Internal Revenue Bulletin 2015-49 (PDF rendition): IRS Revenue Procedures

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

# INTERNAL REVENUE BULLETIN

IRS

Bulletin No. 2015-49
December 7, 2015

## 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

### REG-134219-08, page 842.

This document contains proposed regulations relating to relief
from joint and several liability under section 6015 of the Inter-
nal Revenue Code (Code).

### Rev. Rul. 2015-25, page 695.

Federal rates; adjusted federal rates; adjusted federal long-
term rate and the long-term exempt rate. For purposes of
sections 382, 642, 1274, 1288, and other sections of the
Code, tables set forth the rates for December 2015.

### Rev. Rul. 2015-26, page 696.

The "base period T-bill rate" for the period ending September
30, 2015, is published as required by section 995(f) of the
Code.

### Rev. Proc. 2015-56, page 827.

Revenue Procedure 2015-56 provides guidance that taxpay-
ers may use to determine whether costs paid or incurred to
refresh or remodel a qualified retail or restaurant building are
deductible under § 162(a), must be capitalized as improve-
ments under § 263(a), or must be capitalized as property
produced for use in the taxpayer's trade or business under
§ 263A.

### Notice 2015-79, page 775.

This notice describes regulations that the Treasury Department
and the IRS will issue to address certain transactions that are
structured to avoid the purposes of section 7874 and certain
post-inversion tax avoidance transactions.

## EMPLOYEE PLANS

### T.D. 9744, page 700.

This document contains final regulations concerning Public
Health Services Act sections which are incorporated into sec-
tion 9815 of the Internal Revenue Code by section 1563(f) of
the Patient Protection and Affordable Care Act, regarding
grandfathered health (PHS Act section 1251), the prohibition
on preexisting condition exclusions (PHS Act section 2704),
the prohibition on lifetime and annual dollar limits (PHS Act
section 2711), the prohibition on rescissions (PHS Act section
2712), the extension of coverage of dependent children to age
26 (PHS Act section 2714), the patient protections (PHS Act
section 2719A), and the provisions for internal claims and
appeals and external review (PHS Act section 2719). The final
rule was published jointly with the Departments of Labor and of
Health and Human Services.

## EXEMPT ORGANIZATIONS

Announcement 2015-32, page 841.

Serves notice to potential donors of organizations that have
recently filed a timely declaratory judgment suit under section
7428 of the Code, challenging revocation of its status as an
eligible donee under section 170(c)(2).

### Announcement 2015-33, page 842.

Revocation of IRC 501(c)(3) Organizations for failure to meet
the code section requirements. Contributions made to the
organizations by individual donors are no longer deductible
under IRC 170(b)(1)(A).

(Continued on the next page)

### Notice 2015-81, page 784.

This notice advises how the Treasury Department and the
Internal Revenue Service (IRS) intend to respond to comments
by revising three provisions of the proposed regulations under
§ 529A of the Internal Revenue Code when those regulations
are finalized. Specifically, commenters noted that the following
three requirements for qualified Achieving Better Life Experi-
ence (ABLE) programs in the proposed regulations would cre-
ate significant barriers to the establishment of such programs:
(1) the requirement to establish safeguards to categorize dis-
tributions from ABLE accounts, (2) the requirement to request
the taxpayer identification number (TIN) of each contributor to
an ABLE account, and (3) the requirements for disability certi-
fications, and in particular the requirement to process disability
certifications with signed physicians' diagnoses.

## ADMINISTRATIVE

Announcement 2015-31, page 841.

This document contains corrections to Revenue Procedure
2015-51, as published on Monday, October 19, 2015 (I.R.B.
2015-42, 583). In particular, this announcement corrects
certain specifications for checkboxes on Form W-2 and the
address to send sample substitute forms to receive approval
from the SSA.

Rev. Proc. 2015-55, page 788.

Pub. 1167, General Rules and Specifications for Substitute
Forms and Schedules, provides guidelines and general require-
ments for the development, printing, and approval of substitute
tax forms.

## The IRS Mission

Provide America's taxpayers top-quality service by helping
them understand and meet their tax responsibilities and en-
force the law with 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 policy of the Service to publish in the Bulletin all
substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of internal
management are not published; however, statements of inter-
nal 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, identify-
ing 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, Legisla-
tion 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 Sec-
retary (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 contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

## Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 1274 .-
Determination of Issue
Price in the Case of
Certain Debt Instruments
Issued for Property

(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)

### Rev. Rul. 2015-25

This revenue ruling provides various
prescribed rates for federal income tax
purposes for December 2015 (the current

month). Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month for
purposes of section 1274(d) of the Internal
Revenue Code. Table 2 contains the short-
term, mid-term, and long-term adjusted
applicable federal rates (adjusted AFR)
for the current month for purposes of sec-
tion 1288(b). Table 3 sets forth the ad-
justed federal long-term rate and the long-
term tax-exempt rate described in section
382(f). Table 4 contains the appropriate
percentages for determining the low-
income housing credit described in sec-
tion 42(b)(1) for buildings placed in ser-

vice during the current month. However,
under section 42(b)(2), the applicable
percentage for non-federally subsidized
new buildings placed in service after
July 30, 2008, with respect to housing
credit dollar amount allocations made
before January 1, 2015, shall not be less
than 9%. Table 5 contains the federal
rate for determining the present value of
an annuity, an interest for life or for a
term of years, or a remainder or a rever-
sionary interest for purposes of section
7520. Finally, Table 6 contains the 2016
interest rate for purposes of sections 846
and 807.

REV. RUL. 2015-25 TABLE 1 Applicable Federal Rates (AFR) for December 2015

Annual

Period for Compounding Semiannual

Quarterly

Monthly

Short-term

AFR

.56%

110% AFR

.62%

120% AFR

.67%

130% AFR

.73%

Mid-term

AFR

1.68%

1.67%

1.66%

110% AFR

1.85%

1.84%

1.83%

120% AFR

2.01%

2.00%

1.99%

130% AFR

2.18%

2.17%

2.16%

150% AFR

2.53%

2.51%

2.50%

175% AFR

2.94%

2.92%

2.91%

2.90%

Long-term

AFR

2.61%

2.59%

2.58%

110% AFR

2.87%

2.85%

2.84%

2.83%

120% AFR

3.13%

3.11%

3.10%

3.09%

130% AFR

3.40%

3.37%

3.36%

3.35%

REV. RUL. 2015-25 TABLE 2

Adjusted AFR for December 2015

Period for Compounding

Annual

Semiannual

Quarterly

Monthly

Short-term adjusted AFR

.48%

Mid-term adjusted AFR

1.38%

Long-term adjusted AFR

2.61%

2.59%

2.58%

# REV. RUL. 2015-25 TABLE 3 Rates Under Section 382 for December 2015

Adjusted federal long-term rate for the current month
2.61%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the
adjusted federal long-term rates for the current month and the prior two months.)

2.61%

# REV. RUL. 2015-25 TABLE 4 Appropriate Percentages Under Section 42(b)(1) for December 2015

Note: Under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service
after July 30, 2008, with respect to housing credit dollar amount allocations made before January 1, 2015 shall not
be less than 9%.

REV. RUL. 2015-25 TABLE 5 Rate Under Section 7520 for December 2015

Appropriate percentage for the 70%

present value low-income housing credit

7.49%

Appropriate percentage for the 30%

present value low-income housing credit

3.21%

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of
years, or a remainder or reversionary interest

2.0%

REV. RUL. 2015-25 TABLE 6
Rate Under Sections 846 and 807

Applicable rate of interest for 2016 for purposes of sections 846 and 807

1.56%

## Section 995 .- Taxation of DISC Income to Shareholders

2015 Base Period T-Bill Rate. The "base period T-bill
rate" for the period ending September 30, 2015, is
published as required by section 995(f) of the Code.

## Rev. Rul. 2015-26

Section 995(f)(1) of the Internal Reve-
nue Code provides that a shareholder of a
domestic international sales corporation
("DISC") shall pay interest each taxable
year in an amount equal to the product of
the shareholder's DISC-related deferred
tax liability for the year (as defined in
section 995(f)(2)) and the "base period
T-bill rate." Under section 995(f)(4), the
base period T-bill rate is the annual rate of
interest determined by the Secretary to be
equivalent to the average of the 1-year
constant maturity Treasury yields, as pub-
lished by the Board of Governors of the
Federal Reserve System, for the 1-year
period ending on September 30 of the cal-
endar year ending with (or the most recent

calendar year ending before) the close of the
taxable year of the shareholder.

The base period T-bill rate for the period
ending September 30, 2015, is 0.24 percent.

Pursuant to section 6622 of the Internal
Revenue Code, interest must be com-
pounded daily. The table below provides
factors for compounding the 2015 base
period T-bill rate daily for any number of
days in the shareholder's taxable year (in-
cluding for a 52-53 week accounting pe-
riod). To compute the amount of the in-
terest charge for the shareholder's taxable
year, multiply the amount of the sharehold-
er's DISC-related deferred tax liability for
that year by the base period T-bill rate factor
corresponding to the number of days in the
shareholder's taxable year for which the in-
terest charge is being computed. Generally,
one would use the factor for 365 days. One
would use a different factor only if the
shareholder's taxable year for which the in-
terest charge is being determined is a short
taxable year, if the shareholder uses a 52-53
week taxable year, or if the shareholder's
taxable year is a leap year.

For the base period T-bill rates for pe-
riods ending in prior years, see Rev. Rul.
2014-33, 2014-52 IRB 957; Rev. Rul.
2013-24, 2013-49 IRB 594; Rev. Rul.
2012-22, 2012-48 IRB 565; Rev. Rul.
2011-30, 2011-49 IRB 826; and Rev.
Rul. 2010-28, 2010-49 IRB 804.

## DRAFTING INFORMATION

The principal author of this revenue
ruling is Joshua Simmons of the Office of
Associate Chief Counsel (International).
For further information regarding the rev-
enue ruling, contact Anand Desai at (202)
317-6939 (not a toll-free number).

ANNUAL RATE, COM- POUNDED DAILY

0.24 PERCENT

DAYS

FACTOR

.000006575

.000013151

.000019726

.000026302

.000032877

ANNUAL RATE, COM- POUNDED DAILY 0.24 PERCENT

DAYS

FACTOR

DAYS

FACTOR

DAYS

FACTOR

.000039453

.000282779

.000526164

.000046028

.000289356

.000052604

.000295933

.000532743

.000059180

.000539322

.000065755

.000302511

.000545901

.000309088

.000552480

.000072331

.000315665

.000559058

.000078907

.000322243

.000085483

.000328820

.000565638

.000092059

.000572217

.000098635

.000335398

.000578796

.000341975

.000585375

.000105211

.000348553

.000591954

.000111787

.000355130

.000118363

.000361708

.000598533

.000124939

.000605113

.000131515

.000368286

.000611692

.000374864

.000618271

.000138091

.000381441

.000624851

.000144668

.000388019

.000151244

.000394597

.000631430

.000157820

.000638010

.000164397

.000401175

.000644589

.000407753

.000651169

.000170973

.000414331

100

.000657748

.000177549

.000420909

.000184126

.000427487

101

.000664328

.000190702

102

.000670908

.000197279

.000434065

103

.000677487

.000440644

104

.000684067

.000203856

.000447222

105

.000690647

.000210432

.000453800

.000217009

.000460378

106

.000697227

.000223586

107

.000703807

.000230163

.000466957

108

.000710387

.000473535

109

.000716967

.000236740

.000480114

110

.000723547

.000243316

.000486692

.000249893

.000493271

111

.000730127

.000256470

112

.000736707

.000263047

.000499849

113

.000743287

.000506428

114

.000749868

.000269624

.000513007

115

.000756448

.000276202

.000519585

ANNUAL RATE, COM- POUNDED DAILY 0.24 PERCENT

DAYS

FACTOR

DAYS

FACTOR

DAYS

FACTOR

116

.000763028

153

.001006530

190

.001250092

117

.000769609

154

.001013112

118

.000776189

155

.001019694

191

.001256675

119

.000782769

192

.001263259

120

.000789350

156

.001026276

193

.001269842

157

.001032858

194

.001276426

121

.000795930

158

.001039441

195

.001283010

122

.000802511

159

.001046023

123

.000809092

160

.001052605

196

.001289594

124

.000815672

197

.001296178

125

.000822253

161

.001059187

198

.001302761

162

.001065770

199

.001309345

126

.000828834

163

.001072352

200

.001315929

127

.000835415

164

.001078934

128

.000841995

165

.001085517

201

.001322513

129

.000848576

202

.001329097

130

.000855157

166

.001092099

203

.001335681

167

.001098682

204

.001342265

131

.000861738

168

.001105264

205

.001348850

132

.000868319

169

.001111847

133

.000874900

170

.001118430

206

.001355434

134

.000881481

207

.001362018

135

.000888062

171

.001125012

208

.001368602

172

.001131595

209

.001375187

136

.000894644

173

.001138178

210

.001381771

137

.000901225

174

.001144761

138

.000907806

175

.001151343

211

.001388356

139

.000914387

212

.001394940

140

.000920969

176

.001157926

213

.001401525

177

.001164509

214

.001408109

141

.000927550

178

.001171092

215

.001414694

142

.000934132

179

.001177675

143

.000940713

180

.001184258

216

.001421278

144

.000947295

217

.001427863

145

.000953876

181

.001190842

218

.001434448

182

.001197425

219

.001441033

146

.000960458

183

.001204008

220

.001447617

147

.000967039

184

.001210591

148

.000973621

185

.001217175

221

.001454202

149

.000980203

222

.001460787

150

.000986785

186

.001223758

223

.001467372

187

.001230341

224

.001473957

151

.000993367

188

.001236925

225

.001480542

152

.000999948

189

.001243508

ANNUAL RATE, COM- POUNDED DAILY 0.24 PERCENT

DAYS

FACTOR

DAYS

FACTOR

DAYS

FACTOR

226

.001487127

263

.001730806

300

.001974543

227

.001493712

264

.001737392

228

.001500297

265

.001743979

301

.001981131

229

.001506883

302

.001987720

230

.001513468

266

.001750566

303

.001994308

267

.001757153

304

.002000897

231

.001520053

268

.001763740

305

.002007485

232

.001526639

269

.001770326

233

.001533224

270

.001776913

306

.002014074

234

.001539809

307

.002020662

235

.001546395

271

.001783500

308

.002027251

272

.001790088

309

.002033840

236

.001552980

273

.001796675

310

.002040428

237

.001559566

274

.001803262

238

.001566151

275

.001809849

311

.002047017

239

.001572737

312

.002053606

240

.001579323

276

.001816436

313

.002060195

277

.001823024

314

.002066784

241

.001585909

278

.001829611

315

.002073373

242

.001592494

279

.001836198

243

.001599080

280

.001842786

316

.002079962

244

.001605666

317

.002086551

245

.001612252

281

.001849373

318

.002093140

282

.001855961

319

.002099729

246

.001618838

283

.001862548

320

.002106318

247

.001625424

284

.001869136

248

.001632010

285

.001875723

321

.002112907

249

.001638596

322

.002119496

250

.001645182

286

.001882311

323

.002126086

287

.001888899

324

.002132675

251

.001651768

288

.001895487

325

.002139264

252

.001658354

289

.001902074

253

.001664941

290

.001908662

326

.002145854

254

.001671527

327

.002152443

255

.001678113

291

.001915250

328

.002159033

292

.001921838

329

.002165622

256

.001684700

293

.001928426

330

.002172212

257

.001691286

294

.001935014

258

.001697873

295

.001941602

331

.002178801

259

.001704459

332

.002185391

260

.001711046

296

.001948190

333

.002191981

297

.001954778

334

.002198570

261

.001717632

298

.001961367

335

.002205160

262

.001724219

299

.001967955

ANNUAL RATE, COM- POUNDED DAILY 0.24 PERCENT

DAYS

FACTOR

336

.002211750

337

.002218340

338

.002224930

339

.002231520

340

.002238110

341

.002244700

342

.002251290

343

.002257880

344

.002264470

345

.002271061

346

.002277651

347

.002284241

348

.002290832

349

.002297422

350

.002304012

351

.002310603

352

.002317193

353

.002323784

354

.002330375

355

.002336965

356

.002343556

357

.002350147

358

.002356738

359

.002363328

360

.002369919

361

.002376510

362

.002383101

363

.002389692

364

.002396283

365

.002402874

366

.002409466

367

.002416057

368

.002422648

369

.002429239

370

.002435831

371

.002442422

26 CFR 54.9801-2; 54.9801-3; 54.9815-1251;
54.9815-2704;
54.9815-2711;
54.9815.2712;
54.9815 2714; 54.9815.2719; 54.9815.2719A

T.D. 9744

DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 54

DEPARTMENT OF LABOR
Employee Benefits Security
Administration
29 CFR Part 2590

DEPARTMENT OF HEALTH
AND HUMAN SERVICES
45 CFR Parts 144, 146
and 147
CMS-9993-F

Final Rules for Grandfathered
Plans, Preexisting Condition
Exclusions, Lifetime and
Annual Limits, Rescissions,
Dependent Coverage,
Appeals, and Patient
Protections under the
Affordable Care Act

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: Final rules.

SUMMARY: This document contains fi-
nal regulations regarding grandfathered
health plans, preexisting condition exclu-
sions, lifetime and annual dollar limits on
benefits, rescissions, coverage of depen-
dent children to age 26, internal claims
and appeal and external review processes,
and patient protections under the Afford-
able Care Act. It finalizes changes to the
proposed and interim final rules based on
comments and incorporates subregulatory
guidance issued since publication of the
proposed and interim final rules.

DATES: Effective date. These final regu-
lations are effective on January 19, 2016.

Applicability date. These final regula-
tions apply to group health plans and
health insurance issuers beginning on the
first day of the first plan year (or, in the
individual market, the first day of the first
policy year) beginning on or after January
1, 2017. For information on requirements
applicable prior to this date, see section
II.I. of this preamble.

## FOR FURTHER INFORMATION

CONTACT: Elizabeth Schumacher or
Amber Rivers, Employee Benefits Secu-
rity Administration, Department of La-
bor, at (202) 693-8335; Karen Levin,
Internal Revenue Service, Department
of the Treasury, at (202) 927-9639; Cam
Clemmons, Centers for Medicare &
Medicaid Services, Department of
Health and Human Services, at (410)
786-1565.

Customer Service Information: Individ-
uals interested in obtaining information
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 De-
partment of Labor's web site (www.dol.
gov/ebsa). Information from HHS on pri-
vate health insurance coverage can be
found on CMS's web site (www.cms.gov/
cciio), and information on health care re-
form 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; the Health Care and
Education Reconciliation Act (the Recon-
ciliation Act), Pub. L. 111-152, was en-
acted on March 30, 2010 (these are col-
lectively known as the "Affordable Care

Act"). The Affordable Care Act reorga-
nizes, amends, and adds to the provisions
of part A of title XXVII of the Public
Health Service Act (PHS Act) relating to
group health plans and health insurance
issuers in the group and individual mar-
kets. 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
Revenue Code (the Code) to incorporate
the provisions of part A of title XXVII of
the PHS Act into ERISA and the Code,
and make them applicable to group
health plans, and health insurance issu-
ers providing health insurance coverage
in connection with group health plans.
The PHS Act sections incorporated into
the Code and ERISA are sections 2701
through 2728.

The Departments of Labor (DOL),
Health and Human Services (HHS) and
the Treasury (collectively, the Depart-
ments) have issued regulations imple-
menting the revised PHS Act sections
2701 through 2719A in several phases.2
Throughout 2010, the Departments issued
interim final regulations (or temporary
and proposed regulations),3 with requests
for comment, implementing Affordable
Care Act section 1251 (preservation of
right to maintain existing coverage), and
PHS Act sections 2704 (prohibition of
preexisting condition exclusions), 2711
(prohibition on lifetime or annual limits),
2712 (prohibition on rescissions), 2714
(extension of dependent coverage), 2719
(internal claims and appeals and external
review process), and 2719A (patient pro-
tections) (collectively, the 2010 interim
final regulations). As discussed in more
detail below, after consideration of com-
ments4 in response to the 2010 interim
final regulations, the Departments are is-
suing these final regulations.

### II. Overview of the Final Regulations

A. Section 1251 of the Affordable Care
Act, Preservation of Right to Maintain
Existing Coverage (26 CFR 54.9815-
1251, 29 CFR 2590.715-1251, and 45
CFR 147.140)

Section 1251 of the Affordable Care
Act provides that certain group health
plans and health insurance coverage exist-
ing as of March 23, 2010 (the date of
enactment of the Affordable Care Act)
(grandfathered health plans) are only sub-
ject to certain provisions of the Affordable
Care Act (for as long as they maintain that
status as grandfathered health plans under
the applicable regulations).5 On June 17,
2010, the Departments issued interim final
regulations implementing section 1251
and requesting comment.6 On November
17, 2010, the Departments issued an
amendment to the interim final regulations
to permit certain changes in policies, cer-
tificates, or contracts of insurance without
loss of grandfathered status.7 Also in
2010, the Departments released Afford-
able Care Act Implementation Frequently
Asked Questions (FAQs) Parts I, II, IV,
V, and VI to answer questions related to
maintaining a plan's status as a grandfa-
thered health plan.8 After consideration of
the comments and feedback received from
stakeholders, the Departments are publish-
ing these final regulations. As discussed in
more detail below, these final regulations
finalize the 2010 interim final regulations
and amendment to the interim final regula-
tions without substantial change and incor-

porate the clarifications issued thus far in
subregulatory guidance.

#### 1. Definition of Grandfathered Health Plan Coverage

Under the Affordable Care Act and
paragraph (a)(1) of the interim final regu-
lations implementing section 1251 of the
Affordable Care Act, a group health plan
or group or individual health insurance
coverage is a grandfathered health plan
with respect to individuals enrolled on
March 23, 2010 (for as long as it main-
tains that status under the applicable reg-
ulations). The interim final regulations
provided that a group health plan or cov-
erage does not relinquish its grandfather
status merely because one or more (or
even all) individuals enrolled on March
23, 2010 cease to be covered, provided
that the plan or group health insurance
coverage has continuously covered at
least one person (although not necessarily
the same person) at all times since March
23, 2010. The interim final regulations
also provided that the determination of
grandfather status under the rules is made
separately with respect to each benefit
package made available under a group
health plan or health insurance coverage.

Some commenters requested clarifica-
tion with respect to the meaning of the
term "benefit package" including request-
ing further guidance regarding what cov-
erage option features constitute separate
benefit packages. In response to the com-
ments, the Departments issued Affordable
Care Act Implementation FAQs Part II Q2
to further clarify the application of the

"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.

2Note, however, that in sections under headings listing only two of the three Departments, the term "Departments" generally refers only to the two Departments listed in the heading.

3The Departments of Labor and HHS published their rules as interim final rules and are finalizing their interim final rules. The Department of the Treasury/Internal Revenue Service published
temporary regulations and proposed regulations with the text of the temporary regulations serving as the text of the proposed regulations. The Department of the Treasury/Internal Revenue
Service is finalizing its proposed rules.

4In response to the 2010 interim final regulations, the Departments received many comments that relate to early implementation issues, many of which were addressed through subregulatory
guidance (addressed more fully below). While the Departments acknowledge and have reviewed the comments provided in response to the 2010 interim final regulations, to the extent the
issues presented are now moot, such comments are not explicitly addressed below.

5For a list of the market reform provisions under title XXVII of the PHS Act, as added or amended by the Affordable Care Act and incorporated into ERISA and the Code, applicable to
grandfathered health plans, visit http://www.dol.gov/ebsa/pdf/grandfatherregtable.pdf.

675 FR 34538.

775 FR 70114.

8See Affordable Care Act Implementation FAQs Part I, available at http://www.dol.gov/ebsa/faqs/faq-aca.html and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_i-
mplementation_faqs.html, Affordable Care Act Implementation FAQs Part II available at http://www.dol.gov/ebsa/faqs/faq-aca2.html and https://www.cms.gov/CCIIO/Resources/Fact-
Sheets-and-FAQs/aca_implementation_faqs2.html, Affordable Care Act Implementation FAQs Part IV, available at http://www.dol.gov/ebsa/faqs/faq-aca4.html and https://www.cms.gov/
CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs4.html and Affordable Care Act Implementation FAQs Part V, available at http://www.dol.gov/ebsa/faqs/faq-aca5.html
and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs5.html and Affordable Care Act Implementation FAQs Part VI, available at http://www.dol.gov/
ebsa/faqs/faq-aca6.html and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs6.html.

rules on a benefit-package-by-benefit-
package basis.9 These final regulations
continue to provide that the determination
of grandfather status applies separately
with respect to each benefit package and
incorporate the clarifications issued in the
FAQs. Therefore, as demonstrated by the
example provided in the FAQs, if a group
health plan offers three benefit package
options - a PPO (preferred provider orga-
nization), a POS (point of service) ar-
rangement, and an HMO (health main-
tenance organization) -the PPO, POS
arrangement, and HMO are treated as
separate benefit packages. Similarly, un-
der these final regulations, if any benefit
package ceases grandfather status, it
will not affect the grandfather status of
the other benefit packages.

#### 2. Disclosure of Grandfather Status

Paragraph (a)(2) of the interim final
regulations implementing section 1251 of
the Affordable Care Act provided that to
maintain status as a grandfathered health
plan, a plan or health insurance coverage
(1) must include a statement, in any plan
materials provided to participants or ben-
eficiaries (in the individual market, pri-
mary subscribers) describing the benefits
provided under the plan or health insur-
ance coverage, that the plan or health in-
surance coverage believes that it is a
grandfathered health plan within the
meaning of section 1251 of the Affordable
Care Act and (2) must provide contact
information for questions and complaints.
The interim final regulations provided
model language that can be used to satisfy
this disclosure requirement.10

The Departments received several
comments asking the Departments to re-
quire enhanced disclosure to participants
that includes a more comprehensive ex-
planation of grandfathered health plan sta-
tus, information on the triggers that can
result in a cessation of such status, a com-
plete listing of the specific market reforms
that are inapplicable to the plan by virtue
of its status, and access to a formal pro-

cess for obtaining a determination on a
plan's status from the appropriate govern-
ment agency. Other commenters stated
that including this disclosure requirement
in consumer materials may be confusing
to participants, may not have the intended
benefit, and that it may be more appropri-
ate to include the applicable consumer
protections in the employer plan docu-
ments or insurance coverage documents.
Additional commenters stated this require-
ment is unnecessary because ERISA's dis-
closure requirements are already sufficient
to explain to participants the information
they need about their plan (including which
benefits are included or excluded), and that
including information about what benefits
they could have had if their employers
chose to relinquish their grandfathered plan
status is unnecessary.

In response to these comments the De-
partments issued Affordable Care Act Im-
plementation FAQs Part IV Q1, in which
the Departments clarified that a grandfa-
thered health plan is not required to pro-
vide the disclosure statement every time it
sends out a communication, such as an
explanation of benefits (EOB), to a partic-
ipant or beneficiary. Instead, a grandfa-
thered health plan will comply with this
disclosure requirement if it includes the
model disclosure language provided in the
Departments' interim final grandfather
regulations (or a similar statement) when-
ever a summary of the benefits under the
plan is provided to participants and bene-
ficiaries. For example, many plans distrib-
ute summary plan descriptions upon ini-
tial eligibility to receive benefits under the
plan or coverage, during an open enroll-
ment period, or upon other opportunities
to enroll in, renew, or change coverage.
The FAQs also provided that, while it is
not necessary to include the disclosure
statement with each plan or issuer com-
munication to participants and beneficia-
ries (such as an EOB), the Departments
encourage plan sponsors and issuers to
identify other communications in which
disclosure of grandfather status would be
appropriate and consistent with the goal of

providing participants and beneficiaries
information necessary to understand and
make informed choices regarding health
coverage.11

After consideration of the comments
and feedback from stakeholders, the De-
partments retain the approach in the in-
terim final regulations and subsequent
subregulatory guidance because that ap-
proach provides consumers with informa-
tion about the status of their plan or health
insurance coverage, which assists them in
identifying and enforcing their rights,
without undue burden on plans and issu-
ers. Therefore, these final regulations clar-
ify that, to maintain status as a grandfa-
thered health plan, a group health plan, or
health insurance coverage, must include a
statement that the plan or health insurance
coverage believes it is a grandfathered
health plan in any summary of benefits
provided under the plan. It must also pro-
vide contact information for questions and
complaints. These final regulations also
retain the model disclosure language.
Plans and issuers may (but are not re-
quired to) utilize the model disclosure lan-
guage to satisfy this disclosure require-
ment. The Departments also note that the
disclosure language is a model, and, thus,
plans and issuers are permitted to include
additional disclosure elements, such as the
entire list of the market reform provisions
that do not apply to grandfathered health
plans.

### 3. Anti-abuse rules

The interim final regulations provided
that a group health plan that provided cov-
erage on March 23, 2010 generally is a
grandfathered health plan with respect to
new employees (whether newly hired or
newly enrolled) and their families who
enroll in the grandfathered health plan af-
ter March 23, 2010. The interim final reg-
ulations also provided two anti-abuse
rules to curtail attempts to retain grandfa-
ther status by indirectly making changes
that would otherwise result in a loss of
grandfather status.

9See Affordable Care Act Implementation FAQs Part II, available at http://www.dol.gov/ebsa/faqs/faq-aca2.html and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs2.html.

1029 CFR 2590.715-1251(a)(2)(ii); 45 CFR 147.140(a)(2)(ii).

11See Affordable Care Act Implementation FAQs Part IV, available at http://www.dol.gov/ebsa/faqs/faq-aca4.html and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs4.html.

The first anti-abuse rule provided that
if the principal purpose of a merger, ac-
quisition, or similar business restructuring
is to cover new individuals under a grand-
fathered health plan, the plan ceases to be
a grandfathered health plan. Under the
second anti-abuse rule, the interim final
regulations set forth specific criteria that,
if met, would cause a plan that is trans-
ferring employees to relinquish its grand-
father status. Specifically, the interim final
regulations provided that a plan that is
transferring employees would relinquish
its grandfather status if, comparing the
terms of the transferee plan with those of
the transferor plan (as in effect on March
23, 2010) and treating the transferee plan
as if it were an amendment of the trans-
feror plan, such amendment would cause a
loss of grandfather status and there was no
bona fide employment-based reason to
transfer the employees into the transferee
plan. The second anti-abuse rule was de-
signed to prevent a plan or issuer from
circumventing the limits on changes that
cause a plan or health insurance coverage
to cease to be a grandfathered health plan.
This rule was intended to address situa-
tions in which employees who previously
were covered by a grandfathered health
plan are transferred to another grandfa-
thered health plan without any bona fide
employment-based reason.

### a. Bona fide employment-based reasons

The Departments received several
comments regarding the anti-abuse provi-
sions. Stakeholders requested that the De-
partments clarify what constitutes a bona
fide employment-based reason that would
prevent a plan that is transferring employ-
ees from relinquishing its grandfather sta-
tus. In response, the Departments issued
Affordable Care Act Implementation
FAQs Part VI Q1, which provided several
examples of the variety of circumstances
that would constitute a bona fide
employment-based reason to transfer em-

ployees. Examples of a bona fide
employment-based reason include: when
a benefit package is being eliminated be-
cause the issuer is exiting the market;
when a benefit package is being elimi-
nated because the issuer no longer offers
the product to the employer; when low or
declining participation by plan partici-
pants in the benefit package makes it im-
practical for the plan sponsor to continue
to offer the benefit package; when a ben-
efit package is eliminated from a multiem-
ployer plan as agreed upon as part of the
collective bargaining process; or when a
benefit package is eliminated for any rea-
son and multiple benefit packages cover-
ing a significant portion of other employ-
ees remain available to the employees
being transferred.12

These final regulations include those
examples of bona fide employment-based
reasons. The Departments continue to in-
terpret the term "bona fide employment-
based reason" to embrace a variety of
circumstances, and plans and issuers
should evaluate all facts and circum-
stances carefully to determine whether a
bona fide employment-based reason exists
when considering transferring employees
from one grandfathered health plan to an-
other. The Departments may issue addi-
tional guidance if further questions re-
garding what constitutes a bona fide
employment-based reason arise.

### b. Clarification regarding multiemployer plans

Section 1251 of the Affordable Care
Act, as well as the 2010 interim final
regulations, permit a grandfathered group
health plan to cover new employees with-
out any effect on its status as a grandfa-
thered plan. Several commenters re-
quested that the Departments clarify in the
final regulations whether a multiemployer
plan may add new contributing employers
to the plan without triggering a loss of
grandfather status. These final regulations

clarify that the addition of a new contrib-
uting employer or new group of employ-
ees of an existing contributing employer
to a grandfathered multiemployer health
plan will not affect the plan's grandfa-
thered status, provided that the multiem-
ployer plan has not made any other
changes that would cause the plan to re-
linquish its grandfathered status.

### 4. Maintenance of Grandfather Status

The interim final regulations set forth
rules for determining when changes to the
terms of a plan or health insurance cover-
age cause the plan or coverage to cease to
be a grandfathered health plan. Specifi-
cally, the interim final regulations out-
lined six changes to benefits, cost-sharing
mechanisms, and contribution rates that
will cause a plan or health insurance cov-
erage to relinquish its grandfather status.13
Since the promulgation of the interim final
regulations, questions have been brought
to the Departments' attention regarding
other specific changes to a plan's design
and the impact of such changes on a
plan's grandfather status.

### a. Elimination of all or substantially all benefits

The 2010 interim final regulations and
these final regulations provide that the
elimination of all or substantially all ben-
efits to diagnose or treat a particular con-
dition will cause a group health plan or
health insurance coverage to relinquish its
grandfathered status. One commenter re-
quested that the Departments clarify what
constitutes eliminating "substantially all
benefits" to diagnose or treat a particular
condition. As the interim final regulations
stated, and these final regulations continue
to provide, the elimination of benefits for
any necessary element to diagnose or treat
a condition is considered the elimination
of all or substantially all benefits to diag-
nose or treat a particular condition. The

12See Affordable Care Act Implementation FAQs Part VI, available at http://www.dol.gov/ebsa/faqs/faq-aca6.html and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs6.html.

13The six changes (measured from March 23, 2010) outlined in paragraph (g)(1) of the interim final regulations that are considered to change a health plan so significantly that they will
cause a group health plan or health insurance coverage to relinquish grandfather status include the following: (1) the elimination of all or substantially all benefits to diagnose or treat a
particular condition, (2) any increase in percentage cost-sharing requirements, (3) an increase in a deductible or out-of-pocket maximum by an amount that exceeds medical inflation plus
15 percentage points, (4) an increase in a copayment by an amount that exceeds medical inflation plus 15 percentage points (or, if greater, $5 plus medical inflation), (5) a decrease in an
employer's contribution rate towards the cost of coverage by more than 5 percentage points, or (6) the imposition of annual dollar limits below the restricted annual dollar limits that were
in effect prior to 2014 (note that for plan years (or policy years in the individual market) beginning on and after January 1, 2014, annual dollar limits on essential health benefits are prohibited,
except for grandfathered individual health insurance coverage). See 26 CFR 54.9815-1251(g), 29 CFR 2590.715-1251(g), and 45 CFR 147.140(g).

Departments decline to establish a bright-
line test establishing what constitutes
"substantially all benefits" for purposes of
these final regulations. Whether or not a
plan has eliminated substantially all ben-
efits to diagnose or treat a particular con-
dition must be determined based on all the
facts and circumstances, taking into ac-
count the items and services covered for a
particular condition under the plan on
March 23, 2010, as compared to the items
and services covered at the time the plan
makes the benefit change effective. The
preamble to the 2010 interim final regula-
tions provided two examples. First, if a
plan or health insurance coverage elimi-
nates all benefits for cystic fibrosis, the
plan or coverage will lose its grandfa-
thered status. Second, if a plan or insur-
ance coverage provides benefits for a par-
ticular mental health condition, the
treatment for which is a combination of
counseling and prescription drugs, and
subsequently eliminates benefits for coun-
seling, the plan is treated as having elim-
inated all or substantially all benefits for
that mental health condition and will as a
result lose its grandfathered status. These
final regulations continue to provide that
the elimination of all or substantially all
benefits to diagnose or treat a particular
condition will cause a group health plan
or health insurance coverage to relin-
quish its grandfathered status and con-
tain an example.

### b. Increase in fixed-amount copayments

The interim final regulations provided
standards for when increases in fixed-
amount copayments would cause a plan or
coverage to relinquish its grandfather sta-
tus. Under the interim final regulations, a
plan or coverage ceases to be a grandfa-
thered health plan if there is an increase
since March 23, 2010 in a copayment that
exceeds the greater of the maximum per-
centage increase14 or five dollars in-
creased by medical inflation.15

With respect to grandfathered health
plans that utilize multiple levels of copay-
ments for different benefits under the plan,
stakeholders sought clarification on what
degree of change would cause a plan to
relinquish its grandfather status. Specifi-
cally, stakeholders wanted to know
whether raising the copayment level for a
category of services by an amount that
would otherwise trigger a loss of grandfa-
ther status would cause a loss of grandfa-
ther status if the plan retained the level of
copayment on other categories of services.
The Departments clarified in Affordable
Care Act Implementation FAQs Part II Q4
that a change to a copayment level for a
category of services that exceeds the stan-
dards set forth in the interim final regula-
tions will cause a plan to relinquish its
grandfather status, even if a plan retains
the level of copayment for other catego-
ries of services.16 These final regula-
tions retain this clarification, and con-
tinue to provide that each change in cost
sharing must be separately evaluated un-
der the standards set forth in the regu-
lations. A plan or issuer may not exceed
the standards set forth in these final reg-
ulations with respect to one level of
copayment for a category of services,
and retain its grandfather status by re-
taining the level of copayments for other
categories of services.

### c. Decrease in Contribution Rate by Employers and Employee Organization

The interim final regulations provided
that a decrease in the employer contribu-
tion rate for coverage under a group health
plan or group health insurance coverage
beyond the permitted percentage would
result in cessation of grandfather status.
There are two rules related to decreases in
employer contributions: one for a contri-
bution based on the cost of coverage and
one for a contribution based on a formula.

First, if the contribution rate is based
on the cost of coverage, a group health
plan or group health insurance coverage

ceases to be a grandfathered health plan if
the employer or employee organization
decreases its contribution rate towards the
cost of any tier of coverage for any class
of similarly situated individuals17 by more
than 5 percentage points below the contri-
bution rate on March 23, 2010. For this
purpose, contribution rate is defined as the
amount of contributions made by an em-
ployer or employee organization com-
pared to the total cost of coverage, ex-
pressed as a percentage. The interim final
regulations also provided that the total
cost of coverage is determined in the same
manner as the applicable premium is cal-
culated under the Consolidated Omnibus
Budget Reconciliation Act of 1986 (CO-
BRA) continuation provisions of section
604 of ERISA, section 4980B(f)(4) of the
Code, and section 2204 of the PHS Act. In
the case of a self-insured group health
plan, contributions by an employer or em-
ployee organization are calculated by sub-
tracting the employee contributions to-
wards the total cost of coverage from the
total cost of coverage.

Second, if the contribution rate is based
on a formula, such as hours worked or
tons of coal mined, a group health plan or
group health insurance coverage ceases to
be a grandfathered health plan if the em-
ployer or employee organization de-
creases its contribution rate towards the
cost of any tier of coverage for any class
of similarly situated individuals by more
than 5 percentage points below the contri-
bution rate on March 23, 2010. These final
regulations finalize these provisions with-
out change but incorporate the additional
clarifications issued in subregulatory
guidance as discussed below.

The Departments received several
comments relating to the employer contri-
bution limitations. Some commenters
stated that issuers do not always have the
information needed to know whether (or
when) an employer plan sponsor changes
its rate of contribution towards the cost of
group health plan coverage. In response to
this issue, the Departments issued Afford-

14The interim final regulations defined the maximum percentage increase as medical inflation (from March 23, 2010) plus 15 percentage points. Medical inflation is defined in the interim
final regulations by reference to the overall medical care component of the Consumer Price Index for All Urban Consumers, unadjusted (CPI), published by the Department of Labor. See
26 CFR 54.9815-1251(g)(3), 29 CFR 2590.715-1251(g)(3), and 45 CFR 147.140(g)(3).

1575 FR 35538, 34543 (June 17, 2010).

16See Affordable Care Act Implementation FAQs Part II, available at http://www.dol.gov/ebsa/faqs/faq-aca2.html and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs2.html.

17Similarly situated individuals are described in the HIPAA nondiscrimination regulations at 26 CFR 54.9802-1(d), 29 CFR 2590.702(d), and 45 CFR 146.121(d).

able Care Act Implementation FAQs Part
I Q2 and Q3 providing relief if issuers and
employer plan sponsors or contributing
employers and multiemployer plans take
certain steps to communicate regarding
changes to the contribution rate for pur-
poses of determining grandfather status.18
These final regulations also provide relief
to issuers, plan sponsors, employers, and
plans that take certain steps to communi-
cate changes in contribution rates. Specif-
ically, these final regulations provide that
an insured group health plan that is a
grandfathered health plan will not relin-
quish its grandfather status immediately
based on a change in the employer contri-
bution rate if, upon renewal, an issuer
requires a plan sponsor to make a repre-
sentation regarding its contribution rate
for the plan year covered by the renewal,
as well as its contribution rate on March
23, 2010 (if the issuer does not already
have it). Additionally, the issuer's poli-
cies, certificates, or contracts of insurance
must disclose in a prominent and effective
manner that plan sponsors are required to
notify the issuer if the contribution rate
changes at any point during the plan year.
An insured grandfathered group health
plan with a decrease in employer contri-
butions relinquishes its grandfather status
as of the earlier of the first date on which
the issuer knows or reasonably should
know that there has been at least a
5-percentage-point reduction or the first
date on which the plan no longer qualifies
for grandfathered status without regard to
the 5-percentage-point reduction. Simi-
larly, if multiemployer plans and contrib-
uting employers follow these steps, the
plan will not relinquish its grandfather
status unless or until the multiemployer
plan knows or reasonably should know
that the contribution rate has changed by
at least the applicable 5-percentage point
reduction or until the date the plan no
longer qualifies for grandfathered status
without regard to the 5-percentage point
reduction. Moreover, nothing in the Af-

fordable Care Act or these regulations
prevents a policy, certificate, or contract
of insurance from requiring a plan sponsor
to notify an issuer in advance (for exam-
ple, 30 or 60 days in advance) of a change
in their contribution rate.

The Departments also received com-
ments on the application of this provision
to multiemployer plans with unique con-
tribution structures. It is common for mul-
tiemployer plans to have either a fixed-
dollar employee contribution or no
employee contribution towards the cost of
coverage. In such cases, a contributing
employer's contribution rate may change
(for example, after making up a funding
deficit in the prior year or to reflect a
surplus) but the employee contribution
amount is not affected. The Departments
issued Affordable Care Act Implementa-
tion FAQs Part I Q4 clarifying that in this
case, provided any changes in the cover-
age terms would not otherwise cause the
plan to cease to be grandfathered and
there continues to be no employee contri-
bution or no increase in the fixed-dollar
employee contribution towards the cost of
coverage, the plan would not relinquish its
grandfather status.19 These final regula-
tions incorporate this clarification and ap-
ply the relief to all grandfathered group
health plans. Therefore, under these final
regulations a group health plan that re-
quires either fixed-dollar employee contri-
butions or no employee contributions will
not cease to be a grandfathered health plan
if the employer contribution rate changes
so long as there continues to be no em-
ployee contributions or no increase in the
fixed-dollar employee contributions to-
wards the cost of coverage and there are
no corresponding changes in coverage
terms that would otherwise cause the plan
to cease to be a grandfathered plan.

The Departments also received com-
ments requesting clarification on the ap-
plication of the rules where a group health
plan includes multiple tiers of coverage.
In response, the Departments issued Af-

fordable Care Act Implementation FAQs
Part II Q3, explaining that the standards
for employer contributions found in para-
graph (g)(1)(v) of the interim final regu-
lations on grandfathered health plans ap-
ply on a tier-by-tier basis.2º These final
regulations incorporate this guidance.
Therefore, if a group health plan modifies
the tiers of coverage it had on March 23,
2010 (for example, from self-only and
family to a multi-tiered structure of self-
only, self-plus-one, self-plus-two, and
self-plus-three-or-more), the employer
contribution for any new tier would be
tested by comparison to the contribution
rate for the corresponding tier on March
23, 2010. For example, if the employer
contribution rate for family coverage was
50 percent on March 23, 2010, the em-
ployer contribution rate for any new tier
of coverage other than self-only (i.e., self-
plus-one, self-plus-two, self-plus-three or
more) must be within 5 percentage points
of 50 percent (i.e., at least 45 percent). If,
however, the plan adds one or more new
coverage tiers without eliminating or
modifying any previous tiers and those
new coverage tiers cover classes of indi-
viduals that were not covered previously
under the plan, the new tiers would not be
analyzed under the standards for changes
in employer contributions. For example, if
a plan with self-only as the sole coverage
tier added a family coverage tier, the level
of employer contributions toward the fam-
ily coverage could not cause the plan to
lose grandfather status.

The Departments also received com-
ments asking for clarification on when a
decrease in the employer contribution rate
for coverage under a group health plan or
group health insurance beyond the permit-
ted percentage would result in cessation of
grandfather status for a contribution based
on a formula. In response, the Depart-
ments issued Affordable Care Act Imple-
mentation FAQs Part VI Q6.21 The FAQ
provided an example under which a plan
covers both retirees and active employees

18See Affordable Care Act Implementation FAQs Part I, available at http://www.dol.gov/ebsa/faqs/faq-aca.html and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs.html.

19See Affordable Care Act Implementation FAQs Part I, available at http://www.dol.gov/ebsa/faqs/faq-aca.html and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs.html.

20See Affordable Care Act Implementation FAQs Part II, available at http://www.dol.gov/ebsa/faqs/faq-aca2.html and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs2.html.

21See Affordable Care Act Implementation FAQs Part VI, available at http://www.dol.gov/ebsa/faqs/faq-aca6.html and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs6.html.

and the employer that sponsors the plan
contributes $300 per year multiplied by
the individual's years of service for the
employer, capped at $10,000 per year. In
the example, the employer makes contri-
butions based on a formula, and accord-
ingly, the plan will cease to be a grandfa-
thered health plan if the employer
decreases its contribution rate towards the
cost of coverage by more than five percent
below the contribution rate on March 23,
2010. If the formula does not change, the
employer is not considered to have re-
duced its contribution rate, regardless of
any increase in the total cost of coverage.
However, if the dollar amount that is mul-
tiplied by years of service decreases by
more than five percent (or if the $10,000
maximum employer contribution cap de-
creases by more than five percent), the plan
will cease to be a grandfathered health plan.
Although this example has not been added
to the text of the final regulations, this guid-
ance continues to apply.

#### d. Changes in annual limits

PHS Act section 2711, as added by the
Affordable Care Act, generally prohibits
lifetime and annual limits on the dollar
amount of essential health benefits, as de-
fined in section 1302(b) of the Affordable
Care Act. Under PHS Act section 2711 and
its implementing regulations, plans and is-
suers were generally prohibited from impos-
ing lifetime limits on the dollar value of
essential health benefits for plan years (in
the individual market, policy years) begin-
ning on or after September 23, 2010.

With respect to annual dollar limits, for
plan or policy years beginning before Jan-
uary 1, 2014, plans and issuers were per-
mitted to impose restricted annual dollar
limits in accordance with the guidance set
forth in the interim final regulations. For
plans years beginning on or after January
1, 2014, plans and issuers generally are
prohibited from imposing annual dollar
limits on essential health benefits. How-
ever, grandfathered individual health in-

surance plans are not subject to the annual
dollar limit prohibition. Accordingly, the
final regulations retain the rules regarding
loss of grandfathered status based on im-
position of annual dollar limits to allow
issuers of grandfathered individual health
insurance coverage to analyze grandfa-
thered status.

