, the Departments are
confident that such long waiting periods
are rare.
B.Paperwork Reduction Act
1.Department of Labor and Department
of the Treasury
As stated above, Sections 9801 of the
Code and 701 of ERISA, and 2701 of the
PHS Act as originally added by Health In-
surance Portability and Accountability Act
of 1996, included requirements pertaining
to the application of preexisting conditions
exclusions and waiting periods as well as
methods of crediting coverage. The 2004
HIPAA regulations (in effect prior to the
effective date of these amendments) permit
limited exclusions of coverage based on
a preexisting condition under certain cir-
cumstances.
PHS Act section 2704, added by the Af-
fordable Care Act and incorporated into
ERISA and the Code, amends the 2004
HIPAA regulations relating to preexisting
conditions to provide that a group health
plan and a health insurance issuer offering
group or individual health insurance cover-
age may not impose any preexisting condi-
tion exclusion. PHS Act section 2704 and
the interim final regulations implementing
that section are generally effective with re-
spect to plan years (in the individual mar-
ket, policy years) beginning on or after
January 1, 2014, but for enrollees who are
under 19 years of age, this prohibition be-
came effective for plan years (in the in-
dividual market, policy years) beginning
on or after September 23, 2010. There-
fore, these regulations propose to amend
the 2004 HIPAA regulations implementing
Code sections 9801, ERISA section 701,
and PHS Act section 2701 (as originally
added by HIPAA), to remove provisions
superseded by the prohibition on preexist-
ing conditions underPHS Act section 2704
and the implementing regulations.
The Departments are proposing to
discontinue the following Information
Collection Requests (ICRs) that are as-
sociated with the superseded regulation:
The Notice of Preexisting Condition Ex-
clusion under Group Health Plans, which
is approved under OMB Control Number
1210–0102 through January 31, 2016, and
Establishing Creditable Coverage under
Group Health Plans, which is approved
under OMB Control Number 1210–0103
through January 31, 2016.
Additionally, the Departments are
proposing to revise Final Regulations for
Health Coverage Portability for Group
Health Plans and Group Health Insurance
Issuers under HIPAA Titles I & IV, which
is approved under OMB Control Number
1545–1537 through January 31, 2014, to
remove the Health Plans Imposing Pre-ex-
isting Condition Notification Require-
ments, Certification Requirements, and
Exclusion Period Notification Information
Collections within this ICR because they
are associated with the superseded regula-
tion.
26
1,200 hours/40 hours per week= 30 weeks; 30 weeks *7 days/week= 210 days; 210 days eligibility requirement + 90 day wait period= 300 days.
2013–19 I.R.B.1050May 6, 2013

Discontinuing and revising these ICRs
would result in a total burden reduction
of approximately 341,000 hours (5,000
hours attributable to OMB Control Num-
ber 1210–0102, 74,000 hours attributable
to OMB Control Number 1210–0103, and
262,000 hours attributable to OMB Con-
trol Number 1545–1537) and a total cost
burden reduction of approximately $32.7
million ($1.1 million attributable to OMB
Control Number 1210–0102, $12.4 mil-
lion attributable to OMB Control Number
1210–0103, and $19.2 million attributable
to OMB Control Number 1545–1537).
C.Regulatory Flexibility
Act—Department of Labor and
Department of Health and Human
Services
The Regulatory Flexibility Act (5
U.S.C. 601 et seq.) (RFA) applies to most
Federal rules that are subject to the no-
tice and comment requirements of section
553(b) of the Administrative Procedure
Act (5 U.S.C. 551 et seq.). Unless an
agency certifies that such a rule will not
have a significant economic impact on a
substantial number of small entities, sec-
tion 603 of the RFA requires the agency
to present an initial regulatory flexibility
analysis at the time of the publication of
the notice of proposed rulemaking de-
scribing the impact of the rule on small
entities. Small entities include small busi-
nesses, organizations and governmental
jurisdictions.
For purposes of analysis under the RFA,
the Departments propose to continue to
consider a small entity to be an employee
benefit plan with fewer than 100 partici-
pants. The basis of this definition is found
in section 104(a)(3) of ERISA, which per-
mits the Secretary of Labor to prescribe
simplified annual reports for welfare ben-
efit plans that cover fewer than 100 partic-
ipants.
27
Further, while some large employers
may have small plans, in general, small
employers maintain most small plans.
Thus, the Departments believe that as-
sessing the impact of these proposed
regulations on small plans is an appropri-
ate substitute for evaluating the effect on
small entities.
The definition of small entity consid-
ered appropriate for this purpose differs,
however, from a definition of small busi-
ness that is based on size standards pro-
mulgated by the Small Business Adminis-
tration (SBA) (13 CFR 121.201) pursuant
to the Small Business Act (15 U.S.C. 631
et seq.). The Departments therefore re-
quest comments on the appropriateness of
the size standard used in evaluating the im-
pact of these proposedregulations on small
entities.
The Departments carefully considered
the likely impact of the rule on small en-
tities in connection with their assessment
under Executive Order 12866. The De-
partments lack data to focus only on the
impacts on small business. However, the
Departments believe that the proposed
rule includes flexibility that would allow
small employers to minimize the transfers
in health insurance premiums that they
would have to pay to employees.
The Departments hereby certify that
these proposed regulations will not have a
significant economic impact on a substan-
tial number of small entities. Consistent
with the policy of the RFA, the Depart-
ments encourage the public to submit
comments that would allow the Depart-
ments to assess the impacts specifically
on small plans or suggest alternative rules
that accomplish the stated purpose of PHS
Act section 2708 and minimize the impact
on small entities.
D.Special Analyses—Department of the
Treasury
For purposes of the Department of the
Treasury, it has been determined that this
notice of proposed rulemaking is not a
significant regulatory action as defined in
Executive Order 12866,as supplemented
by Executive Order 13563. Therefore,
a regulatory assessment is not required.
It has also been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply to
these proposed regulations, and, because
these proposed regulations do not impose
a collection of information requirement
on small entities, a regulatory flexibility
analysis under the Regulatory Flexibility
Act (5 U.S.C. chapter 6) is not required.
Pursuant to Code section 7805(f), this
notice of proposed rulemaking has been
submitted to the Small Business Adminis-
tration for comment on its impact on small
business.
E.Congressional Review Act
These proposed regulations are subject
to the Congressional Review Act provi-
sions of the Small Business Regulatory
Enforcement Fairness Act of 1996 (5
U.S.C. 801 et seq.) and, if finalized, will
be transmitted to the Congress and the
Comptroller General for review.
F.Unfunded Mandates Reform Act
For purposes of the Unfunded Man-
dates Reform Act of 1995 (Pub. L. 104–4),
as well as Executive Order 12875, these
proposed rules do not include any pro-
posed federal mandate that may result
in expenditures by state, local, or tribal
governments, or by the private sector, of
$100 million or more adjusted for inflation
($141millionin2013).