These final regulations, like the interim
final regulations, address three different
limit-related situations that would cause a
plan or health insurance coverage to relin-
quish its grandfather status: (1) A plan or
health insurance coverage that, on March
23, 2010, did not impose an overall annual
or lifetime limit on the dollar value of all
benefits ceases to be a grandfathered health
plan if the plan or health insurance coverage
imposes an overall annual limit on the dollar
value of benefits; (2) A plan or health insur-
ance coverage, that, on March 23, 2010,
imposed an overall lifetime limit on the dol-
lar value of all benefits but no overall annual
limit on the dollar value of all benefits
ceases to be a grandfathered health plan if
the plan or health insurance coverage adopts
an overall annual limit at a dollar value that
is lower than the dollar value of the lifetime
limit on March 23, 2010; and (3) A plan or
health insurance coverage that, on March
23, 2010, imposed an overall annual limit
on the dollar value of all benefits ceases to
be a grandfathered health plan if the plan or
health insurance coverage decreases the dol-
lar value of the annual limit (regardless of
whether the plan or health insurance cover-
age also imposed an overall lifetime limit on
March 23, 2010 on the dollar value of all
benefits).

### e. Changes to fixed amount cost-sharing based on a formula

On December 22, 2010, the Departments
issued Affordable Care Act Implementation
FAQs Part V Q7 to provide clarification on
the application of the thresholds under para-
graph (g)(1) of the interim final regulations
when a plan's terms include out-of-pocket
spending limits that are based on a for-

mula.22 The Departments continue to inter-
pret paragraph (g)(1) as clarified in the
FAQ. Therefore, under these final regula-
tions, if a plan or coverage has a fixed-
amount cost-sharing requirement other than
a copayment (for example, a deductible or
out-of-pocket limit) that is based on a
percentage-of-compensation formula, that
cost-sharing arrangement will not cause the
plan or coverage to cease to be a grandfa-
thered health plan as long as the formula
remains the same as that which was in effect
on March 23, 2010. Accordingly, if the
percentage-of-compensation formula for de-
termining an out-of-pocket limit is un-
changed and an employee's compensation
increases, then the employee could face a
higher out-of-pocket limit, but that change
would not cause the plan to relinquish
grandfather status.

### f. Grandfather status and wellness programs

Under PHS Act section 2705, ERISA
section 702, and Code section 9802 and
the Departments' implementing regula-
tions, group health plans and health insur-
ance issuers in the group and individual
market are prohibited from discriminating
against participants, beneficiaries, and in-
dividuals in eligibility, benefits, or premi-
ums based on a health factor.23 For group
health plans and group health insurance
coverage, an exception to this general pro-
hibition allows premium discounts, re-
bates, or modification of otherwise appli-
cable cost sharing (including copayments,
deductibles, or coinsurance) in return for
adherence to certain programs of health
promotion and disease prevention, com-
monly referred to as wellness programs.

Many stakeholders requested clarifica-
tion with respect to how changes to con-
tribution rates and cost-sharing mecha-
nisms in the context of a wellness
program would impact a plan's grandfa-
ther status. In light of these questions, the
Departments issued Affordable Care Act
Implementation FAQs Part II Q5, which
stated that while group health plans may

22See Affordable Care Act Implementation FAQs Part V and Mental Health Parity Implementation, available at http://www.dol.gov/ebsa/faqs/faq-aca5.html and https://www.cms.gov/
CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs5.html.

23The statute and its implementing regulations set forth eight health status-related factors, which the final regulations on Nondiscrimination and Wellness Programs in Health Coverage in
the Group Market refer to as "health factors" for simplicity. 71 FR 75014, 75016 (Dec. 13, 2006) Under the statute and the regulations, the eight health factors are health status, medical
condition (including both physical and mental illnesses), claims experience, receipt of health care, medical history, genetic information, evidence of insurability (including conditions arising
out of acts of domestic violence), and disability. Id. In the Departments' view, "[t]hese terms are largely overlapping and, in combination, include any factor related to an individual's health."
66 FR 1378, 1379 (Jan. 8, 2001).

continue to provide incentives for well-
ness by providing premium discounts or
additional benefits to reward healthy be-
haviors by participants and beneficiaries,
penalties (such as cost-sharing sur-
charges) may implicate the standards out-
lined in paragraph (g)(1) of the grandfa-
ther interim final regulations and should
be examined carefully.24 If additional
questions arise regarding the interaction
of wellness programs and these require-
ments, the Departments may issue addi-
tional subregulatory guidance.

### g. Changes to multi-tiered prescription drug formularies

In Affordable Care Act Implementation
FAQs Part VI Q2, the Departments ad-
dressed questions related to certain changes
to the level of cost sharing for brand-name
prescription drugs. Stakeholders requested
that the Departments clarify whether
changes to cost sharing for brand-name pre-
scription drugs would cause a plan to relin-
quish its grandfather status in instances
where a plan classifies and determines cost
sharing for prescription drugs based on the
availability of a generic alternative, and a
generic drug becomes available and is
added to the formulary. The Departments
stated that if a drug was classified in a tier as
a brand name drug with no generic avail-
able, and a generic alternative for the drug
becomes available and is added to the for-
mulary, moving the brand-name drug to a
higher tier would not cause the plan or cov-
erage to relinquish grandfather status.25
These final regulations adopt this rule that
such changes will not result in a loss of
grandfather status.

### h. Grandfather status and certain changes in individual policies

Some individual health insurance poli-
cies in place on March 23, 2010 included
a feature that allowed a policyholder to
elect an option under which the individual
would pay a reduced premium in ex-
change for higher cost sharing. The De-
partments received comments asking
whether individuals enrolled in these pol-
icies as of March 23, 2010 could make
such an election after March 23, 2010
without affecting the policy's grandfather
status, even if the increase in cost sharing
would exceed the limits set forth under the
interim final regulations. In response, the
Departments issued Affordable Care Act
Implementation FAQs Part IV Q2, which
stated that, as long as the policyholder had
such option under the insurance policy
that was in place on March 23, 2010, he or
she could exercise the option after March
23, 2010 without affecting grandfather
status, even if as a result of electing this
option the individual's cost sharing would
increase by an amount that exceeds the
limits established under the interim final
regulations.26 The Departments maintain
this approach in these final regulations.

### i. Clarifications on timing of the loss of grandfather status

Since the promulgation of the 2010
interim final regulations, questions have
arisen regarding whether or not a plan
ceases to be a grandfathered health plan
immediately after making a change that
triggers a loss of grandfathered status, and
whether or not there is an opportunity to
cure a loss of grandfather status following
a change made inadvertently or otherwise
that triggers a loss of grandfather status.
Several commenters have requested clar-

ification on when the plan or coverage
ceases to be a grandfathered health plan if
it makes an amendment to plan terms that
trigger loss of grandfather status in the
middle of the plan year. The Departments
issued Affordable Care Act Implementa-
tion FAQs Part VI Q4 and Q5 addressing
timing of the loss of grandfather status
with respect to mid-year plan amendments
that exceed the thresholds described in the
interim final regulations.27 These final
regulations adopt the clarification outlined
in the FAQs that a plan or coverage will
cease to be a grandfathered health plan
when an amendment to plan terms that
exceeds the thresholds described in para-
graph (g)(1) of these final regulations be-
comes effective - regardless of when the
amendment is adopted. Once grandfather
status is lost there is no opportunity to
cure the loss of grandfather status. A re-
versal after the effective date will not al-
low the plan or coverage to regain grand-
father status. If a plan sponsor wishes to
avoid relinquishing grandfathered status
in the middle of a plan year, any changes
that will cause a plan or coverage to re-
linquish grandfather status should not be
effective before the first day of a plan year
that begins after the change is adopted.

B. PHS Act Section 2704, Prohibition of
Preexisting Condition Exclusions (26
CFR 54.9815-2704, 29 CFR 2590.715-
2704, 45 CFR 147.108)

PHS Act section 2704, added by the
Affordable Care Act, amends the
HIPAA28 rules relating to preexisting con-
dition exclusions to provide that a group
health plan and a health insurance issuer
offering group or individual health insur-
ance coverage generally may not impose
any preexisting condition exclusions.29
HIPAA, as well as PHS Act section 2704

24See Affordable Care Act Implementation FAQs Part II, available at http://www.dol.gov/ebsa/faqs/faq-aca2.html and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs2.html.

25 Affordable Care Act Implementation FAQs Part VI, available at http://www.dol.gov/ebsa/faqs/faq-aca6.html and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs6.html.

26See Affordable Care Act Implementation FAQs Part IV, available at http://www.dol.gov/ebsa/faqs/faq-aca4.html and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs4.html.

27See Affordable Care Act Implementation FAQs Part VI, available at http://www.dol.gov/ebsa/faqs/faq-aca6.html and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs6.html.

28HIPAA is the Health Insurance Portability and Accountability Act of 1996 (Public Law 104-191).

29The HIPAA rules (that were in effect prior to the effective date of these amendments) applied only to group health plans and group health insurance coverage, and permitted limited
exclusions of coverage based on a preexisting condition under certain circumstances. Section 2704 prohibits any preexisting condition exclusion from being imposed by group health plans
or group health insurance coverage and extends this protection to non-grandfathered individual health insurance coverage but this prohibition does not apply to grandfathered individual health
insurance coverage.

and its implementing regulations, define a
preexisting condition exclusion as a limi-
tation or exclusion of benefits relating to a
condition based on the fact that the con-
dition was present before the date of en-
rollment for the coverage, regardless of
whether any medical advice, diagnosis,
care, or treatment was recommended or
received before that date. PHS Act section
2704,30 which became effective for en-
rollees who are under 19 years of age for
plan years (in the individual market, pol-
icy years) beginning on or after Septem-
ber 23, 2010, and effective for adults for
plan years (in the individual market, pol-
icy years) beginning on or after January 1,
2014, prohibits preexisting condition ex-
clusions for both group health plans and
group or individual health insurance cov-
erage (except for grandfathered individual
health insurance). On June 28, 2010, the
Departments issued interim final regula-
tions implementing PHS Act section 2704
and requesting comment.31 After issuance
of regulations in 2010, the Departments
also released Affordable Care Act Imple-
mentation FAQs Part V, Q632 to provide
additional clarification on the prohibition
of preexisting condition exclusions. These
final regulations finalize the 2010 interim
final regulations without substantial
change and incorporate the clarifications
issued to date in subregulatory guidance.

### 1. Allowable Exclusion of Benefits

Prior to implementation of PHS Act
section 2704, HIPAA rules limiting pre-
existing condition exclusions provided
that a plan's or issuer's exclusion of ben-
efits for a condition regardless of when the
condition arose relative to the effective
date of coverage is not a preexisting con-
dition exclusion. With respect to such ex-
clusions, the 2010 interim final regula-
tions did not change this approach under
HIPAA.33

Several commenters requested that the
final regulations reiterate this rule. Other
commenters requested that all exclusions
of specific conditions be prohibited re-
gardless of whether the exclusion relates
to when the condition arose. Another
commenter wrote that restrictions on ben-
efits concerning rehabilitation services
and devices should be considered a form
of preexisting condition exclusion and not
be allowed.

Similar to the interim final regulations,
these final regulations retain the approach
set forth under HIPAA relating to exclu-
sions for a specific benefit. More specifi-
cally, these final regulations continue to
provide that a plan's or issuer's exclusion
of benefits for a condition from the plan or
policy regardless of when the condition
arose relative to the effective date of cov-
erage is not a preexisting condition exclu-
sion. Other requirements of Federal or
State law, however, may prohibit certain
benefit exclusions, including the essen-
tial health benefits requirements appli-
cable in the individual and small group
health insurance markets at 45 CFR
156.110 et seq.

### 2. Enrollment Period

The 2010 interim final regulations did
not impose any requirement on plans to
provide for an open enrollment period.
One commenter requested that the regula-
tions clarify that issuers in the individual
market may restrict enrollment of children
under age 19 to specified open enrollment
periods, consistent with guidance issued
by HHS.34 Another commenter requested
that the regulations specify that after the
initial enrollment period, health insurance
issuers must make open enrollment peri-
ods available to families at least once a
year during a standardized time period for
at least 90 days and that insurers should
fully advertise the availability. Another
commenter stated that having at least one

issuer that offers open enrollment at any
time during the year, without a penalty for
deferral, will be an economic incentive to
defer the purchase of insurance which
may encourage adverse selection and sub-
sequently, higher claim costs. Additional
commenters requested continuous open
enrollment for children with preexisting
conditions, clarification of whether guar-
anteed issue will be available only during
open enrollment or all 12 months of the
year, and that families be given the oppor-
tunity to enroll their children when certain
life events occur. These final regulations
do not adopt these suggestions. The pro-
visions of the Affordable Care Act related
to guaranteed availability of coverage, in-
cluding open and special enrollment peri-
ods, are implemented in regulations issued
by HHS under section 2702 of the PHS
Act and are outside the scope of this rule-
making. Additionally, while HIPAA gen-
erally permits plans and issuers to treat
participants and beneficiaries with adverse
health factors more favorably, such as
providing a longer open enrollment pe-
riod, nothing in these regulations requires
plans and issuers to do so.

### 3. Premiums

Commenters raised concerns about in-
creasing premiums related to the prohibi-
tion on preexisting condition exclusions.
Effective for plan years (or, in the indi-
vidual market, policy years) beginning on
or after January 1, 2014, section 2701 of
the PHS Act and section 1312(c) of the
Affordable Care Act govern the premium
rates charged by an issuer for non-
grandfathered health insurance coverage
in the individual and small group markets,
and section 2794 of the PHS Act provides
for the annual review of unreasonable in-
creases in premiums for health insurance
coverage in the individual and small
group markets. These provisions are im-

30Before the amendments made by the Affordable Care Act, PHS Act section 2701(b)(1) was the applicable provision concerning preexisting condition exclusions; after the amendments
made by the Affordable Care Act, PHS Act section 2704(b)(1) is the applicable provision. See also ERISA section 701(b)(1) and Code section 9801(b)(1).

3175 FR 37188 (June 28, 2010).

32See Affordable Care Act Implementation FAQs Part V, available at http://www.dol.gov/ebsa/faqs/faq-aca5.html and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs5.html.

33The rule is illustrated with examples in the HIPAA regulations on preexisting condition exclusions. See Examples 6, 7, and 8 in 26 CFR 54.9801-3(a)(2), 29 CFR 2590.701-3(a)(2), 45
CFR 146.111(a)(2).

34Center for Consumer Information & Insurance Oversight, Questions and Answers on Enrollment of Children Under 19 Under the New Policy That Prohibits Pre-Existing Condition
Exclusions, available at https://www.cms.gov/CCIIO/Resources/Files/factsheet.html.

plemented in regulations issued by HHS35
and are outside the scope of this rulemak-
ing. However, the rating rules under PHS
Act section 2701 prohibit variations in
premiums based on a child's health status.

### 4. Allowable Screenings to Determine Eligibility for Alternative Coverage in the Individual Market

Subsequent to the promulgation of the
interim final regulations, questions arose
regarding whether it would be permissible
under the rules implementing PHS Act
section 2704 for issuers in the individual
market to screen certain applicants for el-
igibility for alternative coverage before
issuing a child-only policy. Specifically,
States expressed an interest in permitting
such screenings. In response to these con-
cerns, the Departments issued Affordable
Care Act Implementation FAQs Part V,
Q6, which provided that under certain cir-
cumstances, States can permit issuers in
the individual market to screen applicants
for eligibility for alternative coverage op-
tions before offering a child-only policy if
(1) the practice is permitted under State
law; (2) the screening applies to all child-
only applicants, regardless of health sta-
tus; and (3) the alternative coverage op-
tions include options for which healthy
children would potentially be eligible,
such as the Children's Health Insurance
Program (CHIP) and group health insur-
ance.36 Screenings may not be limited to
programs targeted to individuals with a
preexisting condition, such as a State high
risk pool. Note that Medicaid policy, un-
der 42 U.S.C. 1396a (25)(G), prohibits
participating States from allowing health
insurance issuers to consider whether an
individual is eligible for, or is provided
medical assistance under, Medicaid in

making enrollment decisions. Further-
more, issuers may not implement a
screening process that by its operation sig-
nificantly delays enrollment or artificially
engineers eligibility of a child for a pro-
gram targeted to individuals with a preex-
isting condition. Additionally, the screen-
ing process may not be applied to offers of
dependent coverage for children. The
FAQ provided that States are encouraged
to require issuers that screen for other
coverage to enroll and provide coverage
to the applicant effective on the first date
that the child-only policy would have
been effective had the applicant not been
screened for an alternative coverage op-
tion. It also provided that States are en-
couraged to impose a reasonable time
limit, such as 30 days, at which time the
issuer would have to enroll the child re-
gardless of pending applications for other
coverage. Subsequent to the issuance of
the FAQ, the guaranteed availability re-
quirements in section 2702 of the PHS
Act took effect, similarly precluding an
issuer from denying coverage. This
screening, as permitted under State law,
will continue to be allowed under these
final regulations, consistent with both sec-
tion 2704 and guaranteed availability ob-
ligations under section 2702.

C. PHS Act Section 2711, Prohibition on
Lifetime and Annual Limits (26 CFR
54.9815-2711, 29 CFR 2590.715-2711,
45 CFR 147.126)

PHS Act section 2711, as added by the
Affordable Care Act, generally prohibits
annual and lifetime dollar limits on essen-
tial health benefits, as defined in section
1302(b) of the Affordable Care Act. With
respect to annual dollar limits, PHS Act
section 2711(a)(2) provided that for plan

years beginning before January 1, 2014,
restricted annual dollar limits were al-
lowed. On June 28, 2010, the Departments
issued interim final regulations imple-
menting PHS Act section 2711 and re-
quested comment.37 After issuance of the
2010 interim final regulations, the Depart-
ments also released Affordable Care Act
Implementation FAQs Parts IV, XI, XV,
XXII, as well as Technical Release 2013-
03, to address various requests for clarifi-
cations under PHS Act section 2711.38
These final regulations adopt the 2010 in-
terim final regulations without substantial
change and incorporate certain pertinent
clarifications issued thus far in subregula-
tory guidance.

#### 1. Definition of Essential Health Benefits

On February 25, 2013, HHS issued fi-
nal regulations addressing essential health
benefits (EHB) under Affordable Care Act
section 1302.39 Among other things, HHS
regulations defined EHB based on a State-
specific benchmark plan and required
each State to select a benchmark plan
from among several options.40 While self-
insured, large group market, and grandfa-
thered health plans are not required to
offer EHB, PHS Act section 2711 prohib-
its such plans from imposing annual and
lifetime dollar limits on covered benefits
that fall within the definition of EHB. In
the interim final regulations, the Depart-
ments said that "[f]or plan years (in the
individual market, policy years) begin-
ning before the issuance of regulations
defining 'essential health benefits,' for
purposes of enforcement, the Departments
will take into account good faith efforts to
comply with a reasonable interpretation of
the term 'essential health benefits.'"

35See 45 CFR 147.102, 154.101 et. seq., and 156.80.

36See Affordable Care Act Implementation FAQs Part V, available at http://www.dol.gov/ebsa/faqs/faq-aca5.html and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs5.html.

3775 FR 37188 (June 28, 2010).

38 Affordable Care Act Implementation FAQs Parts IV, XI, XV, XXII, available at http://www.dol.gov/ebsa/faqs/faq-aca4.html, http://www.dol.gov/ebsa/faqs/faq-aca11.html, http://
www.dol.gov/ebsa/faqs/faq-aca15.html, and http://www.dol.gov/ebsa/faqs/faq-aca22.html, or https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs4.html, https://
www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs11.html, https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs15.html and
https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/FAQs-Part-XXII-FINAL.pdf; Technical Release 2013-03, available at http://www.dol.gov/ebsa/newsroom/tr13-
03.html. See footnote 51 for a list of additional items of guidance under PHS Act section 2711.

3978 FR 12834.

40The benchmark plans from which a State could choose are: (1) the largest plan by enrollment in any of the three largest products in the State's small group market; (2) any of the largest
three State employee health benefit plans options by enrollment; (3) any of the largest three national Federal Employees Health Benefits Program (FEHBP) plan options by enrollment; or
(4) the largest insured commercial HMO in the State. 45 CFR 156.100. The EHB-benchmark plan serves as a reference plan, reflecting both the scope of services and limits offered by a
typical employer plan in each State. The term "base-benchmark plan" in 45 CFR 156.100 is distinct from the term "EHB-benchmark plan" as defined in 45 CFR 156.20.

In a 2012 FAQ, HHS stated that the
Departments would consider a self-
insured group health plan, a large group
market health plan, or a grandfathered
group health plan to have used a permis-
sible definition of EHB under section
1302(b) of the Affordable Care Act if the
definition was one of the potential EHB
base-benchmark plans that, at the time,
States could have chosen from as the stan-
dard for EHB in their State.41 At the time,
this list of potential EHB-benchmark
plans included over 510 EHB base-
benchmark plans that were authorized by
the Secretary for a State or the District of
Columbia42 to select, as each State and the
District of Columbia has a choice of ten
possible benchmark plans. All of these
potential plans were "authorized" in the
sense that they were potential EHB bench-
mark plans that could be selected by a
State or the District of Columbia under the
EHB regulations. This approach was in-
tended to provide plans and issuers not
subject to the EHB rules with flexibility to
define what constitutes EHB under their
respective plan for purposes of the limits
in PHS Act section 2711. Since that time,
each State and the District of Columbia
has selected or defaulted to a single EHB-
benchmark option, and that is the only
benchmark plan "authorized" to be used
for defining EHB in that State or the Dis-
trict of Columbia.

Given the enforcement challenges for
Federal and State regulators and difficul-
ties for participants, beneficiaries, and en-
rollees in ascertaining what benefits under
their respective plans constitute EHB
posed by a choice of over 500 plans, the
Departments are codifying their interpre-
tation that a "reasonable interpretation of
the term 'essential health benefits" in-
cludes only those EHB base-benchmarks
that, in fact, have been selected, whether
by active State selection or by default to
be the EHB base-benchmark plan for a
State, rather than all plans that are poten-
tially authorized.

In addition to the foregoing base-
benchmark plans, there are three base-
benchmark plan options not currently
among those a State or the District of
Columbia has either selected or had as-
signed by default that the Departments
believe should also continue to be made
available for plans and issuers not subject
to EHB requirements. These three plan
options are the current base-benchmark
plan options under the Federal Employees
Health Benefit Program (FEHBP) speci-
fied at 45 CFR 156.100(a)(3) (the three
largest FEHBP plans available to all Fed-
eral employees nationally). These base-
benchmark plan options are unique among
base-benchmark plans in that they are
available nationally, and thus can be uti-
lized to determine what benefits would be
categorized as EHBs for those employers
who provide health coverage to employ-
ees throughout the United States and are
not situated only in a single State.

Thus, under these final regulations,
group health plans (and health insurance
coverage offered in connection with such
plans) and grandfathered individual mar-
ket coverage that are not required to pro-
vide EHB may select among any of the 51
EHB base-benchmark plans identified un-
der 45 CFR 156.100 and selected by a
State or the District of Columbia and the
FEHBP base-benchmark plan, as applica-
ble for plan years beginning on or after
January 1, 2017, for purposes of determin-
ing which benefits cannot be subject to
annual and lifetime dollar limits. The cur-
rent list of the 51 proposed EHB base-
benchmark plans selected by the States for
2017 can be found at https://www.cms.
gov/CCIIO/Resources/Data-Resources/ehb.
html. HHS anticipates publishing the final
list later this month.

#### 2. Out-of-network benefits

The Departments have been asked
whether the scope of the prohibition on
lifetime and annual dollar limits in PHS

Act section 2711 applies only to in-
network benefits as opposed to both in-
network and out-of-network benefits. The
statute and interim final regulations made
no distinction between in-network or out-
of-network benefits. Therefore, lifetime
and annual dollar limits on essential
health benefits are generally prohibited,
regardless of whether such benefits are
provided on an in-network or out-of-
network basis. These final regulations in-
corporate this clarification.

### 3. End of Waiver Program

Under PHS Act section 2711, for plan
years beginning before January 1, 2014,
the Departments were given authority to
define restricted annual dollar limits to
ensure that access to needed services was
made available with minimal impact on
premiums. As noted in the preamble to the
2010 interim final regulations, in order to
mitigate the potential for premium in-
creases for all plans and policies, while at
the same time ensuring access to EHB, the
interim final regulations adopted a three-
year phased approach for restricted annual
dollar limits, with the dollar limit increas-
ing for each year of the three year period.
Annual dollar limits, including restricted
annual dollar limits, are not allowed for
plan years (in the individual market, pol-
icy years) beginning on or after January 1,
2014, except for grandfathered individual
health insurance coverage.

Some previously widely available low-
cost coverage was designed with low
maximum benefits and did not meet the
phased in restricted annual dollar limits,
such as stand-alone health reimbursement
arrangements (HRAs)43 and so-called
"mini med" plans. In order to ensure that
individuals with such limited coverage
would not be denied access to needed
services or experience more than a mini-
mal impact on premiums, the interim final
regulations also provided for HHS to es-
tablish a program under which the re-

41See Q10 of Frequently Asked Questions on Essential Health Benefits Bulletin, available at https://www.cms.gov/CCIIO/Resources/Files/Downloads/ehb-faq-508.pdf.

42Initially, issuers in the territories were subject to the EHB requirement and also had potential benchmarks to choose from under the EHB regulations. A change in the interpretation of
the statute resulted in issuers in the territories being exempt from the EHB rules. See Letter to Gary R. Francis, Commissioner, Office of Lieutenant Governor, Virgin Islands, dated July
16, 2014, available at https://www.cms.gov/CCIIO/Resources/Letters/Downloads/letter-to-Francis.pdf.

43 An HRA is an arrangement that is funded solely by an employer and that reimburses an employee for medical care expenses (as defined under Code section 213(d)) incurred by the
employee, or his spouse, dependents, and any children who, as of the end of the taxable year, have not attained age 27, up to a maximum dollar amount for a coverage period. IRS Notice
2002-45, 2002-02 CB 93; Revenue Ruling 2002-41, 2002-2 CB 75. This reimbursement is excludable from the employee's income. Amounts that remain at the end of the year generally
can be used to reimburse expenses incurred in later years. HRAs generally are considered to be group health plans within the meaning of Code section 9832(a), section 733(a) of ERISA,
and section 2791(a) of the PHS Act and are subject to the rules applicable to group health plans.

stricted annual dollar limit requirements
would be waived if compliance with the
limits would result in a significant de-
crease in access to benefits or a significant
increase in premiums.44 However, this
waiver program was only available for the
period during which the statute authorized
restricted annual dollar limits, that is, plan
years (in the individual market, policy
years) beginning before January 1, 2014.
Consequently such waivers are no longer
available and the waiver program rules are
not incorporated in these final regulations.

### 4. HRAs and other account based plans

In general, HRAs and other account-
based group health plans are subject to the
annual dollar limit prohibition under PHS
Act section 2711 (annual dollar limit pro-
hibition)45 and will fail to comply with
this prohibition because these arrange-
ments impose an annual limit on the
amount of expenses the arrangement will
reimburse. However, special rules apply
to certain types of account-based plans
under which the HRA or other account-
based health plan either is not subject to
the annual dollar limit prohibition, or is
considered to comply with the annual
dollar limit prohibition if it is "inte-
grated" with another group health plan
that complies with the annual dollar
limit prohibition.

The preamble to the interim final reg-
ulations noted that the annual dollar limit
prohibition applies differently to certain
account-based plans that are subject to
other rules that limit the benefits available
under those plans.46 In particular, under
the 2010 interim final regulations and
these final regulations, certain health Flex-
ible Spending Arrangements (health
FSAs)47 are not subject to the PHS Act
section 2711 annual dollar limit prohibi-
tion because health FSAs are subject to
specific limits under section 9005 of the
Affordable Care Act. In addition, as noted
in the preamble to the 2010 interim final
regulations, the annual dollar limit prohi-
bition does not apply to Archer Medical
Savings Accounts (Archer MSAs) under
section 220 of the Code and Health Sav-
ings Accounts (HSAs) under section 223
of the Code, because both types of plans
are subject to specific statutory provi-
sions that require that the contributions
be limited.

These final regulations contain a clari-
fication regarding the application of the
annual dollar limit prohibition to health
FSAs. Question and Answer 8 of DOL
Technical Release 2013-0348 and IRS
Notice 2013-5449 clarified that the annual
dollar limit prohibition applies to a health
FSA that is not offered through a Code
section 125 plan. That is because the ex-
emption for health FSAs from the annual

dollar limit prohibition is intended to ap-
ply only to health FSAs that are subject to
the separate annual limitation under Code
section 125(i), and health FSAs that are
not offered through a Code section 125
plan are not subject to that separate stat-
utory limit. The prior guidance provided
that this clarification was intended to ap-
ply beginning September 13, 2013 and the
guidance noted that the Departments in-
tended to amend the annual dollar limit
prohibition regulations to conform to the
Q&A. These final regulations include this
amendment.

Other types of account-based plans,
such as HRAs and employer payment
plans,50 are not exempt from the annual
dollar limit prohibition. However, the pre-
amble to the interim final regulations and
subsequently issued subregulatory guid-
ance31 interpreting these rules included a
number of rules regarding the application
of the annual dollar limit prohibition to
these types of arrangements. In particular,
this guidance provides that if an HRA is
"integrated" with other group health plan
coverage, and the other group health plan
coverage complies with the requirements
of PHS Act section 2711, the combined
arrangement satisfies the requirements
even though the HRA imposes a dollar
limit.52 The basic principles for when an
HRA is considered integrated with other
group health plan coverage have been set

44Guidance regarding the annual dollar limit waiver program was issued at https://www.cms.gov/cciio/resources/Regulations-and-Guidance/index.html#Annual Limits.

45In accordance with Code section 9831(a)(2) and ERISA section 732(a), the market reforms, including PHS Act section 2711, do not apply to a group health plan that has fewer than two
participants who are current employees on the first day of the plan year, and, in accordance with Code section 9831(b), ERISA section 732(b), and PHS Act sections 2722(b) and 2763,
the market reforms, including PHS Act section 2711, also do not apply to a group health plan in relation to its provision of excepted benefits described in Code section 9832(c), ERISA
section 733(c) and PHS Act section 2791(c).

46See 75 FR 37188, 37190 (June 28, 2010).

47In general, a health FSA is a benefit designed to reimburse employees for medical care expenses (as defined in Code section 213(d), other than premiums) incurred by the employee, or
the employee's spouse, dependents, and any children who, as of the end of the taxable year, have not attained age 27. See Employee Benefits-Cafeteria Plans, 72 FR 43938, 43957 (August
6, 2007) (proposed regulations; to be codified, in part, once final, at 26 CFR 1.125-5); Code section 105(b) and 106(c). Contributions to a health FSA offered through a cafeteria plan satisfying
the requirements of Code section 125 do not result in gross income to the employee. Code section 125(a).

48Technical Release 2013-03, available at www.dol.gov/ebsa/pdf/tr13-03.pdf.

492013-40 IRB 287.

50 An employer payment plan is a group health plan under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance
policy, such as a reimbursement arrangement described in Revenue Ruling 61-146, 1961-2 CB 25, or arrangements under which the employer uses its funds to directly pay the premium
for an individual health insurance policy covering the employee.

51Five items of guidance have been issued on this topic: (1) Affordable Care Act Implementation FAQs Part XI, available at (http://www.dol.gov/ebsa/faqs/faq-aca11.html) or
http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs11.html; (2) IRS Notice 2013-54 and DOL Technical Release 2013-03, issued on September 13,
2013; (3) IRS FAQ on Employer Healthcare Arrangements available at http://www.irs.gov/Affordable-Care-Act/Employer-Health-Care-Arrangements; (4) Affordable Care Act Implemen-
tation FAQs Part XXII, available at http://www.dol.gov/ebsa/faqs/faq-aca22.html or http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/Downloads/FAQs-Part-XXII-FINAL.pdf;
and (5) IRS Notice 2015-17, issued on February 18, 2015. See also 75 FR 37188 (June 28, 2010). This guidance, much of which is not directly addressed in these final regulations, continues
to be in effect.

52Issues also arise for account-based group health plans under PHS Act section 2713, which requires non-grandfathered group health plans (or health insurance issuers offering group health
insurance plans) to provide certain preventive services without imposing any cost-sharing requirements for these services. The Departments have issued guidance providing that, similar to
the analysis of the annual dollar limit prohibition, an HRA that is integrated with a group health plan will comply with the preventive services requirements if the group health plan with
which the HRA is integrated complies with the preventive services requirements. Also, a group health plan, including an HRA, used to purchase coverage on the individual market is not
integrated with that individual market coverage for purposes of the preventive services requirements and therefore will fail to comply with the preventive services requirements because an
HRA or similar arrangement does not provide preventive services without cost-sharing in all instances. See DOL Technical Release 2013-03 and IRS Notice 2013-54.

forth in various forms of subregulatory
guidance and have been included in these
final regulations.

These final regulations clarify the
scope of arrangements, in addition to
HRAs, that can be integrated with other
group health plan coverage by defining
and referring to "account-based plans."
Account-based plans are employer-
provided group health plans that provide
reimbursements of medical expenses
other than individual market policy pre-
miums, with the reimbursement subject to
a maximum fixed dollar amount for a pe-
riod. Examples of account-based plans in-
clude health FSAs and medical reimburse-
ment plans that are not HRAs, in addition
to HRAs. Account-based plans that do not
qualify as excepted benefits53 generally
are subject to the market reforms (ex-
cept that health FSAs offered through a
Code section 125 plan are not subject to
the annual dollar limit prohibition), in-
cluding the preventive services require-
ments under PHS Act section 2713. If
the other group health plan coverage
with which an account-based plan is in-
tegrated complies with the requirements
under PHS Act sections 2711 and 2713,
the account-based plan also complies
with those requirements because, in that
case, the combined benefit satisfies
those requirements.54

The Departments' prior guidance re-
garding when an HRA is considered inte-
grated with another group health plan pro-
vides two methods for integration, each of
which has been added to the final regula-
tions and extended to other account-based
plans. In addition to various other require-
ments, each integration method requires
that under the terms of the HRA or other
account-based plan, (1) an employee (or
former employee) must be permitted to
permanently opt out of and waive future
reimbursements from the account-based
plan at least annually, and (2) upon termi-

nation of employment either remaining
funds are forfeited or the employee is al-
lowed to opt out of and waive future re-
imbursements under the account-based
plan.

Stakeholders have requested clarifica-
tion regarding whether for this purpose a
forfeiture of amounts or a waiver of reim-
bursements under an HRA includes an
otherwise permanent forfeiture or waiver,
if the amounts will be reinstated or the
waiver will be discontinued upon a fixed
date or death. The Departments interpret
the prior guidance to provide, and the final
regulations clarify, that forfeiture or
waiver occurs even if the forfeited
amounts or waived reimbursements may
be reinstated upon a fixed date, a partici-
pant's death, or the earlier of the two
events (the reinstatement event). For this
purpose, an HRA is considered forfeited
or waived prior to a reinstatement event
only if the participant's election to forfeit
or waive is irrevocable, meaning that, be-
ginning on the effective date of the elec-
tion, the participant and the participant's
beneficiaries have no access to amounts
credited to the HRA until the reinstate-
ment event.55 This means that the HRA
may not be used to reimburse or pay
medical expenses incurred during the
period after the forfeiture or waiver and
prior to reinstatement. An HRA need not
provide for reinstatement of forfeited
amounts or waived reimbursements to
be integrated with a non-HRA group
health plan. The final regulations reflect
this clarification, and this clarification
applies for integration of HRAs as well
as other account-based plans, as defined
in the regulations.

The Departments' prior guidance re-
garding integration of an HRA or other
account-based plan with another group
health plan further provides that integra-
tion requires, among other requirements,
that the plan sponsor offering the HRA or

other account-based plan also offer to the
employee another group health plan (other
than the HRA or other account-based
plan). On February 18, 2015, Treasury
and IRS issued Notice 2015-17, which, in
Q&A3, provided for integration of a pre-
mium reimbursement arrangement for an
employee's Medicare part B or D premi-
ums for purposes of the annual dollar limit
prohibition and the preventive services re-
quirements under PHS Act section 2713 if
the arrangement meets certain conditions
and the employer offers the employee an-
other group health plan.56 However, No-
tice 2015-17 provided that the premium
reimbursement arrangement for an em-
ployee's Medicare part B or D premiums
could not be integrated with Medicare
coverage to satisfy the market reforms
because Medicare coverage is not a group
health plan. In response to this prior guid-
ance, stakeholders have indicated that em-
ployers with fewer than 20 employees are
unable to meet the integration test set out
in Notice 2015-17 for Medicare part B or
D premium reimbursement arrange-
ments. That is because these employers
that offer group health plan coverage are
not required by the applicable Medicare
secondary payer rules to offer group
health plan coverage to their employees
who are eligible for Medicare coverage,
and some issuers of insurance for group
health plans do not allow these smaller
employers to offer group health plan
coverage to their employees who are
eligible for Medicare coverage. In re-
sponse to these concerns, these regula-
tions now provide a special rule for em-
ployers with fewer than 20 employees
that are not required to offer their group
health plan coverage to employees who
are eligible for Medicare coverage, and
that offer group health plan coverage to
their employees who are not eligible for
Medicare, but not to their employees
who are eligible for Medicare coverage.

53Health FSAs will be considered to provide only excepted benefits if the employer also makes available group health plan coverage that is not limited to excepted benefits and the health
FSA is structured so that the maximum benefit payable to any participant cannot exceed two times the participant's salary reduction election for the health FSA for the year (or, if greater,
cannot exceed $500 plus the amount of the participant's salary reduction election). See 26 CFR 54.9831-1(c)(3)(v), 29 CFR 2590.732(c)(3)(v), and 45 CFR 146.145(c)(3)(v).

54See Affordable Care Act Implementation FAQs Part XIX, available at http://www.dol.gov/ebsa/faqs/faq-aca19.html and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs19.html.

55During a period in which an HRA has been forfeited or waived prior to a reinstatement event, the participant is considered not covered by the HRA. For a former employee (such as a
retiree), an individual's right to have a forfeited or waived HRA reinstated upon a reinstatement event will not prevent the individual from receiving the premium tax credit under § 36B
during the period after forfeiture or waiver and prior to reinstatement, if the individual is otherwise eligible for a premium tax credit. See 26 CFR § 1.36B-2(c)(3)(i), proposed §
1.36B-2(c)(3)(iv).

56Notice 2015-17 provides special rules for integration of Medicare Part B and D premium reimbursement arrangements and TRICARE-related HRAs with other group health plans, along
with various other related pieces of guidance. That guidance continues to apply but is not repeated in these final regulations.

For these employers, a premium reim-
bursement arrangement for Medicare
part B or D premiums may be integrated
with Medicare (and deemed to satisfy)
the annual dollar limit prohibition and
the preventive services requirements un-
der PHS Act section 2713 if the employ-
ees who are not offered the other group
health plan coverage would be eligible
for that group health plan but for their
eligibility for Medicare. These employ-
ers may use either of the non-Medicare
specific integration tests, as applicable,
for account-based plans for employees
who are not eligible for Medicare.

Although in certain circumstances
HRAs and other account-based plans may
be integrated with another group health
plan to satisfy the annual dollar limit pro-
hibition, these final regulations incorpo-
rate the general rule set forth in prior
subregulatory guidance clarifying that an
HRA and other account-based plans may
not be integrated with individual market
coverage, and therefore an HRA or other
account-based plan used to reimburse pre-
miums for the individual market coverage
fails to comply with PHS Act section
2711.

These final regulations, however, do
not incorporate all of the other subregula-
tory guidance concerning the application
of the Affordable Care Act to HRAs and
other account-based plans. It has come to
the Departments' attention that there are a
wide variety of account-based products
being marketed, often with subtle but in-
substantial differences, in an attempt to
circumvent the guidance set forth by the
Departments on the application of the
annual dollar limit prohibition and the
preventive services requirements to
account-based plans. The Departments
intend to continue to address these spe-
cific instances of noncompliance. The
subregulatory guidance not specifically
addressed in these final regulations con-
tinues to apply and the Departments will
continue to address additional situations
as necessary.

D. PHS Act Section 2712, Prohibition
on Rescissions (26 CFR 54.9815-2712,
29 CFR 2590.715-2712, 45 CFR
147.128)

PHS Act section 2712, as added by the
Affordable Care Act, provides that a
group health plan or health insurance is-
suer offering group or individual health
insurance coverage must not rescind cov-
erage unless a covered individual commits
fraud or makes an intentional misrepre-
sentation of material fact. This standard
applies to all rescissions, whether in the
group or individual insurance market, or
self-insured coverage. These rules also ap-
ply regardless of any contestability period
of the plan or issuer. On June 28, 2010,
the Departments issued interim final reg-
ulations implementing PHS Act section
2712.57 The interim final regulations in-
cluded several clarifications regarding the
standards for rescission, including that the
rules of PHS Act section 2712 apply
whether the coverage is rescinded for an
individual or a group. The Departments
also issued Affordable Care Act Imple-
mentation FAQs Part II Q7, which clari-
fied when retroactive terminations in the
'normal course of business' would not be
considered rescissions.58 These final reg-
ulations finalize the 2010 interim final
regulations without substantial change
and incorporate the clarifications issued
thus far in subregulatory guidance.

#### 1. Definition of rescission

Under the interim final regulations and
these final regulations, a rescission is a
cancellation or discontinuance of cover-
age that has retroactive effect. For exam-
ple, a cancellation that treats an insurance
policy as void from the time of an indi-
vidual's or group's enrollment is a rescis-
sion, whether the cancellation is a result of
the issuer subsequently determining that a
valid insurance contract does not exist or
the insurance contract was entered into
despite its noncompliance with applicable
law. As another example, a cancellation
that voids benefits paid up to a year before

the cancellation is also a rescission. How-
ever, a cancellation or discontinuance of
coverage is not a rescission if it has only
prospective effect or to the extent it is
attributable to a failure to timely pay re-
quired premiums or contributions towards
the cost of coverage. Other provisions of
Federal and State law limit the grounds
for prospective cancellations of cover-
age, including PHS Act section 2703
regarding guaranteed renewability of
coverage and PHS Act section 2705 re-
garding non-discrimination in rules for
eligibility (or continued eligibility)
based on health status.

Under PHS Act section 2712, rescis-
sion is not prohibited if a covered individ-
ual commits fraud or makes an intentional
misrepresentation of material fact. Some
commenters recommended that the De-
partments define the term "material fact."
These final regulations decline this sug-
gestion. However, the Departments have
addressed whether providing false or in-
accurate information concerning to-
bacco use is considered a misrepresen-
tation of material fact for this purpose.
HHS published final regulations under
PHS Act section 2701 (regarding fair
health insurance premiums) on February
13, 2013.59 In the preamble to those
regulations, HHS stated that, with re-
spect to an individual who is found to
have reported false or inaccurate infor-
mation about their tobacco use, the in-
dividual may be charged the appropriate
premium that should have been paid ret-
roactive to the beginning of the plan
year. However, as stated in the pream-
ble, the "remedy of recoupment renders
any misrepresentation with regard to to-
bacco use no longer a 'material' fact for
purposes of rescission under PHS Act
section 2712 and its implementing reg-
ulations," and therefore, coverage can-
not be rescinded on such basis. The De-
partments may provide further guidance
regarding the definition of a "material
fact" for purposes of rescission under
PHS Act section 2712 if additional
questions arise.

5775 FR 37188 (June 28, 2010).

58 Affordable Care Act Implementation FAQs Part II, available at http://www.dol.gov/ebsa/faqs/faq-aca2.html or https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs2.html.

5978 FR 13406, 13414 (February 13, 2013).

### 2. Scope and Application

The statutory prohibition related to re-
scissions is not limited to rescissions
based on prior medical history, rather it
precludes plans and issuers from rescind-
ing coverage under any circumstances ex-
cept as provided in the statute and regu-
lations. For example, coverage cannot be
rescinded because an individual makes a
mistake on an insurance application or
enrollment form. An example in both the
interim final regulations and in these final
regulations clarifies that some plan errors
(such as mistakenly covering a part-time
employee for a period of time under a plan
that only covers full-time employees) may
be cancelled prospectively once identi-
fied, but not retroactively rescinded un-
less there was fraud or intentional mis-
representation of a material fact by the
employee.

The Departments received comments
on the interim final regulations stating that
some employers' human resource depart-
ments may reconcile lists of eligible indi-
viduals with their plan or issuer via data
feed only once per month, and that routine
enrollment adjustments in the normal
course of business should not be consid-
ered a rescission.

In response to these comments, the De-
partments issued an FAQ concerning re-
scissions on October 8, 2010.60 The FAQ
stated that if a plan covers only active
employees (subject to the COBRA contin-
uation of coverage provisions) and an em-
ployee pays no premiums for coverage
after termination of employment, the De-
partments do not consider the retroactive
elimination of coverage back to the date
of termination of employment, due to de-
lay in administrative record-keeping, to be
a rescission. Similarly, if a plan does not
cover ex-spouses and the plan is not noti-
fied of a divorce (subject to the COBRA
continuation coverage provisions), and
the full COBRA premium is not paid by
the employee or ex-spouse for coverage,
the Departments do not consider a plan's
termination of coverage retroactive to the
divorce to be a rescission.61

### 3. Termination of Coverage Initiated by Participant, Beneficiary, or Enrollee

The Departments have been asked
whether the rescission rules prohibit a
plan or issuer from retroactively terminat-
ing coverage at the request of a partici-
pant, beneficiary, or enrollee. In the De-
partments' view, the statutory provision
was enacted by Congress to protect indi-
viduals against potential abuses by group
health plans and health insurance issuers;
it was not intended to prevent individuals
from exercising their rights and privileges
under the terms of the plan or coverage in
accordance with applicable State law,
where they are acting voluntarily and
without coercion by the plan or issuer.
Moreover, HHS regulations at 45 CFR
155.430, which govern termination of en-
rollment in the Exchange, permit enrollees
and the Exchange to initiate a retroactive
termination of enrollment in a QHP
through the Exchange, including instances
where the enrollee has the right to termi-
nate coverage under applicable State law
(such as State "free look" cancellations
laws).62 For these reasons, the Depart-
ments clarify in these final regulations that
a retroactive cancellation or discontinu-
ance of coverage is not a rescission if (1)
it is initiated by the individual (or by the
individual's authorized representative)
and the employer, sponsor, plan, or issuer
does not, directly or indirectly, take action
to influence the individual's decision to
cancel or discontinue coverage retroac-
tively, or otherwise take any adverse ac-
tion or retaliate against, interfere with,
coerce, intimidate, or threaten the individ-
ual; or (2) it is initiated by the Exchange
pursuant to 45 CFR 155.430 (other than
under paragraph (b)(2)(iii)). The Depart-
ments may issue additional subregulatory
guidance if abusive situations or questions
arise.

### 4. Interaction with Internal Appeals and External Review

Commenters requested that these final
regulations provide that individuals have

the right to appeal a rescission to an inde-
pendent third party. PHS Act section 2719
and its implementing regulations address
internal claims and appeals and external
review of adverse benefit determinations.
Under the Department of Labor's claims
procedure regulation at 29 CFR
2560.503-1 (the DOL claims procedure
regulation), adverse benefit determina-
tions eligible for internal claims and ap-
peals processes generally include denial,
reduction, termination of, or a failure to
provide or make a payment (in whole or in
part) for a benefit, including a denial, re-
duction, termination, or failure to make a
payment based on the imposition of a pre-
existing condition exclusion, a source of
injury exclusion, or other limitation on
covered benefits. The Departments' regu-
lations under PHS Act section 2719
broaden the definition of "adverse benefit
determination" to include rescissions of
coverage. Therefore, rescissions of cover-
age are also eligible for internal claims
and appeals and external review for non-
grandfathered health plans, whether or not
the rescission has an adverse effect on any
particular benefit at the time of an appeal.
The regulations under PHS Act section
2719 also contain provisions requiring
coverage to remain effective pending the
outcome of an internal appeal.

### 5. Interaction with COBRA Continuation Coverage

COBRA provides for a temporary con-
tinuation of group health coverage that
would otherwise be lost due to certain life
events. COBRA requires group health
plans to offer continuation coverage to
covered employees, former employees,
spouses, former spouses, and dependent
children when group health coverage
would be terminated due to the following:
the death of a covered employee; termi-
nation or reduction in the hours of a cov-
ered employee's employment for reasons
other than gross misconduct; a covered
employee's becoming entitled to Medi-
care; divorce or legal separation of a cov-
ered employee and spouse; and a child's

60 Affordable Care Act Implementation FAQs Part II, Q7 at http://www.dol.gov/ebsa/pdf/faq-aca2.pdf and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs2.html.

61In such situations, COBRA may require coverage to be offered for up to 36 months if the COBRA applicable premium is paid by the qualified beneficiary.

62State "free look" cancellation laws are laws permitting an individual to cancel coverage within a certain time period, even following the effectuation of the enrollment.

loss of dependent status (and therefore
coverage) under the plan.

COBRA sets forth rules for how and
when continuation coverage must be of-
fered and provided, how employees and
their families may elect continuation cov-
erage, and what circumstances justify ter-
minating continuation coverage. COBRA
allows plans to continue coverage during
an initial 60-day election period and al-
lows plans to continue providing coverage
during the 30-day grace periods for each
premium payment. If a qualified benefi-
ciary fails to pay for coverage during the
initial election period, or fails to pay in
full before the end of a grace period, con-
tinuation coverage may be terminated ret-
roactively under COBRA.

Several commenters sought clarifica-
tion about the interaction of the COBRA
continuation provisions with the prohibi-
tion against rescissions. The Departments
clarify that the regulatory exception to the
prohibition on rescission for failure to
timely pay required premiums or contri-
butions toward the cost of coverage also
includes failure to timely pay required
premiums towards the cost of COBRA
continuation coverage. Accordingly, if a
group health plan requires the payment of
a COBRA premium to continue coverage
after a qualifying event and that premium
is not paid by the applicable deadline, the
prohibition on rescission is not violated if
the plan retroactively terminates coverage
due to a failure to elect and pay for CO-
BRA continuation coverage.

### 6. Notice of Rescission

Consistent with PHS Act section 2712,
under the interim final regulations and
these final regulations, a plan or issuer
must provide at least 30 calendar days
advance written notice to each participant
(in the individual market, primary sub-
scriber) who would be affected before
coverage may be rescinded (where per-

mitted). This provides individuals time to
appeal the decision or enroll into new
coverage. This notice is required regard-
less of whether it is a rescission of group
or individual coverage; or whether, in the
case of group coverage, the coverage is
insured or self-insured, or the rescission
applies to an entire group or only to an
individual within the group.

Some commenters recommended the
30-day notice of rescission be coordinated
with the rules for providing notices of
adverse benefit determinations under the
Departments' internal appeals and exter-
nal review regulations under PHS Act sec-
tion 2719. Other commenters made spe-
cific suggestions regarding the content of
the notice, such as that the notice indicate
the basis for the rescission and include an
explanation of the remedies available to
the individual.

Under PHS Act section 2719, the in-
terim final regulations, and these final reg-
ulations, a plan or issuer must provide
notice to individuals, in a culturally and
linguistically appropriate manner, of the
reason or reasons for an adverse benefit
determination or final internal adverse
benefit determination (including a rescis-
sion of coverage) and a description of
available internal appeals and external re-
view processes, including information on
how to initiate an appeal. The Depart-
ments encourage plans and issuers to co-
ordinate notices related to rescissions and
appeal procedures to the extent possible.

E. PHS Act section 2714, Coverage of
Dependents to Age 26 (26 CFR
54.9815-2714, 29 CFR 2590.715-2714,
45 CFR 147.120)

PHS Act section 2714, as added by the
Affordable Care Act, provides that a
group health plan or a health insurance
issuer offering group or individual health
insurance coverage that makes available
dependent coverage63 of children must

make such coverage available for children
until attainment of 26 years of age.64 On
May 13, 2010, the Departments issued
interim final regulations implementing
PHS Act section 2714 and requesting
comment.65 After issuance of the 2010
interim final regulations, the Departments
released Affordable Care Act Implemen-
tation FAQs Parts I and V to address
various requests for clarifications under
PHS Act section 2714.66 These final reg-
ulations adopt the 2010 interim final reg-
ulations without substantial change and
incorporate the clarifications issued thus
far in subregulatory guidance.

### 1. Restrictions on Plan Definition of Dependent

### a. Definition of Dependent - Based on Relationship Between Child and Participant

PHS Act section 2714 provides that the
"Secretary shall promulgate regulations to
define the dependents to which coverage
shall be made available" under the depen-
dent coverage provision. The 2010 interim
final regulations provided that with re-
spect to a child who has not attained age
26, a plan or issuer may not define depen-
dent for purposes of eligibility for depen-
dent coverage of children other than in
terms of a relationship between a child
and the participant. For example, a plan or
issuer may not deny or restrict coverage
for a child who has not attained age 26
based on the child's financial dependency
(upon the participant or any other person),
residency with the participant or with any
other person, student status, employment,
or any combination of those factors. Ad-
ditional examples of factors that cannot be
used for defining dependent for purposes
of eligibility (or continued eligibility) in-

63For purposes of these final regulations, dependent coverage means coverage of any individual under the terms of a group health plan, or group or individual health insurance coverage,
because of the relationship to a participant (in the individual market, primary subscriber).

64Under section 1004(d) of the Reconciliation Act and IRS Notice 2010-38, 2010-20 IRB 682, released on April 27, 2010, employers may exclude from the employee's income the value
of any employer-provided health coverage for an employee's child for the entire taxable year the child turns 26 if the coverage continues until the end of that taxable year. This means that
if a child turns 26 in March, but stays on the plan past December 31st (the end of most individual's taxable year), the health benefits up to December 31st can be excluded from the employee's
income.

65 See 75 FR 27122 (May 13, 2010).

66 Affordable Care Act Implementation FAQs Part I, Q&A-14, available at http://www.dol.gov/ebsa/faqs/faq-aca.html and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs.html and Affordable Care Act Implementation FAQs Part 5 and Mental Health Parity Implementation, Q&A 5, available at http://www.dol.gov/ebsa/faqs/faq-
aca5.html and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs5.html.http://www.dol.gov/ebsa/faqs/faq-aca5.html.

clude eligibility for other coverage67 and
marital status of a dependent child.68 Be-
cause the statute does not distinguish be-
tween coverage for minor children and
coverage for adult children under age 26,
these factors also may not be used to
determine eligibility for dependent cover-
age of minor children.

It has come to the Departments' atten-
tion that certain plans that utilize an HMO
design impose restrictions on eligibility
that require participants and beneficiaries
to work, live or reside in the HMO service
area. While these provisions on their face
appear to be generally applicable, the
overwhelming impact of such provisions
affects dependent children, who would
otherwise be required to be covered pur-
suant to PHS Act section 2714. For exam-
ple, a plan that utilizes an HMO design
that requires participants and beneficiaries
to work, live or reside in the service area
would not permit a dependent child cov-
ered under the parent's plan to continue to
be eligible for the plan if the dependent
child moves out of the HMO's service
area to attend college. Under the same
plan, however, most employees and their
spouses would work, live or reside in the
service area.

These final regulations provide that, to
the extent such restrictions are applicable
to dependent children up to age 26, eligi-
bility restrictions under a plan or coverage
that require individuals to work, live or
reside in a service area violate PHS Act
section 2714. (This rule does not relate to
the extent to which a plan must cover
participants or provide services outside
of its service area). While eligibility
provisions of general applicability are
usually outside the scope of PHS Act
section 2714, due to the disproportion-

ate effect on dependent children, these
final regulations do not permit eligibility
provisions under a plan or coverage
based on service area, to the extent such
restrictions are applicable to dependent
children up to age 26, even if such re-
strictions are intended to apply gener-
ally to all participants and beneficiaries
under the plan.

### b. Definition of Child

PHS Act section 2714 does not require
a plan to provide dependent coverage of
children but instead provides that if a plan
does provide dependent coverage of chil-
dren it must continue to make such cov-
erage available until the child turns age
26.69 Neither PHS Act section 2714 nor
the interim final regulations defined the
term child for purpose of the dependent
coverage provision.70

In response to comments requesting
guidance on the definition of the term
child and questions from stakeholders, the
Departments released an FAQ71 stating
that a group health plan or issuer will not
fail to satisfy the dependent coverage pro-
vision merely because it conditions health
coverage on support, residency, or other
dependency factors for individuals under
age 26 who are not described in section
152(f)(1) of the Code. For an individual
not described in section 152(f)(1), such as
a grandchild or niece, a plan may impose
additional conditions on eligibility for
health coverage, such as a condition that
the individual be a dependent for income
tax purposes. The FAQ also provided that
a plan or issuer does not fail to satisfy the
requirements of PHS Act section 2714 or
its implementing regulations because the
plan limits health coverage for children

until the child turns 26 to only those chil-
dren who are described in section
152(f)(1) of the Code. These final regula-
tions incorporate the clarifications pro-
vided in the FAQ.

Some commenters requested that the
Departments interpret PHS Act section
2714 to apply to grandchildren. The stat-
ute and the 2010 interim final regulations
provided that nothing in PHS Act section
2714 requires a plan or issuer to make
available coverage for a child of a child
receiving dependent coverage. Because
the statute specifically provides that
plans and issuers are not required to
make coverage available to grandchil-
dren, these final regulations do not adopt
this suggestion.

#### 2. Uniformity Irrespective of Age

The 2010 interim final regulations pro-
vided that the terms of the plan or health
insurance coverage providing dependent
coverage of children cannot vary based on
the age of a child, except for children age
26 or older. The 2010 interim final regu-
lations contained examples illustrating
that age-based surcharges violate the uni-
formity requirement but that cost of cov-
erage increases for tiers with more cov-
ered individuals do not violate this
requirement because such an increase ap-
plies without regard to the age of any
child. The 2010 interim final regulations
also contained an example demonstrating
that a plan that limits the benefit packages
offered based on the age of dependent
children violates the uniformity require-
ment. These final regulations retain these
examples.

67 See section II.H.1. of this preamble, entitled "Special Rule Relating to Dependent Coverage of Children to Age 26 for Grandfathered Group Health Plans," for discussion of an out-of-date
special rule for grandfathered plans regarding adult children eligible for other coverage.

68The Affordable Care Act, as originally enacted, required plans and issuers to make dependent coverage available only to a child "who is not married." This language was struck by section
2301(b) of the Reconciliation Act. Accordingly, under the interim final regulations and these final regulations, plans and issuers may not limit dependent coverage of children based on
whether a child is married (however, a plan or issuer is not required under the final regulations to cover the spouse of an eligible child).

69In general, under section 4980H of the Code, certain employers (applicable large employers) must either offer health coverage to their full-time employees (and their dependents) or
potentially pay an assessable payment if at least one full-time employee receives a premium tax credit for purchasing individual coverage on an Affordable Insurance Exchange. For purposes
of section 4980H, the term dependent means "a child (as defined in section 152(f)(1) of the Code but excluding a stepson, stepdaughter or an eligible foster child (and excluding any individual
who is excluded from the definition of dependent under section 152 of the Code by operation of section 152(b)(3) of the Code)) of an employee who has not attained age 26. A child attains
age 26 on the 26th anniversary of the date the child was born. A child is a dependent for purposes of section 4980H for the entire calendar month during which he or she attains age 26.
Absent knowledge to the contrary, applicable large employer members may rely on an employee's representation about that employee's children and the ages of those children. The term
dependent does not include the spouse of an employee." See 26 CFR 54.4980H-1(a)(12). Under section 152(f)(1) of the Code a child means an individual who is (i) a son, daughter, stepson,
or stepdaughter of the taxpayer (including a legally adopted child or an individual lawfully placed for adoption with the taxpayer) or (ii) an eligible foster child of the taxpayer.

70Under section 1004(d) of the Reconciliation Act and IRS Notice 2010-38, child means child as defined in section 152(f)(1) of the Code.

71 Affordable Care Act Implementation FAQs Part I, Q&A 14 (released on September 20, 2010), available at http://www.dol.gov/ebsa/faqs/faq-aca.html and https://www.cms.gov/CCIIO/
Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs.html.

Following the 2010 interim final regu-
lations, the Departments issued an FAQ72
that addressed an arrangement under
which a group health plan charges a co-
payment for physician visits that do not
constitute preventive services to individu-
als age 19 and over, including employees,
spouses, and dependent children, but
waives the copayment for children under
age 19. The FAQ clarifies that the Depart-
ments do not consider such an arrange-
ment to violate the dependent coverage
provision. This arrangement is permissi-
ble under the dependent coverage provi-
sion because, while the dependent cover-
age provision prohibits distinctions based
upon age in dependent coverage of chil-
dren under age 26, it does not prohibit
distinctions based upon age that apply to
all coverage under the plan, including
coverage for employees and spouses as
well as dependent children. In this situa-
tion, the copayments charged to depen-
dent children are the same as those
charged to employees and spouses. (How-
ever, with respect to individual and small
group plans required to provide essential
health benefits, distinctions based on age
may be considered discriminatory under
HHS regulations regarding essential
health benefits.73) The final regulations
reflect the clarification contained in this
FAQ.

F. PHS Act Section 2719, Internal
Claims and Appeals and External
Review (26 CFR 54.9815-2719, 29 CFR
2590.715-2719, 45 CFR 147.136)

PHS Act section 2719, as added by the
Affordable Care Act, applies to group
health plans that are not grandfathered
health plans and health insurance issuers
offering non-grandfathered coverage in
the group and individual markets, and sets
forth standards for plans and issuers re-
garding both internal claims and appeals
and external review. With respect to inter-
nal claims and appeals processes for
group health plans and health insurance
issuers offering group health insurance
coverage, PHS Act section 2719 provides
that a non-grandfathered group health

plan or health insurance issuer offering
non-grandfathered group coverage must
initially incorporate the internal claims
and appeals processes set forth in regula-
tions promulgated by the Department of
Labor (DOL) at 29 CFR 2560.503-1 (the
DOL claims procedure regulation) and
update such processes in accordance with
standards established by the Secretary of
Labor. Similarly, with respect to internal
claims and appeals processes for individ-
ual health insurance coverage, issuers
must initially incorporate the internal
claims and appeals processes set forth in
applicable State law and update such pro-
cesses in accordance with standards estab-
lished by the Secretary of HHS. With re-
spect to external review, PHS Act section
2719 provides for either a State external
review process or a Federal external re-
view process.

The following list identifies certain
regulations and subregulatory guidance
that the Departments have issued to im-
plement these requirements:

· Interim final regulations on July 23,
2010, at 75 FR 43329, implementing
the internal claims and appeals and
external review process requirements
of PHS Act section 2719;

· Technical Release 2010 - 01, on Au-
gust 23, 2010, setting forth interim
procedures for Federal External Re-
view;

· Technical Guidance, on August 26,
2010 , setting forth interim procedures
for Federal External Review for health
insurance issuers in the group and in-
dividual markets under the Patient
Protection and Affordable Care Act;

· Affordable Care Act Implementation
FAQs part I, on September 20, 2010,
providing guidance on outstanding
questions regarding the internal claims
and appeals and external review pro-
cess requirements of PHS Act section
2719;

· Technical Release 2010 - 02, on Sep-
tember 20, 2010, establishing an en-
forcement grace period with respect to
some of the internal claims and ap-
peals standards set forth in the interim
final regulations;

· Technical Release 2011 - 01, on
March 18, 2011, extending the en-
forcement grace period set forth in
Technical Release 2010 - 02;

· Technical Release 2011 - 02, on June
22, 2011, setting forth interim stan-
dards for a State-administered external
review process authorized under sec-
tion 2719(b)(2) of the PHS Act and
paragraph (d) of the interim final reg-
ulations;

· Amendments to the interim final reg-
ulations on June 24, 2011, at 76 FR
37207, with respect to the internal
claims and appeals and external re-
view provisions of PHS Act section
2719 in response to comments re-
ceived regarding the interim final reg-
ulations; and

· Technical Release 2013 - 01, on
March 15, 2013, extending the interim
standards for a State-administered ex-
ternal review process authorized under
section 2719(b)(2) of the PHS Act and
paragraph (d) of the interim final reg-
ulations set forth in Technical Release
2011 - 02.

After consideration of the comments
and feedback received from stakeholders,
the Departments are publishing these final
regulations. These final regulations adopt
the interim final regulations, as previously
amended, without substantial change.
These final regulations also codify some
of the enforcement safe harbors, transition
relief, and clarifications set forth through
subregulatory guidance. Contemporane-
ous with the issuance of these final regu-
lations, the Department of Labor is issuing
a proposed regulation to amend the DOL
claims procedure regulations under 29
CFR 2560.503-1, as applied to plans pro-
viding disability benefits. The amendment
would revise and strengthen the current
DOL claims procedure regulations regard-
ing claims and appeals applicable to plans
providing disability benefits primarily by
adopting the protections and standards for
internal claims and appeals applicable to
group health plans under PHS Act section
2719 and these final regulations.

72 Affordable Care Act Implementation Part V and Mental Health Parity Implementation FAQs, Q&A 5 (released on December 22, 2010), available at http://www.dol.gov/ebsa/faqs/faq-
aca5.html and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs5.html.

73See 45 CFR 156.125.

### 1. Internal Claims and Appeals

In addition to the requirement in PHS
Act section 2719(a) that plans and issuers
must initially incorporate the internal
claims and appeals processes set forth in
the DOL claims procedure regulation, the
interim final regulations, as amended, pro-
vide further standards for compliance with
the internal claims and appeals require-
ments of PHS Act 2719.74 Specifically,
under these requirements, in addition to
complying with the internal claims and
appeals processes set forth in the DOL
claims procedure regulation, plans and is-
suers are required to comply with the fol-
lowing standards: (1) The scope of ad-
verse benefit determinations eligible for
internal claims and appeals includes a re-
scission of coverage (whether or not the
rescission has an adverse effect on any
particular benefit at the time); (2) A plan
or issuer must notify a claimant of a ben-
efit determination (whether adverse or
not) with respect to a claim involving ur-
gent care as soon as possible, taking into
account the medical exigencies, but not
later than 72 hours after the receipt of the
claim by the plan or issuer; (3) Clarifica-
tions with respect to full and fair review,
such that plans and issuers are clearly
required to provide the claimant (free of
charge) with new or additional evidence
considered, relied upon, or generated by
(or at the direction of) the plan or issuer in
connection with the claim, as well as any
new or additional rationale for a denial at
the internal appeals stage, and a reason-
able opportunity for the claimant to re-
spond to such new evidence or rationale;
(4) Clarifications regarding conflicts of in-
terest, such that decisions regarding hir-
ing, compensation, termination, promo-
tion, or other similar matters with respect
to an individual, such as a claims adjudi-
cator or medical expert, must not be based
upon the likelihood that the individual
will support the denial of benefits; (5)
Notices must be provided in a culturally
and linguistically appropriate manner, as
required by the statute, and as set forth in
paragraph (e) of the interim final regula-
tions, as amended; (6) Notices to claim-
ants must provide additional content, in-

cluding that any notice of adverse benefit
determination or final internal adverse
benefit determination must include infor-
mation sufficient to identify the claim in-
volved, including the date of the service,
the health care provider, the claim amount
(if applicable), and a statement describing
the availability, upon request, of the diag-
nosis code and its corresponding meaning,
and the treatment code and its correspond-
ing meaning; and (7) With the exception
of de minimis violations under specified
circumstances, if a plan or issuer fails to
adhere to all the requirements of the in-
terim final regulations, as amended, the
claimant is deemed to have exhausted the
plan's or issuer's internal claims and ap-
peals process, and the claimant may initi-
ate any available external review process
or remedies available under ERISA or un-
der State law.

To address certain relevant differences
in the group and individual markets the
interim final regulations, as amended, pro-
vided that health insurance issuers offer-
ing individual coverage must comply with
three additional requirements for internal
claims and appeals processes. First, initial
eligibility determinations in the individual
market must be included within the scope
of claims eligible for internal appeals.
Second, health insurance issuers offering
individual coverage are only permitted to
have one level of internal appeal. Third,
health insurance issuers offering individ-
ual coverage must maintain records of all
claims and notices associated with the in-
ternal claims and appeals process for six
years. The issuer must make such records
available for examination by the claimant
or State, or Federal oversight agency upon
request.

These final regulations generally incor-
porate the standards of the interim final
regulations, as amended, and the Depart-
ments' associated guidance, without ma-
jor change.

### a. Full and fair review

The interim final regulations provided
that plans and issuers must provide the
claimant (free of charge) with new or ad-
ditional evidence considered, relied upon,

or generated by (or at the direction of) the
plan or issuer in connection with the
claim, as well as any new or additional
rationale as soon as possible and suffi-
ciently in advance of the date on which
the notice of the final adverse benefit de-
termination is required to be provided un-
der the DOL claims procedure regula-
tions. Since the issuance of the interim
final regulations and subsequent subregu-
latory guidance, stakeholders have re-
quested additional clarification regarding
how to provide a full and fair review in
accordance with the requirements set forth
in the regulations.

Commenters requested additional
guidance related to the timing and amount
of information required to be provided in
order to satisfy this requirement. Specifi-
cally, individuals asked whether such in-
formation actually must be provided auto-
matically to participants and whether or
not it would be sufficient to send partici-
pants a notice informing them of the avail-
ability of new or additional evidence or
rationale. The Departments retain the re-
quirement that plans and issuers provide
the new or additional evidence or ratio-
nale automatically. In the Departments'
view, fundamental fairness requires that
participants and beneficiaries have an op-
portunity to rebut or respond to any new
or additional evidence upon which a plan
or issuer may rely. Therefore, plans and
issuers that wish to rely on any new or
additional evidence or rationale in making
a benefit determination must send such
new or additional evidence or rationale to
participants as soon as it becomes avail-
able to the plan or issuer.

In order to comply with this require-
ment, a plan or issuer must send the new
or additional evidence or rationale to the
participant. Merely sending a notice in-
forming participants of the availability of
such information fails to satisfy this re-
quirement. To address the narrow circum-
stance raised by some comments that the
new or additional information could be
first received so late that it would be im-
possible to provide it, these final regula-
tions provide that if the new or additional
evidence is received so late that it would

74The statute requires the Secretary of Health and Human Services to set forth processes for internal claims and appeals in the individual market. Under the interim final regulations, the
Secretary of Health and Human Services has determined that a health insurance issuer offering individual health insurance coverage must generally comply with all the requirements for
the internal claims and appeals process that apply to group health coverage. Also, see 45 CFR 147.136 for additional requirements for coverage in the individual market.

be impossible to provide it to the claimant
in time for the claimant to have a reason-
able opportunity to respond, the period for
providing a notice of final internal adverse
benefit determination is tolled until such
time as the claimant has a reasonable op-
portunity to respond. After the claimant
responds, or has a reasonable opportunity
to respond but fails to do so, the plan or
issuer must notify the claimant of the ben-
efit determination as soon as a plan or
issuer acting in a reasonable and prompt
fashion can provide the notice, taking into
account the medical exigencies.

### 2. Culturally and linguistically appropriate standard (CLAS)

PHS Act section 2719 requires group
health plans and health insurance issuers
to provide relevant notices in a culturally
and linguistically appropriate manner.
The interim final regulations, as amended,
set forth a requirement to provide notices
in a non-English language if at least a
specified percentage of residents in a
county are literate only in the same non-
English language. Specifically, with re-
spect to group health plans and health
insurance issuers offering group or indi-
vidual health insurance coverage, the in-
terim final regulations established that the
threshold percentage of people who are
literate only in the same non-English lan-
guage is set at ten percent or more of the
population residing in the claimant's
county, as determined in guidance based
on American Community Survey data
published by the United States Census
Bureau. Furthermore, the interim final
regulations, as amended, required that
each notice sent by a plan or issuer to an
address in a county that meets this thresh-
old include a one-sentence statement in
the relevant non-English language about
the availability of language services. In
addition, under the interim final regula-
tions, as amended, plans and issuers must
provide a customer assistance process
(such as a telephone hotline) with oral
language services in the non-English lan-
guage and provide written notices in the
non-English language upon request.

In response to the culturally and lin-
guistically appropriate standards (CLAS)
set forth in the amendments to the interim
final regulations described in the prior
paragraph, the Departments received
many comments from various stakehold-
ers. Some commenters requested that the
Departments incorporate the prior pro-
posed CLAS (rather than the amended
CLAS) into these final regulations, citing
that the prior standard was less costly for
plans and issuers than was stated in the
proposed regulations. Other commenters
requested that the threshold percentage
that triggers the CLAS requirements be
reduced to a lower percentage to capture a
greater number of counties. Other stake-
holders supported the CLAS requirements
as set forth in the amendments to the
interim final regulations. Stakeholders
that support the amended CLAS reiterated
prior comments that the Departments re-
ceived that opposed the "tagging and
tracking" requirement.75

In light of all the comments received,
these final regulations retain the CLAS
requirements as set forth in the amend-
ment to the interim final regulations. The
Departments believe that the CLAS re-
quirements appropriately balance the ob-
jective of protecting consumers by provid-
ing understandable notices to individuals
who speak primary languages other than
English with the goal of imposing reason-
able language access requirements on
plans and issuers. Furthermore, the De-
partments note that nothing in these reg-
ulations should be construed as limiting
an individual's rights under Federal or
State civil rights statutes, such as section
1557 of the Affordable Care Act and Title
VI of the Civil Rights Act of 1964 (Title
VI) which prohibits covered entities, in-
cluding issuers participating in Medicare
Advantage, from discriminating on the ba-
sis of race, color, or national origin. To
ensure non-discrimination on the basis of
national origin under Title VI, recipients
are required to take reasonable steps to
ensure meaningful access to their pro-
grams and activities by limited English
proficient persons. (For more information,
see, "Guidance to Federal Financial As-
sistance Recipients Regarding Title VI

Prohibition Against National Origin Dis-
crimination Affecting Limited English
Proficient Persons," available at http://
www.hhs.gov/ocr/civilrights/resources/
laws/revisedlep.html.)

3\. Extension of the Transition Period for
State External Review Processes

PHS Act section 2719(b) requires that
a non-grandfathered group health plan
that is not a self-insured plan that is not
subject to State insurance regulations and
a health insurance issuer offering non-
grandfathered group or individual health
insurance coverage comply with an appli-
cable State external review process if that
process includes, at a minimum, the con-
sumer protections set forth in the Uniform
Health Carrier External Review Model
Act issued by the National Association of
Insurance Commissioners (the NAIC Uni-
form Model Act). Paragraph (c)(2) of the
2010 interim final regulations under PHS
Act section 2719, as amended, sets forth
the minimum consumer protection stan-
dards that a State external review process
must include to qualify as an applicable
State external review process under PHS
Act section 2719(b)(1) (NAIC-parallel ex-
ternal review process).

Under PHS Act section 2719(b)(2), if a
State's external review process does not
meet the minimum consumer protection
standards set forth in the NAIC Uniform
Model Act (or if a plan is self-insured and
not subject to State insurance regulation),
group health plans and health insurance
issuers in the group and individual mar-
kets in that State are required to imple-
ment an effective external review process
that meets minimum standards established
by the Secretary of HHS through guid-
ance. These standards must be similar to
the standards established under PHS Act
section 2719(b)(1) and must meet the re-
quirements set forth in paragraph (d) of
the 2010 interim final regulations, as
amended.

In June 2011, the Departments amended
the July 2010 interim final regulations and
announced that plans and issuers could con-
tinue to participate in a State external review
process that met Federal standards that were

75Under the interim final regulations, the CLAS standard included a "tagging and tracking requirement" which required plans and issuers, to the extent individuals request a document in
a non-English language, to "tag" and "track" such request so that any future notices would be provided automatically in the non-English language.

NAIC-similar for a limited time (the NAIC-
similar external review process), in antici-
pation that such an allowance would reduce
market disruption during a transition period.
Contemporaneous with the June 2011
amendment, the Departments issued guid-
ance which, among other things, established
the NAIC-similar external review process.

The Departments recognize that many
States have done considerable work to
bring their external review laws and pro-
cesses into compliance with the NAIC
Uniform Model Act and, because of those
efforts, the Departments have extended
the transition periods to allow States more
time to meet the NAIC-parallel external
review process standards. States continue
to make changes to their laws through
what have often proven to be complex and
time consuming processes, often involv-
ing legislative changes; and it is apparent
that more time is needed for some States
to achieve NAIC-parallel external review
processes. Therefore, the Departments are
extending the NAIC-similar external re-
view process transition period so that the
last day of the transition period is Decem-
ber 31, 2017. Through December 31,
2017, an applicable State external review
process applicable to a health insurance
issuer or group health plan may be con-
sidered to meet the minimum standards of
paragraph (c)(2), if it meets the temporary
standards established by the Secretary in
guidance for a process similar to the
NAIC Uniform Model Act. During this
transition period, the NAIC-similar exter-
nal review process will continue to ap-
ply76 for non-grandfathered group health
plans and issuers of non-grandfathered
group or individual coverage in the
State.77 This modification seeks to mini-
mize cost and confusion for participants
and enrollees, issuers, and plans alike.
Furthermore, the extension will provide
States that are currently in the process of
making changes to external review laws
time to implement NAIC-parallel external
review processes. The Departments will
continue to work with health insurance
issuers, States, and other stakeholders to
assist them in coming into compliance

with the law. Once this transition period
has ended, plans and issuers in a State that
has not implemented the NAIC-parallel
external review process will be required to
comply with a Federal external review
process.

### 4. Federal External Review

PHS Act section 2719(b)(2) provides
that plans and issuers in States without an
external review process that meets the re-
quirements of PHS Act section 2719(b)(1)
or that are self-insured plans not subject to
State insurance regulation shall imple-
ment an effective external review process
that meets minimum standards established
by the Secretary of HHS through guidance
and that is similar to a State external re-
view process described in PHS Act sec-
tion 2719(b)(1). The interim final regula-
tions reiterated this statutory requirement,
and also provided additional standards, in-
cluding that the Federal external review
process, like the State external review pro-
cess, will provide for expedited external
review and additional consumer protec-
tions with respect to external review for
claims involving experimental or investi-
gational treatment. The interim final reg-
ulations also set forth the scope of claims
eligible for review under the Federal ex-
ternal review process. The interim final
regulations also established the procedural
standards that apply to claimants, plans,
and issuers under this Federal external
review process, as well as the substantive
standards under this process. These final
regulations incorporate both the proce-
dural and substantive standards estab-
lished in the interim final regulations and
subsequent subregulatory guidance with-
out substantial change and with minor
clarifications.

### a. Scope of Federal External Review Process

The 2010 interim final regulations set
forth the original scope of claims eligible
for external review under the Federal ex-
ternal review process. Specifically, any

adverse benefit determination (including
final internal adverse benefit determina-
tion) could be reviewed unless it related to
a participant's or beneficiary's failure to
meet the requirements for eligibility under
the terms of a group health plan (for ex-
ample, worker classification and similar
issues were not within the scope of the
Federal external review process). After
considering comments received in re-
sponse to the 2010 interim final regula-
tions, the Departments suspended the
original rule and temporarily narrowed its
scope. The amended scope limited the
Federal external review process to claims
that involve (1) medical judgment (includ-
ing, but not limited to, those based on the
plan's or issuer's requirements for medi-
cal necessity, appropriateness, health care
setting, level of care, or effectiveness of a
covered benefit, or its determination that a
treatment is experimental or investiga-
tional), as determined by the external re-
viewer; and (2) a rescission of coverage
(whether or not the rescission has any
effect on any particular benefit at the
time). The amendments also provided two
examples of claims involving medical
judgment.

The Departments received mixed com-
ments in response to the revised scope of
Federal external review in the 2011
amendment to the July 2010 interim final
regulations. Generally, comments sup-
ported narrowing the scope to decisions
based on medical judgment and suggested
permanently adopting the standards in the
2011 amendment. However, there were
also commenters that objected to limiting
the scope and favored the original scope
as stated in the July 2010 interim final
regulations. Some of these commenters
stated that the description of medical
judgment was ambiguous and that it was
unclear how to determine whether a claim
involved "medical judgment." Other com-
menters disagreed with the description of
medical judgment, finding either the ex-
planation was too vague or that certain
information in the examples did not fall
within what was normally considered
medical judgment.

76If a State enacts an NAIC-parallel law prior to January 1, 2018, coverage subject to that State law will be required to comply with the provisions of that State law, in accordance with
ERISA section 731 and PHS Act section 2719 and 2724.

77 See Technical Release 2011-02, Guidance on External Review for Group Health Plans and Health Insurance Issuers Offering Group and Individual Health Coverage, and Guidance for
States on State External Review Processes, June 22, 2011. The temporary standards were extended in March 15, 2013 in Technical Release 2013-01, Extension of the Transition Period for
the Temporary NAIC-Similar State External Review Process under the Affordable Care Act.

Additionally, the Departments received
comments requesting more clarity around
the treatment of coding issues under the
amended scope of Federal external re-
view. The Departments recognize that
there may be instances when a patient
may have a procedure performed that is
similar to another and a coding issue im-
pacts whether coverage is provided. For
example, a patient may need a stoma re-
vision, and recent significant weight loss
necessitates a procedure to remove the
patient's excess skin and tissue prior to
addressing the stoma. However, the skin
removal procedure may be coded as a
cosmetic surgery, such as an abdomino-
plasty or "tummy tuck", instead of as a
panniculectomy, and is therefore not cov-
ered. In this case both procedures involve
the removal of skin from the abdomen, but
one procedure is an excluded cosmetic
surgery while the other is covered so long
as certain medical criteria are met. This
dispute would likely be resolved via an
internal appeal, but in the event that the
initial decision to deny coverage was af-
firmed on an internal appeal, the claimant
could have the claim reviewed in a Fed-
eral external review process. Medical
judgment is necessary to determine
whether the correct code was used in the
patient's case. To the extent that a coding
error such as this one involves medical
judgment, the claim is within the scope of
Federal external review under the July
2010 interim final regulations, as
amended.

After consideration of comments, these
final regulations make permanent the
scope for Federal external review as set
out in the 2011 amendments to the July
2010 interim final regulations, to include
only an adverse benefit determination that
involves medical judgment as determined
by the external reviewer, or a rescission of
coverage. The interim final regulations in-
cluded a non-exhaustive list of adverse
benefit determinations that involve medi-
cal judgment. The final regulations add
two items to the list of adverse benefit
determinations that involve medical judg-

ment: (1) a plan's or issuer's determina-
tion of whether a participant or benefi-
ciary is entitled to a reasonable alternative
standard for a reward under a wellness
program, and (2) a plan's or issuer's de-
termination of whether a plan is comply-
ing with the nonquantitative treatment
limitation provisions of the Mental Health
Parity and Addiction Equity Act and its
implementing regulations, which gener-
ally require, among other things, parity in
the application of medical management
techniques. Both of these clarifications
were included in preambles to regulations
issued previously by the Departments.78

### b. Federal External Review Process for Self-Insured Group Health Plans

The preamble to the 2010 interim final
regulations stated that the Departments
will address in sub-regulatory guidance
how non-grandfathered self-insured group
health plans may comply with the require-
ments of the new Federal external review
process. The Department of Labor issued
Technical Releases 2010-01 and
2011-02 regarding procedures for Federal
external review.79 The technical releases
set forth these procedures for non-
grandfathered self-insured group health
plans not subject to a State external re-
view process. Technical Release 2011-02
also provided non-grandfathered health
insurance issuers subject to a Federally-
administered external review process80
and all non-grandfathered self-insured,
non-Federal governmental plans with
the option of using the external review
process set out in Technical Release
2010-01.

In general, under these procedures, a
group health plan must first allow a claim-
ant to file a request for Federal external
review with the plan. The group health
plan must then complete a preliminary
review of the request within five business
days following the date of receipt of the
external review request. Within one busi-
ness day after completion of the prelimi-
nary review, the plan must issue a notifi-

cation in writing to the claimant. If the
request is complete but not eligible for
external review, such notification must in-
clude the reasons for its ineligibility and
current contact information, including the
phone number for the Employee Benefits
Security Administration (toll free number
866-444-EBSA (3272)). Upon its deter-
mination that a request is eligible for ex-
ternal review, the group health plan must
then assign an independent review orga-
nization (IRO), accredited by URAC or by
a similar nationally-recognized accredit-
ing organization, to conduct the external
review. The IRO must timely notify the
claimant in writing of the external review
and provide the claimant 10 business days
to submit additional information that the
IRO must consider. The group health plan
must provide the IRO with any documents
and information used in making the orig-
inal determination within five business
days after the date of the assignment and
the IRO must forward any information
submitted by the claimant to the group
health plan within one business day after
receipt of the information. The IRO must
review all information and documents
timely received and must provide written
notice of the final external review decision
to the claimant and the group health plan
within 45 days after the request for the
external review. After the final external
review decision, the IRO must maintain
records of all associated claims and no-
tices for six years. If the IRO has decided
to reverse the original determination, then,
upon receipt of the IRO's notice of this
decision, the group health plan must im-
mediately provide coverage or payment
for the claim.

The technical releases also provided
that a group health plan must allow a
claimant to make a request for expedited
external review for benefit determinations
involving a medical condition for which
the timeframe for completion of an expe-
dited internal appeal or standard external
review under the interim final regulations
would seriously jeopardize the life or
health of the claimant or would jeopardize

78 See 78 FR 33158, 33164 (June 3, 2013); see also 78 FR 68240, 68247-8 (November 13, 2013).

79 See Technical Release 2010-01, available at: http://www.dol.gov/ebsa/pdf/ACATechnicalRelease2010-01.pdf and Technical Release 2011-02, available at: http://www.dol.gov/ebsa/
pdf/tr11-02.pdf.

80Where a State's external review process does not meet the Federal consumer protection standards, issuers and self-insured non-Federal governmental plans may choose to utilize either
the Federal IRO external review process or an HHS -administered Federal external review process in which a designated Federal contractor will perform all functions of the external review.

the claimant's ability to regain maximum
function. The IRO must provide a notice
of the final external review decision as
expeditiously as the claimant's medical
condition or circumstances require, but in
no event more than 72 hours after the IRO
receives the request for expedited review.
If the notice is not in writing, within 48
hours after the date of providing that no-
tice, the assigned IRO must provide writ-
ten confirmation of the decision to the
claimant and the plan.

These final regulations incorporate the
guidance in Technical Releases 2010-01
and 2011-02 without substantial change.
These final regulations also continue to
permit non-grandfathered self-insured
plans to comply with the external review
process outlined in these final regulations
or a State external review process if the
State chooses to expand access to their
State external review process to plans that
are not subject to the applicable State
laws.

Furthermore, these final regulations
continue to provide issuers subject to a
Federally-administered external review
process and all self-insured, non-Federal
governmental plans with the option of
electing the private accredited IRO pro-
cess for external review described in these
final regulations or the Federally-
administered external review process,
which is administered by HHS (also re-
ferred to as the HHS-administered exter-
nal review process).

Similar to the technical releases, these
final regulations continue to provide that
group health plans must assign an IRO
that is accredited by URAC or by similar
nationally-recognized accrediting organi-
zation to conduct the external review.
Moreover, the plan must take action to
protect against bias and to ensure indepen-
dence. Accordingly, plans must contract
with at least three IROs for assignments
under the plan and rotate claims assign-
ments among them (or incorporate other
independent, unbiased methods for selec-
tion of IROs, such as random selection).
In addition, the IRO may not be eligible
for any financial incentives based on the
likelihood that the IRO will support the
denial of benefits. (Of course, plans also

may not terminate an IRO's contract in
retaliation for granting claims.) For issu-
ers and all self-insured, non-Federal gov-
ernmental plans participating in the HHS-
administered external review process, the
requirement to take action to protect
against bias and to ensure independence is
satisfied without contracting with three
IROs for assignment and rotating the
claims assignments among them. Under
the HHS-administered external review
process, there are other unique factors that
ensure independence and the absence of
bias such as HHS oversight and lack of
privity of contract between the issuer or
self-insured non-Federal governmental
plan and the IRO.

After issuance of the interim final reg-
ulations and technical releases, the De-
partments received questions relating to
self-insured group health plans contract-
ing directly with IROs. While such a
group health plan must designate an IRO
to conduct any external review, neither the
interim final regulations nor the technical
releases require a plan to contract directly
with any IRO. As clarified in the FAQs
about the Affordable Care Act implemen-
tation, issued on September 20, 2010,
where a self-insured plan contracts with a
third party administrator that, in turn, con-
tracts with an IRO, the standards of the
technical release can be satisfied in the
same manner as if the plan had contracted
directly. Such a contract does not auto-
matically relieve the plan from responsi-
bility if there is a failure to provide an
individual with external review and fidu-
ciaries of plans that are subject to ERISA
have a duty to monitor the service provid-
ers to the plan. Furthermore, plans may
contract with an IRO in another State, as
these final regulations do not require the
plan to be located in the same State as the
IRO. If additional questions arise regard-
ing the IRO external review process, the
Departments may issue additional sub-
regulatory guidance.

### c. Filing Fees for External Review

The Departments also received com-
ments related to the standard allowing
consumers to be charged a filing fee when

requesting external review. While the
original 2004 NAIC model upon which
the 2010 interim final regulations was
based expressly permitted imposition of a
nominal filing fee for a claimant request-
ing an external review, and a small num-
ber of States have adopted this approach,
the 2010 NAIC model did not address this
topic. Commenters on the 2010 interim
final regulations indicated that the ability
to charge a filing fee should be prohibited
because such fees may dissuade consum-
ers from filing an appeal, even in cases
where the fee is not a financial hardship
for the consumer.

The Departments find the change in the
NAIC model to be important and are con-
cerned that any fee may impose a financial
hardship on some claimants or discourage
them from seeking external review.
Therefore, these final regulations gener-
ally prohibit the imposition of filing fees
for external review on claimants. How-
ever, the Departments recognize that sev-
eral States' external review processes cur-
rently applicable to group and individual
coverage permit nominal filing fees.
Therefore, in determining whether a State
external review process provides the
claimants with minimum consumer pro-
tections, these final regulations do not in-
validate existing State external review
processes because they permit a nominal
filing fee, consistent with the 2004 NAIC
model.81 Therefore, plans and coverage
subject to such laws may continue to im-
pose nominal fees for as long as such laws
continue to apply. For this purpose, con-
sistent with the interim final regulations,
to be considered nominal, the filing fee
must not exceed $25, must be refunded to
the claimant if the adverse benefit deter-
mination (or final internal adverse benefit
determination) is reversed through exter-
nal review, must be waived if payment of
the fee would impose an undue financial
hardship, and the annual limit on filing
fees for any claimant within a single plan
year must not exceed $75. All other plans
and coverage must pay the full cost of the
IRO for conducting the external review,
without imposing any nominal filing fee.

81Twelve States expressly authorize nominal fees: Connecticut, Hawaii, Kentucky, Massachusetts, Minnesota, New Jersey, New York, North Dakota, Rhode Island, South Dakota, Vermont,
and Wyoming.

G. PHS Act Section 2719A, Patient
Protections (26 CFR 54.9815-2719A, 29
CFR 2590.715-2719A, 45 CFR 147.138)

PHS Act section 2719A, as added by
the Affordable Care Act provides, with
respect to a non-grandfathered group
health plan or health insurance issuer of-
fering non-grandfathered group or indi-
vidual health insurance coverage, rules re-
garding the designation of primary care
providers, if a plan or issuer requires or
provides for designation by a participant,
beneficiary, or enrollee of a participating
primary care provider. In addition, the
statute provides requirements relating to
benefits for emergency services. On June
28, 2010, the Departments issued interim
final regulations implementing PHS Act
section 2719A.82 The Departments also
released Affordable Care Act Implemen-
tation FAQs Part I Q15 to address an issue
with respect to emergency services.83
These regulations adopt the 2010 interim
final regulations without substantial
change and incorporate the clarification
issued in subregulatory guidance.

### 1. Choice of Healthcare Professional

The interim final regulations and these
final regulations state that if a plan or
issuer requires or provides for designation
by a participant, beneficiary, or enrollee of
a participating primary care provider, then
the plan or issuer must permit each par-
ticipant, beneficiary, and enrollee to des-
ignate any primary care provider who is
available to accept the participant, benefi-
ciary, or enrollee and who participates in
the network of the plan or issuer.

Commenters recommended clarifying
that in instances where a participant, ben-
eficiary, or enrollee is incapacitated, a
family member may select the primary
care provider on their behalf. Under exist-
ing State and Federal law, including
ERISA, a duly authorized representative
is permitted to act on behalf of a partici-
pant or beneficiary for all purposes, in-
cluding the designation of a primary care
provider as provided under these final reg-
ulations. The final regulations regarding

the designation of a primary care provider
do not include any new text to address
cases of incapacity. However, as with all
of the market reform provisions, a duly
authorized representative may act on be-
half of a participant or beneficiary to the
extent permitted under other applicable
Federal and State law.

Commenters recommended that partic-
ipants, beneficiaries, and enrollees be al-
lowed to designate a provider of any spe-
cialty or licensure as their primary care
provider to improve access to care. For
example, commenters recommended that
enrollees have the option of designating a
nurse practitioner as their primary care
provider. The Departments do not define
primary care provider for purposes of
these final regulations. The classification
of who is considered a primary care pro-
vider is determined under the terms of the
plan or coverage and in accordance with
applicable State law.

If a plan or issuer requires or provides
for the designation of a participating pri-
mary care provider for a child by a par-
ticipant, beneficiary, or enrollee, the plan
or issuer must permit the designation of a
physician (allopathic or osteopathic) who
specializes in pediatrics as the child's pri-
mary care provider if the provider partic-
ipates in the network of the plan or issuer
and is available to accept the child. The
general terms of the plan or health insur-
ance coverage regarding pediatric care
otherwise are unaffected, including any
exclusion with respect to coverage of pe-
diatric care.

Some commenters recommended that
participants, beneficiaries, or enrollees
have the option to designate physicians of
various pediatric sub-specialties as the
child's primary care provider to improve
access to specialty care without prior au-
thorization from a primary care coordina-
tor. For example, commenters suggested
that a pediatric cancer patient with a seri-
ous chronic condition should have the op-
tion of designating a pediatric oncologist
that can provide cancer treatment as well
as other routine treatment as the child's
primary care provider. The Departments
interpret this provision to mean that if a

plan or issuer requires or provides for the
designation of a participating primary care
provider for a child by a participant, ben-
eficiary, or enrollee, the plan or issuer
must permit the designation of any physi-
cian (allopathic or osteopathic) who spe-
cializes in pediatrics, including pediatric
subspecialties, based on the scope of that
provider's license under applicable State
law. The designated provider must also
participate in the plan network and be
available to accept the child. These final
regulations incorporate this clarification.

The interim final regulations also es-
tablished requirements for a plan or issuer
that provides coverage for obstetrical or
gynecological care and requires the desig-
nation of an in-network primary care pro-
vider. Specifically, the plan or issuer may
not require authorization or referral by the
plan, issuer, or any person (including a
primary care provider) for a female par-
ticipant, beneficiary, or enrollee who
seeks obstetrical or gynecological care
provided by an in-network health care
professional who specializes in obstetrics
or gynecology. Plans and issuers must
also treat the provision of obstetrical and
gynecological care, and the ordering of
related obstetrical and gynecological
items and services, by the professional
who specializes in obstetrics or gynecol-
ogy as the authorization of the primary
care provider. For this purpose, a health
care professional specializing in obstetrics
or gynecology is any individual who is
authorized under applicable State law to
provide obstetrical or gynecological care,
and is not limited to a physician.

Commenters sought clarification that
women of all ages may receive obstetrical
and gynecological care without prior au-
thorization or referral by the plan, issuer,
or any person (including a primary care
provider), noting that the statutory provi-
sion contains no restrictions based on the
age of a participant, beneficiary or en-
rollee. The Departments agree that all
women regardless of age are ensured di-
rect access to obstetrical and gynecologi-
cal care under this provision.