G.Federalism Statement—Department
of Labor and Department of Health and
Human Services
Executive Order 13132 outlines fun-
damental principles of federalism, and
requires the adherence to specific criteria
by Federal agencies in the process of their
formulation and implementation of poli-
cies that have “substantial direct effects”
on the States, the relationship between the
national government and States, or on the
distribution of power and responsibilities
among the various levels of government.
Federal agencies promulgating regulations
that have these federalism implications
must consult with Stateand local officials,
and describe the extent of their consulta-
tion and the nature of the concerns of State
and local officials in the preamble to the
regulation.
In the Departments’ view, these pro-
posed regulations have federalism impli-
cations, because they have direct effects
27
Under ERISA section 104(a)(2), the Secretary may also provide exemptions orsimplified reporting and disclosurerequirements for pension plans. Pursuant to the authority of ERISA
section 104(a)(3), the Department of Labor has previously issued at 29 CFR 2520.104–20, 2520.104–21, 2520.104–41, 2520.104–46, and 2520.104b–10 certain simplified reporting provisions
and limited exemptions from reporting and disclosure requirements for smallplans, including unfunded or insured welfare plans, that cover fewer than 100 participants and satisfy certain
other requirements.
May 6, 201310512013–19 I.R.B.

on the States, the relationship between
the national government and States, or on
the distribution of power and responsibili-
ties among various levels of government.
In general, through section 514, ERISA
supersedes State laws to the extent that
they relate to any covered employee ben-
efit plan, and preserves State laws that
regulate insurance,banking, or securities.
While ERISA prohibits States from regu-
lating a plan as an insurance or investment
company or bank, the preemption pro-
visions of ERISA section 731 and PHS
Act section 2724 (implemented in 29
CFR 2590.731(a) and 45 CFR 146.143(a))
apply so that the HIPAA requirements (in-
cluding those of the Affordable Care Act)
are not to be “construed to supersede any
provision of State law which establishes,
implements, or continues in effect any
standard or requirement solely relating
to health insurance issuers in connection
with group health insurance coverage ex-
cept to the extent that such standard or
requirement prevents the application of a
requirement” of a federal standard. The
conference report accompanying HIPAA
indicates that this is intended to be the
“narrowest” preemption of State laws.
(See House Conf. Rep. No. 104–736, at
205, reprinted in 1996 U.S. Code Cong. &
Admin. News 2018.)
States may continue to apply State law
requirements except to the extent that such
requirements prevent the application of the
Affordable Care Act requirements that are
the subject of this rulemaking. State in-
surance laws that are more stringent than
the Federal requirements are unlikely to
“prevent the application of” the Affordable
Care Act, and be preempted. Accordingly,
States have significant latitude to impose
requirements on health insurance issuers
that are more restrictive than the Federal
law.
Guidance conveying this interpretation
was published in theFederal Registeron
April 8, 1997 (62 FR 16904), and Decem-
ber 30, 2004 (69 FR 78720), and these
proposed rules would clarify and imple-
ment the statute’s minimum standards and
would not significantlyreduce the discre-
tion given the states by the statute.
In compliance with the requirement of
Executive Order 13132 that agencies ex-
amine closely any policies that may have
federalism implications or limit the policy
making discretion of the States, the De-
partments have engaged in efforts to con-
sultwithandworkcooperativelywithaf-
fected State and local officials, including
attending conferences of the National As-
sociation of Insurance Commissioners and
consulting with State insurance officials on
an individual basis.
Throughout the process of developing
these proposed regulations, to the extent
feasible within the specific preemption
provisions of HIPAA as it applies to the
Affordable Care Act, the Departments
have attempted to balance the States’ inter-
ests in regulating health insurance issuers,
and Congress’ intent to provide uniform
minimum protections to consumers in
every State. By doing so, it is the De-
partments’ view that they have complied
with the requirements of Executive Order
13132.
IV. Statutory Authority
The Department of the Treasury regula-
tions are proposed to be adopted pursuant
to the authority contained in sections 7805
and 9833 of the Code.
The Department of Labor regulations
are proposed to be adopted pursuant to
the authority contained in 29 U.S.C. 1027,
1059, 1135, 1161–1168, 1169, 1181–1183,
1181 note, 1185, 1185a, 1185b, 1185d,
1191, 1191a, 1191b, and 1191c; sec.
101(g), Public Law104–191, 110 Stat.
1936; sec. 401(b), Public Law 105–200,
112 Stat. 645 (42 U.S.C. 651 note); sec.
512(d), Public Law 110–343, 122 Stat.
3881; sec. 1001, 1201, and 1562(e),
Public Law 111–148, 124 Stat. 119, as
amended by Public Law 111–152, 124
Stat. 1029; Secretary of Labor’s Order
3–2010, 75 FR 55354 (September 10,
2010).
The Department of Health and Human
Services regulations are proposed to be
adopted, with respect to 45 CFR Part 146,
pursuant to the authority contained in sec-
tions 2702 through 2705, 2711 through
2723, 2791, and 2792 of the PHS Act
(42 U.S.C. 300gg–1 through 300gg–5,
300gg–11 through 300gg–23, 300gg–91,
and 300gg–92), and, with respect to 45
CFR Part 147, pursuant to the authority
contained in sections 2701 through 2763,
2791, and 2792 of the PHS Act (42 U.S.C.
300gg through 300gg–63, 300gg–91, and
300gg–92), as amended.
*****
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement,
Internal Revenue Service.
Signed this14thday ofMarch, 2013.
Phyllis C. Borzi,
Assistant Secretary,
Employee Benefits Security Administration,
Department of Labor.
2013–19 I.R.B.1052May 6, 2013

DatedMarch 13, 2013
Marilyn Tavenner,
Acting Administrator,
Centers for Medicare &
Medicaid Services.
DatedMarch 14, 2013
Kathleen Sebelius,
Secretary,
Department of Health and
Human Services.
DEPARTMENT OF THE TREASURY
Internal Revenue Service
Accordingly, 26 CFR part 54 is pro-
posed to be amended as follows:
PART 54—PENSION EXCISE TAXES
Paragraph 1. The authority citation for
Part54isamendedbyaddinganentryfor
§54.9815–2708 in numerical order to read
in part as follows:
Authority:26 U.S.C. 7805. * * *
Section 54.9815–2708 is also issued
under 26 U.S.C. 9833.
Par. 2.Section 54.9801–1 is amended
by revising paragraph (b) to read as fol-
lows:
§54.9801–1 Basis and scope.
*****
(b)Scope. A group health plan or health
insurance issuer offering group health
insurance coverage may provide greater
rights to participants and beneficiaries
than those set forth in the portability and
market reform sections of this part 54.
This part 54 sets forth minimum require-
ments for group health plans and group
health insurance issuers offering group
health insurance coverage concerning cer-
tain consumer protections of the Health
Insurance Portability and Accountability
Act (HIPAA), including special enroll-
ment periods and the prohibition against
discrimination based ona health factor, as
amended by the Patient Protection and Af-
fordable Care Act (Affordable Care Act).