Since the promulgation of the interim
final regulations, it has come to the De-

8275 FR 37188 (June 28, 2010).

83 Affordable Care Act Implementation FAQs Part I, Q&A-15, available at http://www.dol.gov/ebsa/faqs/faq-aca.html and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs.html.

partments' attention that some plans and
issuers utilize plan designs where the de-
livery of care is coordinated through med-
ical groups within the network based on
the geographic location of the participant
and the provider. Specifically, the Depart-
ments have encountered plan provisions
in insured group health plan coverage that
require participants to designate a primary
care provider but restrict a participant's
choice of provider based on the distance
that the participant lives or works from the
provider. Stakeholders requested that the
Departments clarify in the final regula-
tions that the choice of healthcare profes-
sional provision does not prohibit the ap-
plication of such geographical limitations
with respect to the selection of primary
care providers. Stakeholders highlighted
that prohibiting such geographical limita-
tions would fundamentally disrupt these
plan designs, as well as the underlying ne-
gotiated capitation arrangements (where
payment is rendered on a per person rather
than per service basis). Stakeholders also
noted that the underlying provider contracts
do not permit providers to accept partici-
pants that are not within the specified geo-
graphic limit, and, accordingly, such limita-
tions should not violate these provisions of
the regulations, as the providers are not
available to accept such participants, based
on the terms of the plan, and as required by
the regulations.

The Departments recognize the impor-
tance of allowing plans and issuers the
flexibility to deliver care in a cost-
effective and efficient manner. Accord-
ingly, these final regulations include a
codification of the Departments' interpre-
tation that plans and issuers are not pro-
hibited under PHS Act section 2719A
from applying reasonable and appropriate
geographic limitations with respect to
which participating primary care provid-
ers are considered available for purposes
of selection as primary care providers, in
accordance with the terms of the plan, the
underlying provider contracts, and appli-
cable State law. The Departments may
provide additional guidance if questions
persist or if the Departments become
aware of geographic limitations that un-

duly restrict a participant's choice of pro-
vider.

### 2. Emergency Services

#### a. Additional administrative requirements

Under the interim final regulations and
these final regulations, if a group health
plan or issuer provides any benefits with
respect to services in the emergency de-
partment of a hospital, then the plan or
issuer must provide coverage for emer-
gency services without the individual or
the health care provider having to obtain
prior authorization (even if the emergency
services are provided out of network). For
a plan or health insurance coverage with a
network of providers that provide benefits
for emergency services, the plan or issuer
may not impose any administrative re-
quirement or limitation on benefits for
out-of-network emergency services that is
more restrictive than the requirements or
limitations that apply to in-network emer-
gency services.

#### b. Out-of-network cost-sharing requirements

Cost-sharing requirements expressed
as a copayment amount or coinsurance
rate imposed for out-of-network emer-
gency services cannot exceed the cost-
sharing requirements that would be im-
posed if the services were provided in-
network. The preamble to the interim final
regulations explained that out-of-network
providers may bill patients for the differ-
ence between the providers' billed
charges and the amount collected from the
plan or issuer and the amount collected
from the patient in the form of a copayment
or coinsurance amount (referred to as bal-
ance billing84). Section 1302(c)(3)(B) of the
Affordable Care Act excludes such balance
billing amounts from the definition of cost
sharing, and the requirement in section
2719A(b)(1)(C)(ii)(II) that cost sharing for
out-of-network services be limited to that
imposed in network only applies to cost
sharing expressed as a copayment amount
or coinsurance rate. Because the statute nei-

ther requires plans or issuers to cover bal-
ance billing amounts, nor prohibits balance
billing, even where the protections in the
statute apply, patients may still be subject to
balance billing. In the preamble to the in-
terim final regulations under PHS Act sec-
tion 2719A, the Departments explained that
it would defeat the purpose of the protec-
tions in the statute if a plan or issuer paid an
unreasonably low amount to a provider,
even while limiting the coinsurance or co-
payment associated with that amount to in-
network amounts.85

To avoid the circumvention of the pro-
tections of PHS Act section 2719A, the
Departments determined it necessary that
a reasonable amount be paid before a pa-
tient becomes responsible for a balance
billing amount. Therefore, as provided in
the interim final regulations and these fi-
nal regulations, a plan or issuer must pay
a reasonable amount for emergency ser-
vices by some objective standard. Specif-
ically, a plan or issuer satisfies the copay-
ment or coinsurance limitations in the
statute if it provides benefits for out-of-
network emergency services (prior to im-
posing in-network cost sharing) in an
amount at least equal the greatest of: (1)
the median amount negotiated with in-
network providers for the emergency ser-
vice; (2) the amount for the emergency
service calculated using the same method
the plan generally uses to determine pay-
ments for out-of-network services (such
as the usual, customary, and reasonable
amount); or (3) the amount that would be
paid under Medicare for the emergency
service (minimum payment standards).
The interim final regulations under PHS
Act section 2719 clarified that the cost-
sharing requirements create a minimum
payment requirement. The cost-sharing
requirements do not prohibit a group
health plan or health insurance from pro-
viding benefits with respect to an emer-
gency service that are greater than the
amounts specified in the regulations.

Some commenters expressed concern
about the level of payment for out-of-
network emergency services and urged
the Departments to require plans and is-
suers to use a transparent database to de-
termine out-of-network amounts. The De-

84See Uniform Glossary of Health Coverage and Medical Terms at http://www.dol.gov/ebsa/pdf/sbcuniformglossaryproposed.pdf and https://www.cms.gov/apps/glossary.

8575 FR 37188, 37194 (June 28, 2010).

partments believe that this concern is
addressed by our requirement that the
amount be the greatest of the three amounts
specified in paragraphs (b)(3)(i)(A),
(b)(3)(i)(B), and (b)(3)(i)(C) of this section
(which are adjusted for in-network cost-
sharing requirements).

#### c. Clarifications regarding balance billing

Some commenters sought clarification
about the interaction of the minimum
payment standards under the interim fi-
nal regulations and State laws that pro-
hibit balance billing for emergency ser-
vices. Balance billing generally is the
practice of billing by a provider that is
not a preferred provider for the differ-
ence between the charge of a provider
that is not a preferred provider and the
allowed amount under the plan or cov-
erage. Some stakeholders expressed
their opposition to the use of balance
billing because it creates a substantial
financial burden and may discourage a
participant, beneficiary, or enrollee from
obtaining the care needed in an emer-
gency situation. Other stakeholders sug-
gested that plans and issuers should be
required to negotiate contracts with hos-
pitals and facility-based providers that
avoid balance billing. However, the stat-
ute does not require plans or issuers to
cover balance billed amounts, nor does
it prohibit balance billing. Even where
the protections in the statute apply, a
participant, beneficiary, or enrollee may
be subject to balance billing. In the fu-
ture, the Departments will consider
ways to prevent providers from billing a
participant, beneficiary, or enrollee for
emergency services from out-of-
network providers at in-network hospi-
tals and facilities. States may also con-
sider ways to prevent balance billing in
these circumstances.

The minimum payment standards are
designed to reduce potential amounts of
balance billing to patients. Stakeholders
commented that in circumstances where
patients will not be balance billed (be-
cause balance billing is prohibited or be-

cause the issuer, rather than the patient, is
required to cover the balance bill), the
minimum payment standards are not nec-
essary. In response to these comments, the
Departments issued an FAQ86 stating that
the minimum payment standards set forth
in the interim final regulations were de-
veloped to protect patients from being fi-
nancially penalized for obtaining emer-
gency services on an out-of-network
basis. If State law prohibits balance bill-
ing, plans and issuers are not required to
satisfy the payment minimum set forth in
the regulations. Similarly, if a plan or is-
suer is contractually responsible for any
amounts balanced billed by an out-of-
network emergency services provider, the
plan or issuer is not required to satisfy the
payment minimum. In both situations,
however, a plan or issuer may not impose
any copayment or coinsurance require-
ment for out-of-network emergency ser-
vices that is higher than the copayment or
coinsurance requirement that would apply
if the services were provided in-network.
In addition, a plan or issuer must provide
an enrollee or beneficiary adequate and
prominent notice of their lack of financial
responsibility with respect to amounts bal-
ance billed in order to prevent inadvertent
payment by an enrollee or beneficiary.
These final regulations incorporate this
clarification. The regulations do not pre-
empt existing State consumer protection
laws and do not prohibit States from en-
acting new laws with respect to balance
billing that would provide consumer pro-
tections at least as strong as the Federal
statute.

In response to the interim final regula-
tions, commenters also requested that the
Departments require plans and issuers to
inform a participant, beneficiary, or en-
rollee using clear and understandable lan-
guage of the consequences of using out-
of-network emergency services, including
the possibility of balance billing. Another
commenter stated that the summary plan
description (SPD) provides sufficient in-
formation to meet the notice requirements.
The Departments agree that plans and is-
suers must disclose the terms of the cov-
erage as part of plan documents and are

not adding a new notice requirement at
this time.

### d. Definition of emergency services

In applying the rules relating to emer-
gency services, the terms emergency med-
ical condition, emergency services, and
stabilize have the meaning given to those
terms under the Emergency Medical
Treatment and Labor Act (EMTALA),
section 1867 of the Social Security Act.
Under EMTALA, the term emergency
services includes (1) "an appropriate med-
ical screening examination that is within
the capability of the emergency depart-
ment of a hospital, including ancillary ser-
vices routinely available to the emergency
department, to determine whether an
emergency medical condition exists"; and
(2) "such further medical examination and
such treatment as may be required to sta-
bilize the medical condition."87

Some commenters recommended that
the Departments define "emergency ser-
vices" such that an enrollee or beneficiary
may only receive emergency benefits if an
enrollee or beneficiary seeks treatment
within 24 hours of the onset of an emer-
gency. These final regulations decline to
adopt this comment. The term "emer-
gency services" as defined by the interim
final regulations and these final regula-
tions is based on the statutory definition,
which does not specify parameters with
respect to time. Accordingly, a plan or
issuer cannot set a time limit within which
to seek emergency services and must pro-
vide coverage for any emergency services
that meet the definition of emergency ser-
vices under EMTALA.

Some commenters requested clarifica-
tion as to whether air ambulance transport
and other emergency transportation is
within the scope of the term "emergency
services." The Departments decline to
provide a rule addressing this issue. These
final regulations continue to provide that
the terms emergency medical condition,
emergency services, and stabilize have the
meaning given to those terms under

86See Affordable Care Act Implementation FAQ Part I Q15 at http://www.dol.gov/ebsa/faqs/faq-aca.html and.https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_imple-
mentation_faqs.html.

8742 U.S.C. 1395dd(a)-(b).

EMTALA, section 1867 of the Social Se-
curity Act.88

#### H. Provisions No Longer Applicable

1\. Special Rule Relating to Dependent
Coverage of Children to Age 26 for
Grandfathered Group Health Plans

The dependent coverage provision of
PHS Act section 2714 applies to all group
health plans and health insurance issuers
offering group or individual health insur-
ance coverage for plan years (in the indi-
vidual market, policy years) beginning on
or after September 23, 2010, whether or
not the plan or health insurance coverage
qualifies as a grandfathered health plan.
However, consistent with section 2714 of
the PHS Act, for plan years beginning
before January 1, 2014, the 2010 interim
final regulations provided that a grandfa-
thered health plan that is a group health
plan that makes available dependent cov-
erage of children may exclude from cov-
erage an adult child who has not attained
age 26 if the child is eligible to enroll in
an employer-sponsored health plan (as de-
fined in section 5000A(f)(2) of the Code)
other than a group health plan of a parent.
Because this special rule for grandfa-
thered group health plans no longer ap-
plies, it is not incorporated into these final
regulations.

2\. Transitional Rules for Individuals
Whose Coverage Ended by Reason of
Reaching a Dependent Eligibility
Threshold

The 2010 interim final regulations im-
plementing PHS Act section 2714 pro-
vided transitional relief for a child whose
coverage ended, or who was denied cov-
erage (or was not eligible for coverage)
under a group health plan or health insur-
ance coverage because, under the terms of
the plan or coverage, the availability of
dependent coverage of children ended be-
fore the attainment of age 26. The 2010
interim final regulations also required a
plan or issuer to give such a child a special
enrollment opportunity, which was re-
quired to be provided (including written

notice) not later than the first day of the
first plan year (in the individual market,
policy year) beginning on or after Septem-
ber 23, 2010. Because the transitional rule
no longer applies, it is not incorporated
into these final regulations.

#### 3. Restricted Annual Limits and Transitional Rules for Individuals Whose Coverage or Benefits Ended by Reason of Reaching a Lifetime Dollar Limit

PHS Act section 2711 and its imple-
menting interim final regulations gener-
ally prohibited lifetime or annual limits on
the dollar value of EHBs (as defined in
section 1302(b) of the Affordable Care
Act). With respect to annual dollar limits,
the statute and the interim final regula-
tions allowed the imposition of "restricted
annual limits" with respect to EHBs for
plan years (in the individual market, pol-
icy years) beginning before January 1,
2014. The interim final regulations ad-
opted a three-year phased approach to re-
stricted annual limits. As set forth in the
interim final regulations, the restricted an-
nual limits on the dollar value of EHBs
could not be lower than:

· For plan or policy years beginning on
or after September 23, 2010 but before
September 23, 2011, $750,000;

· For plan or policy years beginning on
or after September 23, 2011 but before
September 23, 2012, $1.25 million;
and

· For plan or policy years beginning on
or after September 23, 2012 but before
January 1, 2014, $2 million.

With respect to plan or policy years
beginning on or after January 1, 2014,
no annual dollar limits are permitted on
essential health benefits except in the
case of grandfathered individual market
coverage.

The interim final regulations also pro-
vided transitional rules for individuals
who reached a lifetime dollar limit under a
group health plan or health insurance cov-
erage prior to the applicability date of the
interim final regulations. The regulations
required a plan or issuer to provide an
individual whose coverage ended due to

reaching a lifetime dollar limit with an
enrollment opportunity (including written
notice) that continues for at least 30 days.
The notice and enrollment opportunity
was required to be provided not later than
the first day of the first plan year (in the
individual market, policy year) beginning
on or after September 23, 2010. Because
the provisions regarding restricted annual
dollar limits and the transitional rules re-
garding lifetime dollar limits no longer
apply, they are not incorporated into these
final regulations.

### I. Applicability

### 1. General applicability

These final regulations apply to group
health plans and health insurance issuers
beginning on the first day of the first plan
year (or, in the individual market, the first
day of the first policy year) beginning on
or after January 1, 2017. Until these final
regulations become applicable, plans and
issuers are required to continue to comply
with the corresponding interim final reg-
ulations at 29 CFR part 2590, contained in
the 29 CFR, parts 1927 to end, edition
revised as of July 1, 2015, and 45 CFR
parts 144, 146, and 147, contained in the
45 CFR, parts 1 to 199, edition revised as
of October 1, 2015. In accordance with
section 7805(e)(2) of the Code, the corre-
sponding temporary regulations promul-
gated by the Department of the Treasury
are inapplicable. Under section 104 of the
Health Insurance Portability and Account-
ability Act (HIPAA), enacted on August
21, 1996, and subsequent amendments,
the Departments must coordinate policies
with respect to parallel provisions of
ERISA, the PHS Act, and the Code
(shared provisions). The Departments op-
erate under a Memorandum of Under-
standing89 implementing HIPAA section
104 which provides that the shared provi-
sions must be administered so as to have
the same effect at all times and the De-
partments must coordinate policies relat-
ing to enforcing the shared provisions in
order to avoid duplication of enforcement
efforts and to assign priorities in enforce-

88For a more detailed discussion of definitions and requirements under EMTALA, see CMS State Operations Manual, Appendix V, pg. 33-41, available at https://www.cms.gov/Regulations-
and-Guidance/Guidance/Manuals/downloads/som107ap_v_emerg.pdf .

89See 64 FR 70164 (December 15, 1999).

ment. Therefore, until these final regula-
tions promulgated by the Department of
the Treasury become applicable, compli-
ance with corresponding interim final reg-
ulations at 29 CFR part 2590, contained in
the 29 CFR, parts 1927 to end, edition
revised as of July 1, 2015 shall satisfy
corresponding requirements of the Code.

Section 1251 of the Affordable Care
Act provides that grandfathered health
plans are subject to only certain provi-
sions of the Affordable Care Act. The
final regulations under PHS Act section
2719, Internal Claims and Appeals and
External Review (26 CFR 54.9815-2719,
29 CFR 2590.715-2719, 45 CFR
147.136) and PHS Act Section 2719A,
Patient Protections (26 CFR 54.9815-
2719A, 29 CFR 2590.715-2719A, 45
CFR 147.138) do not apply to grandfa-
thered health plans. Final regulations un-
der PHS Act section 2704, Prohibition of
Preexisting Condition Exclusions (26
CFR 54.9815-2704, 29 CFR 2590.715-
2704, 45 CFR 147.108); PHS Act section
2711, Prohibition on Lifetime and Annual
Limits (26 CFR 54.9815-2711, 29 CFR
2590.715-2711, 45 CFR 147.126); PHS
Act section 2712, Prohibition on Rescis-
sions (26 CFR 54.9815-2712, 29 CFR
2590.715-2712, 45 CFR 147.128); and
PHS Act section 2714, Coverage of De-
pendents to Age 26 (26 CFR 54.9815-
2714, 29 CFR 2590.715-2714, 45 CFR
147.120) apply to grandfathered health
plans, except the prohibition of preexist-
ing condition exclusions and prohibition
on annual dollar limits do not apply to
grandfathered health plans that are indi-
vidual health insurance coverage. For a
list of the market reform provisions un-
der title XXVII of the PHS Act, as
added or amended by the Affordable
Care Act and incorporated into ERISA
and the Code, applicable to grandfathered
health plans, visit http://www.dol.gov/
ebsa/pdf/grandfatherregtable.pdf.

### 2. Expatriate plans

On December 16, 2014, Congress en-
acted the Expatriate Health Coverage
Clarification Act of 2014 (EHCCA) as
part of the Consolidated and Further Con-

tinuing Appropriations Act, 2015, Divi-
sion M, Public Law 113-235. The EH-
CCA provides that the market reform
requirements of the Affordable Care Act
generally do not apply to expatriate health
plans, expatriate health insurance issuers
with respect to expatriate health plans, and
employers in their capacity as plan spon-
sors of expatriate health plans. However,
the plans, coverage, sponsors and issuers
must still satisfy provisions of the PHS
Act, ERISA and the Code that would oth-
erwise apply if not for the enactment of
the Affordable Care Act. The EHCCA
exception from the market reform require-
ments applies to expatriate health plans
that are issued or renewed on or after July
1, 2015.

Treasury and IRS issued Notice 2015-
43, 2015-29 I.R.B. 73, to provide interim
guidance on the EHCCA. The notice pro-
vides that until the issuance of further
guidance and except as otherwise pro-
vided in the notice, issuers, employers,
and plan sponsors generally may apply the
requirements of EHCCA using a reason-
able good faith interpretation of the stat-
ute. The notice also provides that until
further guidance is issued, using the defi-
nition of expatriate health plan provided
in Affordable Care Act Implementation
FAQs90 is treated as a reasonable good
faith interpretation of the statute. As ex-
plained in the notice, the Departments in-
tend to publish proposed regulations im-
plementing and providing guidance on the
EHCAA. Consequently, these final regu-
lations do not address the application to
expatriate health plans of the Affordable
Care Act provisions under which these
final regulations are promulgated.

III. Economic Impact Analysis
-Departments of Labor and Health
and Human Services

Executive Orders 12866 and 13563

Executive Orders 12866 and 13563 di-
rect agencies to assess all costs and ben-
efits of available regulatory alternatives
and, if regulation is necessary, to select
regulatory approaches that maximize net
benefits (including potential economic,

environmental, public health and safety
effects; distributive impacts; and equity).
Executive Order 13563 emphasizes the
importance of quantifying both costs and
benefits, of reducing costs, of harmoniz-
ing rules, and of promoting flexibility.

Under Executive Order 12866 (58 FR
51735), "significant" regulatory actions
are subject to review by the Office of
Management and Budget (OMB). Section
3(f) of the Executive Order defines a "sig-
nificant regulatory action" as an action
that is likely to result in a rule (1) having
an annual effect on the economy of $100
million or more in any one year, or ad-
versely and materially affecting a sector
of the economy, productivity, competi-
tion, jobs, the environment, public health
or safety, or State, local or tribal govern-
ments or communities (also referred to as
"economically significant"); (2) creating a
serious inconsistency or otherwise inter-
fering with an action taken or planned by
another agency; (3) materially altering the
budgetary impacts of entitlement grants,
user fees, or loan programs or the rights
and obligations of recipients thereof; or
(4) raising novel legal or policy issues
arising out of legal mandates, the Presi-
dent's priorities, or the principles set forth
in the Executive Order. These final regu-
lations have been designated "significant
regulatory actions" under section 3(f) of
Executive Order 12866. Accordingly, the
regulations have been reviewed by the
Office of Management and Budget.

A regulatory impact analysis must be
prepared for major rules with economi-
cally significant effects ($100 million or
more in any one year). The Departments
have concluded that these final regulations
would have economic impacts of $100
million or more in at least one year, thus
meeting the definition of an "economi-
cally significant rule" under Executive Or-
der 12866. Therefore, consistent with Ex-
ecutive Orders 12866 and 13563, the
Departments have provided an assessment
of the potential benefits and the costs as-
sociated with these final regulations.

The Departments expect these final
regulations, when compared with the in-
terim final regulations, to have marginal

90See FAQs about Affordable Care Act Implementation (Part XIII), Q&A-1, available at http://www.dol.gov/ebsa/pdf/faq-aca13.pdf and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-
and-FAQs/ACA_implementation_faqs13.html. See also FAQs about Affordable Care Act Implementation (Part XVIII), Q&A-6 and Q&A-7, available at http://www.dol.gov/ebsa/pdf/faq-
aca18.pdf and https://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/ACA_implementation_faqs18.html.

benefits and costs. This is because they
primarily provide clarifications of the pre-
vious interim final regulations issued in
2010 and 2011 and incorporate subregu-

latory guidance, including frequently
asked questions and safe harbors issued
by the Departments. The Departments do
not have sufficient data to quantify these

costs and benefits, but they are qualita-
tively discussed throughout the remainder
of this section and summarized in the Ac-
counting Table.

Table 1 .- Accounting Table

Category

Estimate

Year Dollar

Discount Rate

Period Covered

Benefits- Qualitative

These final regulations help ensure the protections and benefits intended by Congress. Many of these benefits have a distributional component, and promote equity, in the sense that they will benefit those who are especially vulnerable as a result of health problems and financial status. Other benefits include increased access to care and to information needed to protect consumer's rights. These final regulations also lead to improved health outcomes for patients and increase certainty for issuers, plans and consumers by providing clarifications and guidance.

Costs

Annualized Monetized

$169.9

2015

2016-2025

($millions/year)

$169.9

2015

2016-2025

Qualitative

The Departments have quantified where possible the costs associated with these final regulations.
These costs include burden that will be incurred to prepare and distribute required disclosures
and notices, and to bring plan and issuers' policies and procedures into compliance with the
new requirements.

The Departments have not been able to quantify cost related to increased access to care. To
the extent these patient protections increase access to health care services, increased health
care utilization and costs could result.

Transfers

Annualized Monetized
($millions/year)

$53.5

2015

2016-2025

$53.5

2015

2016-2025

Qualitative

Due to the risk pooling nature of health insurance these patient protections and other requirements
create a transfer from those paying premiums to those individuals and families now obtaining
increased protections, coverage and services.

#### 1. Need for Regulatory Action

## a. Preservation of Right to Maintain Existing Coverage

Section 1251 of the Affordable Care Act
provides that grandfathered health plans are
subject only to certain provisions of the Af-
fordable Care Act. The statute, however, is
silent regarding changes plan sponsors and
issuers can make to plans and health insurance
coverage while retaining grandfather status.

These final regulations are necessary in
order to provide rules that group health
plans and health insurance issuers can use
to determine which changes they can
make to the terms of the plan or health
insurance coverage while retaining their
grandfather status, thus exempting them
from certain provisions of the Affordable
Care Act and fulfilling a goal of the leg-

islation, which is to allow those that like
their coverage to keep it. These final reg-
ulations are designed to allow individuals
to keep the coverage they had on March
23, 2010 (the date of enactment of the
Affordable Care Act) to reduce short term
disruptions in the market, and to ease the
transition required by the market reforms.

In drafting this rule, the Departments at-
tempted to balance a number of competing
interests. For example, the Departments
sought to provide adequate flexibility to
group health plans and issuers to ease tran-
sition and mitigate potential premium in-
creases while avoiding excessive flexibility
that would unduly delay implementation of
critical consumer protections in the Afford-
able Care Act. In addition, the Departments
recognized that many group health plans
and issuers make changes to the terms of
plans or health insurance coverage on an

annual basis: Premiums fluctuate, provider
networks and drug formularies change, em-
ployer and employee contributions and cost-
sharing change, and covered items and ser-
vices may vary. Without some ability to
make some adjustments while retaining
grandfather status, the ability of individuals
to maintain their current coverage would be
frustrated, because most plans or health in-
surance coverage would quickly cease to be
regarded as the same group health plan or
health insurance coverage in existence on
March 23, 2010. At the same time, allowing
unfettered changes while retaining grandfa-
ther status would also be inconsistent with
Congress's intent to provide a transition to
the Affordable Care Act market reforms.

These final regulations regarding grand-
father health plans are designed, among
other things, to take into account reasonable
changes routinely made by plan sponsors or

issuers without the plan or health insurance
coverage relinquishing its grandfather sta-
tus. Thus, for example, these final regula-
tions generally permit plans and issuers to
make voluntary changes to increase bene-
fits, to conform to required legal changes,
and to voluntarily adopt other consumer
protections in the Affordable Care Act with-
out relinquishing grandfather status.

### b. Prohibition of Preexisting Condition Exclusions

Section 2704 of the PHS Act, as added
by the Affordable Care Act, generally pro-
hibits group health plans and health insur-
ance issuers offering group or individual
health insurance coverage from imposing
any preexisting condition exclusion.

Studies estimate that preexisting condi-
tions affect approximately 129 million
Americans91 which includes a broad range
of conditions, from heart disease - affecting
an estimated 85.6 million American adults
(with more than 1 in 3 having one or more
types of cardiovascular disease92) - to cancer
\- which in 2012 affected an estimated 14
million Americans and will affect an estimated
1.7 million additional people in 2015 93 - to
relatively minor conditions like hay fever,
asthma, or previous sports injuries.94 Denials
of benefits or coverage based on a preexisting
condition previously made adequate health in-
surance unavailable to millions of Americans.
Before enactment of the Affordable Care
Act, in 45 States, health insurance issuers in
the individual market could deny coverage,
charge higher premiums, and/or deny bene-
fits for a preexisting condition.95

These regulations finalize interim final
regulations which were necessary to im-
plement this statutory provision which
Congress enacted to help ensure that qual-
ity health coverage is available to more
Americans without the imposition of a
preexisting condition exclusion.

c. Lifetime and Annual Limits

Section 2711 of the PHS Act, as added
to the Affordable Care Act, generally pro-

hibits group health plans and health insur-
ance issuers offering group or individual
health insurance coverage from imposing
annual and lifetime limits on the dollar
value of essential health benefits.

These protections ensure that patients
are not confronted with devastating
healthcare costs because they have ex-
hausted their health coverage when faced
with a serious medical condition.

These regulations finalize interim final
regulations that were necessary to imple-
ment the statutory provisions with respect
to annual and lifetime limits that Congress
enacted to help ensure that more Ameri-
cans with chronic, long-term, and/or ex-
pensive illnesses have access to quality
health coverage.

## d. Prohibition on Rescissions

Section 2712 of the PHS Act, as added
by the Affordable Care Act, prohibits
group health plans and health insurance
issuers offering group or individual health
insurance coverage from rescinding cov-
erage except in the case of fraud or inten-
tional misrepresentation of material fact.

Prior to the Affordable Care Act, thou-
sands of Americans lost health coverage
each year due to rescission. When a cover-
age rescission occurs, an individual's health
coverage is retroactively cancelled, which
means that the insurance company is no
longer responsible for medical care claims
that had previously been accepted and paid.
Rescissions can result in significant finan-
cial hardship for affected individuals, be-
cause, in most cases, the individuals have
accumulated significant medical expenses.

These final regulations implement the
statutory provision enacted by Congress
to protect the most vulnerable Americans,
those that incur substantial medical ex-
penses due to a serious medical condition,
from financial devastation by ensuring
that such individuals do not unjustly lose
health coverage by rescission.

## e. Coverage of Dependents to Age 26

PHS Act section 2714, as added by the
Affordable Care Act, requires group
health plans and health insurance issuers
offering group or individual health insur-
ance coverage that make dependent cov-
erage available for children to continue to
make coverage available to such children
until the attainment of age 26. With re-
spect to a child receiving dependent cov-
erage, coverage does not have to be ex-
tended to a child or children of the child or
a spouse of the child. Furthermore these
final regulations clarify that for an indi-
vidual not described in Code section
152(f)(1), such as a grandchild or niece, a
plan may impose additional conditions on
eligibility for health coverage, such as a
condition that the individual be a depen-
dent for income tax purposes, and the final
regulations also clarify that distinctions
based upon age that apply generally to all
individuals covered under the plan (em-
ployees, spouses, dependent children) are
not prohibited. These regulations finalize
the interim final regulations, which were
necessary to implement the statute.

### f. Internal Claims and Appeals and External Review

Before the enactment of the Affordable
Care Act, health plan sponsors and issuers
were not uniformly required to implement
claims and appeals processes. For exam-
ple, ERISA-covered group health plan
sponsors were required to implement in-
ternal claims and appeal processes that
complied with the DOL claims procedure
regulation,9% while group health plans that
were not covered by ERISA, such as plans
sponsored by State and local governments
were not. Health insurance issuers offer-
ing coverage in the individual insurance
market were required to comply with var-
ious applicable State internal appeals laws
but were not required to comply with the
DOL claims procedure regulation.

91 ASPE. At Risk: Pre-Existing Conditions Could Affect 1 in 2 Americans: 129 Million People Could Be Denied Affordable Coverage Without Health Reform, 2011.

92Mozzafarian, D., et al. Heart Disease and Stroke Statistics - 2015 Update: A Report From the American Heart Association. Circulation. 2015; 131(4):e29-322

93National Cancer Institute: Surveillance, Epidemiology, and End Results Program (SEER) Stat Fact Sheet: All Cancer Types. http://seer.cancer.gov/statfacts/html/all.html.
94Pollitz, K., et al. How Accessible is Individual Health Insurance for Consumers in Less than Perfect Health? Kaiser Family Foundation, June 2001.

95Levitt, L., et al. How Buying Insurance Will Change Under Obamacare. Kaiser Family Foundation, September 2013.
9629 CFR 2560.503-1

With respect to external appeal pro-
cesses, before the enactment of the Af-
fordable Care Act, sponsors of fully in-
sured ERISA-covered group health plans,
fully-insured State and local governmen-
tal plans, and fully-insured church plans
were required to comply with State exter-
nal review laws, while self-insured
ERISA-covered group health plans were
not subject to such laws due to ERISA
preemption. In the individual health insur-
ance market, issuers in States with exter-
nal review laws were required to comply
with such laws. However, uniform exter-
nal review standards did not apply, be-
cause State external review laws vary
from State-to-State. Moreover, at least six
States did not have external review laws
when the Affordable Care Act was en-
acted; therefore, prior to the Affordable
Care Act, issuers in those States were not
required to implement an external review
process.

Under this regulatory system, inconsis-
tent claims and appeals processes applied
to plan sponsors and issuers and a patch-
work of consumer protections were pro-
vided to participants, beneficiaries, and
enrollees. The applicable processes and
protections depended on several factors
including whether (1) plans were subject
to ERISA, (2) benefits were self-funded or
financed by the purchase of an insurance
policy, (3) issuers were subject to State
internal claims and appeals laws, and (4)
issuers were subject to State external re-
view laws, and if so, the scope of such
laws (such as, whether the laws only apply
to one segment of the health insurance
market, e.g., managed care or HMO cov-
erage). These uneven protections created
an appearance of unfairness, increased
cost for issuers and plans operating in
multiple States, and may have led to con-
fusion among consumers about their
rights.

Congress enacted PHS Act section
2719 to ensure that plans and issuers im-
plemented more uniform internal and ex-
ternal claims and appeals processes and to
set a minimum standard of consumer pro-
tections that are available to participants,
beneficiaries, and enrollees. These final
regulations are necessary to provide rules
that plan sponsors and issuers can use to
implement effective internal and external
claims and appeals processes that meet the
requirements of PHS Act section 2719.

These changes do not add any incre-
mental costs to those associated with the
2010 interim final rules, because they sim-
ply incorporate sub-regulatory guidance
that was already issued.

### g. Patient Protections

Section 2719A of the PHS Act, as
added by the Affordable Care Act, re-
quires group health plans and health in-
surance issuers offering group or individ-
ual health insurance coverage to ensure
choice of healthcare professionals (includ-
ing pediatricians, obstetricians, and gyne-
cologists) and greater access to benefits
for emergency services. Provider choice is
a strong predictor of patient trust in a
provider, and patient-provider trust can
increase health promotion and therapeutic
effects.97 Studies have found that patients
tend to experience better quality health-
care if they have long-term relationships
with their healthcare provider.98

The emergency care provisions of PHS
Act section 2719A require (1) non-
grandfathered group health plans and
health insurance issuers that cover emer-
gency services to cover such services
without prior authorization and without
regard to whether the health care provider
furnishing the services is a participating
network provider, and (2) copayments and
coinsurance for out-of-network emer-
gency care do not exceed the cost-sharing

requirements that would have been im-
posed if the services were provided in-
network. These provisions will help to
ensure that patients receive covered emer-
gency care when they need it, especially
in situations where prior authorization
cannot be obtained due to exigent circum-
stances or an in-network provider is not
available to provide the services. They
also will protect patients from the substan-
tial financial burden that can be imposed
when differing copayment or coinsurance
arrangements apply to in-network and
out-of-network emergency care.

These regulations finalize the interim
final regulations that were necessary to
implement the statutory provision enacted
by Congress to provide these essential pa-
tient protections.

A. Section 1251 of the Affordable Care
Act, Preservation of Right to Maintain
Existing Coverage (26 CFR 54.9815-
1251 , 29 CFR 2590.715-1251, 45 CFR
147.140)

### 1. Affected Entities and Individuals

The Departments estimate that there
are 2.3 million ERISA-covered plans with
an estimated 66 million policy holders and
130.2 million participants and beneficia-
ries in those plans.99 Similarly, the De-
partments estimate that there are 128,400
State and local governmental health
plans100 with an estimated 21.1 million
policy holders and 41.1 million partici-
pants and beneficiaries in those plans.101

The 2014 Employer Health Benefits
Survey reports that 37 percent of firms
offer health benefits that have at least one
health plan that is a grandfathered plan,
and 26 percent of employees are enrolled
in grandfathered plans.102 Using the
above estimates, there are 851,000 (2.3
million ERISA-covered plans* 0.37)
ERISA-covered plans with 17.2 million
policy holders (66 million policy holders

97Piette, John, et al., "The Role of Patient-Physician Trust in Moderating Medication Nonadherence Due to Cost Pressures." Archives of Internal Medicine 165, August (2005) and Roberts,
Kathleen J., "Physician-Patient Relationships, Patient Satisfaction, and Antiretroviral Medication Adherence Among HIV-Infected Adults Attending a Public Health Clinic." AIDS Patient
Care and STDs 16.1 (2002).

98Blewett, Lynn, et al., "When a Usual Source of Care and Usual Provider Matter: Adult Prevention and Screening Services." Journal of General Internal Medicine 23.9 (2008).

99EBSA estimates based on the 2014 Medical Expenditure Survey - Insurance Component.

100The estimate of the total number of State and local governmental plans is based on the 2012 Census of Government.

101 Health Insurance Coverage Bulletin: Abstract of Auxiliary Data for the March 2014 Annual Social and Economic Supplement to the Current Population Survey, Table 3C
http://www.dol.gov/ebsa/pdf/coveragebulletin2014.pdf.

102Kaiser Family Foundation, "2014 Employer Health Benefits Survey." http://kff.org/health-costs/report/2014-employer-health-benefits-survey/.

\*0.26) and 33.9 million participants and
beneficiaries (130.2 million participants
and beneficiaries * 0.26). There are ap-
proximately 47,500 grandfathered State
and local governmental health plans
(0.37\*128,400 plans103) with approxi-
mately 5.5 million policyholders (21.1
million policy holders *0.26) and 10.7
million participants and beneficiaries
(41.1 million participants and beneficia-
ries * 0.26).

There were an estimated 1.4 million
policies with grandfathered coverage dur-
ing 2013 with 2.2 million enrollees.104

2\. Discussion of Economic Impacts of
Retaining or Relinquishing Grandfather
Status

The economic effects of these final reg-
ulations will depend on decisions by plan
sponsors and issuers, as well as by those
covered under these plans and health in-
surance coverage.

For a plan sponsor or issuer, the poten-
tial economic impact of the application of
the provisions in the Affordable Care Act
may be one consideration in making its
decisions. To determine the value of re-
taining a health plan's grandfather status,
each plan sponsor or issuer must deter-
mine whether the rules applicable to
grandfathered health plans are more or
less favorable than the rules applicable to
non-grandfathered health plans. This de-
termination will depend on such factors as
the respective prices of grandfathered and
non-grandfathered health plans, as well as
the preferences of grandfathered health
plans' covered populations and their will-
ingness to pay for benefits and patient pro-
tections available under non-grandfathered
health plans. In making its decision whether
to maintain grandfather status, a plan spon-
sor or issuer is also likely to consider the
market segment (because different rules
apply to the large and small group market
segments), and the utilization pattern of its
covered population. Those costs and ben-
efits of the various provisions of the Af-
fordable Care Act and their interaction
with the coverages' grandfathered status

have been discussed in the impact analysis
of those individual requirements and are
not repeated here.

### 3. Impacts on the Individual Market

The market for individual insurance is
significantly different than that for group
coverage. As discussed in previous in-
terim final regulations issued in 2010 and
2011, for many, the market is transitional,
providing a bridge between other types of
coverage. One study found a high percent-
age of individual insurance policies began
and ended with employer-sponsored cov-
erage.105 More importantly, coverage on
particular policies tends to be for short
periods of time. As such, high turnover
rates are likely the chief source of changes
in grandfather status. Reliable data are
scant, so there is no ability to update esti-
mates as to how many people in the indi-
vidual market are in non-grandfathered
plans today.

### 1. Disclosure of Grandfather Status and Document Retention

To maintain grandfathered health plan
status under these final regulations, a plan
or issuer must maintain records that doc-
ument the plan or policy terms in connec-
tion with the coverage in effect on March
23, 2010, and any other documents nec-
essary to verify, explain or clarify its sta-
tus as a grandfathered health plan, dis-
close its status as a grandfathered health
plan, and if switching issuers and intend-
ing to maintain its status as a grandfa-
thered plan, it must provide to the new
health insurance issuer with documenta-
tion of plan terms under the prior health
coverage sufficient for it to determine
whether a change causing a cessation of
grandfathered health plan status has oc-
curred.

The Departments estimate that the total
cost for these requirements will be $1.8
million annually. For a detailed discussion
of the grandfathered health plan document
retention and disclosure requirements, see

the Paperwork Reduction Act section later
in this preamble.

B. PHS Act Section 2704, Prohibition of
Preexisting Condition Exclusions (26
CFR 54.9815-2704, 29 CFR 2590.715-
2704, 45 CFR 147.108)

### 1. Affected Entities and Individuals

In the individual market, those apply-
ing for insurance will no longer face ex-
clusions or denials of coverage based on a
preexisting condition while those covered
by non-grandfathered individual coverage
with a rider or exclusion period will gain
coverage for any preexisting condition
otherwise covered by the plan. In the
group market, participants and beneficia-
ries that have experienced a lapse in
coverage will no longer face up to a
twelve-month exclusion for preexisting
conditions.

There are two main categories of peo-
ple who have most likely been directly
affected by this provision: First, those
who had a preexisting condition and who
were uninsured; second, those who were
covered by grandfathered individual poli-
cies containing riders excluding coverage
for a preexisting condition or have an ex-
clusion period. It is difficult to estimate
precisely how many uninsured individuals
had a preexisting condition as of when
this provision went into effect, as infor-
mation on whether individuals have a pre-
existing condition for the purpose of ob-
taining health insurance is not collected in
any major population based survey and
can include conditions from hay fever to
HIV/AIDS, all which could result in a
denial of coverage.106 The Departments
find it difficult to estimate the number of
individuals that will be uniquely affected
by these final regulations due to the inter-
actions with other provisions of the Af-
fordable Care Act; however, estimates in-
dicate that 50-129 million non-elderly
individuals with a preexisting condition,
25 million uninsured individuals - includ-
ing the 3.7 million adults that fall into the
"coverage gap" in States without Medic-

103The estimate of the total number of State and local governmental plans is based on the 2012 Census of Government.

104Based on data from the McKinsey Center for US Health System Reform and Medical Loss Ratio submissions for 2013 reporting year.

105 Adele M. Kirk. The Individual Insurance Market: A Building Block for Health Care Reform? Health Care Financing Organization Research Synthesis. May 2008.

106Levitt, L., et al. How Buying Insurance Will Change Under Obamacare. Kaiser Family Foundation, September 2013.

aid expansion, and the estimated 66.6-82
million with ESI with preexisting conditions
could benefit from these final regulations. 107

### 2. Benefits

These final regulations will expand and
improve coverage for those Americans
with preexisting conditions; those cur-
rently diagnosed, undiagnosed, or who
will develop conditions as they age. This
will likely increase access to health care,
improve health outcomes, and reduce
family financial strain and "job lock."

For many years insurance providers/
issuers maintained risk pools that are
equal to that of the general population,
using various methodologies;108 often to
the detriment of those most in need. Pas-
sage of the Affordable Care Act on March
23, 2010, provided millions of Americans
with a way to obtain, re-obtain, or keep
their affordable health coverage without
the fear of losing or not having it when
they are at their most vulnerable.

Prior to enactment of the Affordable
Care Act, an estimated 50-52 million
non-elderly people lacked insurance and
50-129 million were diagnosed with a
preexisting condition.109 Numerous stud-
ies show that uninsured adults and chil-
dren are 3 to 6 times more likely to go
without or postpone receiving needed
care, experience higher delays and inci-
dences of unmet needs, have higher inci-
dences in avoidable hospital stays, and

have a higher risk of death after an acci-
dent or when hospitalized.110 This provi-
sion benefits and protects the millions of
non-elderly persons who currently have a
preexisting condition and those that will
develop some condition as they age - in
one study of those reporting good or ex-
cellent health, 15-30 percent will develop
a preexisting condition in the next eight
years111 - by providing them a means to
obtain or keep health coverage. Without
the protections of these final regula-
tions, many more Americans could be
faced with the fear and anxiety of trying
to obtain health coverage or faced with
insufficient coverage due to preexisting
conditions.

As discussed previously, those with
preexisting condition exclusions or those
that were uninsured could have found
themselves being charged 2.5 times more
prior to the Affordable Care Act.112 The
higher cost faced by those with preexist-
ing conditions, whether uninsured or con-
taining riders, could have led families to
encounter financial hardships, crisis, and
emotional stress.

Reports show that those lacking cover-
age are more likely to have trouble paying
bills while being more likely to take on
additional credit card debt and spend
down family assets and savings, often re-
sulting in the loss of their homes and
personal bankruptcy: In 1981 the foreclo-
sure rate reported to be associated with
medical issues was only 8 percent; by

2007 this rate had increased to 62.1 per-
cent of all personal bankruptcies, and 49
percent of foreclosures.113 These higher
rates can in turn lead to many health care
organizations providing uncompensated
care: in 2008, the uninsured received $116
billion worth of hospital care - the primary
source of which was federal funding.114 In
addition to their advantages with regard to
access to care, health, and well-being these
final regulations are likely to lower families'
out-of-pocket health care spending and the
level of uncompensated care; thus benefit-
ing State and Federal governments and, by
extension, taxpayers.

Finally, these final regulations may re-
duce instances of "job lock"- situations
in which workers are unable to change
jobs due to concerns regarding health in-
surance coverage for them and/or their
dependents. Due to the limitations and
exclusions in individual health coverage,
many people were forced into a position
where they chose to remain in a job out of
fear of losing their existing coverage or
chose a job with sponsored coverage over
a higher wage position.115 Job lock leads
to a number of labor market distortions
resulting in workers in jobs that are a
"poor fit," with reduced satisfaction or
skills that are not properly utilized, affect-
ing their ability to start new businesses,
retire, or reduce their work load.116 One
study indicates that 35 percent of those
surveyed worried they will have to forego

107 ASPE. At Risk: Pre-Existing Conditions Could Affect 1 in 2 Americans: 129 Million People Could Be Denied Affordable Coverage Without Health Reform, 2011 and Artiga, S. et al.
The Impact of the Coverage Gap in States not Expanding Medicaid by Race and Ethnicity. The Kaiser Family Foundation, April 2015.

108Claxton, G. and Lundy, J. How Health Care Coverage Works: A Primer 2008 Update. The Kaiser Family Foundation, April 2008.

109 ASPE. At Risk: Pre-Existing Conditions Could Affect 1 in 2 Americans: 129 Million People Could Be Denied Affordable Coverage Without Health Reform, 2011; Collins, S., et al. Help
is on the Horizon: How the Recession Has Left Millions of Workers Without Health Insurance, and How Health Reform Will Bring Relief - Findings from The Commonwealth Fund Biennial
Health Insurance Survey of 2010. The Commonwealth Fund. 2011. Studies utilized 2008 MEPS data and The Commonwealth Biennial Health Insurance Survey of 2010 and prior years
to estimate the numbers of individuals with preexisting conditions.

110Collins, S., et al. Help is on the Horizon: How the Recession Has Left Millions of Workers Without Health Insurance, and How Health Reform Will Bring Relief - Findings from The
Commonwealth Fund Biennial Health Insurance Survey of 2010. The Commonwealth Fund. 2011; Callahan, S., et al. Access to Health Care for Young Adults With Disabling Chronic
Conditions. Arch Pediatr Adolesc Med. 2006;160:178-182; and Bernstein, J., et al. Issue Brief: How Does Insurance Coverage Improve Health Outcomes? Mathematica Policy Research,
Inc. 2010:1.

111Bailey, K. Worry No More: Americans with Pre-Existing Conditions Are Protected by the Health Care Law, Families USA; 2012 and ASPE. At Risk: Pre-Existing Conditions Could
Affect 1 in 2 Americans: 129 Million People Could Be Denied Affordable Coverage Without Health Reform, 2011.

112Bailey, K. Worry No More: Americans with Pre-Existing Conditions Are Protected by the Health Care Law, Families USA; 2012 and Anderson, G. From 'Soak The Rich' To 'Soak The
Poor': Recent Trends In Hospital Pricing. Health Affairs,2007; 26(3), pp. 780-789.

113Himmelstein, D. et al. Medical Bankruptcy in the United States, 2007: Results of a National Study. Am Jour of Med. 2009; 122(8), pp. 741-746; Robertson, T., et al. "Get sick, get out:
the medical causes of home mortgage foreclosures." Health Matrix: Journal of Law-Medicine. 2008; 18(65), pp 65-105; Fact Sheet. Key Facts about the Uninsured Population. The Kaiser
Family Foundation. October 2014; see also https://www.medicare.gov/your-medicare-costs/help-paying-costs/medicaid/medicaid.html.

114Stoll, K. and Bailey, K. Hidden Health Tax: Americans Pay a Premium. Families USA, 2009 and Coughlin, T. et al. Uncompensated Care for Uninsured in 2013: A detailed Examination.
The Kaiser Family Foundation, 2014.

115GAO, Private Health Insurance: Estimates of Individuals with Preexisting Conditions Range from 36 million to 122 million, GAO-12-439, 2012.