Other consumer protection provisions,
including other protections provided by
the Affordable Care Act and the Mental
Health Parity and Addiction Equity Act
are set forth in this part 54.
*****
Par. 3.Section 54.9801–2 is amended
by revising the definitions of “enrollment
date”, “late enrollment”, and “waiting pe-
riod”, and by adding definitions of “first
day of coverage”and“late enrollee”inal-
phabetical order, to read as follows:
§54.9801–2 Definitions.
*****
Enrollment datemeans the first day of
coverage or, if there is a waiting period, the
first day of the waiting period. If an in-
dividual receiving benefits under a group
health plan changes benefit packages, or
if the plan changes group health insurance
issuers, the individual’s enrollment date
does not change.
*****
First day of coveragemeans, in the case
of an individual covered for benefits under
a group health plan, the first day of cover-
age under the plan and, in the case of an in-
dividual covered by health insurance cov-
erage in the individual market, the first day
of coverage under the policy or contract.
*****
Late enrolleemeans an individual
whose enrollment in a plan is a late enroll-
ment.
Late enrollmentmeans enrollment of an
individual under a group health plan other
than the earliest date on which coverage
can become effective for the individual un-
der the terms of the plan, or through spe-
cial enrollment. (For rules relating to spe-
cial enrollment, see §54.9801–6.) If an in-
dividual ceases to be eligible for coverage
under a plan, and then subsequently be-
comes eligible for coverage under the plan,
only the individual’s most recent period of
eligibility is taken into account in deter-
mining whether the individual is a late en-
rollee under the plan with respect to the
most recent period of coverage. Similar
rules apply if an individual again becomes
eligible for coverage following a suspen-
sion of coverage that applied generally un-
der the plan.
*****
Waiting periodmeanswaiting period
within the meaning of §54.9815–2708(b).
*****
Par. 4.Section 54.9801–3 is amended
by:
A. Removing paragraphs (a)(2), (a)(3),
(c), (d), (e) and (f).
B. Revising the heading to paragraph
(a).
C. Removing paragraph (a)(1) intro-
ductory text, and redesignating paragraphs
(a)(1)(i) and (a)(1)(ii) as paragraphs (a)(1)
and (a)(2).
D. Amending paragraph (a)(2) by revis-
ing paragraph (ii) of Examples 1 and 2, by
revising Example 3 and Example 4, and by
revising paragraph (ii) of Examples 5, 6, 7
and 8.
E. Revising paragraph (b).
The revisions read as follows:
§54.9801–3 Limitations on preexisting
condition exclusion period.
(a)Preexisting condition exclusion de-
fined—
*****
(2) * * *
Example 1. ***
May 6, 201310532013–19 I.R.B.

(ii)Conclusion.InthisExample 1, the exclusion
of benefits for any prosthesis if the body part was
lost before the effective date of coverage is a preex-
isting condition exclusion because it operates to ex-
clude benefits for a condition based on the fact that
the condition was present before the effective date of
coverage under the policy. The exclusion of benefits,
therefore, is prohibited.
Example 2. ***
(ii)
Conclusion.InthisExample 2, the plan provi-
sion excluding cosmetic surgery benefits for individ-
uals injured before enrolling in the plan is a preexist-
ing condition exclusion because it operates to exclude
benefits relating to a condition based on the fact that
the condition was present before the effective date of
coverage. The plan provision, therefore, is prohib-
ited.
Example 3.(i)Facts. A group health plan pro-
vides coverage for the treatment of diabetes, gener-
ally not subject to any requirement to obtain an ap-
proval for a treatment plan. However, if an individ-
ual was diagnosed with diabetes before the effective
date of coverage under the plan, diabetes coverage is
subject to a requirement to obtain approval of a treat-
ment plan in advance.
(ii)
Conclusion.InthisExample 3, the require-
ment to obtain advance approval of a treatment plan
is a preexisting condition exclusion because it limits
benefits for a condition based on the fact that the con-
dition was present before the effective date of cover-
age. The plan provision, therefore, is prohibited.
Example 4.(i)Facts. A group health plan pro-
vides coverage for three infertility treatments. The
plan counts against the three-treatment limit benefits
provided under prior health coverage.
(ii)
Conclusion.InthisExample 4, counting ben-
efits for a specific condition provided under prior
health coverage against a treatment limit for that con-
dition is a preexisting condition exclusion because it
operates to limit benefits for a condition based on the
fact that the condition was present before the effec-
tive date of coverage. The plan provision, therefore,
is prohibited.
Example 5. ***
(ii)
Conclusion.InthisExample 5, the require-
ment to be covered under the plan for 12 months to
be eligible for pregnancy benefits is a subterfuge for a
preexisting condition exclusion because it is designed
to exclude benefits for a condition (pregnancy) that
arosebeforetheeffectivedate of coverage. The plan
provision, therefore, is prohibited.
Example 6.***
(ii)
Conclusion.InthisExample 6, the exclusion
of coverage for treatment of congenital heart condi-
tions is a preexisting condition exclusion because it
operates to exclude benefits relating to a condition
based on the fact that the condition was present be-
fore the effective date of coverage. The plan provi-
sion, therefore, is prohibited.
Example 7. ***
(ii)
Conclusion.InthisExample 7, the exclusion
of coverage for treatment of cleft palate is not a preex-
isting condition exclusion because the exclusion ap-
plies regardless of when the condition arose relative
to the effective date of coverage. The plan provi-
sion, therefore, is not prohibited. (But see 45 CFR
147.150, which may require coverage of cleft palate
as an essential health benefit for health insurance cov-
erage in the individual or small group market).
Example 8. ***
(ii)
Conclusion.InthisExample 8, the exclusion
of coverage for treatment of cleft palate for individ-
uals who have not been covered under the plan from
the date of birth operates toexclude benefits in rela-
tion to a condition based on the fact that the condition
was present before the effective date of coverage. The
plan provision, therefore, is prohibited.
*****
(b)General rules.See
§54.9815–2704T for rules prohibiting
the imposition of a preexisting condition
exclusion.
Par. 5.Section 54.9801–4 is amended
by removing paragraphs (a)(3) and (c), and
revising paragraph (b) to read as follows:
§54.9801–4 Rules relating to creditable
coverage.
*****
(b)Counting creditable coverage rules
superseded by prohibition on preexisting
condition exclusion.See§54.9815–2704T
for rules prohibiting the imposition of a
preexisting condition exclusion.
Par. 6.Section 54.9801–5 is revised to
read as follows:
§54.9801–5 Evidence of creditable
coverage.
(a)In general. The rules for provid-
ing certificates of creditable coverage
and demonstrating creditable coverage
have been superseded by the prohibition
on preexisting condition exclusions.See
§54.9815–2704T for rules prohibiting the
imposition of a preexisting condition ex-
clusion.
(b)Applicability. The amendments
made under this section apply beginning
December 31, 2014.
Par. 7.Section 54.9801–6 is amended
by removing paragraph (a)(3)(i)(E)
and revising paragraphs (a)(3)(i)(C),
(a)(3)(i)(D), (a)(4)(i) and (d)(2) to read as
follows:
§54.9801–6 Special enrollment periods.
*****
(a) * * *
(3) * * *
(i) * * *
(C) In the case of coverage offered
through an HMO, or other arrangement,
in the group market that does not provide
benefits to individuals who no longer re-
side, live, or work in a service area, loss of
coverage because an individual no longer
resides, lives, or works in the service area
(whether or not within the choice of the
individual), and no other benefit package
is available to the individual; and
(D) A situation in which a plan no
longer offers any benefits to the class of
similarly situated individuals (as described
in §54.9802–1(d)) that includes the indi-
vidual.
*****
(4) * * *
(i) A plan or issuer must allow an em-
ployee a period of at least 30 days after an
event described in paragraph (a)(3) of this
section to request enrollment (for the em-
ployee or the employee’s dependent).
*****
(d) * * *
(2) Special enrollees must be offered
all the benefit packages available to simi-
larly situated individuals who enroll when
first eligible. For this purpose, any dif-
ference in benefits or cost-sharing require-
ments for different individuals constitutes
a different benefit package. In addition, a
special enrollee cannot be required to pay
more for coverage than a similarly situated
individual who enrolls in the same cover-
age when first eligible.
*****
Par. 8.Section 54.9802–1 is amended
by:
A. Removing paragraph (b)(3)
and revising paragraphs (b)(1)(i) and
(b)(2)(i)(B).
B. Revising Example 1, paragraph (i) of
Example 2, paragraph (ii) of Example 4,
paragraph (ii) of Example 5, and removing
Example 8 in paragraph (b)(2)(i)(D).
C. Revising Example 2, and paragraph
(i) of Example 5, in paragraph (d)(4).
D. Revising paragraph (ii) of Example
2 in paragraph (e)(2)(i)(B).
E. Revising Example 1 in paragraph
(g)(1)(ii).
The revisions read as follows:
§54.9802
–1 Prohibiting discrimination
against p
articipants and beneficiaries
based on a
health factor.
*****
(b) * * *
(1) * * *
(i) A group health plan may not es-
tablish any rule for eligibility (including
2013–19 I.R.B.1054May 6, 2013

continued eligibility) of any individual to
enroll for benefits under the terms of the
plan that discriminates based on any health
factor that relates to that individual or a
dependent of that individual. This rule
is subject to the provisions of paragraph
(b)(2) of this section (explaining how this
rule applies to benefits), paragraph (d) of
this section (containing rules for establish-
ing groups of similarly situated individu-
als), paragraph (e) of this section (relating
to nonconfinement, actively-at-work, and
other service requirements), paragraph (f)
of this section (relating to wellness pro-
grams), and paragraph (g) of this section
(permitting favorable treatment of individ-
uals with adverse health factors).
*****
(2) * * *
(i) * * *
(B) However, benefits provided under
a plan must be uniformly available to all
similarly situated individuals (as described
in paragraph (d) of this section). Likewise,
any restriction on a benefit or benefits must
apply uniformly to all similarly situated in-
dividuals and must not be directed at indi-
vidual participants or beneficiaries based
on any health factor of the participants or
beneficiaries (determined based on all the
relevant facts and circumstances). Thus,
for example, a plan may limit or exclude
benefits in relation to a specific disease or
condition, limit or exclude benefits for cer-
tain types of treatments or drugs, or limit
or exclude benefits based on a determina-
tion of whether the benefits are experimen-
tal or not medically necessary, but only if
the benefit limitation or exclusion applies
uniformly to all similarly situated individ-
uals and is not directed at individual partic-
ipants or beneficiaries based on any health
factor of the participants or beneficiaries.
In addition, a plan may require the satis-
faction of a deductible, copayment, coin-
surance, or other cost-sharing requirement
in order to obtain a benefit if the limit
or cost-sharing requirement applies uni-
formly to all similarly situated individu-
als and is not directed at individual partic-
ipants or beneficiaries based on any health
factor of the participants or beneficiaries.
In the case of a cost-sharing requirement,
see also paragraph (b)(2)(ii) of this section,
which permits variances in the application
of a cost-sharing mechanism made avail-
able under a wellness program. (Whether
any plan provision orpractice with respect
to benefits complies with this paragraph
(b)(2)(i) does not affect whether the provi-
sion or practice is permitted under ERISA,
the Affordable Care Act (including the re-
quirements related to essential health ben-
efits), the Americans with Disabilities Act,
or any other law, whether State or Federal.)
*****
(D)***
Example 1.(i)Facts. A group health plan applies
a $10,000 annual limit on a specific covered benefit
that is not an essential health benefit to each partici-
pant or beneficiary covered under the plan. The limit
is not directed at individual participants or beneficia-
ries.
(ii)
Conclusion.InthisExample 1, the limit does
not violate this paragraph (b)(2)(i) because cover-
age of the specific, non-essential health benefit up to
$10,000 is available uniformly to each participant and
beneficiary under the plan and because the limit is ap-
plied uniformly to all participants and beneficiaries
and is not directed at individual participants or bene-
ficiaries.
Example 2.(i)Facts. A group health plan has a
$500 deductible on all benefits for participants cov-
ered under the plan. Participant B files a claim for
the treatment of AIDS. At the next corporate board
meeting of the plan sponsor, the claim is discussed.
Shortly thereafter, the plan is modified to impose a
$2,000 deductible on benefits for the treatment of
AIDS, effective before the beginning of the next plan
year.
*****
Example 4. ***
(ii)
Conclusion.InthisExample 4, the limit does
not violate this paragraph (b)(2)(i) because $2,000
of benefits for the treatment of TMJ are available
uniformly to all similarly situated individuals and
aplanmaylimitbenefitscoveredinrelationtoa
specific disease or condition if the limit applies uni-
formly to all similarly situated individuals and is not
directed at individual participants or beneficiaries.
(However, applying a lifetime limit on TMJ may
violate § 54.9815–2711, if TMJ coverage is an es-
sential health benefit. Thisexample does not address
whether the plan provision is permissible under any
other applicable law, including PHS Act section 2711
or the Americans with Disabilities Act.)
Example 5. ***
(ii)
Conclusion.InthisExample 5,thelower
lifetime limit for participants and beneficiaries with
a congenital heart defect violates this paragraph
(b)(2)(i) because benefitsunder the plan are not uni-
formly available to all similarly situated individuals
and the plan’s lifetime limit on benefits does not
apply uniformly to all similarly situated individuals.
Additionally, this plan provision is prohibited under
§54.9815–2711 because it imposes a lifetime limit
on essential health benefits.