116Baker, D. Job Lock and Employer - Provided Health Insurance: Evidence from the Literature. Public Policy Institute. 2015;1-35; ASPE. At Risk: Pre-Existing Conditions Could Affect
1 in 2 Americans: 129 Million People Could Be Denied Affordable Coverage Without Health Reform, 2011; Fact Sheet. Key Facts about the Uninsured Population. The Kaiser Family
Foundation. October 2014.

job opportunities or forego retirement to
maintain coverage.117

Under the Affordable Care Act, the
interim final regulations, and these final
regulations, someone currently insured
through the group market with less than
18 months of continuous coverage may be
more willing to leave their job and be-
come a self-employed entrepreneur if they
or their dependents have a preexisting
condition - resulting in potentially 2-4
million more self-employed individu-
als.118 Similarly, even a worker with
more than 18 months of continuous cov-
erage who is already protected by
HIPAA may be more likely to consider
switching firms and changing policies
because they will not have to worry that
a preexisting condition could be ex-
cluded for up to 12 months.119 While the
total reduction in job-lock may be small,
the impact on those families with mem-
bers that have preexisting conditions
may be significant.

Executive Order 12866 requires agen-
cies to take account of "distributive im-
pacts" and "equity." Requiring health
plans and issuers to provide coverage to
adults and children with preexisting con-
ditions will result in a small increase in
premium for relatively healthy adults and
children, and a large increase in health and
financial security for individuals with pre-
existing conditions. This transfer is a
meaningful increase in equity, and is a
benefit of this final regulation.

### 3. Costs and Transfers

Although those that have preexisting
condition exclusions have higher health
care costs than healthier individuals,
among individuals with preexisting condi-
tions, those who are uninsured have ex-
penditures that are somewhat lower than
the average insured individual.120 It is ex-
pected that when those individuals who
are uninsured or have policies with preex-
isting condition exclusions gain coverage,

there will be additional demand for and
utilization of services, leading to a transfer
from out-of-pocket spending to spending
covered by insurance, which will partially
be mitigated by a reduction in cost-
shifting of uncompensated care to the in-
sured population as coverage expands.

In evaluating the impact of this provi-
sion, it is important to remember that the
full net effects of this provision cannot be
estimated because of its interactions with
other provisions in the Affordable Care
Act. For example, under the current guar-
anteed availability and renewability pro-
tections in the individual market, children
and young adults with a preexisting con-
dition are now generally able to obtain
and maintain coverage on a parental plan,
where he or she can potentially stay on
that plan until age 26. As another exam-
ple, the Affordable Care Act requires that
non-grandfathered health plans provide
recommended preventive services at no
cost-sharing. This will amplify the bene-
fits of coverage for newly insured individ-
uals with preexisting conditions. More-
over, the expansion of the preexisting
condition exclusion policy occurred at the
same time as other policies were imple-
mented, such as the individual responsi-
bility and premium tax credit provisions.
Therefore, the Departments cannot pro-
vide a more precise estimation of either
the benefits or the costs and transfers of
this provision.

C. PHS Act Section 2711, Prohibition on
Lifetime and Annual Limits (26 CFR
54.9815-2711, 29 CFR 2590.715-2711,
45 CFR 147.126)

#### 1. Affected Entities and Individuals

Prior to the passage of the Affordable
Care Act, both the incidence and amount
of lifetime limits varied by market and
plan type (e.g., HMO, PPO, POS). In the
RIA for the interim final regulations, it
was estimated that only 8 percent of large
employers, 14 percent of small employers

and 19 percent of individual market poli-
cies imposed an annual limit at that time
and thus would have been directly im-
pacted by the interim final regulations,
which were phased in.

Fear and anxiety about reaching annual
or lifetime limits on coverage was a major
concern among Americans who have
health insurance, although while such lim-
its were relatively common in health in-
surance, the numbers of people expected
to exceed either an annual or lifetime limit
was quite low.

#### 2. Benefits

As discussed in the RIA for the interim
final regulations, annual and lifetime lim-
its function as caps on how much a group
health plan or insurance company will
spend on medical care for a given insured
individual over the course of a year, or the
individual's lifetime. Once a person
reaches this limit or cap, the person is
essentially uninsured: he or she must pay
the remaining cost of medical care out-of-
pocket. These limits particularly affect
people with high-cost conditions,12
which typically are very serious and can
lead to financial hardship. Prohibiting life-
time limits and annual limits will benefit
families and individuals experiencing fi-
nancial burdens due to exceeding the ben-
efit limits of their insurance policy. By
ensuring and continuing coverage, the
regulations also reduce uncompensated
care, which would otherwise increase pre-
miums of the insured population through
cost-shifting.

These provisions will also improve ac-
cess to care. Reaching a limit could inter-
rupt or cause the termination of needed
treatment, leading to worsening of medi-
cal conditions. The removal and restric-
tion of benefit limits helps ensure conti-
nuity of care and the elimination of the
extra costs that arise when an untreated or
undertreated condition leads to the need
for even more costly treatment, that could

117 Altman, D. Pre-X Redux. The Kaiser Family Foundation, June 2013.

118Baker, D. Job Lock and Employer - Provided Health Insurance: Evidence from the Literature. Public Policy Institute. 2015;1-35.

119Foronstin, P. Health Insurance Portability and Job Lock: Findings from the 1998 Health Confidence Survey. Employee Benefit Research Institute Notes. 1998: 19(8), pp. 4-6.

120Coughlin, T. et al. Uncompensated Care for Uninsured in 2013: A Detailed Examination. The Kaiser Family Foundation, 2014; GAO, Private Health Insurance: Estimates of Individuals
with Preexisting Conditions Range from 36 million to 122 million, GAO-12-439, 2012.

121 A December 2014 study by Milliman "2014 U.S. organ and tissue transplant cost estimates and discussion" found that the average 2014 billed charges related to a heart transplant is
$1,242,200, a liver transplant averaged $739,100, while a heart-lung transplant averaged $2,313,600.

have been prevented if no loss of coverage
had occurred. By ensuring continuation of
coverage, the regulations benefit the
health and the economic well-being of
participants, beneficiaries, and enrollees.

Executive Order 12866 explicitly re-
quires agencies to take account of "dis-
tributive impacts" and "equity," and these
considerations help to motivate the rele-
vant statutory provisions and the interim
final regulations and these regulations.
Prohibiting lifetime and annual limits as-
sures that insurance will perform the func-
tion for which it was designed-namely,
protecting health and financial wellbeing
for those most in need of care. This rep-
resents a meaningful improvement in eq-
uity, which is a benefit associated with the
regulations.

#### 3. Costs and Transfers

As discussed in the regulatory impact
analysis for the interim final regulations,
extending health insurance coverage for
individuals who would otherwise hit a
lifetime or annual limit will increase the
demand for and utilization of health care
services, thereby generating additional
costs to the system. The three year
phase-in of the elimination of annual lim-
its and the immediate elimination of life-
time limits increased the actuarial value of
the insurance coverage for affected plans
and policies if no other changes were
made to the plan or policy. Issuers and
plans in the group market may have cho-
sen to make changes to the plan or policy
to maintain the pre-regulation actuarial
value of the plan or policy, such as chang-
ing their provider networks or copayments
in some manner. To the extent that higher
premiums (or other plan or policy
changes) are passed on to all employees,
there is an explicit transfer from workers
who would not incur high medical costs to
those who do incur high medical costs. If,
instead, the employers do not pass on the
higher costs of insurance coverage to their
workers, this can result in lower profits or
higher prices for the employer's goods or
services. In the individual market, when
policies were individually underwritten

with no rating bands in the majority of
States, the Departments expected the
added premium cost or other benefit
changes to be largely borne by the indi-
vidual policyholder. With the market re-
forms in place, along with single risk pool
requirements, issuers can spread the in-
creased costs across the entire individual
market, leading to a transfer from those
who do not incur high medical costs to
those who do incur such costs. However,
as with the group market, such a transfer
was expected to be modest, given the
small numbers of people who were ex-
pected to exceed their benefit limits. The
Departments previously estimated that the
transfer would be three-quarters of a per-
cent or less for lifetime limits and one-
tenth of a percent or less for annual limits,
under a situation of pure community rat-
ing where all the costs get spread across
the insured population. This impact does
not apply to grandfathered individual mar-
ket plans.

It is worth noting that these transfers
are expected to have been significantly
mitigated by the associated expansion of
coverage created by the interim final reg-
ulations and other regulations implement-
ing the Affordable Care Act. The Depart-
ments expect that, as a result of the
gradual elimination of annual limits and
the immediate elimination of lifetime lim-
its, fewer people have been left without
protection against high medical costs.
This results in fewer individuals spend-
ing down resources and enrolling in
Medicaid or receiving other State and
locally funded medical support. Such an
effect will likely be amplified due to the
high-cost nature of people who exceed
benefit limits.

D. PHS Act Section 2712, Prohibition
on Rescissions (26 CFR 54.9815-2712,
29 CFR 2590.715-2712, 45 CFR
147.128)

##### 1. Affected Entities and Individuals

PHS Act Section 2712 and these final
regulations create a statutory Federal stan-
dard and enforcement power in the group

and individual markets where it did not
exist. Prior to this provision taking effect,
varying Federal common laws existed for
ERISA plans. State rules pertaining to re-
scission have been found to be preempted
by ERISA by five circuit courts (5th, 6th,
7th, 9th and 11th as of 2008).

The Affordable Care Act and its imple-
menting regulations should have a large
effect on reducing the number of rescis-
sions for two reasons. First, the Afford-
able Care Act raised the standard govern-
ing when coverage may be rescinded.
Group health plans and health insurance
issuers may now only rescind coverage
based on fraud or intentional misrepresen-
tation of a material fact which is a higher
standard than most State laws required
previously. Second, the interaction of
these regulations with PHS Act sections
2704, prohibition of preexisting condition
exclusions, and sections 2705, prohibiting
discrimination against individual partici-
pants and beneficiaries based on health
status, could significantly reduce the num-
ber of policies rescinded. Previously, the
issues surrounding the reporting of pre-
existing conditions to issuers and an indi-
vidual's health status were primary causes
of rescissions. With the main source of
rescissions removed there would be a sig-
nificant drop in rescissions even without
these regulations.

The Departments assume that these fi-
nal regulations will have their largest im-
pact on the individual insurance market,
because group health coverage rarely is
rescinded.122 By creating a new Federal
standard governing when policies can be
rescinded, the Departments expect these
final regulations to potentially affect the
approximately 6.7 million non-elderly in-
dividual health insurance policies cover-
ing 10.9 million policy holders and their
dependents in the individual health insur-
ance market.123 In addition, approxi-
mately 430 health insurance issuers offer-
ing coverage in the individual health
insurance market who currently could re-
scind health insurance coverage are ex-
pected to be affected.124 That said, the
actual incidence of individuals who are
subject to rescissions each year is likely to

122This statement is based on the Departments' conversations with industry experts.

1232013 filings of the Medical Loss Ratio Report found at https://www.cms.gov/CCIIO/Programs-and-Initiatives/Health-Insurance-Market-Reforms/Medical-Loss-Ratio.html.

1242013 filings of the Medical Loss Ratio Report.

be small. The NAIC Regulatory Frame-
work Task Force collected data on 52
companies covering the period 2004-
2008, and found that rescissions averaged
1.46 per thousand policies in force.125
These pre-Affordable Care Act estimates
are believed to be a significant over-
statement of rescissions occurring now,
however no new data is available. Using
this estimate implies that when combined
with the current numbers of policy holders
in the individual market there could be
approximately 9,900 rescissions per year.

##### 2. Benefits

Because there is little pre-Affordable
Care Act data available and no publicly
available post-Affordable Care Act data,
the Departments find it difficult to esti-
mate the benefits associated with this pro-
vision. However, the Departments believe
that the benefits of this provision would
accrue to those individuals who without
these regulations would have their poli-
cies rescinded.

As noted, Executive Order 12866 re-
quires consideration of "distributive im-
pacts" and "equity." To the extent that
rescissions are arbitrary, or targeted at
those most ill, and revoke the insurance
that enrollees paid for and expected to
cover the cost of expensive illnesses and
conditions, preventing rescissions would
prevent inequity and greatly increase
health and economic well-being. Consum-
ers would have greater confidence that
purchasing insurance would be worth-
while, and policies would represent better
value for money.

Individuals who otherwise would have
had their policies rescinded are now able
to retain their coverage; the maintenance
of such coverage through severe illness
helps to prevent financial hardship for the
enrollee and their family, creating a sub-
stantial financial benefit.126

As discussed previously, uninsured in-
dividuals are less likely to receive needed
care when they become ill, resulting in the

worsening of their condition. The lack of
insurance can lead to lost workplace pro-
ductivity and additional mortality and
morbidity. Additionally, this provision
protects those individuals currently re-
ceiving treatment for a condition by
eliminating the potential interruptions or
terminations in care resulting from re-
scissions, resulting in higher losses in
productivity.127 Thus, this rule would
contribute to increased worker produc-
tivity by reducing the burden associated
with the loss of insurance coverage, and
the concomitant financial and emotional
stress.

## 3. Costs and Transfers

As with the benefits, the costs and
transfers of these regulations are similar to
those of the interim final regulations. The
prohibition of rescissions except in cases
of fraud or intentional misrepresentation
of material fact could lead insurers to
spend more resources checking applica-
tions before issuing policies than they did
before the Affordable Care Act, which
would increase administrative costs.
However, under the final regulations,
these costs could be partially offset by
decreased costs associated with reduced
post-claims underwriting.

To the extent that continuing coverage
for these generally high-cost populations
leads to additional demand for and utili-
zation of health care services, there will be
additional costs generated in the health
care system. However, given the rela-
tively low rate of rescissions (approxi-
mately 0.15 percent of individual policies
in force) and the relative nature of those
individuals who generally have policies
rescinded (who would have difficulty go-
ing without treatment), the Departments
estimate that these additional costs would
be small.

For those policies or plans that are re-
scinded, the requirement for an advance
notice prior to such a rescission imposes a
total hour burden of approximately 250

hours and a cost burden of approximate
$3,900. These costs are discussed in more
detail in the Paperwork Reduction Act
section later in this preamble.

A transfer likely will occur within the
individual health insurance market from
policyholders whose policies would not
have been rescinded before the Affordable
Care Act to some of those whose policies
that would have been rescinded before the
Affordable Care Act, depending on the
market and the rules which apply to it.
This transfer could result from higher
overall premiums insurers will charge to
recoup the costs associated with the health
care costs of those individuals with
chronic or serious conditions whose poli-
cies could previously be rescinded (the
precise change in premiums depending on
the competitive conditions in specific
insurance markets). This transfer across
the market would benefit those individ-
uals with substantially higher medical
costs, due to chronic or severe condi-
tions, and would be attributable to in-
surers covering those costs associated
with such individuals.

E. PHS Act Section 2714, Coverage of
Dependents to Age 26 (26 CFR
54.9815-2714, 29 CFR 2590.715-2714,
45 CFR 147.120)

### 1. Affected Entities and Individuals

Prior to implementation of the Afford-
able Care Act there were an estimated 6.6
million uninsured young adults age 19-
26; with an estimated 3.3 million having
parents with ESI and an additional 2.7
million with individual coverage, all of
whom could potentially have been af-
fected.128 Implementation of this provi-
sion allowed 13.7 million young adults to
either stay on or join their parents' health
plans (from November 2010 until Novem-
ber 2011).129 There was a rapid response
to changes in the regulations leading to
large number of employers enrolling

125NAIC Rescission Data Call, December 17, 2009, p.1.

126Girion, Lisa "Health Net Ordered to Pay $9 million after Canceling Cancer Patient's Policy," Los Angeles Times (2008), available at: http://www.latimes.com/business/la-fi-
insure23feb23,1,5039339.story.

127Collins et al. "Gaps in Health Insurance: An All American Problem" Commonwealth Fund (2006), available http://www.commonwealthfund.org/usr_doc/Collins_gapshltins_920.pdf.
128Collins, S. and Nicholson, J. Rite of Passage: Young Adults and the Affordable Care Act of 2010. The Commonwealth Fund. May 2010.

129Collins, S. et al. Young, Uninsured and in Debt: Why Young Adults Lack Health Insurance and How the Affordable Care Act is Helping. The Commonwealth Fund. June 2012.

young adults130, with thirteen percent of
small firms and 70 percent of large firms
enrolling at least one young adult - small
employers on average enrolled two young
adults while large employers enrolled on
average 492 young adults.131

Studies have shown that 2.3 million
young adults were able to gain coverage
since implementation of the Affordable
Care Act and this provision in 2010
through the start of the open enrollment
period in October 2013.132 The number of
affected young adults has continued to
increase as more employers began cover-
ing young adult dependents and those on
individual grandfathered plans began
changing policies to include dependents
up to age 26. This has resulted in an
additional 3.4 million young adults gain-
ing coverage since October 2013, result-
ing in a total of an estimated 5.7 million
gaining coverage from 2010 through
March 2015.133

### 2. Benefits

The benefits of these final regulations
are expected to outweigh the costs to the
regulated community. As of March 2015,
an estimated 5.7 million additional young
adults are now covered by their parents'
health plans due to the implementation of
this provision.134 Expanding coverage op-
tions for the 19-26 year old population
has resulted in a decline in the number of
uninsured young adults, declining to an
uninsured rate of 26.7 percent in the third
quarter of 2013 (before the start of the
October 2013 open enrollment period). 135

Uninsured young adults are less likely
to have access to care and thus delay

seeking needed care136, leading to higher
costs when care is received. Further, ex-
panded coverage provides young adults
with security and protection from the fi-
nancial consequences of serious medical
emergencies. Recent studies have found
that due to the implementation of this pro-
vision there has been a decline in the
number of young adults facing higher
out-of-pocket expenses (greater than
$1,500);137 benefiting them when many
young adults are currently facing elevated
debt burdens and low wages.138

Additionally, expanding coverage to
those aged 19-26 should decrease the
cost-shifting of uncompensated care onto
those with coverage (including $147 mil-
lion from emergency department care), 139
increase the receipt of preventive health
care and provide more timely access to
high quality care, resulting in a healthier
population. In particular, children with
chronic conditions or other serious health
issues will be able to continue coverage
through a parent's plan until age 26.

Extending dependent coverage of chil-
dren to age 26 will also permit greater job
mobility for this population as their health
coverage will no longer be tied to their
jobs, thus reducing the potential of "job
lock",140 or student status.

### 3. Costs and Transfers

Estimates for the incremental annual
premium costs for the newly covered in-
dividuals were developed in the interim
final regulations; estimating that for those
enrolling in their parents' ESI, the ex-
pected annual premium cost would lead to
an expected increase of 0.7 percent in
2011, 1.0 percent in 2012, and 1.0 percent

in 2013. A recent study carried out by
Depew and Bailey found that the require-
ment dependent coverage provision led to
a 2.5-2.8 percent increase in premiums
for plans that cover children, and that em-
ployers did not pass on the entire premium
increase to employees in the form of
higher required plan contributions.141 To
the extent that some of these increases are
passed on to workers in the form of higher
premiums for all workers purchasing fam-
ily policies or in the form of lower wages
for all workers, there will be a transfer
from workers who do not have newly cov-
ered dependents to those who do. To the
extent that these higher premiums result in
lower profits or higher prices for the em-
ployer's product, the higher premiums
will result in a transfer either from stock-
holders or consumers to workers who
have newly covered dependents.

In addition, to the extent these final
regulations result in a decrease in the
number of uninsured, the Departments ex-
pect a reduction in uncompensated care,
and a reduction in liability for those who
fund uncompensated care, including pub-
lic programs (primarily Medicaid and
State and local general revenue support
for public hospitals), as well as the portion
of uncompensated care that is paid for by
shifting costs from private payers. Such
effects would lead to lower premiums for
the insured population, both with or with-
out newly covered children.

For the number of young adults enroll-
ing in their parents' non-group (individ-
ual) insurance policy, the Departments es-
timated that, to a large extent, premiums
in the individual market will be borne by
the parents who are purchasing the cover-
age. If, instead, these costs are distributed

130Cantor, J. et al. Early Impact of the Affordable Care Act on Health Insurance Coverage of Young Adults. Health Services Research, 47:5 (2012):pp. 1773-1790.

131Claxton, G. et al. Employer Health Benefits: 2011 Annual Survey. Kaiser Family Foundation and Health Research & Education Trust. 2011

132 ASPE Data Point, Health Insurance Coverage and the Affordable Care Act, September 2015.

133 ASPE. Health Insurance Coverage and the Affordable Care Act. May 2015 at http://aspe.hhs.gov/sites/default/files/pdf/83966/ib_uninsured_change.pdf

134Id.

135Ibid and Sommers, B. Number of Young Adults Gaining Insurance Due to the Affordable Care Act Now Tops 3 Million. ASPE Issue Brief, June 2012

136Newacheck, P. et al. Health Insurance and Access to Primary Care for Children. N Engl J Med. 338:8 (1998) and Sommers, B. et al. The Affordable Care Act Has Led To Significant
Gains in Health Insurance and Access to Care for Young Adults. Health Affairs, 32:1 (2013):pp. 165-174

137Busch, S. et al. ACA Dependent Coverage Provision Reduced High Out-Of-Pocket Health Care Spending For Young Adults. Health Affairs, 33:8 (2014): pp. 1361-1366 and Mulcahy,
A. et al. Insurance Coverage of Emergency Care for Young Adults under Health Reform. N Engl J Med. 368:22 (2013)

138Chua, K-P. and Sommers, B. Changes in Health and Medical Spending Among Young Adults Under Health Reform. JAMA, 311:23 (2014)

139Mulcahy, A. et al. Insurance Coverage of Emergency Care for Young Adults under Health Reform. N Engl J Med. 368:22 (2013)

140Sommers, B. et al. The Affordable Care Act Has Led To Significant Gains in Health Insurance and Access to Care for Young Adults. Health Affairs, 32:1 (2013):pp. 165-174

141Depew, B. and Bailey, J. Did the Affordable Care Act's dependent coverage mandate increase premiums? Journal of Health Economics, 41 (2015):pp. 1-14

over the entire individual market (as
would be the case in a pure community
rated market), the Departments estimated
in the interim final regulations that the
individual premiums would rise 0.7 per-
cent in 2011, 1.0 percent in 2012, and 1.2
percent in 2013. However, the Depart-
ments expected the actual increase across
the entire individual market, if any, to be
much smaller than these estimates, be-
cause they expected the costs to be largely
borne by the subscribers who are directly
affected rather than distributed across the
entire individual market.

F. PHS Act Section 2719, Internal
Claims and Appeals and External
Review (26 CFR 54.9815-2719, 29 CFR
2590.715-2719, 45 CFR 147.136)

#### 1. Estimated Number of Affected Entities

These provisions are applicable to non-
grandfathered health plans and coverage.
Using the estimates from the discussion of
affected entities for the grandfathering
provisions discussed in paragraph III.C,
there are 96.3 million individuals covered
by non-grandfathered ERISA-covered
health plans, 30.4 million individuals cov-
ered by non-grandfathered State and local
health plans, and 8.7 million individuals
in non-grandfathered health coverage in
the individual market.

Not all potentially affected individuals
will be affected equally by these final reg-
ulations. Sponsors of ERISA-covered
group health plans were required to im-
plement an internal appeals process that
complied with the DOL claims procedure
regulation before the Affordable Care
Act's enactment, and the Departments
also understand that many non-Federal
governmental plans and church plans that
are not subject to ERISA had imple-
mented internal claims and appeals pro-
cesses that comply with the DOL claims
procedure regulation. Therefore, partici-
pants and beneficiaries covered by such
plans only will be affected by the internal
claims and appeals standards that are pro-
vided by the Secretary of Labor in para-
graph (b)(2)(ii) of these final regulations
under PHS Act section 2719.

These final regulations will have the
largest impact on individuals covered in
the individual health insurance market,
because with the issuance of the interim
final regulation, these issuers were re-
quired to comply with the DOL claims
procedure regulation for internal claims
and appeals as well as the additional stan-
dards added by the Secretary of the De-
partment of Health and Human Services
in paragraph (b)(3) of these final regula-
tions that are in some cases more protec-
tive than the ERISA standard.

On the external appeals side, before the
enactment of the Affordable Care Act,
issuers offering coverage in the group and
individual health insurance market were
already required to comply with State ex-
ternal review laws. At that time, all States
except Alabama, Mississippi, Nebraska,
North Dakota, South Dakota, and Wyo-
ming had external review laws, and thir-
teen States had external review laws that
apply only to certain market segments (for
example, managed care or HMOs). Cur-
rently, all States except, Alabama, Alaska,
Florida, Georgia, Pennsylvania, and Wis-
consin have State external review laws
that satisfy the requirement to provide a
NAIC-similar or NAIC-parallel external
review process. These six States that do
not meet the requirements, must use the
HHS-administered process or must con-
tract with accredited independent review
organizations to review external appeals
on their behalf until they meet the require-
ments. 142

Individuals participating in ERISA-
covered self-insured group health plans
will be among those most affected by the
external review requirements contained in
these final regulations, because the pre-
emption provisions of ERISA prevent a
State's external review process from ap-
plying directly to an ERISA-covered self-
insured plan. These plans will now be
required to comply with the Federal ex-
ternal review process set forth under para-
graph (d) of these final regulations.

In summary, the number of affected
individuals depends on several factors, in-
cluding whether (i) a health plan retains
its grandfather status, (ii) the plan is sub-
ject to ERISA, (iii) benefits provided un-
der the plan are self-funded or financed by

the purchase of an insurance policy, (iii)
the applicable State has enacted an inter-
nal claims and appeals law, and (iv) the
applicable State has enacted an external
review law, and if so the scope of such
law, and (v) the number of new plans and
enrollees in such plans.

The following, is a summary of the
benefits and costs as discussed in the in-
terim final regulations and that are still
applicable to these final regulations.

#### 2. Benefits

Because of data limitations and a lack
of effective measures, the Departments
did not attempt to quantify the expected
benefits. Nonetheless, the Departments
were able to identify several of the in-
terim final regulation's major economic
benefits.

The interim final regulations and these
final regulations will help transform the
current, highly variable health claims and
appeals process into a more uniform and
structured process. This will:

· improve the extent to which employee
benefit plans provide benefits consis-
tent with the established terms of the
plan;

· ensure greater certainty and consis-
tency in the handling of benefit claims
and appeals and improved access to
information about the manner in
which claims and appeals are adjudi-
cated;

· increase efficiency in the operation of
employee benefit plans and health care
delivery as well as health insurance
and labor markets;

· increase efficiency of health plans by
enhancing their transparency and fos-
tering participants' confidence in the
plan's fairness;

· reduce delays and inappropriate de-
nials;

· reduce the levels of error in the system
and improve health outcomes;

· improve health care, health plan qual-
ity, and insurance market efficiency by
serving as a communication channel,
providing feedback from participants,
beneficiaries, and providers to plans
about quality issues; and

142 Affordable Care Act: Working with States to Protect Consumers, available at https://www.cms.gov/CCIIO/Resources/Files/external_appeals.html.

· enhance some insurers' and group
health plans' abilities to effectively
control costs by limiting access to in-
appropriate care.

#### 3. Costs and Transfers

The Departments have quantified the
primary source of costs associated with
these final regulations that will be incurred
to (i) administer and conduct the internal
and external review process, and (ii) prepare
and distribute required disclosures and no-
tices. These costs and the methodology used
to estimate them are discussed under the
Paperwork Reduction Act section. The total
cost related to the information collections is
$160.1 million annually.

##### a. Additional Requirements for Group Health Plans.

Paragraph (b)(2)(i) of these final regu-
lations imposes additional requirements to
the DOL claims procedure regulation that
must be satisfied by group health plans
and issuers offering group and individual
coverage in the individual and group health
insurance markets. The Departments believe
that the additional requirements have mod-
est costs associated with them, because they
merely clarify provisions of the DOL claims
procedure regulation.

As discussed in the impact analysis for
the interim final regulations the Depart-
ments were not able to estimate the costs for
some of the requirements, namely for: the def-
inition of adverse determination, expedited no-
tification of benefit determination involving
urgent care, eliminating conflicts of interest,
and deemed exhaustion of internal process.
The Departments were able to quantify the
costs for Full and fair review and Enhanced
notice with culturally and linguistically appro-
priate notices. These costs are included in the
Paperwork Reduction Act Section.

##### b. Additional Requirements for Issuers in the Individual Insurance Market.

To address certain relevant differences
in the group and individual markets,

health insurance issuers offering individ-
ual health insurance coverage must com-
ply with three additional requirements.
First, these final regulations expand the
scope of the group health coverage inter-
nal claims and appeals process to cover
initial eligibility determinations.

This protection is important since eli-
gibility determinations in the individual
market are frequently based on the health
status of the applicant, including preexist-
ing conditions. The Departments do not
have sufficient data to quantify the costs
associated with this requirement.

Second, although the DOL claims pro-
cedure regulation permits group health
plans to have a second level of internal
appeals, these final regulations require
health insurance issuers offering individ-
ual health insurance coverage to have only
one level of internal appeals. This allows
the claimant to seek either external review
or judicial review immediately after an
adverse determination is upheld in the first
level of internal appeals. The Departments
have factored this cost into their estimate
of the cost for issuers offering coverage in
the individual market to comply with this
requirement.

Finally, these final regulations require
health insurance issuers offering individ-
ual health insurance coverage to maintain
records of all claims and notices associ-
ated with their internal claims and appeals
processes. An issuer must make such re-
cords available for examination upon re-
quest. Accordingly, a claimant or State or
Federal agency official generally would
be able to request and receive such doc-
uments free of charge. The Departments
believe that minimal costs are associ-
ated with this requirement, because
most issuers retain the required informa-
tion in the normal course of their busi-
ness operations.

#### c. External Appeals.

The analysis of the cost associated with
implementing an external review process
under the interim final regulations and

these final regulations focuses on the cost
incurred by the following three groups
that were not required to implement an
external review process before the enact-
ment of the Affordable Care Act: plans
and participants in ERISA-covered self-
insured plans; plans and participants in
States with no external review laws; and
plans and participants in States that have
State laws only covering specific market
segment (usually HMOs or managed care
coverage).

The Departments estimate that there
are approximately 78.7 million partici-
pants in self-insured ERISA-covered
plans and approximately 15.5 million par-
ticipants in self-insured State and local
governmental plans. In the States which
currently have no external review laws or
whose laws do not meet the federal min-
imum requirements143 there are an esti-
mated 13.8 million participants (8.1 mil-
lion participants in ERISA-covered plans,
3.7 million participants in governmental
plans and 2 million individual covered by
policies in the individual market). These
estimates lead to a total of 108 million
participants, however, only the 80.0 mil-
lion participants in non-grandfathered
plans will be required to be covered by the
external review requirement.

The Departments assume that there are
an estimated 1.3 external appeals for ev-
ery 10,000 participants144, and that there
will be approximately 10,400 external ap-
peals annually. As required by these final
regulations or applicable State law, plans
or issuers are required to pay for most of
the cost of the external review while
claimants may be charged a nominal filing
fee in States that authorized such fees as
of November 18, 2015. One study found
that the average cost of a review was
approximately $665145. The average cost
per appeal in the HHS-administered Ex-
ternal Review Program is approximately
$625 for a standard case and $825 for an
expedited case.1
146

The actual cost per review will vary by
State and type of review (standard or ex-
pedited). Lacking data on the percent of

143These states are Alabama, Alaska, Florida, Georgia, Pennsylvania, and Wisconsin. See Affordable Care Act: Working with States to Protect Consumers, available at https://www.cms.gov/
CCIIO/Resources/Files/external_appeals.html

144 AHIP Center for Policy and Research, "An Update on State External Review Programs, 2006," July 2008.

145North Carolina Department of Insurance "Healthcare Review Program: Annual Report," 2013 Table 4. http://www.ncdoi.com/smart/Documents/ExternalReviewReport16.pdf

146The HHS-administered External Review Program is approximately $625 for a standard case and $825 for an expedited case.

appeals that are expedited, but with the
majority of appeals being standard ap-
peals, the higher cost per appeal of $665
for a standard appeal is used as an esti-
mate for all appeals. These estimates lead
to an estimated cost of the external review
of $6.9 million (10,400 reviews * $665)
annually.

On average, about 40 percent of deni-
als are reversed on external appeal.147 An
estimate of the dollar amount per claim
reversed is $12,500.148 This leads to $53.5
million in additional claims being re-
versed by the external review process an-
nually. While this amount is a cost to
plans, it represents a payment of benefits
that should have previously been paid to
participants, but was denied. Part of this
amount is a transfer from plans and issu-
ers to those now receiving payment for
denied benefits. Part of the amount could
also be a cost if the reversal leads to
services and hence resources being uti-
lized now that had been denied previ-
ously. The Departments are not able to
distinguish between the two types but be-
lieve that most reversals are associated
with a transfer.

These final regulations also require
claimants to receive a notice informing
them of the outcome of an appeal and/or
external review. The independent review
organization that conducts the external re-
view is required to prepare the notice;
therefore, the cost of preparing and deliv-
ering this notice is included in the fee paid
them by the insurer to conduct the review.

## 4. Summary

These final rules extend the protections
of the DOL claims procedure regulation to
non-Federal governmental plans, and the
market for individual coverage. Addi-
tional protections are added that cover
these two markets and in addition to the
market for ERISA-covered plans. These
final regulations also extend the require-
ment to provide an independent external
review. The Departments estimate that the
total costs for these final regulations is

$169.9 million annually with a transfer
from the plan and its participants to those
whose claims are reversed of $53.5 mil-
lion annually.

G. PHS Act Section 2719A, Patient
Protections (26 CFR 54.9815-2719A, 29
CFR 2590.715-2719A, 45 CFR 147.138)

### 1. Designation of Primary Care Provider

The statute, the interim final regula-
tions and these final regulations provide
that if a group health plan, or a health
insurance issuer offering group or individ-
ual health insurance coverage, requires or
provides for designation by a participant,
beneficiary, or enrollee of a participating
primary care provider, then the plan or
issuer must permit each participant, ben-
eficiary, and enrollee to designate any par-
ticipating primary care provider who is
available to accept the participant, benefi-
ciary, or enrollee based on his or her geo-
graphic location.

## a. Affected Entities and Individuals

Choice or assignment of a primary care
provider is typically required by Health
Maintenance Organizations (HMOs) and
Point of Service plans (POS). Recent data
suggest that there are 316,000 HMOs in
the United States, accounting for more
than 11.3 million enrollees with ESI.
There are also 558,000 POS plans ac-
counting for almost 7 million enrollees
with ESI. The individual market includes
130,700 HMO policies.149 Similar data do
not exist for POS policies in the individual
market.

This provision only applies to non-
grandfathered health plans. However, due
to the lack of data on HMO and POS
enrollees by type of market, and the in-
ability to predict new plans that may enter
those markets, the Departments are unable
to predict the number enrollees and plans
that would be affected by this provision.
Moreover, there is no data on the number
of plans that auto-assigned patients to pri-
mary care physicians and did not already

allow patients to make the final provider
choice, as this would be the population to
benefit maximally from the interim final
rules and these regulations. From conver-
sations with industry experts the Depart-
ments expect, however, that this number
would be very small, and therefore the
benefits and costs of this provision would
be small as well.

## b. Benefits, Costs, and Transfers

As discussed in the RIA for the interim
final regulations, provider choice allows
patients to take into account factors they
may value when choosing their provider,
such as provider credentials, office hours
and location, advice from professionals,
and information on the experience of
other patients. Provider choice is a strong
predictor of patient trust in their provider,
which could lead to decreased likelihood
of malpractice claims, improved medica-
tion adherence and also improves health
outcomes.

Although difficult to estimate given the
data limitations described, the costs for
this provision are likely to be minimal. As
noted in the RIA for the interim final
regulations, when enrollees like their pro-
viders, they are more likely to maintain
appointments and comply with treatment,
both of which could induce demand for
services, but these services could then in
turn reduce costs associated with treating
more advanced conditions. However, the
number of affected entities from this pro-
vision is very small, leading to small ad-
ditional costs. There will likely be negli-
gible transfers due to this provision given
no changes in coverage or cost-sharing.

## 2. Designation of Pediatrician as Primary Care Provider

147Of the 105 cases fully reviewed in the HHS-administered external review process so far, 28 have been overturned and 25 have been partially overturned.
148North Carolina Department of Insurance "Healthcare Review Program: Annual Report," 2013. http://www.ncdoi.com/smart/Documents/ExternalReviewReport16.pdf

149Data for the group market (plan and participant counts) were calculated using the 2012 MEPS, 2012 Census of Government, 2014 Current Population Survey, and 2014 Kaiser/HRET
Survey of Employer Sponsored Health Benefits. Data for the individual market were calculated using AHIP "Individual Health Insurance 2009: A Comprehensive Survey of Premiums,
Availability and Benefits," Table 10 and Medical Loss Ratio submissions for 2013 reporting year.

ric subspecialties (based on the scope of
that provider's license under applicable
State law), as the child's primary care
provider if the provider participates in the
network of the plan or issuer and is avail-
able to accept the child. The general terms
of the plan or health insurance coverage
regarding pediatric care otherwise are un-
affected, including any exclusions with
respect to coverage of pediatric care.

## a. Affected Entities and Individuals

Due to lack of data on enrollment in
managed care organizations by age, as
well as lack of data on HMO and POS
enrollees by type of market, and the in-
ability to predict new plans that may enter
those markets, the Departments are unable
to predict the number of enrollees and
plans that would be affected by these pro-
visions. As a reference, there are an esti-
mated 5.6 million individuals under age
19 with ESI who are in an HMO plan.150

### b. Benefits, Costs, and Transfers

By expanding participating primary
care provider options for children to in-
clude pediatricians, this provision benefits
individuals who are making decisions
about care for their children. As discussed
in the previous section, research indicates
that when doctors and patients have a
strong, trusting relationship, patients often
have improved medication adherence,
health promotion, and other beneficial
health outcomes.

In addition, allowing enrollees to select
a physician specializing in pediatrics as
their children's primary care provider has
removed any referral related delays for
individuals in plans that required referrals
to pediatricians and did not allow physi-
cians specializing in pediatrics to serve as
primary care providers. The American
Academy of Pediatrics (AAP) strongly
supports the idea that the choice of pri-
mary care clinicians for children should
include pediatricians.151 Regular pediatric
care, including care by physicians special-
izing in pediatrics, can improve child

health outcomes and avert preventable
health care costs.

Giving enrollees in covered plans (that
require the designation of a primary care
provider) the ability to select a participat-
ing pediatrician as the child's primary
care provider benefits those individuals
who would not otherwise have been given
this choice. Again, the extent of these
benefits will depend on the number of
enrollees with children that are covered by
plans that do not allow the selection of a
pediatrician as the primary care provider,
which industry experts suggest would be
small.

Although difficult to estimate given the
data limitations described, the costs for
this provision are likely to be small. Giv-
ing enrollees a greater choice of primary
care providers by allowing them to select
participating physicians who specialize in
pediatrics as their child's primary care
provider could lead to increased health
care costs by increasing the take-up of
primary care services, assuming they
would not have utilized appropriate ser-
vices as frequently if they had not been
given this choice.

Any transfers associated with the in-
terim final regulations and these final reg-
ulations are expected to be minimal. To
the extent that pediatricians acting as pri-
mary care providers would receive higher
payment rates for services provided than
would other primary care physicians,
there may be some transfer of wealth from
policy holders of non-grandfathered group
plans to those enrollees that choose the
former providers. However, the Depart-
ments do not believe that this is likely
given the similarity in income for primary
care providers that care for children.

### 3. Patient Access to Obstetrical and Gynecological Care

The statute, the interim final regula-
tions and these final regulations also pro-
vide rules for a group health plan, or a
health insurance issuer offering group or
individual health insurance coverage, that
provides coverage for obstetrical or gyne-

cological care and requires the designa-
tion of an in-network primary care pro-
vider. Specifically, the plan or issuer may
not require authorization or referral by the
plan, issuer, or any person (including a
primary care provider) for a female par-
ticipant, beneficiary, or enrollee who
seeks obstetrical or gynecological care
provided by an in-network health care
professional who specializes in obstetrics
or gynecology (OB/GYN). These plans
and issuers must also treat the provision of
obstetrical and gynecological care, and the
ordering of related obstetrical and gyne-
cological items and services, by the OB/
GYN as the authorization of the primary
care provider. For this purpose, an OB/
GYN is any individual who is authorized
under applicable State law to provide ob-
stetrical or gynecological care, and is not
limited to a physician.

## a. Affected Entities and Individuals

Requiring referrals or authorizations to
OB/GYNs is typically required by HMOs
and POS plans.

This provision applies to non-
grandfathered health plans. However, due
to the lack of data on HMO and POS
enrollees by type of market, and the in-
ability to predict new plans that may enter
those markets, the Departments are unable
to predict the number enrollees and plans
that would be affected by this provision.
As a reference, there are an estimated 7.3
million females between ages 21 to 65
with ESI who are in HMO plans.152

### b. Benefits, Costs, and Transfers

This provision gives women in covered
plans easier access to their OB/GYNs,
where they can receive preventive ser-
vices such as pelvic and breast exams,
without the added time, expense, and in-
convenience of needing permission first
from their primary care providers. More-
over, this provision may also save time
and reduce administrative burden since
participating OB/GYNs do not need to get
an authorization from a primary care pro-

150Estimate based on data from the 2012 MEPS, 2012 Census of Government, 2014 Current Population Survey, and 2014 Kaiser/HRET Survey of Employer Sponsored Health Benefits.
151See AAP Policy Statement, "Guiding Principles for Managed Care Arrangements for the Health Care of Newborns, Infants, Children, Adolescents, and Young Adults", available at:
http:/pediatrics.aappublications.org/content/132/5/e1452.full.pdf+html.

152Estimate based on data from the 2012 MEPS, 2012 Census of Government, 2014 Current Population Survey, and 2014 Kaiser/HRET Survey of Employer Sponsored Health Benefits.

vider to provide care and order obstetrical
and gynecological items and services. To
the extent that primary care providers
spend less time seeing women who need a
referral to an OB/GYN, access to primary
care providers will be improved. To the
extent that the items and services are crit-
ical and would have been delayed while
getting an authorization from the primary
care provider, this provision will improve
the treatment and health outcomes of fe-
male patients. Access to such care can
have substantial benefits in women's
lives.

To the extent that direct access to OB/
GYN services results in increased utiliza-
tion of recommended and appropriate
care, this provision may result in benefits
associated with improved health status for
the women affected. Potential cost savings
also exist since women in affected plans
will not need to visit their primary care
provider in order to get a referral for rou-
tine obstetrical and gynecological care,
items, and services, thereby reducing un-
necessary time and administrative burden,
and decreasing the number of office visits
paid by her and by her health plan.

One potential area of additional costs
associated with this provision would be
induced demand, as women who no lon-
ger need a referral to see an OB/GYN may
be more likely to receive preventive
screenings and other care. Data is limited
to provide an estimate of this induced
demand, but the Departments believe it to
be small.

To the extent this provision results in a
shift in services to higher cost providers, it
will result in a transfer of wealth from
enrollees in non-grandfathered group
plans to those individuals using the ser-
vices affected. However, such an effect is
expected to be small.

## 4. Emergency Services

PHS Act section 2719A, the interim
final regulations, and these final regula-
tions provide that a group health plan and
a health insurance issuer covering emer-
gency services must do so without the
individual or the health care provider hav-
ing to obtain prior authorization (even if
the emergency services are provided out-
of-network). For a plan or health insur-
ance coverage with a network of providers

that provide benefits for emergency ser-
vices, the plan or issuer may not impose
any administrative requirement or limita-
tion on benefits for out-of-network emer-
gency services that is more restrictive than
the requirements or limitations that apply
to in-network emergency services.

Finally, the interim final regulations
and these final regulations provide that
cost-sharing requirements expressed as a
copayment amount or coinsurance rate
imposed for out-of-network emergency
services cannot exceed the cost-sharing
requirements that would be imposed if the
services were provided in-network. The
regulations also provide that a plan or
health insurance issuer provide benefits
for out-of-network emergency services
(prior to imposing in-network cost shar-
ing) in an amount at least equal the great-
est of: (1) the median amount negotiated
with in-network providers for the emer-
gency service; (2) the amount for the
emergency service calculated using the
same method the plan generally uses to
determine payments for out-of-network
services (such as the usual, customary,
and reasonable amount); or (3) the amount
that would be paid under Medicare for the
emergency service. In applying the rules
relating to emergency services, the statute
and the regulations define the terms emer-
gency medical condition, emergency ser-
vices, and stabilize. These terms are de-
fined generally in accordance with their
meaning under Emergency Medical Treat-
ment and Labor Act (EMTALA), section
1867 of the Social Security Act.

The statute and the regulations relating
to emergency services do not apply to
grandfathered health plans; however,
other Federal or State laws related to
emergency services may apply regardless
of grandfather status.

## a. Affected Entities and Individuals

The interim final regulations and these
regulations directly affect out-of-pocket
expenditures for individuals enrolled in
non-grandfathered private health plans
(group or individual) whose copayment or
coinsurance arrangements for emergency
services differ between in-network and
out-of-network providers. These regula-
tions may also require some health plans
to change the amount they pay to out-of-

network providers compared to their pre-
Affordable Care Act contractual arrange-
ments. There are no available data,
however, that allow for national estimates
of the number of plans (or number of
enrollees in plans) that have different pay-
ment arrangements for out-of-network
than in-network providers, or differences
between in- and out-of-network copay-
ment and coinsurance arrangements, in or-
der to more precisely estimate the number
of enrollees affected.

Prior to the issuance of the interim final
regulations, the Departments conducted
an informal survey of benefits plans for
large insurers in order to assess the land-
scape with regard to copayment and coin-
surance for emergency department ser-
vices, but found that a variety of
arrangements existed in the marketplace
prior to the issuance of the interim final
regulations. Many of the large insurers
maintained identical copayment and/or
coinsurance arrangements between in-
and out-of-network providers. Others had
differing arrangements based on copay-
ments, coinsurance rates, or a combina-
tion of the two. While useful for examin-
ing the types of arrangement that exist in
the market place, these data do not contain
enrollment information and therefore can-
not be used to make impact estimates.

It was estimated in the interim final
regulations that a maximum of 2.1 to 4.2
million individuals would be potentially
affected by differing out-of-pocket re-
quirements. Based on an informal survey,
some proportion, possibly a large portion,
of these individuals were covered by plans
that had identical in- and out-of-network
requirements. Therefore, the number of
individuals affected by this regulatory
provision was expected to be smaller.

## b. Benefits, Costs, and Transfers

Insurers maintained differing copay-
ment and coinsurance arrangements be-
tween in- and out-of-network providers as
a cost containment mechanism. Imple-
menting reduced cost sharing for the use
of in-network providers provides financial
incentive for enrollees to use these pro-
viders, with whom plans often have
lower-cost contractual arrangements. In
emergency situations, however, the choice
of an in-network provider may not be

available - for example, when a patient
is some distance from his or her local
provider networks or when an ambulance
transports a patient to the nearest hospital
which may not have contractual arrange-
ments with the person's insurer. In these
situations, the differing copayment or co-
insurance arrangements could place a sub-
stantial financial burden on the patient.
This provision eliminates this disparity in
out-of-pocket burden for enrollees, lead-
ing to potentially substantial financial
benefit.

The regulations also provide for poten-
tially higher payments to out-of-network
providers, if usual customary rates or
Medicare rates are higher than median
in-network rates. This can have a direct
economic benefit to providers and pa-
tients, as the remaining differential be-
tween provider charge and plan payment
will be smaller, leading to a smaller
balance-bill for patients.

To the extent that expectations about
such financial burden with out-of-network
emergency department usage would cause
individuals to delay or avoid seeking nec-
essary medical treatment when they can-
not access a network provider, this provi-
sion may result in more timely use of
necessary medical care. It may therefore
result in health and economic benefits as-
sociated with improved health status; and
fewer complications and hospitalizations
due to delayed and possibly reduced mor-
tality. The Departments expect that this
effect would be small, however, because
insured individuals are less likely to delay
care in emergency situations.

The economic costs associated with the
emergency services provisions are likely
to be minimal. These costs will occur to
the extent that any lower cost-sharing will
induce new utilization of out-of-network
emergency services. Given the nature of
these services as emergency services, this
effect is likely to be small for insured
individuals. In addition, the demand for
emergency services in truly emergency
situations can result in health care cost
savings and population health improve-
ments due to the timely treatment of con-
ditions that could otherwise rapidly
worsen.

As discussed in the RIA for the interim
final regulations, the emergency services
provisions are likely to result in some
transfers from the general membership of
non-grandfathered group health plans that
have differing copayment and coinsurance
arrangements to those policy holders that
use the out-of-network emergency ser-
vices. The precise amount of the transfer
which would occur through an increase in
premiums is impossible to quantify due to
lack of data, but only applies to non-
grandfathered health plans.

## 5. Application to Grandfathered Plans

The provisions relating to certain pa-
tient protections do not apply to grandfa-
thered health plans. However, other Fed-
eral or State laws related to these patient
protections may apply regardless of
grandfather status.

## 6. Patient Protection Disclosure Requirement

When applicable, it is important that
individuals enrolled in a plan or health
insurance coverage know of their rights to
(1) choose a primary care provider or a
pediatrician when a plan or issuer requires
participants or subscribers to designate a
primary care physician; or (2) obtain ob-
stetrical or gynecological care without
prior authorization.

Accordingly, as was provided in the
interim final regulations, these final regu-
lations require such plans and issuers to
provide a notice to participants (in the
individual market, primary subscribers) of
these rights when applicable. Model lan-
guage is provided in these regulations.
The notice must be provided whenever the
plan or issuer provides a participant with a
summary plan description or other similar
description of benefits under the plan or
health insurance coverage, or in the indi-
vidual market, provides a primary sub-
scriber with a policy, certificate, or con-
tract of health insurance.

The Departments estimate that the cost
to plans and insurance issuers to prepare
and distribute the disclosure is $940,000
in 2015. For a discussion of the Patient
Protection Disclosure Requirement, see

the Paperwork Reduction Act section later
in this preamble.

## IV. Paperwork Reduction Act

### A. Departments of Labor and the Treasury

These final regulations contain a notice
of grandfather status and third party dis-
closure, rescissions notice, and patient
protection disclosures requirement for is-
suers and notice requirements related to
internal claims and appeals and external
review that are information collection re-
quests (ICRs) subject to the Paperwork
Reduction Act of 1995 (PRA) (44 U.S.C.
3506(c)(2)(A)).

In accordance with the requirements of
the Paperwork Reduction Act of 1995
(PRA) (44 U.S.C. 3506(c)(2)), the Depart-
ments submitted an ICR to OMB in ac-
cordance with 44 U.S.C. 3507(d), contem-
poraneously with the publication of the
interim final regulations, for OMB's re-
view under the emergency PRA Proce-
dures.153 OMB subsequently approved the
ICRs. Contemporaneously with the publi-
cations of the emergency ICRs, the De-
partments published a separate Federal
Register notice informing the public that
it intended to request OMB to extend the
approval for three years and soliciting
comments on the ICRs. OMB approved
the ICR extensions.

No public comments were received in
response to the ICRs contained in the in-
terim final regulations that specifically ad-
dressed the paperwork burden analysis of
the information collections. The com-
ments that were submitted contained in-
formation relevant to the costs and admin-
istrative burdens attendant to the
proposals. The Departments took into ac-
count the public comments when analyz-
ing the economic impact of the proposals,
and developing the revised paperwork
burden analysis, which is summarized in
the following sections.

A copy of the ICRs may be obtained by
contacting the following PRA addressee
or at http://www.RegInfo.gov. PRA AD-
DRESSEE: G. Christopher Cosby, Office
of Policy and Research, U.S. Department
of Labor, Employee Benefits Security Ad-
ministration, 200 Constitution Avenue,

NW, Room N-5718, Washington, DC
20210. Telephone: (202) 693-8410; Fax:
(202) 219-4745. These are not toll-free
numbers. E-mail: ebsa.opr@dol.gov.

#### 1. ICR Regarding Affordable Care Act Notice of Grandfather Status and Third Party Disclosure

As discussed earlier in this preamble,
to maintain grandfathered health plan sta-
tus under these final regulations, a plan or
issuer must maintain records that docu-
ment the plan or policy terms in connec-
tion with the coverage in effect on March
23, 2010, and any other documents nec-
essary to verify, explain, or clarify its sta-
tus as a grandfathered health plan, dis-
close its status as a grandfathered health
plan, and if switching issuers and intend-
ing to maintain its status as a grandfa-
thered plan it must provide to the new
health insurance issuer documentation of
plan terms under the prior health coverage
sufficient for it to determine whether a
change causing a cessation of grandfa-
thered health plan status has occurred.

##### a. Grandfathered Health Plan Disclosure

The final regulations provide that the
plan or issuer of a grandfathered plan
must disclose to participants and benefi-
ciaries its status as a grandfathered health
plan. Model language is provided by the
Departments. Using data from the 2014
Employer Health Benefits Survey it is es-
timated that 37 percent of plans are grand-
fathered plans and 26 percent of employ-
ees in ERISA-covered plans are in a
grandfathered plans.154

The Departments estimate that there
are 850,700 (2.3 million ERISA-covered
plans * 0.37) ERISA-covered plans155 -
with an estimated 17.2 million policy
holders (66 million policy holders *0.26)
\- that will need to include the notice in
plan documents.156 After plans satisfied
the grandfathered health plan disclosure

requirement in 2011, any additional bur-
den should be de minimis if a plan wants
to maintain its grandfathered status in fu-
ture years. The Departments also expect
the cost of removing the notice from plan
documents as plans relinquish their grand-
fathered status to be de minimis and there-
fore it is not estimated. Based on the fore-
going, the Departments estimate that plans
will incur no additional burden to main-
tain or remove the notice from plan doc-
uments. The Departments estimate that
the notice will require one-half of a page
and five cents per page printing and ma-
terial cost will be incurred, and 38 percent
of the notices will be delivered electroni-
cally. This results in a total cost burden of
approximately $266,000 ($0.05 per
page\*1/2 pages per notice * 17.2 million
notices\*0.62).

### b. Record Keeping Requirement

Plans were required to maintain re-
cords documenting the terms of the plan
or health insurance coverage in connec-
tion with the coverage in effect on March
23, 2010.

The Departments assume that most of
the documents required to be retained to
satisfy the recordkeeping requirement of
these final regulations are already retained
by plans for tax purposes, to satisfy
ERISA's record retention and statute of
limitations requirements, and for other
business reasons. The Departments esti-
mated this as a one-time cost incurred in
2011, because after the first year, the De-
partments anticipate that any future costs
to retain the records will be de minimis.

### c. Documentation of Plan Terms

These final regulations contain a dis-
closure requirement that requires that a
group health plan that is changing health
insurance coverage to provide to the suc-
ceeding health insurance issuer (and the

succeeding health insurance issuer must
require) documentation of plan terms (in-
cluding benefits, cost sharing, employer
contributions, and annual limits) under the
prior health insurance coverage sufficient
to make a determination whether the stan-
dards of paragraph (g)(1) under the Af-
fordable Care Act section 1251 regula-
tions are exceeded. The number of plans
that might be effected (133,200) is esti-
mated by multiplying the number of
grandfathered plans (850,700) by the per-
cent of plans shopping for a new carrier
(58 percent) and the number of plans
shopping for a new carrier that switched
(27 percent). Each of these plans would
need to transmit to the carrier documen-
tation of plan terms (including benefits,
cost sharing, employer contributions, and
annual limits) under the prior health insur-
ance coverage sufficient to make a deter-
mination whether the standards of para-
graph (g)(1) of the final regulations under
Affordable Care Act section 1251 are ex-
ceeded. It is estimated that the electronic
transmission of the already retained doc-
uments would require 2 minutes of a cler-
ical staff's time with a labor rate of $30.42
per hour.157 These estimate result in an
hour burden of 4,440 hours (133,200\*2/
60) with an equivalent cost of $135,100
(133,200\*2/60*$30.42). Each of these
plans would need to transmit to the carrier
documentation of plan terms. If half of the
plans transmit the required documents
electronically then 66,600 plans will be
sent via mail resulting in a materials and
postage costs of $467,600 ((66,600*(90
pages *5 cents per page + $2.52 post-
age)).

The Departments note that persons are
not required to respond to, and generally
are not subject to any penalty for failing to
comply with an ICR unless the ICR has a
valid OMB control number.

The paperwork burden estimates are
summarized as follows:

Type of Review: Revision.

154Kaiser Family Foundation, "2014 Employer Health Benefits Survey." http://kff.org/health-costs/report/2014-employer-health-benefits-survey/.

155EBSA estimates based on the 2014 Medical Expenditure Survey - Insurance Component.

156Health Insurance Coverage Bulletin: Abstract of Auxiliary Data for the March 2014 Annual Social and Economic Supplement to the Current Population Survey, Table 3C.

157The Department's estimated 2015 hourly labor rates include wages, other benefits, and overhead are calculated as follows: mean wage from the 2013 National Occupational Employment
Survey (April 2014, Bureau of Labor Statistics http://www.bls.gov/news.release/pdf/ocwage.pdf); wages as a percent of total compensation from the Employer Cost for Employee
Compensation (June 2014, Bureau of Labor Statistics http://www.bls.gov/news.release/ecec.t02.htm); overhead as a multiple of compensation is assumed to be 25 percent of total
compensation for paraprofessionals, 20 percent of compensation for clerical, and 35 percent of compensation for professional; annual inflation assumed to be 2.3 percent annual growth of
total labor cost since 2013 (Employment Costs Index data for private industry, September 2014 http://www.bls.gov/news.release/eci.nr0.htm). Secretaries, Except Legal, Medical, and
Executive (43-6014): $16.35(2013 BLS Wage rate)/0.675(ECEC ratio) *1.2(Overhead Load Factor) *1.023(Inflation rate) 2(Inflated 2 years from base year) = $30.42

Agency: Employee Benefit Security
Administration, Department of Labor; In-
ternal Revenue Service, U.S. Department
of the Treasury.

Title: Disclosure and Recordkeeping
Requirements for Grandfathered Plans un-
der the Affordable Care Act

OMB Control Number: 1210-0140;
1545-2178

Affected Public: Business or other for-
profit; not-for-profit institutions.

Total Respondents: 850,700
Total Responses: 18,143,923

Frequency of Response: Occasionally.

Estimated Total Annual Burden Hours
(three year average): 2,200 (Employee
Benefits Security Administration); 2,200
(Internal Revenue Service).

Estimated Total Annual Cost Burden
(three year average): $366,800 (Em-
ployee Benefits Security Administration);
$366,800 (Internal Revenue Service).

### 2. ICR Regarding Affordable Care Act Notice Relating to Rescissions

As discussed earlier in this preamble,
PHS Act Section 2712 and these final
regulations provide rules regarding rescis-
sions for group health plans and health
insurance issuers that offer group or indi-
vidual health insurance coverage. A plan
or issuer must not rescind coverage under
the plan, policy, certificate, or contract of
insurance except in the case of fraud or
intentional misrepresentation of a material
fact. These final regulations provide that a
group health plan or a health insurance
issuer offering group health insurance
coverage must provide at least 30 calendar
days advance notice to an individual be-
fore coverage may be rescinded. This re-
scission notice requirement is an informa-
tion collection request (ICR) subject to the
Paperwork Reduction Act of 1995 (PRA)
(44 U.S.C. 3506(c)(2)(A)).

The Departments assume that rescis-
sions are rare in the group market and that
small group health plans are affected by
rescissions. The Departments are not

aware of a data source on the number of
group plans whose policy is rescinded;
therefore, the Departments assume that
100 small group health plan policies are
rescinded in a year. The Departments es-
timate that there is an average of 15.33
participants in small, insured plans.158
Based on these numbers the Departments
estimate that approximately 100 policies
are rescinded during a year, which would
result in 1,533 notices being sent to af-
fected participants with 38 percent trans-
mitted electronically and 62 percent
mailed. The Departments estimate that 15
minutes of legal professional time at
$129.94 per hour would be required by the
insurers of the 100 plans to prepare the
notice and one minute per notice of cler-
ical professional time at $30.42 per hour
would be required to distribute the paper
notices. The Departments believe the
costs of electronic transmission would be
de minimis. This results in an hour burden
of approximately 41 hours with an equiv-
alent cost of approximately $3,700.159

The Departments estimate that the cost
burden associated with distributing the pa-
per notices via mail will be approximately
$500. This results from distributing 950
paper notices at a cost of $0.54 per no-
tice.160

These paperwork burden estimates are
summarized as follows:

Type of Review: Revision of existing
collection.

Agencies: Employee Benefits Security
Administration, Department of Labor; In-
ternal Revenue Service, U.S. Department
of the Treasury.

Title: Required Notice of Rescission of
Coverage under the Patient Protection and
Affordable Care Act Disclosures.

OMB Number: 1210-0141; 1545-
2180.

Affected Public: Business or other for-
profit; not-for-profit institutions.
Total Respondents: 100.
Total Responses: 1,533.

Frequency of Response: Occasionally.

Estimated Total Annual Burden Hours:
20.5 hours (Employee Benefits Security
Administration); 20.5 hours (Internal
Revenue Service).

Estimated Total Annual Burden Cost:
$250 (Employee Benefits Security Ad-
ministration); $250 (Internal Revenue
Service).

## 3. ICR Regarding Affordable Care Act Patient Protection Disclosure Requirement

### a. Patient Protection Disclosure

As discussed earlier in this preamble,
PHS Act section 2719A imposes, with
respect to a group health plan, or group or
individual health insurance coverage, a set
of three requirements relating to the
choice of health care professionals. When
applicable, it is important that individuals
enrolled in a plan or health insurance cov-
erage know of their rights to (1) choose a
primary care provider or a pediatrician
when a plan or issuer requires participants
or subscribers to designate a primary care
physician; (2) obtain obstetrical or gyne-
cological care without prior authorization;
or (3) coverage of emergency services.
Accordingly, these final regulations re-
quire such plans and issuers to provide a
notice to participants (in the individual
market, primary subscriber) of these rights
when applicable. Model language is pro-
vided in these final regulations. The notice
must be provided whenever the plan or
issuer provides a participant with a sum-
mary plan description or other similar de-
scription of benefits under the plan or
health insurance coverage, or in the indi-
vidual market, provides a primary sub-
scriber with a policy, certificate, or con-
tract of health insurance. The Affordable
Care Act patient protection disclosure re-
quirement is an ICR subject to the PRA.

In order to satisfy these final regula-
tions' patient protection disclosure re-
quirement, the Departments estimate that
41,000 ERISA-covered plans will need to

158U.S. Department of Labor, EBSA calculations using the March 2014 Current Population Survey Annual Social and Economic Supplement and the 2012 Medical Expenditure Panel Survey.

159The Department's estimated 2015 hourly labor rates include wages, other benefits, and overhead are calculated as follows: mean wage from the 2013 National Occupational Employment
Survey (April 2014, Bureau of Labor Statistics http://www.bls.gov/news.release/pdf/ocwage.pdf); wages as a percent of total compensation from the Employer Cost for Employee
Compensation (June 2014, Bureau of Labor Statistics http://www.bls.gov/news.release/ecec.t02.htm); overhead as a multiple of compensation is assumed to be 25 percent of total
compensation for paraprofessionals, 20 percent of compensation for clerical, and 35 percent of compensation for professional; annual inflation assumed to be 2.3 percent annual growth of
total labor cost since 2013 (Employment Costs Index data for private industry, September 2014 http://www.bls.gov/news.release/eci.nr0.htm).

160This estimate is based on an average document size of one page, $.05 cents per page material and printing costs, and $0.49 postage costs.

notify an estimated 693,000 policy hold-
ers annually of their plans policy in re-
gards to designating a primary care phy-
sician and for obstetrical or gynecological
visits.161 The Departments believe that
plans would only incur costs associated
with this notice during the first year after
relinquishing grandfather status. In subse-
quent years, this notice would remain un-
changed and its costs are factored into the
burden estimates associated with the Sum-
mary Plan Description information collec-
tion request (OMB Control Number 1210-
0039).

The following estimates are based on
the assumption that five percent of group
health plans will relinquish grandfathered
health plan status annually. Because the
final regulations provide model language
for this purpose, the Departments estimate
that five minutes of clerical time (with a
labor rate of $30.42/hour) will be required
to incorporate the required language into
the plan document and ten minutes of a
human resource professional's time (with
a labor rate of $110.30/hour) will be re-
quired to review the modified language.
Therefore, the Departments estimate that
plans relinquishing grandfathered health
plan status will incur an annual hour bur-
den of 10,000 hours with an equivalent
cost of $866,000.162

The Departments assume that only
printing and material costs are associated
with the disclosure requirement, because
the final regulations provide model lan-
guage that can be incorporated into exist-
ing plan documents, such as an SPD. The
Departments estimate that the notice will
require one-half of a page, five cents per
page printing and material cost will be
incurred, and 38 percent of the notices
will be delivered electronically at de mi-
nimis cost. This results in a cost burden of
$11,000.163

b. Out-of-Network Emergency Services
Disclosure

The final regulations require that a plan
or issuer may not impose any copayment
or coinsurance requirement for out-of-
network emergency services that is more
restrictive than the copayment or coinsur-
ance requirement that would apply if the
services were provided in network. If
State law prohibits balance billing, or a
plan or issuer is contractually responsible
for any amounts balanced billed by an
out-of-network emergency services pro-
vider, the plan or issuer must provide an
enrollee or beneficiary adequate and
prominent notice of their lack of financial
responsibility with respect to amounts bal-
anced billed in order to prevent inadver-
tent payment by an enrollee or beneficiary.
This information should already be rou-
tinely included in the Explanation of Benefit
documents sent by plans and issuers to en-
rollees and beneficiaries. Therefore, in ac-
cordance with the implementing regulations
of the PRA at 5 CFR 1320.3(b)(2), we be-
lieve this is a usual and customary business
practice. Plans and issues routinely provide
enrollees and beneficiaries with the Expla-
nation of Benefit documents.

The Departments note that persons are
not required to respond to, and generally
are not subject to any penalty for failing to
comply with, an ICR unless the ICR has a
valid OMB control number. These paper-
work burden estimates are summarized as
follows:

Type of Review: Revision of an exist-
ing collection.

Agencies: Employee Benefits Security
Administration, Department of Labor; In-
ternal Revenue Service, U.S. Department
of Treasury.

Title: Disclosure Requirement for Pa-
tient Protections under the Affordable
Care Act.

OMB Number: 1210-0142; 1545-
2181.

Affected Public: Business or other for
profit; not-for-profit institutions.

Total Respondents: 41,000.

Total Responses: 693,000.
Frequency of Response: One time.

Estimated Total Annual Burden Hours:
5,000 (Employee Benefits Security Ad-
ministration); 5,000 (Internal Revenue
Service).

Estimated Total Annual Burden Cost:
$5,500 (Employee Benefits Security Ad-
ministration); $5,500 (Internal Revenue
Service).

4\. ICR Regarding Affordable Care Act
Internal Claims and Appeals and External
Review

PHS Act section 2719 and these final
regulations, require that group health
plans and health insurance issuers offering
group health insurance coverage must
comply with the internal claims and ap-
peals processes set forth in 29 CFR
2560.503-1 (the DOL claims procedure
regulation) and update such processes in
accordance with standards established by
the Secretary of Labor in paragraph
(b)(2)(ii) of the regulations under PHS
Act section 2719.

The burden to comply with the DOL
claims procedure regulations is accounted
for under OMB control number 1210-
0053, therefore it is not included here.

Paragraph (b)(2)(ii)(C) of the final reg-
ulations under PHS Act section 2719 adds
an additional requirement that non-
grandfathered ERISA-covered group health
plans provide to the claimant, free of charge,
any new or additional evidence considered
to be relied upon, or generated by the plan or
issuer in connection with the claim. The
related hour burden is 1,100 hours and the
related cost burden is $1.1 million.

The June 2011 amendment to the in-
terim final regulations required that plans

161The Departments' estimate of the number of ERISA-covered health plans was obtained from the 2014 Medical Expenditure Survey - Insurance Component and the number of policy
holders was obtained from the Health Insurance Coverage Bulletin: Abstract of Auxiliary Data for the March 2014 Annual Social and Economic Supplement to the Current Population Survey,
Table 3C http://www.dol.gov/ebsa/pdf/coveragebulletin2014.pdf. Information on HMO and POS plans and enrollment in such plans was obtained from the Kaiser/HRET Survey of Employer
Sponsored Health Benefits, 2014. The Department assumes that five percent of group health plans will relinquish grandfathered health plan status annually.

162The Department's estimated 2015 hourly labor rates include wages, other benefits, and overhead are calculated as follows: mean wage from the 2013 National Occupational Employment
Survey (April 2014, Bureau of Labor Statistics http://www.bls.gov/news.release/pdf/ocwage.pdf); wages as a percent of total compensation from the Employer Cost for Employee
Compensation (June 2014, Bureau of Labor Statistics http://www.bls.gov/news.release/ecec.t02.htm); overhead as a multiple of compensation is assumed to be 25 percent of total
compensation for paraprofessionals, 20 percent of compensation for clerical, and 35 percent of compensation for professional; annual inflation assumed to be 2.3 percent annual growth of
total labor cost since 2013 (Employment Costs Index data for private industry, September 2014 http://www.bls.gov/news.release/eci.nr0.htm).

163This estimate is based on an average document size of 1/2 page, $.05 cents per page material and printing costs, and $0.49 postage costs for paper notices and de minimis costs for
electronically distributed notices. The Departments assume 62 percent of notices will be on paper and 38 percent will be distributed electronically.

and issuers must provide participants and
beneficiaries who reside in a county where
ten percent or more of the population re-
siding in the county is literate only in the
same non-English language with a one-
sentence statement in all notices written in
the applicable non-English language
about the availability of language ser-
vices. In addition to including the state-
ment, plans and issuers are required to
provide a customer assistance process
(such as a telephone hotline) with oral
language services in the non-English lan-
guage and provide written notices in the
non-English language upon request. Pro-
viding notice of the services and the trans-
lation services is estimated to have a cost
burden of $1 million annually.

Also, PHS Act section 2719 and these
final regulations provide that group health
plans and issuers offering group health
insurance coverage must comply either
with a State external review process or a
Federal review process. Plans and issuers
must provide to those conducting the ex-
ternal reviews required documents. There
is an estimated 8,400 external appeals
conducted annually. The related hour bur-
den is 3,500 hours with an equivalent cost
of $193,700 and a cost burden of $80,000
annually.

In total, the hour burden associated
with claims, appeals, and external review
is approximately 4,500 hours at an equiv-
alent cost of $244,800 annually. Because
the burden is shared equally between the
Department of Labor and the Department
of the Treasury, each Department's share
is 2,300 hours at an equivalent cost of
$122,400 annually.

In total, the cost burden is approxi-
mately $2.2 million annually. Because the
burden is shared equally between the De-
partment of Labor and the Department of
the Treasury, each Department's share is
$1.1 million annually.

The Departments note that persons are
not required to respond to, and generally
are not subject to any penalty for failing to
comply with, an ICR unless the ICR has a
valid OMB control number.

The paperwork burden estimates are
summarized as follows:

Type of Review: Revision.

Agency: Employee Benefit Security
Administration, Department of Labor; In-
ternal Revenue Service, U.S. Department
of the Treasury.

Title: Affordable Care Act Internal
Claims and Appeals and External Review
Disclosures for Non-Grandfathered Plans.

OMB Control Number: 1210-0144;
1545-2182

Affected Public: Business or other for-
profit; not-for-profit institutions.

Total Respondents: 1,769,264
Total Responses: 275,430

Frequency of Response: Occasionally.

Estimated Total Annual Burden Hours
(three year average): 2,300 (Employee
Benefits Security Administration); 2,300
(Internal Revenue Service).

Estimated Total Annual Cost Burden
(three year average): $1,143,000 (Em-
ployee Benefits Security Administration);
$1,143,000 (Internal Revenue Service).

### B. Department of Health and Human Services

Under the Paperwork Reduction Act of
1995, we are required to provide 60-day
notice in the Federal Register and solicit
public comment before a collection of in-
formation requirement is submitted to the
Office of Management and Budget
(OMB) for review and approval. These
final regulations contain ICRs that are
subject to review by OMB. A description
of these provisions is given in the follow-
ing paragraphs with an estimate of the
annual burden, summarized below in the
Table below. In order to fairly evaluate
whether an information collection should be
approved by OMB, section 3506(c)(2)(A)
of the Paperwork Reduction Act of 1995
requires that we solicit comment on the fol-
lowing issues:

. The need for the information collec-
tion and its usefulness in carrying out
the proper functions of our agency.

. The accuracy of our estimate of the
information collection burden.

· The quality, utility, and clarity of the
information to be collected.

· Recommendations to minimize the in-
formation collection burden on the af-

fected public, including automated
collection techniques.

As discussed above in the Department
of Labor and Department of the Treasury
PRA section, these final regulations con-
tain a notice of grandfather status, rescis-
sions notice, and patient protection disclo-
sures requirement for issuers, and notice
requirements related to internal claims
and appeals and external review. These
requirements are ICRs under the Paper-
work Reduction Act. Each of these re-
quirements is discussed in detail in the
following sections. Estimated hourly la-
bor rates are calculated using data from
the 2013 National Occupational Employ-
ment Survey.164

1\. ICRs Regarding Affordable Care Act
Notice of Grandfather Status
(§§ 147.140(a)(2), 147.140(a)(3)(i),
147.140(a)(3)(ii))

### a. Grandfathered Health Plan Disclosure

The final regulations provide model
language for the grandfathered health plan
disclosure that can be incorporated into
existing plan documents. After plans first
satisfied the grandfathered health plan dis-
closure requirement in 2011, any addi-
tional burden is expected to be negligible
if a plan wants to maintain its grandfa-
thered status in future years. It is also
expected that the cost of removing the
notice from plan documents as plans re-
linquish their grandfathered status would
be minimal and therefore it is not esti-
mated.

Issuers and multi-employer plans must
also add a prominent disclosure in their
group policies, certificates, or contracts of
insurance that plan sponsors are required
to notify the issuer if the contribution rate
changes at any point during the plan year.
This only affects issuers of fully insured
group health plans and multi-employer
plans and after this requirement is first
satisfied, any additional burden in future
years is expected to be negligible and is
therefore not estimated.

Grandfathered plans will incur printing
and material costs associated with the dis-
closure requirements. It is estimated that
there will be approximately 47,500 grand-

1642013 National Occupational Employment Survey, April 2014, Bureau of Labor Statistics, http://www.bls.gov/news.release/pdf/ocwage.pdf.

fathered State and local governmental
health plans with approximately 5.5 mil-
lion policyholders165 and approximately
1.4 million policyholders in the individual
market with grandfathered coverage166 is-
sued by 430 issuers during 2015. There-
fore, grandfathered plans and issuers in
the individual markets will need to send
approximately 6.9 million disclosures no-
tifying plan participants and beneficiaries
of their plans' status as a grandfathered
health plan. We anticipate that the notice
will require one-half of a page and five
cents per page printing and material cost
will be incurred. We also assume that 38
percent of the notices will be delivered
electronically. This results in a total an-
nual cost burden of approximately
$106,000. The number of notices and cost
burden are likely to be lower in subse-
quent years as more plans relinquish their
grandfathered status. In the absence of
data regarding how many plans will retain
grandfathered status in subsequent years,
we consider this estimate to be the upper
limit for the number of notices and cost
burden in future years.

### b. Recordkeeping Requirement

It is assumed that most of the docu-
ments required to be retained to satisfy the
recordkeeping requirement of these final
regulations are already retained by plans
for tax purposes, to satisfy ERISA's re-
cord retention and statute of limitations
requirements, and for other business rea-
sons. It was previously estimated that after
the one-time cost related to record keep-
ing requirement was incurred in 2011,
costs in subsequent years will be negligi-
ble and, therefore, not estimated.

### c. Grandfathered Plan Change in Carrier Disclosure

A group health plan that is changing
health insurance issuers must provide to
the succeeding health insurance issuer
(and the succeeding health insurance is-
suer must require) documentation of plan
terms (including benefits, cost sharing,

employer contributions, and annual lim-
its) under the prior health insurance cov-
erage sufficient to make a determination
whether the standards of § 147.140(g)(1)
are exceeded.

The number of plans that might change
carriers and thus be affected (7,400) is
estimated by multiplying the estimated
number of grandfathered plans (47,500)
by the percent of plans shopping for a new
carrier (58 percent) and the number of
plans shopping for a new carrier that
switched (27 percent).167

Each employer will require about 2
minutes of clerical labor (at an hourly cost
of approximately $30) to send the infor-
mation required for the disclosure (which
is already retained under the recordkeep-
ing requirement) electronically to the suc-
ceeding issuer. The total annual labor bur-
den for all employers is estimated to be
approximately 248 hours with an equiva-
lent annual cost of approximately $7,500.
The cost of transmitting the information
electronically to the succeeding issuer is
negligible and, therefore, not estimated.
The number of disclosures and cost bur-
den may be lower in subsequent years as
more plans relinquish their grandfathered
status. In the absence of data regarding
how many plans will retain grandfathered
status in subsequent years, we consider
this estimate to be the upper limit for the
burden in future years.

2\. ICR Regarding Affordable Care Act
Notice Relating to Rescissions
(§ 147.128(a)(1))

This analysis assumes that rescissions
only occur in the individual health insur-
ance market, because rescissions in the
group market are rare. It is estimated that
there are approximately 430 issuers issu-
ing 6.77 million policies in the individual
market during a year. A report on rescis-
sions found that 0.15 percent of policies
were rescinded during the 2004 to 2008
time period. Based on these numbers, it is
estimated that approximately 10,200 pol-
icies are rescinded during a year, which
would result in approximately 10,200 no-

tices being sent to affected policyholders,
with 38 percent transmitted electronically
and 62 percent mailed. It is estimated that
each issuer will require 15 minutes of
legal professional time (at approximately
$129.94 per hour) to prepare the notice
and one minute per notice of clerical pro-
fessional time (at approximately $30.42
per hour) to distribute the notice to each
policyholder. Assuming that the cost of
electronic distribution is minimal, this re-
sults in an annual hour burden of approx-
imately 212 hours with an equivalent an-
nual cost of approximately $17,160.

Issuers will incur cost to print and send
the notices. We assume that the notice will
require one page printing and material
cost will be $0.05 per page, mailing cost
will be $0.49 per notice, and 38 percent of
the notices will be delivered electronically
at minimal cost. Therefore, it is estimated
that the cost burden associated with mail-
ing the notices to approximately 6,300
affected policy holders will be approxi-
mately $3,400.

3\. ICR Regarding Affordable Care Act
Patient Protection Disclosure
Requirement (§ 147.138(a)(4))

### b. Patient Protection Disclosure

In order to satisfy the patient protection
disclosure requirement, State and local
government plans and issuers in individ-
ual markets will need to notify policy
holders of their plans policy in regards to
designating a primary care physician and
for obstetrical or gynecological visits and
will incur a one-time burden and cost to
incorporate the notice into plan docu-
ments. State and local government plans
that are currently not grandfathered and
issuers in the individual market have al-
ready incurred the one-time cost to pre-
pare and incorporate this notice in their
existing plan documents. Only State and
local government plans and individual
market plans that relinquish their grandfa-
thered status in subsequent years will be-
come subject to this notice requirement

165The Department lacks data on the number of State and local plans that are grandfathered plans. The Kaiser "Employer Health Benefits Survey" has estimates for private employer plans.
Those estimates are used here as a proxy. They report that 37 percent of plans are grandfather plans and 26 percent of covered employees are in those plans. http://kff.org/health-costs/
report/2014-employer-health-benefits-survey/.

166Estimate based on data from the McKinsey Center for US Health System Reform and Medical Loss Ratio submissions for 2013 reporting year.

167See Section 14. http://kff.org/health-costs/report/2014-employer-health-benefits-survey/.

and incur the one-time costs to prepare the
notice.

There are an estimated 128,400 non-
federal governmental plans and 430 health
insurance issuers in the individual market.
We estimate that five percent of non-
federal governmental plans will relinquish
their grandfathered status annually over
the next three years and will therefore
incur one-time costs to prepare the notice.
Health insurance issuers in the individual
market will also have five percent of their
policies relinquish grandfathered status
annually over the next three years. Data
obtained from the 2014 Kaiser/HRET
Survey of Employer Sponsored Health
Benefits finds that 13 percent of plans
have an HMO option and that 23 percent
of plans offer a POS option. Thus, approx-
imately 2,740 plans and issuers will pro-
duce notices each year.168 While not all
HMO and POS options require the desig-
nation of a primary care physician or a
prior authorization or referral before a
woman can visit an OB/GYN, the Depart-
ment is unable to estimate this number.
Therefore, this estimate should be consid-
ered an overestimate of the number of
affected entities.

Each of these 2,740 plans and issuers
will require a compensation and benefits
manager to spend 10 minutes individual-
izing the model notice to fit the plan's
specifications at an hourly rate of $110.30.
This results in approximately 457 hours of
burden at an equivalent cost of $50,400.
Each plan will also require clerical staff to
spend 5 minutes adding the notice to the
plan's documents at an hourly rate of
$30.42. This results in approximately 228
hours of burden at an equivalent cost of
$7,000. The total annual burden associ-
ated with this requirement is 685 hours at
an equivalent cost of $57,000.

The Department assumes that only
printing and material costs are associated
with the disclosure requirement, because
the final regulations provide model lan-
guage that can be incorporated into exist-
ing plan documents. The Department es-
timates that the notice will require one-
half of a page, five cents per page printing

and material cost will be incurred, and 38
percent of the notices will be delivered
electronically.

It is estimated that there are 27.9 mil-
lion non-federal government plan policy-
holders and individual policyholders. As
stated in the previous section, it is esti-
mated that 5 percent of plans will relin-
quish their grandfathered status annually
in the next three years. Data obtained from
the 2014 Kaiser/HRET Survey of Em-
ployer Sponsored Health Benefits finds
that 13 percent of covered workers in
Government plans have an HMO option
and that 8 percent of covered workers
have a POS option. Data obtained from
AHIP in 2009 finds that 1.93 percent of
individual policyholders have an HMO
options. Thus, it is estimated that plans
will produce 228,000 notices each year,
38 percent of which will be sent electron-
ically.169 This results in a cost burden of
approximately $3,500.170

## c. Out-of-Network Emergency Services Disclosure

The final regulations require that a plan
or issuer may not impose any copayment
or coinsurance requirement for out-of-
network emergency services that is more
restrictive than the copayment or coinsur-
ance requirement that would apply if the
services were provided in network. If
State law prohibits balance billing, or a
plan or issuer is contractually responsible
for any amounts balanced billed by an
out-of-network emergency services pro-
vider, the a plan or issuer must provide an
enrollee or beneficiary adequate and
prominent notice of their lack of financial
responsibility with respect to amounts bal-
anced billed in order to prevent inadver-
tent payment by an enrollee or benefi-
ciary. This information should already be
routinely included in the Explanation of
Benefit documents sent by plans and issu-
ers to enrollees and beneficiaries. There-
fore, in accordance with the implementing
regulations of the PRA at 5 CFR
1320.3(b)(2), we believe this is a usual
and customary business practice. Plans

and issues routinely provide enrollees and
beneficiaries with the Explanation of Ben-
efit documents.

4\. ICRs Regarding Affordable Care Act
Internal Claims and Appeals and
External Review (§§ 14.136 (b)(2)(ii),
147.136 (b)(2)(ii)(C), 147.136 (b)(3)(ii),
147.136 (b)(3)(ii)(C))

Paragraph (b)(2)(ii)(C) of the final reg-
ulations implementing PHS Act section
2719 provides that non-grandfathered
ERISA-covered group health plans pro-
vide to the claimant, free of charge, any
new or additional evidence considered
relied upon, or generated by the plan or
issuer in connection with the claim. The
related hour burden is 773,800 hours
and the related cost burden is $115.2
million.

The June 2011 amendment to the in-
terim final regulations under PHS Act sec-
tion 2719 required that plans and issuers
must provide participants and beneficia-
ries who reside in a county where ten
percent or more of the population residing
in the county is literate only in the same
non-English language with a one-sentence
statement in all notices written in the ap-
plicable non-English language, about the
availability of language services. In addi-
tion to including the statement, plans and
issuers are required to provide a customer
assistance process (such as a telephone
hotline) with oral language services in the
non-English language and provide writ-
ten notices in the non-English language
upon request. Providing notice of the
services and the translation services is
estimated to have a cost burden of
$633,000 annually.

Also, PHS Act section 2719 and the
final regulations provide that group health
plans and issuers offering group health
insurance coverage must comply either
with a State external review process or a
Federal review process. Plans and issuers
must provide to those conducting the ex-
ternal reviews required documents. There
is an estimated 2,100 external appeals
conducted annually. The related hour bur-

168128,400 Governmental plans x 5% newly non-grandfathered plans x (13% HMOs + 23% POSs) + 430 issuers = approximately 2,700 affected plans and issuers.

169[21.1 million Government policyholders x 5% newly non-grandfathered plans x (13% in HMOs + 8% in POSs)] + [6.77 million individual policy holders x 5% newly non-grandfathered
plans x 1.93% in HMOs] = approximately 228,000 notices.

170$0.05 per page\*1/2 pages per notice * 228,000 notices\*62% = approximately $3,500

den is 150 hours with an equivalent cost
of $4,600 and a cost burden of $5,400
annually.

In total, the burden associated with
claims, appeals, and external review is
approximately 774,000 hours at an equiv-
alent cost of $41,601,000 annually. The

cost burden associated with claims, ap-
peals, language translation, and external
review is approximately $115.8 million
annually.

Table 2 .- Annual Reporting, Recordkeeping and Disclosure Burden (HHS)

OMB Control No.

Number of Respondents

Responses

Total Annual Burden (Hours)

Total Labor Cost of Report- ing ($)

Total Capital/ Maintenance Costs ($)

Total Costs ($)

Grandfathered Plans Disclosure

0938-1093

47,932

6,850,695

$106,186

(§ 147.140(a)(2))

Grandfathered Plans Change in Carrier

0938-1093

7,440

248

$7,544

Disclosure (§ 147.140(a)(3)(i))

Rescissions Notice (§ 147.128(a)(1))

0938-1094

430

10,200

212

$17,160

$3,400

$20,560

Patient Protection Disclo- sures (§ 147.138(a) (4))

0938-1094

2,741

228,086

685

$57,341

$3,535

$60,876

Claims and Appeals Ex- ternal Review ((§§ 147.136 (b)(2)(ii), 147.136 (b)(2)(ii)(C), 147.136 (b)(3)(ii), 147.136 (b)(3)(ii)(C))

0938-1098

95,500

399,151,000

773,996

$41,601,000

$115,827,000

$157,428,000

Total

154,043

406,247,421

775,141

$157,623,166

## V. Regulatory Flexibility Act

The Regulatory Flexibility Act (5
U.S.C. 601 et seq.) (RFA) imposes certain
requirements with respect to Federal rules
that are subject to the notice and comment
requirements of section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. 551
et seq.) and which are likely to have a
significant economic impact on a substan-
tial number of small entities.

The RFA generally defines a "small
entity" as (1) a proprietary firm meeting
the size standards of the Small Business
Administration (SBA) (13 CFR 121.201)
pursuant to the Small Business Act (15
U.S.C. 631 et seq.), (2) a nonprofit orga-
nization that is not dominant in its field, or
(3) a small government jurisdiction with a
population of less than 50,000. (States and
individuals are not included in the defini-
tion of "small entity.") The Departments
use as their measure of significant eco-
nomic impact on a substantial number of
small entities a change in revenues of
more than 3 to 5 percent.

As discussed in detail in the "Need for
Regulatory Action" section of this Regu-
latory Impact Analysis, these regulations
are necessary to implement the following
provisions: Affordable Care Act section
1251 (preservation of right to maintain
existing coverage), and PHS Act sections
2704 (prohibition of preexisting condition
exclusions), 2711 (no lifetime or annual
limits), 2712 (prohibition on certain re-
scissions), 2714 (extension of dependent
coverage), 2719 (internal appeals and ex-
ternal review process), and 2719A (patient
protections). In response to the 2010 in-
terim final regulations, the Departments
received many comments that relate to
early implementation issues and ad-
dressed many of these issues through sub-
regulatory guidance. The Departments
also held meetings with stakeholders, in-
cluding small entities affected by the
rules. After consideration of comments
and stakeholder input received in response
to the interim final regulations, the De-
partments are issuing these final regula-
tions.

The Regulatory Flexibility Act re-
quires agencies to assess and consider the
direct economic impacts that regulations
impose on small entities. The primary
economic effects of these final regulations
are indirect, because they result in trans-
fers between individuals covered by
health insurance. While these transfers
could be significant, they do not impose
direct effects on the regulated small enti-
ties for purposes of the RFA.

Most of the direct effects of the final
regulations are associated with their dis-
closure requirements. As discussed below
and in the Paperwork Reduction Act sec-
tion above, these disclosure requirements
do not have a significant economic im-
pact. Therefore, pursuant to section
605(b) of the RFA, the Departments
hereby certify that these final regulations
are not likely to have a significant eco-
nomic impact on a substantial number of
small entities. The Departments' basis for
this determination and their estimate of
small entities affected by these final reg-
ulations is discussed below.

### A. Affected Small Entities

There are several different types of
small entities affected by these final reg-
ulations. For issuers and third party ad-
ministrators, a small business is one that
has total premium revenue of $38.5 mil-
lion or less. The Departments continue
to consider a small plan to be an em-
ployee benefit plan with fewer than 100
participants.171 Further, while some
large employers may have small plans,
in general small employers maintain
most small plans. Thus, the Departments
believe that assessing the impact of this
final rule on small plans is an appropri-
ate substitute for evaluating the effect
on small entities. The definition of small
entity considered appropriate for this
purpose differs, however, from a defini-
tion of small business that is based on
size standards promulgated by the Small
Business Administration (SBA) (13
CFR 121.201) pursuant to the Small
Business Act (15 U.S.C. 631 et seq.).

Based on data from MLR annual re-
port submissions for the 2013 MLR re-
porting year, approximately 141 out of
500 issuers of health insurance coverage
nationwide had total premium revenue
of $38.5 million or less.172 This estimate
may overstate the actual number of
small health insurance companies that
may be affected, since 77 percent of
these small companies belong to larger
holding groups, and many if not all of
these small companies are likely to have
non-health lines of business that would
result in their revenues exceeding $38.5
million.

As discussed previously in the RIA,
there are an estimated 2.3 million
ERISA-covered plans and 128,400 State
and local governmental health plans that
may have experienced an increase in
costs related to the provisions of these
final rules. Ninety-seven percent of
these plans are provided by small
entities and have incurred costs related
to the provisions of these final regula-
tions.

### B. Direct Impacts of Final Rules on Small Entities

1\. Affordable Care Act Section 1251,
Preservation of Right to Maintain
Existing Coverage (26 CFR 54.9815-
1251 , 29 CFR 2590.715-1251, 45 CFR
147.140)

The direct impacts of this provision on
affected small entities are primarily asso-
ciated with notices requirements. Specifi-
cally, the final regulations require affected
plans to maintain records documenting the
terms of the plan in effect on March 23,
2010, and any other documents that are
necessary to verify, explain or clarify sta-
tus as a grandfathered health plan (the
"recordkeeping requirement"). The plan
must make such records available for ex-
amination upon request by participants,
beneficiaries, individual policy subscrib-
ers, or a State or Federal agency official.
The Departments believe this requirement
imposes a minimal burden on small enti-
ties, because they should maintain such
records in the usual and customary course
of their business operations following
standard business procedures.

To maintain status as a grandfathered
health plan, a plan or health insurance
coverage must include a statement that the
plan or coverage believes it is a grandfa-
thered health plan within the meaning of
section 1251 of the Patient Protection and
Affordable Care Act and must provide
contact information for questions and
complaints, in any summary of benefits
provided under the plan to consumers.
The Departments believe the costs associ-
ated with this disclosure are minimal, be-
cause a model statement is provided in the
final rule and that statement can be pro-
vided in any summary of benefits that
already is being provided to consumers.

Finally, if a grandfathered group health
plan switches issuers and intends to main-
tain its status as a grandfathered plan, it
must provide to the new health insurance
issuer with documentation of plan terms
under the prior health coverage sufficient
for it to determine whether a change caus-
ing a cessation of grandfathered health
plan status has occurred. This requirement

also imposes a minimal burden on af-
fected small entities, because the docu-
ments should be maintain in the ordinary
course of the plan's business operations,
and the only additional cost would be in-
curred to prepare the documentation for
mailing and associated material and print-
ing cost, which are estimated to total ap-
proximately $8.

1\. PHS Act Section 2704, Prohibition of
Preexisting Condition Exclusions (26
CFR 54.9815-2704, 29 CFR 2590.715-
2704, 45 CFR 147.108)

The direct impacts of this rule on the
regulated small entities is limited as the
removal of preexisting condition exclu-
sions primarily operates through the pric-
ing of insurance products, which are paid
by plan participants. Small businesses will
be impacted when they pay for part of the
health insurance premium. The Depart-
ments have not been able to estimate this
effect separately from the effect on pre-
miums brought about by the other the
Affordable Care Act changes.

2\. PHS Act Section 2711, Prohibition on
Lifetime and Annual Limits (26 CFR
54.9815-2711, 29 CFR 2590.715-2711,
45 CFR 147.126)

The direct impacts of this rule on the
regulated small entities were primarily
limited to an initial notice sent shortly
after the issuance of the interim final reg-
ulations requiring plans to notify partici-
pants that had lost coverage due to reach-
ing the lifetime limit of the new coverage
option. This notice requirement is no lon-
ger in effect as the statute now bans all
annual and life time limits, so there are no
individuals losing coverage that need to
be notified. To the extent premiums in-
crease and employers contribute part of
the premiums, or plans are self-insured
with payments from the employers gen-
eral assets there could be direct effects on
employers, but for most employers those
effects are small.

171The basis for this definition is found in section 104(a)(2) of ERISA, which permits the Secretary of Labor to prescribe simplified annual reports for pension plans that cover fewer than
100 participants.

172U. S. Small Business Administration, "Table of Small Business Size Standards Matched to North American Industry Classification System Codes", July 14, 2014.

3\. PHS Act Section 2712, Prohibition on
Rescissions (26 CFR 54.9815-2712, 29
CFR 2590.715-2712, 45 CFR 147.128)

PHS Act Section 2712 and the final
regulations prohibit group health plans
and health insurance issuers that offer
group or individual health insurance cov-
erage generally from rescinding coverage
under the plan, policy, certificate, or con-
tract of insurance from the individual cov-
ered under the plan or coverage unless the
individual (or a person seeking coverage
on behalf of the individual) performs an
act, practice, or omission that constitutes
fraud, or unless the individual makes an
intentional misrepresentation of material
fact, as prohibited by the terms of the plan
or coverage. The final regulations provide
that a group health plan or a health insur-
ance issuer offering group health insur-
ance coverage must provide at least 30
days advance notice to an individual be-
fore coverage may be rescinded. The De-
partments believe that rescissions are rare
in the group market and that small group
health plans are affected by rescissions
more than large group health plans.

The Departments estimate173 that 15
minutes of legal professional time at
$129.94 per hour174 would be required by
the insurers of the policies to prepare the
notice, and one minute per notice of cler-
ical professional time at $30.42 per
hour175 would be required to distribute the
paper notices. The Departments believe
the costs of electronic transmission would
be de minimis. This leads to an estimate of
less than $40 per rescission notice, which
the Departments do not believe is signif-
icant.