*****
(d)***
(4)***
Example 2.(i)Facts. Under a group health
plan, coverage is made available to employees, their
spouses, and their children. However, coverage is
made available to a child only if the child is under
age 26 (or under age 29 if the child is continuously
enrolled full-time in an institution of higher learning
(full-time students)). There is no evidence to suggest
that these classifications are directed at individual
participants or beneficiaries.
(ii)
Conclusion. In this Example 2, treating
spouses and children differently by imposing an
age limitation on children, but not on spouses, is
permitted under this paragraph (d). Specifically,
the distinction between spouses and children is per-
mitted under paragraph (d)(2) of this section and is
not prohibited under paragraph (d)(3) of this section
because it is not directed at individual participants or
beneficiaries. It is also permissible to treat children
who are under age 26 (or full-time students under
age 29) as a group of similarly situated individuals
separate from those who are age 26 or older (or age
29 or older if they are not full-time students) because
the classification is permitted under paragraph (d)(2)
of this section and is not directed at individual par-
ticipants or beneficiaries.
*****
Example 5.(i)Facts. An employer sponsors a
group health plan that provides the same benefit pack-
age to all seven employees of the employer. Six of the
seven employees have the same job title and respon-
sibilities, but Employee
Ghas a different job title and
different responsibilities. After
Gfiles an expensive
claim for benefits under the plan, coverage under the
plan is modified so that employees with
G’s job ti-
tle receive a different benefit package that includes a
higher deductible than inthe benefit package made
available to the other six employees.
*****
(e)***
(2)***
(i)***
(B)***
Example 2. ***
(ii)
Conclusion. In this Example 2, the plan vio-
lates this paragraph (e)(2) (and thus also paragraph
(b) of this section) because the 90-day continuous
service requirement is a rule for eligibility based on
whether an individual is actively at work. However,
the plan would not violate this paragraph (e)(2) or
paragraph (b) of this section if, under the plan, an ab-
sence due to any health factor is not considered an
absence for purposes of measuring 90 days of contin-
uous service. (In addition, any eligibility provision
that is time-based must comply with the requirements
of PHS Act section 2708 and its implementing regu-
lations.)
*****
(g)***
(1)***
(ii)***
Example 1.(i)Facts. An employer sponsors a
group health plan that generally is available to em-
ployees, spouses of employees, and dependent chil-
dren until age 26. However, dependent children who
are disabled are eligible for coverage beyond age 26.
(ii)
Conclusion. In this Example 1, the plan pro-
vision allowing coverage for disabled dependent chil-
dren beyond age 26 satisfies this paragraph (g)(1)
(and thus does not violate this section).
*****
May 6, 201310552013–19 I.R.B.

Par. 9.Section 54.9815–2708 is added
to read as follows:
§54.9815–2708 Prohibition on waiting
periods that exceed 90 days.
(a)General rule. A group health plan,
and a health insurance issuer offering
group health insurance coverage, must not
apply any waiting period that exceeds 90
days, in accordance with the rules of this
section. If, under the terms of a plan, an
employee can elect coverage that would
begin on a date that is not later than the
end of the 90-day waiting period, this
paragraph (a) is considered satisfied. Ac-
cordingly, a plan or issuer in that case will
not be considered to have violated this
paragraph (a) solely because employees
(or other classes of participants) may take
additional time (beyond the end of the
90-day waiting period) to elect coverage.
(b)Waiting period defined. For pur-
poses of this part, a waiting period is
the period that must pass before cover-
age for an employee or dependent who
is otherwise eligible to enroll under the
terms of a group health plan can become
effective. If an employee or dependent
enrolls as a late enrollee (as defined under
§54.9801–2) or special enrollee (as de-
scribed in §54.9801–6), any period before
such late or special enrollment is not a
waiting period.
(c)Relation to a plan’s eligibility crite-
ria— (1) Except as provided in paragraphs
(c)(2) and (c)(3) of this section, being oth-
erwise eligible to enroll under the terms
of a group health plan means having met
the plan’s substantive eligibility conditions
(such as, for example, being in an eligi-
ble job classification or achieving job-re-
lated licensure requirements specified in
the plan’s terms). Moreover, except as pro-
vided in paragraphs (c)(2) and (c)(3) of this
section, nothing in this section requires a
plan sponsor to offer coverage to any par-
ticular employee or class of employees (in-
cluding, for example, part-time employ-
ees). Instead, this section prohibits re-
quiring otherwise eligible participants and
beneficiaries to wait more than 90 days
before coverage is effective. (While a
substantive eligibility condition that de-
nies coverage to employees may be per-
missible under this section, a failure by
an applicable large employer (as defined
in section 4980H) to offer coverage to a
full-time employee might, for example,
nonetheless give rise to an assessable pay-
ment under section 4980H and its imple-
menting regulations.)
(2)Eligibility conditions based solely
on the lapse of time. Eligibility conditions
that are based solely on the lapse of a time
period are permissible for no more than 90
days.
(3)Other conditions for eligibility.
Other conditions for eligibility under the
terms of a group health plan are generally
permissible under PHS Act section 2708,
unless the condition is designed to avoid
compliance with the 90-day waiting pe-
riod limitation, determined in accordance
with the rules of this paragraph (c)(3).
(i)Application to variable-hour em-
ployees in cases in which a specified
number of hours of service per period is a
plan eligibility condition. If a group health
plan conditions eligibility on an employee
regularly having a specified number of
hours of service per period (or working
full-time), and it cannot be determined
that a newly-hired employee is reasonably
expected to regularly work that number of
hours per period (or work full-time), the
plan may take a reasonable period of time,
not to exceed 12 months and beginning
on any date between the employee’s start
day and the first day of the first calendar
month following the employee’s start date,
to determine whether the employee meets
the plan’s eligibility condition. Except
in cases in which a waiting period that
exceeds 90 days is imposed in addition to
a measurement period, the time period for
determining whether such an employee
meets the plan’s eligibility condition will
not be considered to be designed to avoid
compliance with the 90-day waiting period
limitation if coverage is made effective no
later than 13 months from the employee’s
start date, plus if the employee’s start date
is not the first day of a calendar month, the
time remaining until the first day of the
next calendar month.
(ii)Cumulative service requirements.
If a group health plan or health insurance
issuer conditions eligibility on an em-
ployee’s having completed a number of
cumulative hours of service, the eligibility
condition is not considered to be designed
to avoid compliance with the 90-day wait-
ing period limitation if the cumulative
hours-of-service requirement does not ex-
ceed 1,200 hours.
(d)Counting days. Under this sec-
tion, all calendar days are counted begin-
ning on the enrollment date (as defined in
§54.9801–2), including weekends and hol-
idays. If, in the case of a plan or issuer
imposing a 90-day waiting period, the 91
st
day is a weekend or holiday, the plan or
issuer may choose to permit coverage to
become effective earlier than the 91
st
day,
for administrative convenience. Similarly,
plans and issuers that do not want to start
coverage in the middle of a month (or pay
period) may choose to permit coverage to
become effective earlier than the 91
st
day,
for administrative convenience. For exam-
ple, a plan may impose a waiting period of
60 days plus a fraction of a month (or pay
period) until the first day of the next month
(or pay period). However, a plan or issuer
that extends the effective date of coverage
beyond the 91
st
day fails to comply with
the 90-day waiting period limitation.