4\. PHS Act Section 2714, Coverage of
Dependents to Age 26 (26 CFR
54.9815-2714, 29 CFR 2590.715-2714,
45 CFR 147.120)

The direct impacts of this rule on the
regulated small entities were primarily

limited to an initial notice sent shortly
after the issuance of the interim final reg-
ulations requiring plans to notify partici-
pants of the new coverage option. To the
extent premiums increase and employ-
ers contribute part of the premiums, or
plans are self-insured with payments
from the employers general assets there
could be direct effects on employers, but
for most employers those effects are
small.

5\. PHS Act Section 2719, Internal
Claims and Appeals and External
Review (26 CFR 54.9815-2719, 29 CFR
2590.715-2719, 45 CFR 147.136)

These final regulations will have the
largest impact on individuals covered in
the individual health insurance market,
because with the issuance of the final reg-
ulation, these issuers were required to
comply with the DOL claims procedure
regulation for internal claims and ap-
peals as well as the additional standards
added by the Secretary of the Depart-
ment of Health and Human Services in
paragraph (b)(3) of the final regulations
under PHS Act section 2719 that are in
some cases more protective than the
ERISA standard.

Using estimates calculated for the Pa-
perwork Reduction Act it is estimated
that there will be an average costs of 40
cents per notice that is required to be

sent related to the internal claims and
appeals.

On the external appeals side, before the
enactment of the Affordable Care Act,
issuers offering coverage in the group and
individual health insurance market were
already required to comply with State ex-
ternal review laws. At that time, all States
except Alabama, Mississippi, Nebraska,
North Dakota, South Dakota, and Wyo-
ming had external review laws, and thir-
teen States had external review laws that
apply only to certain market segments
(for example, managed care or HMOs).
Currently, all States except, Alabama,
Alaska, Florida, Georgia, Pennsylvania,
and Wisconsin have State external re-
view laws that satisfy these require-
ments. These six states that do not meet
the requirements, must use the HHS ad-
ministered process or must contract with
accredited independent review organiza-
tions to review external appeals on their
behalf.176

As discussed in the Regulatory Impact
Section above an estimate for the average
cost for an external appeal is $665. This
cost would be incurred by plans or issuers.
It is also estimated above that there is on
average only 1.3 external appeals per
10,000 covered lives. The Departments
believe such costs are minimal for pur-
pose of the RFA, because most small en-
tities will have no external appeals in a
given year.

173The Department's estimated 2015 hourly labor rates include wages, other benefits, and overhead are calculated as follows: mean wage from the 2013 National Occupational Employment
Survey (April 2014, Bureau of Labor Statistics http://www.bls.gov/news.release/pdf/ocwage.pdf); wages as a percent of total compensation from the Employer Cost for Employee
Compensation (June 2014, Bureau of Labor Statistics http://www.bls.gov/news.release/ecec.t02.htm); overhead as a multiple of compensation is assumed to be 25 percent of total
compensation for paraprofessionals, 20 percent of compensation for clerical, and 35 percent of compensation for professional; annual inflation assumed to be 2.3 percent annual growth of
total labor cost since 2013 (Employment Costs Index data for private industry, September 2014 http://www.bls.gov/news.release/eci.nr0.htm).

174Legal Professional (23-1011): $63.46(2013 BLS Wage rate) /0.69(ECEC ratio) *1.35(Overhead Load Factor) *1.023(Inflation rate) 2(Inflated 2 years from base year) = $129.94

175Secretaries, Except Legal, Medical, and Executive (43-6014): $16.35(2013 BLS Wage rate)/0.675(ECEC ratio) *1.2(Overhead Load Factor) *1.023(Inflation rate) 2(Inflated 2 years from
base year) = $30.42

176https://www.cms.gov/CCIIO/Resources/Files/external_appeals.html

6\. PHS Act Section 2719A, Patient
Protections (26 CFR 54.9815-2719A, 29
CFR 2590.715-2719A, 45 CFR
147.138)

PHS Act section 2719A imposes, with
respect to a group health plan, or group or
individual health insurance coverage, a set
of three requirements relating to the
choice of health care professionals. When
applicable, it is important that individuals
enrolled in a plan or health insurance cov-
erage know of their rights to (1) choose a
primary care provider or a pediatrician
when a plan or issuer requires participants
or subscribers to designate a primary care
physician; (2) obtain obstetrical or gyne-
cological care without prior authorization;
or (3) coverage of emergency services.
Accordingly, these final regulations re-
quire such plans and issuers to provide a
notice to participants (in the individual
market, primary subscriber) of these rights
when applicable. Model language is pro-
vided in these final regulations. The notice
must be provided whenever the plan or
issuer provides a participant with a sum-
mary plan description or other similar de-
scription of benefits under the plan or
health insurance coverage, or in the indi-
vidual market, provides a primary sub-
scriber with a policy, certificate, or con-
tract of health insurance.

The Departments assume that this pro-
vision will primarily affect Health Mainte-
nance Organizations and Point-of-Service
type arrangements. The Department be-
lieves that insignificant costs are associated
with this notice, because a model notice is
provided in the final rule, and it can be
distributed with existing plan documents.

The Departments estimate that each
plan or issuer would require a compensa-
tion and benefits manager177 to spend 10
minutes individualizing the model notice
provided by the Departments to fit the
plan's specifications at an hourly rate of
$110.30.178 This results in a cost of ap-
proximately $21 in the first year. The cost
per participant to receive the notice would
be less than five cents per paper notice as

the notice would be included in existing
documents.

### VI. Unfunded Mandates Reform Act-Department of Labor and Department of Health and Human Services

Section 202 of the Unfunded Mandates
Reform Act (UMRA) of 1995 requires
that agencies assess anticipated costs and
benefits before issuing any final rule that
includes a Federal mandate that could re-
sult in expenditure in any one year by
State, local or Tribal governments, in the
aggregate, or by the private sector, of
$100 million in 1995 dollars updated an-
nually for inflation. In 2015, that threshold
level is approximately $144 million.
These final regulations include a Federal
mandate that may result in expenditures
by State, local, or Tribal governments.
Specifically, these final regulations in-
clude requirements regarding minimum
consumer protection standards that a State
external review process must include to
qualify as an applicable State external re-
view process under PHS Act section
2719(b)(1). However, we conclude that
these costs would not exceed the $144
million threshold. Thus, the Departments
of Labor and HHS conclude that these
final regulations would not impose an un-
funded mandate on State, local or Tribal
governments or the private sector. Re-
gardless, consistent with the policy em-
bodied in UMRA, the final requirements
described in this notice of final rulemak-
ing has been designed to be the least bur-
densome alternative for State, Local and
Tribal governments, and the private sector
while achieving the objectives of the Af-
fordable Care Act.

### VII. Federalism Statement-Department of Labor and Department of Health and Human Services

Executive Order 13132 outlines funda-
mental principles of federalism, and re-
quires 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 regula-
tions that have federalism implications
must consult with State and 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 of Labor's and
HHS' view, these final regulations have
federalism implications because they
would have direct effects on the States,
the relationship between the national gov-
ernment and the States, or on the distribu-
tion of power and responsibilities among
various levels of government. Under these
final regulations, group health plans and
health insurance issuers offering group or
individual health insurance coverage, in-
cluding non-federal governmental plans
as defined in section 2791 of the PHS Act,
would be required to follow the Federal
standards developed under Affordable
Care Act section 1251 and PHS Act sec-
tions 2704, 2711, 2712, 2714, 2719 and
2719A, as added by the Affordable Care
Act. However, in the Departments' view,
the federalism implications of these final
regulations are substantially mitigated be-
cause, with respect to health insurance
issuers, the Departments expect that the
majority of States will enact laws or take
other appropriate action resulting in their
meeting or exceeding the Federal stan-
dards.

In general, through section 514,
ERISA supersedes State laws to the extent
that they relate to any covered employee
benefit 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 provi-
sions of section 731 of ERISA and section

177The Department's estimated 2015 hourly labor rates include wages, other benefits, and overhead are calculated as follows: mean wage from the 2013 National Occupational Employment
Survey (April 2014, Bureau of Labor Statistics http://www.bls.gov/news.release/pdf/ocwage.pdf); wages as a percent of total compensation from the Employer Cost for Employee
Compensation (June 2014, Bureau of Labor Statistics http://www.bls.gov/news.release/ecec.t02.htm); overhead as a multiple of compensation is assumed to be 25 percent of total
compensation for paraprofessionals, 20 percent of compensation for clerical, and 35 percent of compensation for professional; annual inflation assumed to be 2.3 percent annual growth of
total labor cost since 2013 (Employment Costs Index data for private industry, September 2014 http://www.bls.gov/news.release/eci.nr0.htm).

178Compensation and Benefits Manager (11-3041): $53.87(2013 BLS Wage rate) /0.69(ECEC ratio) *1.35(Overhead Load Factor) *1.023(Inflation rate) 2(Inflated 2 years from base year)
=$110.30

2724 of the PHS Act (implemented in 29
CFR 2590.731(a) and 45 CFR 146.143(a))
apply so that the requirements in title XX-
VII of the PHS Act (including those added
by 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 re-
quirement solely relating to health insur-
ance issuers in connection with individual
or group health insurance coverage except
to the extent that such standard or require-
ment prevents the application of a require-
ment of a Federal standard. The confer-
ence 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.
Accordingly, States have significant lati-
tude to impose requirements on health in-
surance issuers that are more restrictive
than the Federal law.

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 of Labor and HHS have en-
gaged in efforts to consult with and work
cooperatively with affected States, includ-
ing consulting with, and attending confer-
ences of, the National Association of In-
surance Commissioners and consulting
with State insurance officials on an indi-
vidual basis. It is expected that the De-
partments of Labor and HHS will act in a
similar fashion in enforcing the Afford-
able Care Act.

Throughout the process of developing
these final regulations, to the extent feasi-
ble within the applicable preemption pro-
visions, the Departments of Labor and
HHS have attempted to balance the
States' interests in regulating health insur-
ance issuers, and Congress' intent to pro-
vide uniform minimum protections to
consumers in every State. By doing so, it
is the Departments of Labor's and HHS'
view that they have complied with the
requirements of Executive Order 13132.

Pursuant to the requirements set forth
in section 8(a) of Executive Order 13132,
and by the signatures affixed to this final
rule, the Departments certify that the Em-
ployee Benefits Security Administration
and the Centers for Medicare & Medicaid
Services have complied with the require-
ments of Executive Order 13132 for the
attached final rules in a meaningful and
timely manner.

## VIII. Special Analyses - Department of the Treasury

Certain IRS regulations, including this
one, are exempt from the requirements of
Executive Order 12866, as supplemented
and reaffirmed by Executive Order 13563.
Therefore, a regulatory assessment is not
required. It has also been determined that
section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these final regulations. For a dis-
cussion of the impact of this final rule on
small entities, please see section V.B. of
this preamble. Pursuant to section 7805(f)
of the Code, this notice of final rulemak-
ing has been submitted to the Small Busi-
ness Administration for comment on its
impact on small business.

## IX. Congressional Review Act

These final regulations are subject to
the Congressional Review Act provisions
of the Small Business Regulatory En-
forcement Fairness Act of 1996 (5 U.S.C.
801 et seq.), which specifies that before a
rule can take effect, the Federal agency
promulgating the rule shall submit to each
House of the Congress and to the Comp-
troller General a report containing a copy
of the rule along with other specified in-
formation, and has been transmitted to
Congress and the Comptroller General for
review.

## X. Statutory Authority

The Department of the Treasury final
regulations are adopted pursuant to the
authority contained in sections 7805 and
9833 of the Code.

The Department of Labor final regula-
tions are adopted pursuant to the authority
contained in 29 U.S.C. 1135, and 1191c;
Secretary of Labor's Order 1-2011, 77 FR
1088 (Jan. 9, 2012).

The Department of Health and Human
Services final regulations are adopted pur-
suant to the authority contained in sec-
tions 2701 through 2763, 2791, and 2792
of the PHS Act (42 USC 300gg through
300gg-63, 300gg-91, and 300gg-92), as
amended.

** * * *

John Dalrymple
Deputy Commissioner for
Services and Enforcement
Internal Revenue Service.

Approved: October 27, 2015

Mark J. Mazur
Assistant Secretary
of the Treasury (Tax Policy).

Signed this 6th day of November 2015.

Phyllis C. Borzi,
Assistant Secretary Employee
Benefits Security Administration
Department of Labor

Dated: October 15, 2015

Andrew M. Slavitt,
Acting Administrator Centers for
Medicare & Medicaid Services

Approved: October 22, 2015

Sylvia M. Burwell,
Secretary Department of
Health and Human Services

(Filed by the Office of the Federal Register on July 13, 2015,
8:45 a.m., and published in the issue of the Federal Register
for July 14, 2015, 80 F.R. 40661)

DEPARTMENT OF THE TREA-
SURY

Internal Revenue Service
26 CFR Chapter I

For the reasons stated in the preamble,
the Internal Revenue Service amends Part
54 as set forth below:

PART 54-PENSION EXCISE
TAXES

Paragraph 1. The authority citation for
part 54 is amended by adding entries for
§§ 54.9815-1251, 54.9815-2704, 54.9815-

2711,
54.9815-2712,
54.9815-2714,
54.9815-2719, and 54.9815-2719A in nu-
merical order to read in part as follows:

Authority: 26 U.S.C. 7805. * * *

Section 54.9815-1251 also issued un-
der 26 U.S.C. 9833.

* * * * *

Section 54.9815-2704 also issued un-
der 26 U.S.C. 9833.

* * * * *

Section 54.9815-2711 also issued un-
der 26 U.S.C. 9833.

* * * * *

Section 54.9815-2712 also issued un-
der 26 U.S.C. 9833.

** * * *

Section 54.9815-2714 also issued un-
der 26 U.S.C. 9833.

* * * * *

Section 54.9815-2719 also issued un-
der 26 U.S.C. 9833.

Section 54.9815-2719A also issued
under 26 U.S.C. 9833.

Par.2. Section 54.9801-2 is amended
by revising the introductory text and the
definition of "preexisting condition exclu-
sion" to read as follows:

## § 54.9801-2 Definitions.

Unless otherwise provided, the defini-
tions in this section govern in applying the
provisions of sections 9801 through 9815
and 9831 through 9833.

* * * * *

Preexisting condition exclusion means
a limitation or exclusion of benefits (in-
cluding a denial of coverage) based on the
fact that the condition was present before
the effective date of coverage (or if cov-
erage is denied, the date of the denial)
under a group health plan or group or
individual health insurance coverage (or
other coverage provided to Federally eli-
gible individuals pursuant to 45 CFR part
148), whether or not any medical advice,
diagnosis, care, or treatment was recom-
mended or received before that day. A
preexisting condition exclusion includes
any limitation or exclusion of benefits (in-
cluding a denial of coverage) applicable to
an individual as a result of information
relating to an individual's health status
before the individual's effective date of
coverage (or if coverage is denied, the
date of the denial) under a group health
plan, or group or individual health insur-
ance coverage (or other coverage pro-

vided to Federally eligible individuals
pursuant to 45 CFR part 148), such as a
condition identified as a result of a pre-
enrollment questionnaire or physical ex-
amination given to the individual, or re-
view of medical records relating to the
pre-enrollment period.

* * * * *

Par.3. Section 54.9801-3 is amended
by revising the section heading and para-
graph (a)(1) to read as follows:

## § 54.9801-3 Limitations on preexisting condition exclusion period.

(a) Preexisting condition exclusion de-
fined-(1) A preexisting condition exclu-
sion means a preexisting condition exclu-
sion within the meaning of § 54.9801-2.
* * * * *

Par.4. Section 54.9815-1251 is added
to read as follows:

## § 54.9815-1251 Preservation of right to maintain existing coverage.

(a) Definition of grandfathered health
plan coverage-(1) In general-(i)
Grandfathered health plan coverage
means coverage provided by a group
health plan, or a health insurance issuer, in
which an individual was enrolled on
March 23, 2010 (for as long as it main-
tains that status under the rules of this
section). A group health plan or group
health insurance coverage does not cease
to be grandfathered health plan coverage
merely because one or more (or even all)
individuals enrolled on March 23, 2010
cease to be covered, provided that the plan
or group health insurance coverage has
continuously covered someone since
March 23, 2010 (not necessarily the same
person, but at all times at least one per-
son). In addition, subject to the limitation
set forth in paragraph (a)(1)(ii) of this
section, a group health plan (and any
health insurance coverage offered in con-
nection with the group health plan) does
not cease to be a grandfathered health plan
merely because the plan (or its sponsor)
enters into a new policy, certificate, or
contract of insurance after March 23, 2010
(for example, a plan enters into a contract
with a new issuer or a new policy is issued
with an existing issuer). For purposes of
this section, a plan or health insurance
coverage that provides grandfathered

health plan coverage is referred to as a
grandfathered health plan. The rules of
this section apply separately to each ben-
efit package made available under a group
health plan or health insurance coverage.
Accordingly, if any benefit package relin-
quishes grandfather status, it will not af-
fect the grandfather status of the other
benefit packages.

(ii) Changes in group health insurance
coverage. Subject to paragraphs (f) and
(g)(2) of this section, if a group health
plan (including a group health plan that
was self-insured on March 23, 2010) or its
sponsor enters into a new policy, certifi-
cate, or contract of insurance after March
23, 2010 that is effective before Novem-
ber 15, 2010, then the plan ceases to be a
grandfathered health plan.

(2) Disclosure of grandfather status-
(i) To maintain status as a grandfathered
health plan, a plan or health insurance
coverage must include a statement that the
plan or coverage believes it is a grandfa-
thered health plan within the meaning of
section 1251 of the Patient Protection and
Affordable Care Act, and must provide
contact information for questions and
complaints, in any summary of benefits
provided under the plan.

(ii) The following model language can be used
to satisfy this disclosure requirement:

This [group health plan or health insurance
issuer] believes this [plan or coverage] is a
"grandfathered health plan" under the Patient
Protection and Affordable Care Act (the Af-
fordable Care Act). As permitted by the Af-
fordable Care Act, a grandfathered health plan
can preserve certain basic health coverage that
was already in effect when that law was en-
acted. Being a grandfathered health plan means
that your [plan or policy] may not include
certain consumer protections of the Affordable
Care Act that apply to other plans, for example,
the requirement for the provision of preventive
health services without any cost sharing. How-
ever, grandfathered health plans must comply
with certain other consumer protections in the
Affordable Care Act, for example, the elimina-
tion of lifetime dollar limits on benefits.

Questions regarding which protections apply
and which protections do not apply to a grand-
fathered health plan and what might cause a
plan to change from grandfathered health plan
status can be directed to the plan administrator
at [insert contact information]. [For ERISA
plans, insert: You may also contact the Em-
ployee Benefits Security Administration, U.S.
Department of Labor at 1-866-444-3272 or

www.dol.gov/ebsa/healthreform. This Web
site has a table summarizing which protections
do and do not apply to grandfathered health
plans.] [For individual market policies and
nonfederal governmental plans, insert: You
may also contact the U.S. Department of
Health and Human Services at www.healthcare.
gov.]

(3)(i) Documentation of plan or policy
terms on March 23, 2010. To maintain
status as a grandfathered health plan, a
group health plan, or group health insur-
ance coverage, must, for as long as the
plan or health insurance coverage takes
the position that it is a grandfathered
health plan -

(A) Maintain records documenting the
terms of the plan or health insurance cov-
erage in connection with the coverage in
effect on March 23, 2010, and any other
documents necessary to verify, explain, or
clarify its status as a grandfathered health
plan; and

(B) Make such records available for
examination upon request.

(ii) Change in group health insurance
coverage. To maintain status as a grand-
fathered health plan, a group health plan
that enters into a new policy, certificate, or
contract of insurance must provide to the
new health insurance issuer (and the new
health insurance issuer must require) doc-
umentation of plan terms (including ben-
efits, cost sharing, employer contribu-
tions, and annual dollar limits) under the
prior health coverage sufficient to deter-
mine whether a change causing a cessa-
tion of grandfathered health plan status
under paragraph (g)(1) of this section has
occurred.

(4) Family members enrolling after
March 23, 2010. With respect to an indi-
vidual who is enrolled in a group health
plan or health insurance coverage on
March 23, 2010, grandfathered health
plan coverage includes coverage of family
members of the individual who enroll af-
ter March 23, 2010 in the grandfathered
health plan coverage of the individual.

(b) Allowance for new employees to
join current plan- (1) In general. Subject
to paragraph (b)(2) of this section, a group
health plan (including health insurance
coverage provided in connection with the
group health plan) that provided coverage
on March 23, 2010 and has retained its
status as a grandfathered health plan (con-
sistent with the rules of this section, in-

cluding paragraph (g) of this section) is
grandfathered health plan coverage for
new employees (whether newly hired or
newly enrolled) and their families enroll-
ing in the plan after March 23, 2010.
Further, the addition of a new contributing
employer or new group of employees of
an existing contributing employer to a
grandfathered multiemployer health plan
will not affect the plan's grandfather sta-
tus.

(2) Anti-abuse rules- (i) Mergers and
acquisitions. If the principal purpose of a
merger, acquisition, or similar business
restructuring is to cover new individuals
under a grandfathered health plan, the
plan ceases to be a grandfathered health
plan.

(ii) Change in plan eligibility. A group
health plan or health insurance coverage
(including a benefit package under a
group health plan) ceases to be a grandfa-
thered health plan if-

(A) Employees are transferred into the
plan or health insurance coverage (the
transferee plan) from a plan or health in-
surance coverage under which the em-
ployees were covered on March 23, 2010
(the transferor plan);

(B) Comparing the terms of the trans-
feree plan with those of the transferor plan
(as in effect on March 23, 2010) and treat-
ing the transferee plan as if it were an
amendment of the transferor plan would
cause a loss of grandfather status under
the provisions of paragraph (g)(1) of this
section; and

(C) There was no bona fide employment-
based reason to transfer the employees into
the transferee plan. For this purpose,
changing the terms or cost of coverage is
not a bona fide employment-based reason.

(iii) Illustrative list of bona fide
employment-based reasons. For purposes
of paragraph (b)(2)(ii)(C) of this section,
bona fide employment-based reasons in-
clude -

(A) When a benefit package is being
eliminated because the issuer is exiting
the market;

(B) When a benefit package is being
eliminated because the issuer no longer
offers the product to the employer;

sponsor to continue to offer the benefit
package;

(D) When a benefit package is elimi-
nated from a multiemployer plan as
agreed upon as part of the collective bar-
gaining process; or

(E) When a benefit package is elimi-
nated for any reason and multiple benefit
packages covering a significant portion of
other employees remain available to the
employees being transferred.

(3) Examples. The rules of this para-
graph (b) are illustrated by the following
examples:

Example 1. (i) Facts. A group health plan offers
two benefit packages on March 23, 2010, Options F
and G. During a subsequent open enrollment period,
some of the employees enrolled in Option F on
March 23, 2010 switch to Option G.

(ii) Conclusion. In this Example 1, the group
health coverage provided under Option G remains a
grandfathered health plan under the rules of para-
graph (b)(1) of this section because employees pre-
viously enrolled in Option F are allowed to enroll in
Option G as new employees.

Example 2. (i) Facts. A group health plan offers
two benefit packages on March 23, 2010, Options H
and I. On March 23, 2010, Option H provides cov-
erage only for employees in one manufacturing
plant. Subsequently, the plant is closed, and some
employees in the closed plant are moved to another
plant. The employer eliminates Option H and the
employees that are moved are transferred to Option
I. If instead of transferring employees from Option H
to Option I, Option H was amended to match the
terms of Option I, then Option H would cease to be
a grandfathered health plan.

(ii) Conclusion. In this Example 2, the plan has a
bona fide employment-based reason to transfer em-
ployees from Option H to Option I. Therefore, Op-
tion I does not cease to be a grandfathered health
plan.

(c) General grandfathering rule-(1)
Except as provided in paragraphs (d) and
(e) of this section, subtitles A and C of
title I of the Patient Protection and Afford-
able Care Act (and the amendments made
by those subtitles, and the incorporation of
those amendments into ERISA section
715 and Internal Revenue Code section
9815) do not apply to grandfathered
health plan coverage. Accordingly, the
provisions of PHS Act sections 2701,
2702, 2703, 2705, 2706, 2707, 2709 (re-
lating to coverage for individuals partici-
pating in approved clinical trials, as added
by section 10103 of the Patient Protection
and Affordable Care Act), 2713, 2715A,
2716, 2717, 2719, and 2719A, as added or
amended by the Patient Protection and
Affordable Care Act, do not apply to
grandfathered health plans. (In addition,

see 45 CFR 147.140(c), which provides
that the provisions of PHS Act section
2704, and PHS Act section 2711 insofar
as it relates to annual dollar limits, do not
apply to grandfathered health plans that
are individual health insurance coverage.)

(2) To the extent not inconsistent with
the rules applicable to a grandfathered
health plan, a grandfathered health plan
must comply with the requirements of the
PHS Act, ERISA, and the Internal Reve-
nue Code applicable prior to the changes
enacted by the Patient Protection and Af-
fordable Care Act.

(d) Provisions applicable to all grand-
fathered health plans. The provisions of
PHS Act section 2711 insofar as it relates
to lifetime dollar limits, and the provisions
of PHS Act sections 2712, 2714, 2715,
and 2718, apply to grandfathered health
plans for plan years beginning on or after
September 23, 2010. The provisions of
PHS Act section 2708 apply to grandfa-
thered health plans for plan years begin-
ning on or after January 1, 2014.

(e) Applicability of PHS Act sections
2704, 2711, and 2714 to grandfathered
group health plans and group health in-
surance coverage-(1) The provisions of
PHS Act section 2704 as it applies with
respect to enrollees who are under 19
years of age, and the provisions of PHS
Act section 2711 insofar as it relates to
annual dollar limits, apply to grandfa-
thered health plans that are group health
plans (including group health insurance
coverage) for plan years beginning on or
after September 23, 2010. The provisions
of PHS Act section 2704 apply generally
to grandfathered health plans that are
group health plans (including group health
insurance coverage) for plan years begin-
ning on or after January 1, 2014.

(2) For plan years beginning before
January 1, 2014, the provisions of PHS
Act section 2714 apply in the case of an
adult child with respect to a grandfathered
health plan that is a group health plan only
if the adult child is not eligible to enroll in
an eligible employer-sponsored health
plan (as defined in section 5000A(f)(2) of
the Internal Revenue Code) other than a
grandfathered health plan of a parent. For
plan years beginning on or after January 1,
2014, the provisions of PHS Act section
2714 apply with respect to a grandfa-
thered health plan that is a group health

plan without regard to whether an adult
child is eligible to enroll in any other
coverage.

(f) Effect on collectively bargained
plans-In general. In the case of health
insurance coverage maintained pursuant
to one or more collective bargaining
agreements between employee representa-
tives and one or more employers that was
ratified before March 23, 2010, the cover-
age is grandfathered health plan coverage
at least until the date on which the last of
the collective bargaining agreements re-
lating to the coverage that was in effect on
March 23, 2010 terminates. Any coverage
amendment made pursuant to a collective
bargaining agreement relating to the cov-
erage that amends the coverage solely to
conform to any requirement added by sub-
titles A and C of title I of the Patient
Protection and Affordable Care Act (and
the amendments made by those subtitles,
and the incorporation of those amend-
ments into ERISA section 715 and Inter-
nal Revenue Code section 9815) is not
treated as a termination of the collective
bargaining agreement. After the date on
which the last of the collective bargaining
agreements relating to the coverage that
was in effect on March 23, 2010 termi-
nates, the determination of whether health
insurance coverage maintained pursuant
to a collective bargaining agreement is
grandfathered health plan coverage is
made under the rules of this section other
than this paragraph (f) (comparing the
terms of the health insurance coverage
after the date the last collective bargaining
agreement terminates with the terms of
the health insurance coverage that were in
effect on March 23, 2010).

(g) Maintenance of grandfather sta-
tus-(1) Changes causing cessation of
grandfather status. Subject to paragraph
(g)(2) of this section, the rules of this
paragraph (g)(1) describe situations in
which a group health plan or health insur-
ance coverage ceases to be a grandfa-
thered health plan. A plan or coverage will
cease to be a grandfathered health plan
when an amendment to plan terms that
results in a change described in this para-
graph (g)(1) becomes effective, regardless
of when the amendment was adopted.
Once grandfather status is lost, it cannot
be regained.

(i) Elimination of benefits. The elimi-
nation of all or substantially all benefits to
diagnose or treat a particular condition
causes a group health plan or health insur-
ance coverage to cease to be a grandfa-
thered health plan. For this purpose, the
elimination of benefits for any necessary
element to diagnose or treat a condition is
considered the elimination of all or sub-
stantially all benefits to diagnose or treat a
particular condition. Whether or not a plan
or coverage has eliminated substantially
all benefits to diagnose or treat a particular
condition must be determined based on all
the facts and circumstances, taking into
account the items and services provided
for a particular condition under the plan
on March 23, 2010, as compared to the
benefits offered at the time the plan or
coverage makes the benefit change effec-
tive.

(ii) Increase in percentage cost-
sharing requirement. Any increase, mea-
sured from March 23, 2010, in a percent-
age cost-sharing requirement (such as an
individual's coinsurance requirement)
causes a group health plan or health insur-
ance coverage to cease to be a grandfa-
thered health plan.

(iii) Increase in a fixed-amount cost-
sharing requirement other than a copay-
ment. Any increase in a fixed-amount
cost-sharing requirement other than a co-
payment (for example, deductible or out-
of-pocket limit), determined as of the ef-
fective date of the increase, causes a group
health plan or health insurance coverage
to cease to be a grandfathered health plan,
if the total percentage increase in the cost-
sharing requirement measured from
March 23, 2010 exceeds the maximum
percentage increase (as defined in para-
graph (g)(3)(ii) of this section).

(iv) Increase in a fixed-amount copay-
ment. Any increase in a fixed-amount co-
payment, determined as of the effective
date of the increase, and determined for
each copayment level if a plan has differ-
ent copayment levels for different catego-
ries of services, causes a group health plan
or health insurance coverage to cease to
be a grandfathered health plan, if the total
increase in the copayment measured from
March 23, 2010 exceeds the greater of:
(A) An amount equal to $5 increased
by medical inflation, as defined in para-

graph (g)(3)(i) of this section (that is, $5
times medical inflation, plus $5), or

(B) The maximum percentage increase
(as defined in paragraph (g)(3)(ii) of this
section), determined by expressing the to-
tal increase in the copayment as a percent-
age.

(v) Decrease in contribution rate by
employers and employee organizations-
(A) Contribution rate based on cost of
coverage. A group health plan or group
health insurance coverage ceases to be a
grandfathered health plan if the employer
or employee organization decreases its
contribution rate based on cost of cover-
age (as defined in paragraph (g)(3)(iii)(A)
of this section) towards the cost of any tier
of coverage for any class of similarly sit-
uated individuals (as described in
§ 54.9802(d)) by more than 5 percentage
points below the contribution rate for the
coverage period that includes March 23,
2010.

(B) Contribution rate based on a for-
mula. A group health plan or group health
insurance coverage ceases to be a grand-
fathered health plan if the employer or
employee organization decreases its con-
tribution rate based on a formula (as de-
fined in paragraph (g)(3)(iii)(B) of this
section) towards the cost of any tier of
coverage for any class of similarly situ-
ated individuals (as described in
§ 54.9802(d)) by more than 5 percent be-
low the contribution rate for the coverage
period that includes March 23, 2010.

(C) Special rules regarding decreases
in contribution rates. An insured group
health plan (or a multiemployer plan) that
is a grandfathered health plan will not
cease to be a grandfathered health plan
based on a change in the employer contri-
bution rate unless the issuer (or multiem-
ployer plan) knows, or should know, of
the change, provided:

(1) Upon renewal (or, in the case of a
multiemployer plan, before the start of a
new plan year), the issuer (or multiem-
ployer plan) requires relevant employers,
employee organizations, or plan sponsors,
as applicable, to make a representation
regarding its contribution rate for the plan
year covered by the renewal, as well as its
contribution rate on March 23, 2010 (if
the issuer, or multiemployer plan, does
not already have it); and

(2) The relevant policies, certificates,
contracts of insurance, or plan documents
disclose in a prominent and effective man-
ner that employers, employee organiza-
tions, or plan sponsors, as applicable, are
required to notify the issuer (or multiem-
ployer plan) if the contribution rate
changes at any point during the plan year.

(D) Application to plans with multi-
tiered coverage structures. The standards
for employer contributions in this para-
graph (g)(1)(v) apply on a tier-by-tier ba-
sis. Therefore, if a group health plan mod-
ifies the tiers of coverage it had on March
23, 2010 (for example, from self-only and
family to a multi-tiered structure of self-
only, self-plus-one, self-plus-two, and
self-plus-three-or-more), the employer
contribution for any new tier would be
tested by comparison to the contribution
rate for the corresponding tier on March
23, 2010. For example, if the employer
contribution rate for family coverage was
50 percent on March 23, 2010, the em-
ployer contribution rate for any new tier
of coverage other than self-only (i.e., self-
plus-one, self-plus-two, self-plus-three or
more) must be within 5 percentage points
of 50 percent (i.e., at least 45 percent). If,
however, the plan adds one or more new
coverage tiers without eliminating or
modifying any previous tiers and those
new coverage tiers cover classes of indi-
viduals that were not covered previously
under the plan, the new tiers would not be
analyzed under the standards for changes
in employer contributions. For example, if
a plan with self-only as the sole coverage
tier added a family coverage tier, the level
of employer contributions toward the fam-
ily coverage would not cause the plan to
lose grandfather status.

(E) Group health plans with fixed-
dollar employee contributions or no em-
ployee contributions. A group health plan
that requires either fixed-dollar employee
contributions or no employee contribu-
tions will not cease to be a grandfathered
health plan solely because the employer
contribution rate changes so long as there
continues to be no employee contributions
or no increase in the fixed-dollar em-
ployee contributions towards the cost of
coverage.

(vi) Changes in annual limits-(A) Ad-
dition of an annual limit. A group health
plan, or group health insurance coverage,

that, on March 23, 2010, did not impose
an overall annual or lifetime limit on the
dollar value of all benefits ceases to be a
grandfathered health plan if the plan or
health insurance coverage imposes an
overall annual limit on the dollar value of
benefits. (But see § 54.9815-2711, which
prohibits all annual dollar limits on essen-
tial health benefits for plan years begin-
ning on or after January 1, 2014).

(B) Decrease in limit for a plan or
coverage with only a lifetime limit. A
group health plan, or group health insur-
ance coverage, that, on March 23, 2010,
imposed an overall lifetime limit on the
dollar value of all benefits but no overall
annual limit on the dollar value of all
benefits ceases to be a grandfathered
health plan if the plan or health insurance
coverage adopts an overall annual limit at
a dollar value that is lower than the dollar
value of the lifetime limit on March 23,
2010. (But see § 54.9815-2711, which
prohibits all annual dollar limits on essen-
tial health benefits for plan years begin-
ning on or after January 1, 2014).

(C) Decrease in limit for a plan or
coverage with an annual limit. A group
health plan, or group health insurance
coverage, that, on March 23, 2010, im-
posed an overall annual limit on the dollar
value of all benefits ceases to be a grand-
fathered health plan if the plan or health
insurance coverage decreases the dollar
value of the annual limit (regardless of
whether the plan or health insurance cov-
erage also imposed an overall lifetime
limit on March 23, 2010 on the dollar
value of all benefits). (But see § 54.9815-
2711, which prohibits all annual dollar
limits on essential health benefits for plan
years beginning on or after January 1,
2014).

(2) Transitional rules-(i) Changes
made prior to March 23, 2010. If a group
health plan or health insurance issuer
makes the following changes to the terms
of the plan or health insurance coverage,
the changes are considered part of the
terms of the plan or health insurance cov-
erage on March 23, 2010 even though
they were not effective at that time and
such changes do not cause a plan or health
insurance coverage to cease to be a grand-
fathered health plan:

(A) Changes effective after March 23,
2010 pursuant to a legally binding con-

tract entered into on or before March 23,
2010;

(B) Changes effective after March 23,
2010 pursuant to a filing on or before
March 23, 2010 with a State insurance
department; or

(C) Changes effective after March 23,
2010 pursuant to written amendments to a
plan that were adopted on or before March
23, 2010.

(ii) Changes made after March 23,
2010 and adopted prior to issuance of
regulations. If, after March 23, 2010, a
group health plan or health insurance is-
suer makes changes to the terms of the
plan or health insurance coverage and the
changes are adopted prior to June 14,
2010, the changes will not cause the plan
or health insurance coverage to cease to
be a grandfathered health plan if the
changes are revoked or modified effective
as of the first day of the first plan year (in
the individual market, policy year) begin-
ning on or after September 23, 2010, and
the terms of the plan or health insurance
coverage on that date, as modified, would
not cause the plan or coverage to cease to
be a grandfathered health plan under the
rules of this section, including paragraph
(g)(1) of this section. For this purpose,
changes will be considered to have been
adopted prior to June 14, 2010 if:

(A) The changes are effective before
that date;

(B) The changes are effective on or
after that date pursuant to a legally bind-
ing contract entered into before that date;

(C) The changes are effective on or
after that date pursuant to a filing before
that date with a State insurance depart-
ment; or

(D) The changes are effective on or
after that date pursuant to written amend-
ments to a plan that were adopted before
that date.

(3) Definitions-(i) Medical inflation
defined. For purposes of this paragraph
(g), the term medical inflation means the
increase since March 2010 in the overall
medical care component of the Consumer
Price Index for All Urban Consumers
(CPI-U) (unadjusted) published by the
Department of Labor using the 1982 -
1984 base of 100. For this purpose, the
increase in the overall medical care com-
ponent is computed by subtracting
387.142 (the overall medical care compo-

nent of the CPI-U (unadjusted) published
by the Department of Labor for March
2010, using the 1982 - 1984 base of 100)
from the index amount for any month in
the 12 months before the new change is to
take effect and then dividing that amount
by 387.142.

(ii) Maximum percentage increase de-
fined. For purposes of this paragraph (g),
the term maximum percentage increase
means medical inflation (as defined in
paragraph (g)(3)(i) of this section), ex-
pressed as a percentage, plus 15 percent-
age points.

(iii) Contribution rate defined. For pur-
poses of paragraph (g)(1)(v) of this sec-
tion:

(A) Contribution rate based on cost of
coverage. The term contribution rate
based on cost of coverage means the
amount of contributions made by an em-
ployer or employee organization com-
pared to the total cost of coverage, ex-
pressed as a percentage. The total cost of
coverage is determined in the same man-
ner as the applicable premium is calcu-
lated under the COBRA continuation pro-
visions of section 604 of ERISA, section
4980B(f)(4) of the Internal Revenue
Code, and section 2204 of the PHS Act. In
the case of a self-insured plan, contribu-
tions by an employer or employee organi-
zation are equal to the total cost of cover-
age minus the employee contributions
towards the total cost of coverage.

(B) Contribution rate based on a for-
mula. The term contribution rate based on
a formula means, for plans that, on March
23, 2010, made contributions based on a
formula (such as hours worked or tons of
coal mined), the formula.

(4) Examples. The rules of this para-
graph (g) are illustrated by the following
examples:

Example 1. (i) Facts. On March 23, 2010, a
grandfathered health plan has a coinsurance require-
ment of 20% for inpatient surgery. The plan is sub-
sequently amended to increase the coinsurance re-
quirement to 25%.

(ii) Conclusion. In this Example 1, the increase in
the coinsurance requirement from 20% to 25%
causes the plan to cease to be a grandfathered health
plan.

Example 2. (i) Facts. Before March 23, 2010, the
terms of a group health plan provide benefits for a
particular mental health condition, the treatment for
which is a combination of counseling and prescrip-
tion drugs. Subsequently, the plan eliminates bene-
fits for counseling.

(ii) Conclusion. In this Example 2, the plan
ceases to be a grandfathered health plan because
counseling is an element that is necessary to treat the
condition. Thus the plan is considered to have elim-
inated substantially all benefits for the treatment of
the condition.

Example 3. (i) Facts. On March 23, 2010, a
grandfathered health plan has a copayment require-
ment of $30 per office visit for specialists. The plan
is subsequently amended to increase the copayment
requirement to $40. Within the 12-month period
before the $40 copayment takes effect, the greatest
value of the overall medical care component of the
CPI-U (unadjusted) is 475.

(ii) Conclusion. In this Example 3, the increase in
the copayment from $30 to $40, expressed as a
percentage, is 33.33% (40 - 30 = 10; 10 + 30 =
0.3333; 0.3333 = 33.33%). Medical inflation (as
defined in paragraph (g)(3)(i) of this section) from
March 2010 is 0.2269 (475 - 387.142 = 87.858;
87.858 + 387.142 = 0.2269). The maximum per-
centage increase permitted is 37.69% (0.2269 =
22.69%; 22.69% + 15% = 37.69%). Because
33.33% does not exceed 37.69%, the change in the
copayment requirement at that time does not cause
the plan to cease to be a grandfathered health plan.

Example 4. (i) Facts. Same facts as Example 3,
except the grandfathered health plan subsequently
increases the $40 copayment requirement to $45 for
a later plan year. Within the 12-month period before
the $45 copayment takes effect, the greatest value of
the overall medical care component of the CPI-U
(unadjusted) is 485.

(ii) Conclusion. In this Example 4, the increase in
the copayment from $30 (the copayment that was in
effect on March 23, 2010) to $45, expressed as a
percentage, is 50% (45 - 30 = 15; 15 + 30 = 0.5;
0.5 = 50%). Medical inflation (as defined in para-
graph (g)(3)(i) of this section) from March 2010 is
0.2527 (485 - 387.142 = 97.858; 97.858 + 387.142
= 0.2527). The increase that would cause a plan to
cease to be a grandfathered health plan under para-
graph (g)(1)(iv) of this section is the greater of the
maximum percentage increase of 40.27% (0.2527 =
25.27%; 25.27% + 15% = 40.27%), or $6.26 ($5 x
0.2527 = $1.26; $1.26 + $5 = $6.26). Because 50%
exceeds 40.27% and $15 exceeds $6.26, the change
in the copayment requirement at that time causes the
plan to cease to be a grandfathered health plan.

Example 5. (i) Facts. On March 23, 2010, a
grandfathered health plan has a copayment of $10
per office visit for primary care providers. The plan
is subsequently amended to increase the copayment
requirement to $15. Within the 12-month period
before the $15 copayment takes effect, the greatest
value of the overall medical care component of the
CPI-U (unadjusted) is 415.

(ii) Conclusion. In this Example 5, the increase in
the copayment, expressed as a percentage, is 50%
(15 - 10 = 5; 5 + 10 = 0.5; 0.5 = 50%). Medical
inflation (as defined in paragraph (g)(3) of this sec-
tion) from March 2010 is 0.0720 (415.0 - 387.142 =
27.858; 27.858 + 387.142 = 0.0720). The increase
that would cause a plan to cease to be a grandfa-
thered health plan under paragraph (g)(1)(iv) of this
section is the greater of the maximum percentage
increase of 22.20% (0.0720 = 7.20%; 7.20% + 15%
= 22.20), or $5.36 ($5 x 0.0720 = $0.36; $0.36 +

$5 = $5.36). The $5 increase in copayment in this
Example 5 would not cause the plan to cease to be a
grandfathered health plan pursuant to paragraph
(g)(1)(iv)this section, which would permit an in-
crease in the copayment of up to $5.36.

Example 6. (i) Facts. The same facts as Example
5, except on March 23, 2010, the grandfathered
health plan has no copayment ($0) for office visits
for primary care providers. The plan is subsequently
amended to increase the copayment requirement to
$5.

(ii) Conclusion. In this Example 6, medical in-
flation (as defined in paragraph (g)(3)(i) of this sec-
tion) from March 2010 is 0.0720 (415.0 - 387.142 =
27.858; 27.858 + 387.142 = 0.0720). The increase
that would cause a plan to cease to be a grandfa-
thered health plan under paragraph (g)(1)(iv)(A) of
this section is $5.36 ($5 x 0.0720 = $0.36; $0.36 +
$5 = $5.36). The $5 increase in copayment in this
Example 6 is less than the amount calculated pursu-
ant to paragraph (g)(1)(iv)(A) of this section of
$5.36. Thus, the $5 increase in copayment does not
cause the plan to cease to be a grandfathered health
plan.

Example 7. (i) Facts. On March 23, 2010, a
self-insured group health plan provides two tiers of
coverage - self-only and family. The employer
contributes 80% of the total cost of coverage for
self-only and 60% of the total cost of coverage for
family. Subsequently, the employer reduces the con-
tribution to 50% for family coverage, but keeps the
same contribution rate for self-only coverage.

(ii) Conclusion. In this Example 7, the decrease
of 10 percentage points for family coverage in the
contribution rate based on cost of coverage causes
the plan to cease to be a grandfathered health plan.
The fact that the contribution rate for self-only cov-
erage remains the same does not change the result.

Example 8. (i) Facts. On March 23, 2010, a
self-insured grandfathered health plan has a COBRA
premium for the 2010 plan year of $5000 for self-
only coverage and $12,000 for family coverage. The
required employee contribution for the coverage is
$1000 for self-only coverage and $4000 for family
coverage. Thus, the contribution rate based on cost
of coverage for 2010 is 80% ((5000 - 1000)/5000)
for self-only coverage and 67% ((12,000 - 4000)/
12,000) for family coverage. For a subsequent plan
year, the COBRA premium is $6000 for self-only
coverage and $15,000 for family coverage. The em-
ployee contributions for that plan year are $1200 for
self-only coverage and $5000 for family coverage.
Thus, the contribution rate based on cost of coverage
is 80% ((6000 - 1200)/6000) for self-only coverage
and 67% ((15,000 - 5000)/15,000) for family cov-
erage.

(ii) Conclusion. In this Example 8, because there
is no change in the contribution rate based on cost of
coverage, the plan retains its status as a grandfa-
thered health plan. The result would be the same if
all or part of the employee contribution was made
pre-tax through a cafeteria plan under section 125 of
the Internal Revenue Code.

Example 9. (i) Facts. A group health plan not
maintained pursuant to a collective bargaining agree-
ment offers three benefit packages on March 23,
2010. Option F is a self-insured option. Options G
and H are insured options. Beginning July 1, 2013,

the plan increases coinsurance under Option H from
10% to 15%.

(ii) Conclusion. In this Example 9, the coverage
under Option H is not grandfathered health plan
coverage as of July 1, 2013, consistent with the (rule
in paragraph (g)(1)(ii) of this section. Whether the
coverage under Options F and G is grandfathered
health plan coverage is determined separately under
the rules of this paragraph (g).

## § 54.9815-1251T [Removed]

Par. 5. Section 54.9815-1251T is re-
moved.

Par.6. Section 54.9815-2704 is added
to read as follows:

§ 54.9815-2704 Prohibition of
preexisting condition exclusions.

(a) No preexisting condition exclu-
sions. A group health plan, or a health
insurance issuer offering group health in-
surance coverage, may not impose any
preexisting condition exclusion (as de-
fined in § 54.9801-2).

(b) Examples. The rules of paragraph
(a) of this section are illustrated by the
following examples (for additional exam-
ples illustrating the definition of a preex-
isting condition exclusion, see § 54.9801-
3(a)(2)):

Example 1. (i) Facts. A group health plan pro-
vides benefits solely through an insurance policy
offered by Issuer P. At the expiration of the policy,
the plan switches coverage to a policy offered by
Issuer N. N's policy excludes benefits for oral sur-
gery required as a result of a traumatic injury if the
injury occurred before the effective date of coverage
under the policy.

(ii) Conclusion. In this Example 1, the exclusion
of benefits for oral surgery required as a result of a
traumatic injury if the injury occurred before the
effective date of coverage is a preexisting condition
exclusion because it operates to exclude benefits for
a condition based on the fact that the condition was
present before the effective date of coverage under
the policy. Therefore, such an exclusion is prohib-
ited.

Example 2. (i) Facts. Individual C applies for
individual health insurance coverage with Issuer M.
M denies C's application for coverage because a
pre-enrollment physical revealed that C has type 2
diabetes.