(e)Examples. The rules of this section
are illustrated by the following examples:
Example 1.(i)Facts. A group health plan pro-
vides that full-time employees are eligible for cover-
age under the plan. Employee
Abegins employment
as a full-time employee on January 19.
(ii)
Conclusion.InthisExample 1, any waiting
period for
AwouldbeginonJanuary19andmaynot
exceed 90 days. Coverage under the plan must be-
come effective no later than April 19 (assuming Feb-
ruary lasts 28 days).
Example 2.(i)Facts. A group health plan pro-
vides that only employees with job title
Mare eligi-
ble for coverage under the plan. Employee
Bbegins
employment in job title
Lon January 30.
(ii)
Conclusion.InthisExample 2,Bis not eligi-
ble for coverage under the plan, and the period while
Bis working in job titleLandthereforenotinaneligi-
ble class of employees is not part of a waiting period
under this section.
Example 3.(i)Facts. Same facts asExample 2,
except that
Btransfers to a new position with job title
Mon April 11.
(ii)
Conclusion.InthisExample 3,Bbecomes
eligible for coverage on April 11, but for the waiting
period. Any waiting period for
Bbegins on April 11
and may not exceed 90 days. Coverage under the plan
must become effective no later than July 10.
Example 4.(i)Facts. A group health plan pro-
vides that only employees who have completed spec-
ified training and achieved specified certifications are
eligible for coverage under the plan. Employee
Cis
hired on May 3 and meets the plan’s eligibility crite-
ria on September 22.
(ii)
Conclusion.InthisExample 4,Cbecomes eli-
gible for coverage on September 22, but for the wait-
ing period. Any waiting period for
Cwould begin
on September 22 and may not exceed 90 days. Cov-
erage under the plan must become effective no later
than December 21.
2013–19 I.R.B.1056May 6, 2013

Example 5.(i)Facts. A group health plan pro-
vides that employees are eligible for coverage after
one year of service.
(ii)
Conclusion.InthisExample 5,theplan’s
eligibility condition is based solely on the lapse of
time and, therefore, is impermissible under paragraph
(c)(2) of this section because it exceeds 90 days.
Example 6.(i)Facts.EmployerW’s group health
plan provides for coverage to begin on the first day
of the first payroll period on or after the date an em-
ployee is hired and completes the applicable enroll-
ment forms. Enrollment forms are distributed on an
employee’s start date and may be completed within
90 days. Employee
Dis hired and starts on October
31, which is the first day of a pay period.
Dcom-
pletes the enrollment forms and submits them on the
90
th
day afterD’s start date. Coverage is made effec-
tive 7 days later, which is the first day of the next pay
period.
(ii)
Conclusion.InthisExample 6, under the
terms of
W’s plan, coverage may become effective as
early as October 31, depending on when
Dcompletes
the applicable enrollment forms. Under the terms of
the plan, when coverage becomes effective is depen-
dent solely on the length of time taken by
Dto com-
plete the enrollment materials. Therefore, under the
terms of the plan,
Dmay elect coverage that would
begin on a date that does not exceed the 90-day wait-
ing period limitation, and the plan complies with this
section.
Example 7.(i)Facts. Under EmployerY’s
group health plan, only employees who are full-time
(defined under the plan as regularly averaging 30
hours of service per week) are eligible for coverage.
Employee
Ebegins employment for EmployerYon
November 26 of Year 1.
E’s hours are reasonably
expected to vary, with an opportunity to work be-
tween 20 and 45 hours per week, depending on shift
availability and
E’s availability. Therefore, it cannot
be determined at
E’s start date thatEis reasonably
expected to work full-time. Under the terms of the
plan, variable-hour employees, such as
E, are eligible
to enroll in the plan if they are determined to be a
full-time employee aftera measurement period of
12 months that begins on the employee’s start date.
Coverage is made effective no later than the first day
of the first calendar month after the applicable enroll-
ment forms are received.
E’s 12-month measurement
period ends November 25 of Year 2.
Eis determined
to be a full-time employee and is notified of
E’s plan
eligibility. If
Ethen elects coverage,E’s first day of
coverage will be January 1 of Year 3.
(ii)
Conclusion.InthisExample 7, the measure-
ment period is permissible because it is not consid-
ered to be designed to avoid compliance with the
90-day waiting period limitation. The plan may use
a reasonable period of time to determine whether a
variable-hour employee is a full-time employee, pro-
vided the period of time is no longer than 12 months
and begins on a date between the employee’s start
date and the first day of the next calendar month,
provided coverage is made effective no later than 13
months from
E’s start date (plus if the employee’s
start date is not the first day of a calendar month, the
time remaining until the first day of the next calendar
month) and provided that, in addition to the measure-
ment period, no more than 90 days elapse prior to the
employee’s eligibility for coverage.
Example 8.(i)Facts.EmployeeFbegins work-
ing 25 hours per week for Employer
Zon January 6
and is considered a part-time employee for purposes
of
Z’s group health plan.Zsponsors a group health
plan that provides coverage to part-time employees
after they have completed a cumulative 1,200 hours
of service.
Fsatisfies the plan’s cumulative hours of
service condition on December 15.
(ii)
Conclusion.InthisExample 8, the cumulative
hours of service condition with respect to part-time
employees is not considered to be designed to avoid
compliance with the 90-day waiting period limitation.
Accordingly, coverage for
Funder the plan must be-
gin no later than the 91st day after
Fcompletes 1,200
hours. (If the plan’s cumulative hours-of-service re-
quirement was more than 1,200 hours, the require-
ment would be considered to be designed to avoid
compliance with the 90-day waiting period limita-
tion.)
(f)Special rule for health insurance is-
suers. To the extent coverage under a
group health plan is insured by a health
insurance issuer, the issuer is permitted to
rely on the eligibility information reported
to it by the employer (or other plan spon-
sor) and will not be considered to violate
the requirements of this section with re-
spect to its administration of any waiting
period, if both of the following conditions
are satisfied:
(1) The issuer requires the plan spon-
sor to make a representation regarding the
terms of any eligibility conditions or wait-
ing periods imposed by the plan sponsor
before an individual is eligible to become
covered under the terms of the employer’s
plan (and requires the plan sponsor to up-
date this representation with any changes);
and
(2) The issuer has no specific knowl-
edge of the imposition of a waiting period
that would exceed the permitted 90-day
period.
(g)No effect on other laws. Compli-
ance with this section is not determina-
tive of compliance with any other pro-
vision of State or Federal law (including
ERISA, the Code, or other provisions of
the Patient Protection and Affordable Care
Act).See e.g., §54.9802–1, which pro-
hibits discrimination in eligibility for cov-
erage based on a health factor, and section
4980H, which generally requires applica-
ble large employers to offer coverage to
full-time employeesand their dependents
or make an assessable payment.
(h)Applicability date—(1)In general.
The provisions of this section apply for
plan years beginning on or after January
1, 2014.See§54.9815–1251T providing
that the prohibition on waiting periods ex-
ceeding 90 days applies to all group health
plans and health insurance issuers, includ-
ing grandfathered health plans.
(2)Application to individuals in a wait-
ing period prior to the applicability date
— (i) With respect to individuals who are
in a waiting period for coverage before the
applicability date of this section, begin-
ning on the first day the section applies, the
waiting period can no longer apply to the
individual if it would exceed 90 days with
respect to the individual.
(ii) This paragraph (h)(2) is illustrated
by the following example:
Example.(i)Facts. A group health plan is
a calendar year plan. Prior to January 1, 2014, the
plan provides that full-time employees are eligible for
coverage after a 6-month waiting period. Employee
Abegins work as a full-time employee on October 1,
2013.
(ii)
Conclusion.InthisExample 1,thefirstday
of A’s waiting period is October 1, 2013 because that
is the first day
Ais otherwise eligible to enroll under
the plan’s substantive eligibility provisions, but for
the waiting period. Beginning January 1, 2014, the
plan may not apply a waiting period that exceeds 90
days. Accordingly,
Amust be given the opportunity
to elect coverage that begins no later than January 1,
2014 (which is 93 days after
A’s start date) because
otherwise, on January 1, 2014, the plan would be ap-
plying a waiting period that exceeds 90 days. The
plan is not required to make coverage effective be-
fore January 1, 2014 under the rules of this section.
Par. 10.Section 54.9815–2719T is
amended by adding a sentence to the end
of the introductory text of paragraph (d)
and revising paragraph (d)(1)(i) to read as
follows:
§54.9815–2719T Internal claims and
appeals and external review processes.
*****
(d)***AMultiStatePlanorMSP,
as defined by 45 CFR 800.20, must pro-
vide an effective Federal external review
process in accordance with this paragraph
(d).
(1) * * *
(i)In general. Subject to the suspen-
sion provision in paragraph (d)(1)(ii) of
this section and except to the extent pro-
vided otherwise by the Secretary in guid-
ance, the Federal external review process
established pursuant to this paragraph (d)
applies, at a minimum, to any adverse ben-
efit determination or final adverse bene-
fit determination (as defined in paragraphs
(a)(2)(i) and (a)(2)(v) of this section), ex-
cept that a denial, reduction, termination,
or a failure to provide payment for a ben-
May 6, 201310572013–19 I.R.B.

efit based on a determination that a partic-
ipant or beneficiary fails to meet the re-
quirements for eligibility under the terms
of a group health plan is not eligible for the
Federal external review process under this
paragraph (d).
*****
Par. 11.Section 54.9831–1 is amended
by removing paragraph (b)(2)(i), and re-
designating paragraphs (b)(2)(ii) through
(b)(2)(viii) as (b)(2)(i) through (b)(2)(vii).
(Filed by the Office of the Federal Register on March 18,
2013, 4:15 p.m., and published in the issue of the Federal
Register for March 21, 2013, 78 FR 17313)
2013–19 I.R.B.1058May 6, 2013

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cases
in litigation, or the outcome of a Service
study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
May 6, 2013i2013–19 I.R.B.

Numerical Finding List
1
Bulletins 2013–1 through 2013–19
Announcements:
2013-1, 2013-1 I.R.B.251
2013-2, 2013-2 I.R.B.271
2013-3, 2013-2 I.R.B.271
2013-4, 2013-4 I.R.B.440
2013-5, 2013-3 I.R.B.306
2013-6, 2013-3 I.R.B.307
2013-7, 2013-3 I.R.B.308
2013-8, 2013-4 I.R.B.440
2013-9, 2013-4 I.R.B.441
2013-10, 2013-3 I.R.B.311
2013-11, 2013-6 I.R.B.483
2013-12, 2013-11 I.R.B.651
2013-13, 2013-9 I.R.B.532
2013-14, 2013-11 I.R.B.651
2013-15, 2013-11 I.R.B.652
2013-16, 2013-14 I.R.B.738
2013-17, 2013-16 I.R.B.911
2013-19, 2013-14 I.R.B.760
2013-20, 2013-14 I.R.B.761
2013-21, 2013-17 I.R.B.980
2013-22, 2013-17 I.R.B.981
2013-23, 2013-16 I.R.B.940
2013-26, 2013-16 I.R.B.940
2013-27, 2013-17 I.R.B.981
2013-28, 2013-17 I.R.B.982
2013-29, 2013-18 I.R.B.1024
Notices:
2013-1, 2013-3 I.R.B.281
2013-2, 2013-6 I.R.B.473
2013-3, 2013-7 I.R.B.484
2013-4, 2013-9 I.R.B.527
2013-5, 2013-9 I.R.B.529
2013-6, 2013-10 I.R.B.540
2013-7, 2013-6 I.R.B.477
2013-8, 2013-7 I.R.B.486
2013-9, 2013-9 I.R.B.529
2013-10, 2013-8 I.R.B.503
2013-11, 2013-11 I.R.B.610
2013-12, 2013-10 I.R.B.543
2013-13, 2013-12 I.R.B.659
2013-14, 2013-13 I.R.B.712
2013-15, 2013-14 I.R.B.739
2013-16, 2013-14 I.R.B.740
2013-18, 2013-14 I.R.B.742
2013-19, 2013-14 I.R.B.743
2013-20, 2013-15 I.R.B.902
2013-21, 2013-15 I.R.B.903
2013-22, 2013-15 I.R.B.904
2013-23, 2013-16 I.R.B.906
2013-24, 2013-16 I.R.B.909
Notices— Continued:
2013-25, 2013-17 I.R.B.
978
2013-26, 2013-18 I.R.B.984
2013-27, 2013-18 I.R.B.985
2013-28, 2013-19 I.R.B.1039
Proposed Regulations:
REG-155929-06, 2013-11 I.R.B.650
REG-106918-08, 2013-13 I.R.B.714
REG-141066-09, 2013-3 I.R.B.289
REG-148873-09, 2013-7 I.R.B.494
REG-102966-10, 2013-10 I.R.B.579
REG-120391-10, 2013-18 I.R.B.1005
REG-132702-10, 2013-19 I.R.B.1042
REG-140649-11, 2013-12 I.R.B.666
REG-118315-12, 2013-14 I.R.B.746
REG-122706-12, 2013-19 I.R.B.1043
REG-122707-12, 2013-5 I.R.B.450
REG-148500-12, 2013-13 I.R.B.716
Revenue Procedures:
2013-1, 2013-1 I.R.B.1
2013-2, 2013-1 I.R.B.92
2013-3, 2013-1 I.R.B.113
2013-4, 2013-1 I.R.B.126
2013-5, 2013-1 I.R.B.170
2013-6, 2013-1 I.R.B.198
2013-7, 2013-1 I.R.B.233
2013-8, 2013-1 I.R.B.237
2013-9, 2013-2 I.R.B.255
2013-10, 2013-2 I.R.B.267
2013-11, 2013-2 I.R.B.269
2013-12, 2013-4 I.R.B.313
2013-13, 2013-6 I.R.B.478
2013-14, 2013-3 I.R.B.283
2013-15, 2013-5 I.R.B.444
2013-16, 2013-7 I.R.B.488
2013-17, 2013-11 I.R.B.612
2013-18, 2013-8 I.R.B.503
2013-19, 2013-11 I.R.B.648
2013-20, 2013-14 I.R.B.744
2013-21, 2013-12 I.R.B.660
2013-22, 2013-18 I.R.B.985
2013-23, 2013-17 I.R.B.978
Revenue Rulings:
2013-1, 2013-2 I.R.B.252
2013-2, 2013-10 I.R.B.533
2013-3, 2013-8 I.R.B.500
2013-4, 2013-9 I.R.B.520
2013-5, 2013-9 I.R.B.525
2013-6, 2013-13 I.R.B.701
2013-7, 2013-11 I.R.B.608
2013-8, 2013-15 I.R.B.763
2013-9, 2013-15 I.R.B.764
Tax Conventions:
2013-16, 2013-14 I.R.B.738
Treasury Decisions:
9601, 2013-10 I.R.B.535
9603, 2013-3 I.R.B.273
9605, 2013-11 I.R.B.587
9606, 2013-11 I.R.B.586
9607, 2013-6 I.R.B.469
9608, 2013-3 I.R.B.274
9609, 2013-12 I.R.B.655
9610, 2013-15 I.R.B.765
9611, 2013-13 I.R.B.699
9612, 2013-13 I.R.B.678
9613, 2013-15 I.R.B.900
9614, 2013-17 I.R.B.947
9615, 2013-19 I.R.B.1026
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2012–27 through 2012–52 is in Internal Revenue Bulletin
2012–52, dated December 27, 2012.
2013–19 I.R.B.iiMay 6, 2013

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2013–1 through 2013–19
Announcements:
2012-42
Obsoleted by
T.D. 9610, 2013-15 I.R.B.
765
2013-12
Supplemented by
Ann. 2013-22, 2013-17 I.R.B.
981
Notices:
87-64
Obsoleted by
T.D. 9614, 2013-17 I.R.B.
947
2000-45
Modified and superseded by
Notice 2013-18, 2013-14 I.R.B.
742
2008-10
Obsoleted by
T.D. 9615, 2013-19 I.R.B.
1026
2010-60
Obsoleted by
T.D. 9610, 2013-15 I.R.B.
765
2011-14
Amplified and supplemented by
Notice 2013-7, 2013-6 I.R.B.
477
2011-34
Obsoleted by
T.D. 9610, 2013-15 I.R.B.
765
2011-38
Obsoleted by
REG-148873-09, 2013-7 I.R.B.
494
2011-53
Obsoleted by
T.D. 9610, 2013-15 I.R.B.
765
2012-60
Superseded by
Notice 2013-1, 2013-3 I.R.B.
281
2013-1
Modified and superseded by
Notice 2013-16, 2013-14 I.R.B.
740
Proposed Regulations:
REG-140668-07
Corrected by
Ann. 2013-6, 2013-3 I.R.B.
307
Revenue Procedures:
87-57
Modified by
Rev. Proc. 2013-13, 2013-6 I.R.B.
478
2004-66
Modified and superseded by
Rev. Proc. 2013-11, 2013-2 I.R.B.
269
2008-35
Modified and superseded by
Rev. Proc. 2013-14, 2013-3 I.R.B.
283
2008-50
Modified and superseded by
Rev. Proc. 2013-12, 2013-4 I.R.B.
313
2011-14
Modified by
Rev. Proc. 2013-20, 2013-14 I.R.B.
744
2011-49
Modified by
Rev. Proc. 2013-6, 2013-1 I.R.B.
198
2011-52
Modified and partly superseded by
Rev. Proc. 2013-15, 2013-5 I.R.B.
444
2011-55
Amplified and supplemented by
Notice 2013-7, 2013-6 I.R.B.
477
2011-61
Superseded by
Rev. Proc. 2013-17, 2013-11 I.R.B.
612
2011-62
Superseded by
Rev. Proc. 2013-18, 2013-8 I.R.B.
503
2012-1
Superseded by
Rev. Proc. 2013-1, 2013-1 I.R.B.
1
2012-2
Superseded by
Rev. Proc. 2013-2, 2013-1 I.R.B.
92
2012-3
Superseded by
Rev. Proc. 2013-3, 2013-1 I.R.B.
113
2012-4
Superseded by
Rev. Proc. 2013-4, 2013-1 I.R.B.
126
2012-5
Superseded by
Rev. Proc. 2013-5, 2013-1 I.R.B.
170
2012-6
Superseded by
Rev. Proc. 2013-6, 2013-1 I.R.B.
198
Revenue Procedures— Continued:
2012-7
Superseded by
Rev. Proc. 2013-7, 2013-1 I.R.B.
233
2012-8
Superseded by
Rev. Proc. 2013-8, 2013-1 I.R.B.
237
2012-9
Superseded by
Rev. Proc. 2013-9, 2013-2 I.R.B.
255
2012-10
Superseded by
Rev. Proc. 2013-10, 2013-2 I.R.B.
267
2012-30
Corrected and clarified by
Ann. 2013-3, 2013-2 I.R.B.
271
Updated by
Ann. 2013-10, 2013-3 I.R.B.
311
2012-46
Corrected by
Ann. 2013-11, 2013-6 I.R.B.
483
2013-1
Corrected by
Ann. 2013-9, 2013-4 I.R.B.
441
2013-4
Modified by
Rev. Proc. 2013-22, 2013-18 I.R.B.
985
2013-6
Revised by
Ann. 2013-15, 2013-11 I.R.B.
652
Corrected by
Ann. 2013-13, 2013-9 I.R.B.
532
2013-8
Modified by
Rev. Proc. 2013-22, 2013-18 I.R.B.
985
2013-14
Modified by
Rev. Proc. 2013-19, 2013-11 I.R.B.
648
Revenue Rulings:
92-19
Supplemented in part by
Rev. Rul. 2013-4, 2013-9 I.R.B.
520
Treasury Decisions:
9564
Corrected by
Ann. 2013-4, 2013-4 I.R.B.
440
Amended by
Ann. 2013-7, 2013-3 I.R.B.
308
9604
Corrected by
Ann. 2013-19, 2013-14 I.R.B.
760
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2012–27 through 2012–52 is in Internal Revenue Bulletin 2012–52, dated December 27,
2012.
May 6, 2013iii2013–19 I.R.B.

Internal Revenue Service
W
ashington,DC20224
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Penalty for Private Use, $300
INTERNAL REVENUE BULLETIN
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