(ii) Conclusion. See Example 2 in 45 CFR
147.108(a)(2) for a conclusion that M's denial of C's
application for coverage is a preexisting condition
exclusion because a denial of an application for
coverage based on the fact that a condition was
present before the date of denial is an exclusion of
benefits based on a preexisting condition. Therefore,
such an exclusion is prohibited.

for plan years beginning on or after Jan-
uary 1, 2017. Until the applicability date
for this regulation, plans and issuers are
required to continue to comply with the
interim final regulations promulgated by
the Department of Labor at 29 CFR part
2590, contained in the 29 CFR, parts 1927
to end, edition revised as of July 1, 2015.

## § 54.9815-2704T [Removed]

Par. 7. Section 54.9815-2704T is re-
moved.

Par.8. Section 54.9815-2711 is added
to read as follows:

## § 54.9815-2711 No lifetime or annual limits.

(a) Prohibition-(1) Lifetime limits.
Except as provided in paragraph (b) of
this section, a group health plan, or a
health insurance issuer offering group
health insurance coverage, may not estab-
lish any lifetime limit on the dollar
amount of essential health benefits for any
individual, whether provided in-network
or out-of-network.

(2) Annual limits-(i) General rule.
Except as provided in paragraphs
(a)(2)(ii) and (b) of this section, a group
health plan, or a health insurance issuer
offering group health insurance coverage,
may not establish any annual limit on the
dollar amount of essential health benefits
for any individual, whether provided in-
network or out-of-network.

(ii) Exception for health flexible spend-
ing arrangements. A health flexible
spending arrangement (as defined in sec-
tion 106(c)(2) of the Internal Revenue
Code) offered through a cafeteria plan
pursuant to section 125 of the Internal
Revenue Code is not subject to the re-
quirement in paragraph (a)(2)(i) of this
section.

(b) Construction-(1) Permissible lim-
its on specific covered benefits. The rules
of this section do not prevent a group
health plan, or a health insurance issuer
offering group health insurance coverage,
from placing annual or lifetime dollar lim-
its with respect to any individual on spe-
cific covered benefits that are not essential
health benefits to the extent that such lim-
its are otherwise permitted under applica-
ble Federal or State law. (The scope of

essential health benefits is addressed in
paragraph (c) of this section).

(2) Condition-based exclusions. The
rules of this section do not prevent a group
health plan, or a health insurance issuer
offering group health insurance coverage,
from excluding all benefits for a condi-
tion. However, if any benefits are pro-
vided for a condition, then the require-
ments of this section apply. Other
requirements of Federal or State law may
require coverage of certain benefits.

(c) Definition of essential health bene-
fits. The term "essential health benefits"
means essential health benefits under sec-
tion 1302(b) of the Patient Protection and
Affordable Care Act and applicable regu-
lations. For this purpose, a group health
plan or a health insurance issuer that is not
required to provide essential health bene-
fits under section 1302(b) must define "es-
sential health benefits" in a manner con-
sistent with one of the three Federal
Employees Health Benefit Program (FE-
HBP) options as defined by 45 CFR
156.100(a)(3) or one of the base-
benchmark plans selected by a State or
applied by default pursuant to 45 CFR
156.100.

(d) Special rule for health reimburse-
ment arrangements (HRAs) and other
account-based plans- (1) In general. If
an HRA or other account-based plan is
integrated with other coverage under a
group health plan and the other group
health plan coverage alone satisfies the
requirements in paragraph (a)(2) of this
section, the fact that the benefits under the
HRA or other account-based plan are lim-
ited does not mean that the HRA or other
account-based plan fails to meet the re-
quirements of paragraph (a)(2) of this sec-
tion. Similarly, if an HRA or other
account-based plan is integrated with
other coverage under a group health plan
and the other group health plan coverage
alone satisfies the requirements in PHS
Act section 2713 and section 54.9815-
2713(a)(1), the HRA or other account-
based plan will not fail to meet the re-
quirements of PHS Act section 2713 and
§ 54.9815-2713(a)(1).

(2) Integration requirements. An HRA
or other account-based plan is integrated
with a group health plan for purposes of
paragraph (a)(2) of this section if it meets
the requirements under either the integra-

tion method set forth in paragraph
(d)(2)(i) of this section or the integration
method set forth in paragraph (d)(2)(ii) of
this section. Integration does not require
that the HRA (or other account-based
plan) and the group health plan with
which it is integrated share the same plan
sponsor, the same plan document, or gov-
erning instruments, or file a single Form
5500, if applicable. The term "excepted
benefits" is used throughout the integra-
tion methods; for a definition of the term
"excepted benefits" see Code section
9832(c), ERISA section 733(c), and PHS
Act section 2791(c).

(i) Integration Method: Minimum
value not required. An HRA or other
account-based plan is integrated with an-
other group health plan for purposes of
this paragraph if:

(A) The plan sponsor offers a group
health plan (other than the HRA or other
account-based plan) to the employee that
does not consist solely of excepted bene-
fits;

(B) The employee receiving the HRA
or other account-based plan is actually
enrolled in a group health plan (other than
the HRA or other account-based plan) that
does not consist solely of excepted bene-
fits, regardless of whether the plan is of-
fered by the same plan sponsor (referred
to as non-HRA group coverage);

(C) The HRA or other account-based
plan is available only to employees who
are enrolled in non-HRA group coverage,
regardless of whether the non-HRA group
coverage is offered by the plan sponsor of
the HRA or other account-based plan (for
example, the HRA may be offered only to
employees who do not enroll in an em-
ployer's group health plan but are enrolled
in other non-HRA group coverage, such
as a group health plan maintained by the
employer of the employee's spouse);

(D) The benefits under the HRA or
other account-based plan are limited to
reimbursement of one or more of the
following-co-payments, co-insurance,
deductibles, and premiums under the non-
HRA group coverage, as well as medical
care (as defined under section 213(d) of
the Code) that does not constitute essen-
tial health benefits as defined in paragraph
(c) of this section; and

(E) Under the terms of the HRA or
other account-based plan, an employee (or

former employee) is permitted to perma-
nently opt out of and waive future reim-
bursements from the HRA or other
account-based plan at least annually and,
upon termination of employment, either
the remaining amounts in the HRA or
other account-based plan are forfeited or
the employee is permitted to permanently
opt out of and waive future reimburse-
ments from the HRA or other account-
based plan.

(ii) Integration Method: Minimum
value required. An HRA or other account-
based plan is integrated with another
group health plan for purposes of this
paragraph if:

(A) The plan sponsor offers a group
health plan (other than the HRA or other
account-based plan) to the employee that
provides minimum value pursuant to
Code section 36B(c)(2)(C)(ii) (and its im-
plementing regulations and applicable
guidance);

(B) The employee receiving the HRA
or other account-based plan is actually
enrolled in a group health plan that pro-
vides minimum value pursuant to section
36B(c)(2)(C)(ii) of the Code (and applica-
ble guidance), regardless of whether the
plan is offered by the plan sponsor of the
HRA or other account-based plan (re-
ferred to as non-HRA MV group cover-
age);

(C) The HRA or other account-based
plan is available only to employees who
are actually enrolled in non-HRA MV
group coverage, regardless of whether the
non-HRA MV group coverage is offered
by the plan sponsor of the HRA or other
account-based plan (for example, the
HRA may be offered only to employees
who do not enroll in an employer's group
health plan but are enrolled in other non-
HRA MV group coverage, such as a group
health plan maintained by an employer of
the employee's spouse); and

(D) Under the terms of the HRA or
other account-based plan, an employee (or
former employee) is permitted to perma-
nently opt out of and waive future reim-
bursements from the HRA or other
account-based plan at least annually, and,
upon termination of employment, either
the remaining amounts in the HRA or
other account-based plan are forfeited or
the employee is permitted to permanently
opt out of and waive future reimburse-

ments from the HRA or other account-
based plan.

(3) Forfeiture. For purpose of integra-
tion under paragraphs (d)(2)(i)(E) and
(d)(2)(ii)(D) of this section, forfeiture or
waiver occurs even if the forfeited or
waived amounts may be reinstated upon a
fixed date, a participant's death, or the
earlier of the two events (the reinstate-
ment event). For this purpose coverage
under an HRA or other account-based
plan is considered forfeited or waived
prior to a reinstatement event only if the
participant's election to forfeit or waive is
irrevocable, meaning that, beginning on
the effective date of the election and
through the date of the reinstatement
event, the participant and the participant's
beneficiaries have no access to amounts
credited to the HRA or other account-
based plan. This means that upon and after
reinstatement, the reinstated amounts un-
der the HRA or other account-based plan
may not be used to reimburse or pay med-
ical expenses incurred during the period
after forfeiture and prior to reinstatement.

(4) No integration with individual mar-
ket coverage. A group health plan, includ-
ing an HRA or other account-based plan,
used to purchase coverage on the individ-
ual market is not integrated with that in-
dividual market coverage for purposes of
paragraph (a)(2) of this section (or for
purposes of the requirements of PHS Act
section 2713).

(5) Integration with Medicare parts B
and D. For employers that are not required
to offer their non-HRA group health plan
coverage to employees who are Medicare
beneficiaries, an HRA or other account-
based plan that may be used to reimburse
premiums under Medicare part B or D
may be integrated with Medicare (and
deemed to comply with PHS Act sections
2711 and 2713) if the following require-
ments are satisfied with respect to em-
ployees who would be eligible for the
employer's non-HRA group health plan
but for their eligibility for Medicare (and
the integration rules under paragraphs
(d)(2)(i) and (ii) of this section continue to
apply to employees who are not eligible
for Medicare):

(i) The plan sponsor offers a group
health plan (other than the HRA or other
account-based plan and that does not con-

sist solely of excepted benefits) to em-
ployees who are not eligible for Medicare;

(ii) The employee receiving the HRA
or other account-based plan is actually
enrolled Medicare part B or D;

(iii) The HRA or other account-based
plan is available only to employees who
are enrolled in Medicare part B or D; and

(iv) The HRA or other account-based
plan complies with paragraphs
(d)(2)(i)(E) and (d)(2)(ii)(D) of this sec-
tion.

(6) Account-based plan. An account-
based plan for purposes of this section is
an employer-provided group health plan
that provides reimbursements of medical
expenses other than individual market
policy premiums with the reimbursement
subject to a maximum fixed dollar amount
for a period. An HRA is a type of account-
based plan.

(e) Applicability date. The provisions
of this section are applicable to group
health plans and health insurance issuers
for plan years beginning on or after Jan-
uary 1, 2017. Until the applicability date
for this regulation, plans and issuers are
required to continue to comply with the
interim final regulations promulgated by
the Department of Labor at 29 CFR part
2590, contained in the 29 CFR, parts 1927
to end, edition revised as of July 1, 2015.

## § 54.9815-2711T [Removed]

Par. 9. Section 54.9815-2711T is re-
moved.

Par.10. Section 54.9815-2712 is added
to read as follows:

## § 54.9815-2712 Rules regarding rescissions.

(a) Prohibition on rescissions-(1) A
group health plan, or a health insurance
issuer offering group health insurance
coverage, must not rescind coverage un-
der the plan, or under the policy, certifi-
cate, or contract of insurance, with respect
to an individual (including a group to
which the individual belongs or family
coverage in which the individual is in-
cluded) once the individual is covered un-
der the plan or coverage, unless the indi-
vidual (or a person seeking coverage on
behalf of the individual) performs an act,
practice, or omission that constitutes
fraud, or makes an intentional misrepre-

sentation of material fact, as prohibited by
the terms of the plan or coverage. A group
health plan, or a health insurance issuer
offering group health insurance coverage,
must provide at least 30 days advance
written notice to each participant who
would be affected before coverage may be
rescinded under this paragraph (a)(1), re-
gardless of whether the coverage is in-
sured or self-insured, or whether the re-
scission applies to an entire group or only
to an individual within the group. (The
rules of this paragraph (a)(1) apply re-
gardless of any contestability period that
may otherwise apply.)

(2) For purposes of this section, a re-
scission is a cancellation or discontinu-
ance of coverage that has retroactive ef-
fect. For example, a cancellation that
treats a policy as void from the time of the
individual's or group's enrollment is a
rescission. As another example, a can-
cellation that voids benefits paid up to a
year before the cancellation is also a
rescission for this purpose. A cancella-
tion or discontinuance of coverage is not
a rescission if -

(i) The cancellation or discontinuance
of coverage has only a prospective effect;

(ii) The cancellation or discontinuance
of coverage is effective retroactively to
the extent it is attributable to a failure to
timely pay required premiums or contri-
butions (including COBRA premiums) to-
wards the cost of coverage;

(iii) The cancellation or discontinuance
of coverage is initiated by the individual
(or by the individual's authorized repre-
sentative) and the sponsor, employer,
plan, or issuer does not, directly or indi-
rectly, take action to influence the individ-
ual's decision to cancel or discontinue
coverage retroactively or otherwise take
any adverse action or retaliate against,
interfere with, coerce, intimidate, or
threaten the individual; or

(iv) The cancellation or discontinuance
of coverage is initiated by the Exchange
pursuant to 45 CFR 155.430 (other than
under paragraph (b)(2)(iii)).

(3) The rules of this paragraph (a) are
illustrated by the following examples:

Example 1. (i) Facts. Individual A seeks enroll-
ment in an insured group health plan. The plan terms
permit rescission of coverage with respect to an
individual if the individual engages in fraud or
makes an intentional misrepresentation of a material
fact. The plan requires A to complete a questionnaire

regarding A's prior medical history, which affects
setting the group rate by the health insurance issuer.
The questionnaire complies with the other require-
ments of this part. The questionnaire includes the
following question: "Is there anything else relevant
to your health that we should know?" A inadver-
tently fails to list that A visited a psychologist on two
occasions, six years previously. A is later diagnosed
with breast cancer and seeks benefits under the plan.
On or around the same time, the issuer receives
information about A's visits to the psychologist,
which was not disclosed in the questionnaire.

(ii) Conclusion. In this Example 1, the plan can-
not rescind A's coverage because A's failure to dis-
close the visits to the psychologist was inadvertent.
Therefore, it was not fraudulent or an intentional
misrepresentation of material fact.

Example 2. (i) Facts. An employer sponsors a
group health plan that provides coverage for employ-
ees who work at least 30 hours per week. Individual
B has coverage under the plan as a full-time em-
ployee. The employer reassigns B to a part-time
position. Under the terms of the plan, B is no longer
eligible for coverage. The plan mistakenly continues
to provide health coverage, collecting premiums
from B and paying claims submitted by B. After a
routine audit, the plan discovers that B no longer
works at least 30 hours per week. The plan rescinds
B's coverage effective as of the date that B changed
from a full-time employee to a part-time employee.

(ii) Conclusion. In this Example 2, the plan can-
not rescind B's coverage because there was no fraud
or an intentional misrepresentation of material fact.
The plan may cancel coverage for B prospectively,
subject to other applicable Federal and State laws.

(b) Compliance with other require-
ments. Other requirements of Federal or
State law may apply in connection with a
rescission of coverage.

(c) Applicability date. The provisions
of this section are applicable to group
health plans and health insurance issuers
for plan years beginning on or after Jan-
uary 1, 2017. Until the applicability date
for this regulation, plans and issuers are
required to continue to comply with the
interim final regulations promulgated by
the Department of Labor at 29 CFR part
2590, contained in the 29 CFR, parts 1927
to end, edition revised as of July 1, 2015.

## § 54.9815-2712T [Removed]

Par. 11. Section 54.9815-2712T is re-
moved.

Par.12. Section 54.9815-2714 is added
to read as follows:

§ 54.9815-2714 Eligibility of children
until at least age 26.

(a) In general-(1) A group health
plan, or a health insurance issuer offering
group health insurance coverage, that

makes available dependent coverage of
children must make such coverage avail-
able for children until attainment of 26
years of age.

(2) The rule of this paragraph (a) is
illustrated by the following example:

Example. (i) Facts. For the plan year beginning
January 1, 2011, a group health plan provides health
coverage for employees, employees' spouses, and
employees' children until the child turns 26. On the
birthday of a child of an employee, July 17, 2011, the
child turns 26. The last day the plan covers the child
is July 16, 2011.

(ii) Conclusion. In this Example, the plan satis-
fies the requirement of this paragraph (a) with re-
spect to the child.

(b) Restrictions on plan definition of
dependent - (1) In general. With respect
to a child who has not attained age 26, a
plan or issuer may not define dependent
for purposes of eligibility for dependent
coverage of children other than in terms of
a relationship between a child and the
participant. Thus, for example, a plan or
issuer may not deny or restrict dependent
coverage for a child who has not attained
age 26 based on the presence or absence
of the child's financial dependency (upon
the participant or any other person); resi-
dency with the participant or with any
other person; whether the child lives,
works, or resides in an HMO's service
area or other network service area; marital
status; student status; employment; eligi-
bility for other coverage; or any combina-
tion of those factors. (Other requirements
of Federal or State law, including section
609 of ERISA or section 1908 of the
Social Security Act, may require coverage
of certain children.)

(2) Construction. A plan or issuer will
not fail to satisfy the requirements of this
section if the plan or issuer limits depen-
dent child coverage to children under age
26 who are described in section 152(f)(1)
. For an individual not described in section
152(f)(1), such as a grandchild or niece, a
plan may impose additional conditions on
eligibility for dependent child health cov-
erage, such as a condition that the individ-
ual be a dependent for income tax pur-
poses.

(c) Coverage of grandchildren not re-
quired. Nothing in this section requires a
plan or issuer to make coverage available
for the child of a child receiving depen-
dent coverage.

(d) Uniformity irrespective of age. The
terms of the plan or health insurance cov-

erage providing dependent coverage of
children cannot vary based on age (except
for children who are age 26 or older).

(e) Examples. The rules of paragraph
(d) of this section are illustrated by the
following examples:

Example 1. (i) Facts. A group health plan offers
a choice of self-only or family health coverage.
Dependent coverage is provided under family health
coverage for children of participants who have not
attained age 26. The plan imposes an additional
premium surcharge for children who are older than
age 18.

(ii) Conclusion. In this Example 1, the plan vio-
lates the requirement of paragraph (d) of this section
because the plan varies the terms for dependent
coverage of children based on age.

Example 2. (i) Facts. A group health plan offers
a choice among the following tiers of health cover-
age: self-only, self-plus-one, self-plus-two, and self-
plus-three-or-more. The cost of coverage increases
based on the number of covered individuals. The
plan provides dependent coverage of children who
have not attained age 26.

(ii) Conclusion. In this Example 2, the plan does
not violate the requirement of paragraph (d) of this
section that the terms of dependent coverage for
children not vary based on age. Although the cost of
coverage increases for tiers with more covered indi-
viduals, the increase applies without regard to the
age of any child.

Example 3. (i) Facts. A group health plan offers
two benefit packages - an HMO option and an
indemnity option. Dependent coverage is provided
for children of participants who have not attained
age 26. The plan limits children who are older than
age 18 to the HMO option.

(ii) Conclusion. In this Example 3, the plan vio-
lates the requirement of paragraph (d) of this section
because the plan, by limiting children who are older
than age 18 to the HMO option, varies the terms for
dependent coverage of children based on age.

Example 4. (i) Facts. A group health plan spon-
sored by a large employer normally charges a co-
payment for physician visits that do not constitute
preventive services. The plan charges this copay-
ment to individuals age 19 and over, including em-
ployees, spouses, and dependent children, but waives
it for those under age 19.

(ii) Conclusion. In this Example 4, the plan does
not violate the requirement of paragraph (d) of this
section that the terms of dependent coverage for
children not vary based on age. While the require-
ment of paragraph (d) of this section generally pro-
hibits distinctions based upon age in dependent cov-
erage of children, it does not prohibit distinctions
based upon age that apply to all coverage under the
plan, including coverage for employees and spouses
as well as dependent children. In this Example 4, the
copayments charged to dependent children are the
same as those charged to employees and spouses.
Accordingly, the arrangement described in this Ex-
ample 4 (including waiver, for individuals under age
19, of the generally applicable copayment) does
not violate the requirement of paragraph (d) of this
section.

(f) Applicability date. The provisions
of this section are applicable to group
health plans and health insurance issuers
for plan years beginning on or after Jan-
uary 1, 2017. Until the applicability date
for this regulation, plans and issuers are
required to continue to comply with the
interim final regulations promulgated by
the Department of Labor at 29 CFR part
2590, contained in the 29 CFR, parts 1927
to end, edition revised as of July 1, 2015.

## § 54.9815-2714T [Removed]

Par. 13. Section 54.9815-2714T is re-
moved.

Par. 14. Section 54.9815-2719 is added
to read as follows:

## § 54.9815-2719 Internal claims and appeals and external review processes

(a) Scope and definitions-(1) Scope.
This section sets forth requirements with
respect to internal claims and appeals and
external review processes for group health
plans and health insurance issuers that are
not grandfathered health plans under
§ 54.9815-1251. Paragraph (b) of this
section provides requirements for internal
claims and appeals processes. Paragraph
(c) of this section sets forth rules govern-
ing the applicability of State external re-
view processes. Paragraph (d) of this sec-
tion sets forth a Federal external review
process for plans and issuers not subject to
an applicable State external review pro-
cess. Paragraph (e) of this section pre-
scribes requirements for ensuring that no-
tices required to be provided under this
section are provided in a culturally and
linguistically appropriate manner. Para-
graph (f) of this section describes the au-
thority of the Secretary to deem certain
external review processes in existence on
March 23, 2010 as in compliance with
paragraph (c) or (d) of this section.

(2) Definitions. For purposes of this
section, the following definitions apply -

(i) Adverse benefit determination. An
adverse benefit determination means an
adverse benefit determination as defined
in 29 CFR 2560.503-1, as well as any
rescission of coverage, as described in
§ 54.9815-2712(a)(2) (whether or not, in
connection with the rescission, there is an
adverse effect on any particular benefit at
that time).

(ii) Appeal (or internal appeal). An
appeal or internal appeal means review
by a plan or issuer of an adverse benefit
determination, as required in paragraph
(b) of this section.

(iii) Claimant. Claimant means an in-
dividual who makes a claim under this
section. For purposes of this section, ref-
erences to claimant include a claimant's
authorized representative.

(iv) External review. External review
means a review of an adverse benefit de-
termination (including a final internal ad-
verse benefit determination) conducted
pursuant to an applicable State external
review process described in paragraph (c)
of this section or the Federal external re-
view process of paragraph (d) of this sec-
tion.

(v) Final internal adverse benefit de-
termination. A final internal adverse ben-
efit determination means an adverse ben-
efit determination that has been upheld by
a plan or issuer at the completion of the
internal appeals process applicable under
paragraph (b) of this section (or an ad-
verse benefit determination with respect to
which the internal appeals process has
been exhausted under the deemed exhaus-
tion rules of paragraph (b)(2)(ii)(F) of this
section).

(vi) Final external review decision. A
final external review decision means a de-
termination by an independent review or-
ganization at the conclusion of an external
review.

(vii) Independent review organization
(or IRO). An independent review organi-
zation (or IRO) means an entity that con-
ducts independent external reviews of ad-
verse benefit determinations and final
internal adverse benefit determinations
pursuant to paragraph (c) or (d) of this
section.

(viii) NAIC Uniform Model Act. The
NAIC Uniform Model Act means the Uni-
form Health Carrier External Review
Model Act promulgated by the National
Association of Insurance Commissioners
in place on July 23, 2010.

(b) Internal claims and appeals pro-
cess-(1) In general. A group health plan
and a health insurance issuer offering
group health insurance coverage must im-
plement an effective internal claims and
appeals process, as described in this para-
graph (b).

(2) Requirements for group health
plans and group health insurance issuers.
A group health plan and a health insur-
ance issuer offering group health insur-
ance coverage must comply with all the
requirements of this paragraph (b)(2). In
the case of health insurance coverage of-
fered in connection with a group health
plan, if either the plan or the issuer com-
plies with the internal claims and appeals
process of this paragraph (b)(2), then the
obligation to comply with this paragraph
(b)(2) is satisfied for both the plan and the
issuer with respect to the health insurance
coverage.

(i) Minimum internal claims and ap-
peals standards. A group health plan and
a health insurance issuer offering group
health insurance coverage must comply
with all the requirements applicable to
group health plans under 29 CFR
2560.503-1, except to the extent those
requirements are modified by paragraph
(b)(2)(ii) of this section. Accordingly, un-
der this paragraph (b), with respect to
health insurance coverage offered in con-
nection with a group health plan, the
group health insurance issuer is subject to
the requirements in 29 CFR 2560.503-1
to the same extent as the group health
plan.

(ii) Additional standards. In addition to
the requirements in paragraph (b)(2)(i) of
this section, the internal claims and ap-
peals processes of a group health plan and
a health insurance issuer offering group
health insurance coverage must meet the
requirements of this paragraph (b)(2)(ii).

(A) Clarification of meaning of ad-
verse benefit determination. For purposes
of this paragraph (b)(2), an "adverse ben-
efit determination" includes an adverse
benefit determination as defined in para-
graph (a)(2)(i) of this section. Accord-
ingly, in complying with 29 CFR
2560.503-1, as well as the other provi-
sions of this paragraph (b)(2), a plan or
issuer must treat a rescission of coverage
(whether or not the rescission has an ad-
verse effect on any particular benefit at
that time) as an adverse benefit determi-
nation. (Rescissions of coverage are sub-
ject to the requirements of § 54.9815-
2712.)

(B) Expedited notification of benefit
determinations involving urgent care. The
requirements of 29 CFR 2560.503-

1(f)(2)(i) (which generally provide, among
other things, in the case of urgent care
claims for notification of the plan's benefit
determination (whether adverse or not) as
soon as possible, taking into account the
medical exigencies, but not later than 72
hours after the receipt of the claim) continue
to apply to the plan and issuer. For purposes
of this paragraph (b)(2)(ii)(B), a claim in-
volving urgent care has the meaning given
in 29 CFR 2560.503-1(m)(1), as deter-
mined by the attending provider, and the
plan or issuer shall defer to such determina-
tion of the attending provider.

(C) Full and fair review. A plan and
issuer must allow a claimant to review the
claim file and to present evidence and
testimony as part of the internal claims
and appeals process. Specifically, in addi-
tion to complying with the requirements
of 29 CFR 2560.503-1(h)(2) -

(1) The plan or issuer must provide the
claimant, free of charge, with any new or
additional evidence considered, relied
upon, or generated by the plan or issuer
(or at the direction of the plan or issuer) in
connection with the claim; such evidence
must be provided as soon as possible and
sufficiently in advance of the date on
which the notice of final internal adverse
benefit determination is required to be
provided under 29 CFR 2560.503-1(i) to
give the claimant a reasonable opportunity
to respond prior to that date; and

(2) Before the plan or issuer can issue
a final internal adverse benefit determina-
tion based on a new or additional ratio-
nale, the claimant must be provided, free
of charge, with the rationale; the rationale
must be provided as soon as possible and
sufficiently in advance of the date on
which the notice of final internal adverse
benefit determination is required to be
provided under 29 CFR 2560.503-1(i) to
give the claimant a reasonable opportunity
to respond prior to that date. Notwith-
standing the rules of 29 CFR 2560.503-
1(i), if the new or additional evidence is
received so late that it would be impossi-
ble to provide it to the claimant in time for
the claimant to have a reasonable oppor-
tunity to respond, the period for providing
a notice of final internal adverse benefit
determination is tolled until such time as
the claimant has a reasonable opportunity
to respond. After the claimant responds,
or has a reasonable opportunity to respond

but fails to do so, the plan administrator
shall notify the claimant of the plan's ben-
efit determination as soon as a plan acting
in a reasonable and prompt fashion can
provide the notice, taking into account the
medical exigencies.

(D) Avoiding conflicts of interest. In
addition to the requirements of 29 CFR
2560.503-1(b) and (h) regarding full and
fair review, the plan and issuer must en-
sure that all claims and appeals are adju-
dicated in a manner designed to ensure the
independence and impartiality of the per-
sons involved in making the decision. Ac-
cordingly, decisions regarding hiring,
compensation, termination, promotion, or
other similar matters with respect to any
individual (such as a claims adjudicator or
medical expert) must not be made based
upon the likelihood that the individual
will support the denial of benefits.

(E) Notice. A plan and issuer must pro-
vide notice to individuals, in a culturally
and linguistically appropriate manner (as
described in paragraph (e) of this section)
that complies with the requirements of 29
CFR 2560.503-1(g) and (j). The plan and
issuer must also comply with the addi-
tional requirements of this paragraph
(b)(2)(ii)(E).

(1) The plan and issuer must ensure
that any notice of adverse benefit determi-
nation or final internal adverse benefit de-
termination includes information suffi-
cient to identify the claim involved
(including the date of service, the health
care provider, the claim amount (if appli-
cable), and a statement describing the
availability, upon request, of the diagnosis
code and its corresponding meaning, and
the treatment code and its corresponding
meaning).

(2) The plan and issuer must provide to
participants and beneficiaries, as soon as
practicable, upon request, the diagnosis
code and its corresponding meaning, and
the treatment code and its corresponding
meaning, associated with any adverse
benefit determination or final internal ad-
verse benefit determination. The plan or
issuer must not consider a request for such
diagnosis and treatment information, in
itself, to be a request for an internal appeal
under this paragraph (b) or an external
review under paragraphs (c) and (d) of
this section.

(3) The plan and issuer must ensure
that the reason or reasons for the adverse
benefit determination or final internal ad-
verse benefit determination includes the
denial code and its corresponding mean-
ing, as well as a description of the plan's
or issuer's standard, if any, that was used
in denying the claim. In the case of a
notice of final internal adverse benefit de-
termination, this description must include
a discussion of the decision.

(4) The plan and issuer must provide a
description of available internal appeals
and external review processes, including
information regarding how to initiate an
appeal.

(5) The plan and issuer must disclose
the availability of, and contact informa-
tion for, any applicable office of health
insurance consumer assistance or om-
budsman established under PHS Act sec-
tion 2793 to assist individuals with the
internal claims and appeals and external
review processes.

(F) Deemed exhaustion of internal
claims and appeals processes - (1) In the
case of a plan or issuer that fails to strictly
adhere to all the requirements of this para-
graph (b)(2) with respect to a claim, the
claimant is deemed to have exhausted the
internal claims and appeals process of this
paragraph (b), except as provided in para-
graph (b)(2)(ii)(F)(2) of this section. Ac-
cordingly the claimant may initiate an ex-
ternal review under paragraph (c) or (d) of
this section, as applicable. The claimant is
also entitled to pursue any available rem-
edies under section 502(a) of ERISA or
under State law, as applicable, on the ba-
sis that the plan or issuer has failed to
provide a reasonable internal claims and
appeals process that would yield a deci-
sion on the merits of the claim. If a claim-
ant chooses to pursue remedies under sec-
tion 502(a) of ERISA under such
circumstances, the claim or appeal is
deemed denied on review without the ex-
ercise of discretion by an appropriate fi-
duciary.

(2) Notwithstanding paragraph
(b)(2)(ii)(F)(1) of this section, the internal
claims and appeals process of this para-
graph (b) will not be deemed exhausted
based on de minimis violations that do not
cause, and are not likely to cause, preju-
dice or harm to the claimant so long as the
plan or issuer demonstrates that the viola-

tion was for good cause or due to matters
beyond the control of the plan or issuer
and that the violation occurred in the con-
text of an ongoing, good faith exchange of
information between the plan and the
claimant. This exception is not available if
the violation is part of a pattern or practice
of violations by the plan or issuer. The
claimant may request a written explana-
tion of the violation from the plan or is-
suer, and the plan or issuer must provide
such explanation within 10 days, includ-
ing a specific description of its bases, if
any, for asserting that the violation should
not cause the internal claims and appeals
process of this paragraph (b) to be deemed
exhausted. If an external reviewer or a
court rejects the claimant's request for
immediate review under paragraph
(b)(2)(ii)(F)(1) of this section on the basis
that the plan met the standards for the ex-
ception under this paragraph (b)(2)(ii)(F)(2),
the claimant has the right to resubmit and
pursue the internal appeal of the claim. In
such a case, within a reasonable time after
the external reviewer or court rejects the
claim for immediate review (not to exceed
10 days), the plan shall provide the claim-
ant with notice of the opportunity to re-
submit and pursue the internal appeal of
the claim. Time periods for re-filing the
claim shall begin to run upon claimant's
receipt of such notice.

(iii) Requirement to provide continued
coverage pending the outcome of an ap-
peal. A plan and issuer subject to the
requirements of this paragraph (b)(2) are
required to provide continued coverage
pending the outcome of an appeal. For this
purpose, the plan and issuer must comply
with the requirements of 29 CFR
2560.503-1(f)(2)(ii), which generally
provides that benefits for an ongoing
course of treatment cannot be reduced or
terminated without providing advance
notice and an opportunity for advance
review.

(c) State standards for external re-
view-(1) In general. (i) If a State exter-
nal review process that applies to and is
binding on a health insurance issuer offer-
ing group health insurance coverage in-
cludes at a minimum the consumer pro-
tections in the NAIC Uniform Model Act,
then the issuer must comply with the ap-
plicable State external review process and
is not required to comply with the Federal

external review process of paragraph (d)
of this section. In such a case, to the extent
that benefits under a group health plan are
provided through health insurance cover-
age, the group health plan is not required
to comply with either this paragraph (c) or
the Federal external review process of
paragraph (d) of this section.

(ii) To the extent that a group health
plan provides benefits other than through
health insurance coverage (that is, the plan
is self-insured) and is subject to a State
external review process that applies to and
is binding on the plan (for example, is not
preempted by ERISA) and the State ex-
ternal review process includes at a mini-
mum the consumer protections in the
NAIC Uniform Model Act, then the plan
must comply with the applicable State ex-
ternal review process and is not required
to comply with the Federal external re-
view process of paragraph (d) of this sec-
tion. Where a self-insured plan is not sub-
ject to an applicable State external review
process, but the State has chosen to ex-
pand access to its process for plans that
are not subject to the applicable State
laws, the plan may choose to comply with
either the applicable State external review
process or the Federal external review
process of paragraph (d) of this section.

(iii) If a plan or issuer is not required
under paragraph (c)(1)(i) or (c)(1)(ii) of
this section to comply with the require-
ments of this paragraph (c), then the plan
or issuer must comply with the Federal
external review process of paragraph (d)
of this section, except to the extent, in the
case of a plan, the plan is not required
under paragraph (c)(1)(i) of this section to
comply with paragraph (d) of this section.

(2) Minimum standards for State exter-
nal review processes. An applicable State
external review process must meet all the
minimum consumer protections in this
paragraph (c)(2). The Department of
Health and Human Services will deter-
mine whether State external review pro-
cesses meet these requirements.

(i) The State process must provide for
the external review of adverse benefit de-
terminations (including final internal ad-
verse benefit determinations) by issuers
(or, if applicable, plans) that are based on
the issuer's (or plan's) requirements for
medical necessity, appropriateness, health

care setting, level of care, or effectiveness
of a covered benefit.

(ii) The State process must require is-
suers (or, if applicable, plans) to provide
effective written notice to claimants of
their rights in connection with an external
review for an adverse benefit determina-
tion.

(iii) To the extent the State process
requires exhaustion of an internal claims
and appeals process, exhaustion must be
unnecessary where the issuer (or, if appli-
cable, the plan) has waived the require-
ment; the issuer (or the plan) is considered
to have exhausted the internal claims and
appeals process under applicable law (in-
cluding by failing to comply with any of
the requirements for the internal appeal
process, as outlined in paragraph (b)(2) of
this section); or the claimant has applied
for expedited external review at the same
time as applying for an expedited internal
appeal.

(iv) The State process provides that the
issuer (or, if applicable, the plan) against
which a request for external review is filed
must pay the cost of the IRO for conduct-
ing the external review. Notwithstanding
this requirement, a State external review
process that expressly authorizes, as of
November 18, 2015, a nominal filing fee
may continue to permit such fees. For this
purpose, to be considered nominal, a filing
fee must not exceed $25; it must be re-
funded to the claimant if the adverse ben-
efit determination (or final internal ad-
verse benefit determination) is reversed
through external review; it must be
waived if payment of the fee would im-
pose an undue financial hardship; and
the annual limit on filing fees for any
claimant within a single plan year must
not exceed $75.

(v) The State process may not impose a
restriction on the minimum dollar amount
of a claim for it to be eligible for external
review. Thus, the process may not impose,
for example, a $500 minimum claims
threshold.

(vi) The State process must allow at
least four months after the receipt of a
notice of an adverse benefit determination
or final internal adverse benefit determi-
nation for a request for an external review
to be filed.

(vii) The State process must provide
that IROs will be assigned on a random

basis or another method of assignment
that assures the independence and impar-
tiality of the assignment process (such as
rotational assignment) by a State or inde-
pendent entity, and in no event selected by
the issuer, plan, or the individual.

(viii) The State process must provide
for maintenance of a list of approved
IROs qualified to conduct the external re-
view based on the nature of the health care
service that is the subject of the review.
The State process must provide for ap-
proval only of IROs that are accredited by
a nationally recognized private accredit-
ing organization.

(ix) The State process must provide
that any approved IRO has no conflicts of
interest that will influence its indepen-
dence. Thus, the IRO may not own or
control, or be owned or controlled by a
health insurance issuer, a group health
plan, the sponsor of a group health plan, a
trade association of plans or issuers, or a
trade association of health care providers.
The State process must further provide
that the IRO and the clinical reviewer
assigned to conduct an external review
may not have a material professional, fa-
milial, or financial conflict of interest with
the issuer or plan that is the subject of the
external review; the claimant (and any
related parties to the claimant) whose
treatment is the subject of the external
review; any officer, director, or manage-
ment employee of the issuer; the plan ad-
ministrator, plan fiduciaries, or plan em-
ployees; the health care provider, the
health care provider's group, or practice
association recommending the treatment
that is subject to the external review; the
facility at which the recommended treat-
ment would be provided; or the developer
or manufacturer of the principal drug, de-
vice, procedure, or other therapy being
recommended.

(x) The State process allows the claim-
ant at least five business days to submit to
the IRO in writing additional information
that the IRO must consider when conduct-
ing the external review, and it requires
that the claimant is notified of the right to
do so. The process must also require that
any additional information submitted by
the claimant to the IRO must be for-
warded to the issuer (or, if applicable, the
plan) within one business day of receipt
by the IRO.

(xi) The State process must provide
that the decision is binding on the plan or
issuer, as well as the claimant except to
the extent the other remedies are available
under State or Federal law, and except that
the requirement that the decision be bind-
ing shall not preclude the plan or issuer
from making payment on the claim or
otherwise providing benefits at any time,
including after a final external review de-
cision that denies the claim or otherwise
fails to require such payment or benefits.
For this purpose, the plan or issuer must
provide benefits (including by making
payment on the claim) pursuant to the
final external review decision without de-
lay, regardless of whether the plan or is-
suer intends to seek judicial review of the
external review decision and unless or un-
til there is a judicial decision otherwise.

(xii) The State process must require,
for standard external review, that the IRO
provide written notice to the issuer (or, if
applicable, the plan) and the claimant of
its decision to uphold or reverse the ad-
verse benefit determination (or final inter-
nal adverse benefit determination) within
no more than 45 days after the receipt of
the request for external review by the
IRO.

(xiii) The State process must provide
for an expedited external review if the
adverse benefit determination (or final in-
ternal adverse benefit determination) con-
cerns an admission, availability of care,
continued stay, or health care service for
which the claimant received emergency
services, but has not been discharged from
a facility; or involves a medical condition
for which the standard external review
time frame would seriously jeopardize the
life or health of the claimant or jeopardize
the claimant's ability to regain maximum
function. As expeditiously as possible but
within no more than 72 hours after the
receipt of the request for expedited exter-
nal review by the IRO, the IRO must
make its decision to uphold or reverse the
adverse benefit determination (or final in-
ternal adverse benefit determination) and
notify the claimant and the issuer (or, if
applicable, the plan) of the determination.
If the notice is not in writing, the IRO
must provide written confirmation of the
decision within 48 hours after the date of
the notice of the decision.

(xiv) The State process must require
that issuers (or, if applicable, plans) in-
clude a description of the external review
process in or attached to the summary
plan description, policy, certificate, mem-
bership booklet, outline of coverage, or
other evidence of coverage it provides to
participants, beneficiaries, or enrollees,
substantially similar to what is set forth in
section 17 of the NAIC Uniform Model
Act.

(xv) The State process must require
that IROs maintain written records and
make them available upon request to the
State, substantially similar to what is set
forth in section 15 of the NAIC Uniform
Model Act.

(xvi) The State process follows proce-
dures for external review of adverse ben-
efit determinations (or final internal ad-
verse benefit determinations) involving
experimental or investigational treatment,
substantially similar to what is set forth in
section 10 of the NAIC Uniform Model
Act.

(3) Transition period for external re-
view processes-(i) Through December
31, 2017, an applicable State external re-
view process applicable to a health insur-
ance issuer or group health plan is consid-
ered to meet the requirements of PHS Act
section 2719(b). Accordingly, through
December 31, 2017, an applicable State
external review process will be considered
binding on the issuer or plan (in lieu of the
requirements of the Federal external re-
view process). If there is no applicable
State external review process, the issuer or
plan is required to comply with the re-
quirements of the Federal external review
process in paragraph (d) of this section.

(ii) An applicable State external review
process must apply for final internal ad-
verse benefit determinations (or, in the
case of simultaneous internal appeal and
external review, adverse benefit determi-
nations) provided on or after January 1,
2018. The Federal external review process
will apply to such internal adverse benefit
determinations unless the Department of
Health and Human Services determines
that a State law meets all the minimum
standards of paragraph (c)(2) of this sec-
tion. Through December 31, 2017, a State
external review process applicable to a
health insurance issuer or group health
plan may be considered to meet the min-

imum standards of paragraph (c)(2) of this
section, if it meets the temporary stan-
dards established by the Secretary in guid-
ance for a process similar to the NAIC
Uniform Model Act.

(d) Federal external review process. A
plan or issuer not subject to an applicable
State external review process under para-
graph (c) of this section must provide an
effective Federal external review process
in accordance with this paragraph (d) (ex-
cept to the extent, in the case of a plan, the
plan is described in paragraph (c)(1)(i) of
this section as not having to comply with
this paragraph (d)). In the case of health
insurance coverage offered in connection
with a group health plan, if either the plan
or the issuer complies with the Federal
external review process of this paragraph
(d), then the obligation to comply with
this paragraph (d) is satisfied for both the
plan and the issuer with respect to the
health insurance coverage. A Multi State
Plan or MSP, as defined by 45 CFR
800.20, must provide an effective Federal
external review process in accordance
with this paragraph (d). In such circum-
stances, the requirement to provide exter-
nal review under this paragraph (d) is sat-
isfied when a Multi State Plan or MSP
complies with standards established by
the Office of Personnel Management.

(1) Scope -(i) In general. The Federal
external review process established pursu-
ant to this paragraph (d) applies to the
following:

(A) An adverse benefit determination
(including a final internal adverse benefit
determination) by a plan or issuer that
involves medical judgment (including, but
not limited to, those based on the plan's or
issuer's requirements for medical neces-
sity, appropriateness, health care setting,
level of care, or effectiveness of a covered
benefit; its determination that a treatment
is experimental or investigational; its de-
termination whether a participant or ben-
eficiary is entitled to a reasonable alterna-
tive standard for a reward under a
wellness program; or its determination
whether a plan or issuer is complying with
the nonquantitative treatment limitation
provisions of Code section 9812 and
§ 54.9812, which generally require,
among other things, parity in the applica-
tion of medical management techniques),
as determined by the external reviewer. (A

denial, reduction, termination, or a failure
to provide payment for a benefit based on
a determination that a participant or ben-
eficiary fails to meet the requirements for
eligibility under the terms of a group
health plan or health insurance coverage is
not eligible for the Federal external re-
view process under this paragraph (d));
and

(B) A rescission of coverage (whether
or not the rescission has any effect on any
particular benefit at that time).

(ii) Examples. The rules of paragraph
(d)(1)(i) of this section are illustrated by
the following examples:

Example 1. (i) Facts. A group health plan pro-
vides coverage for 30 physical therapy visits gener-
ally. After the 30th visit, coverage is provided only if
the service is preauthorized pursuant to an approved
treatment plan that takes into account medical ne-
cessity using the plan's definition of the term. Indi-
vidual A seeks coverage for a 31st physical therapy
visit. A's health care provider submits a treatment
plan for approval, but it is not approved by the plan,
so coverage for the 31st visit is not preauthorized.
With respect to the 31st visit, A receives a notice of
final internal adverse benefit determination stating
that the maximum visit limit is exceeded.

(ii) Conclusion. In this Example 1, the plan's
denial of benefits is based on medical necessity and
involves medical judgment. Accordingly, the claim
is eligible for external review under paragraph
(d)(1)(i) of this section. Moreover, the plan's notifi-
cation of final internal adverse benefit determination
is inadequate under paragraphs (b)(2)(i) and
(b)(2)(ii)(E)(3) of this section because it fails to
make clear that the plan will pay for more than 30
visits if the service is preauthorized pursuant to an
approved treatment plan that takes into account med-
ical necessity using the plan's definition of the term.
Accordingly, the notice of final internal adverse ben-
efit determination should refer to the plan provision
governing the 31st visit and should describe the
plan's standard for medical necessity, as well as how
the treatment fails to meet the plan's standard.

Example 2. (i) Facts. A group health plan does
not provide coverage for services provided out of
network, unless the service cannot effectively be
provided in network. Individual B seeks coverage for
a specialized medical procedure from an out-of-
network provider because B believes that the proce-
dure cannot be effectively provided in network. B
receives a notice of final internal adverse benefit
determination stating that the claim is denied be-
cause the provider is out-of-network.

(ii) Conclusion. In this Example 2, the plan's
denial of benefits is based on whether a service can
effectively be provided in network and, therefore,
involves medical judgment. Accordingly, the claim
is eligible for external review under paragraph
(d)(1)(i) of this section. Moreover, the plan's notice
of final internal adverse benefit determination is in-
adequate under paragraphs (b)(2)(i) and
(b)(2)(ii)(E)(3) of this section because the plan does
provide benefits for services on an out-of-network

basis if the services cannot effectively be provided in
network. Accordingly, the notice of final internal
adverse benefit determination is required to refer to
the exception to the out-of-network exclusion and
should describe the plan's standards for determining
effectiveness of services, as well as how services
available to the claimant within the plan's network
meet the plan's standard for effectiveness of ser-
vices.

(2) External review process standards.
The Federal external review process es-
tablished pursuant to this paragraph (d) is
considered similar to the process set forth
in the NAIC Uniform Model Act and,
therefore satisfies the requirements of
paragraph (d)(2), if such process provides
the following.

(i) Request for external review. A
group health plan or health insurance is-
suer must allow a claimant to file a request
for an external review with the plan or
issuer if the request is filed within four
months after the date of receipt of a notice
of an adverse benefit determination or fi-
nal internal adverse benefit determination.
If there is no corresponding date four
months after the date of receipt of such a
notice, then the request must be filed by
the first day of the fifth month following
the receipt of the notice. For example, if
the date of receipt of the notice is October
30, because there is no February 30, the
request must be filed by March 1. If the
last filing date would fall on a Saturday,
Sunday, or Federal holiday, the last filing
date is extended to the next day that is not
a Saturday, Sunday, or Federal holiday.

(ii) Preliminary review - (A) In gen-
eral. Within five business days following
the date of receipt of the external review
request, the group health plan or health
insurance issuer must complete a prelim-
inary review of the request to determine
whether:

(1) The claimant is or was covered
under the plan or coverage at the time the
health care item or service was requested
or, in the case of a retrospective review,
was covered under the plan or coverage at
the time the health care item or service
was provided;

(2) The adverse benefit determination
or the final adverse benefit determination
does not relate to the claimant's failure to
meet the requirements for eligibility under
the terms of the group health plan or
health insurance coverage (e.g., worker
classification or similar determination);

(3) The claimant has exhausted the
plan's or issuer's internal appeal process
unless the claimant is not required to ex-
haust the internal appeals process under
paragraph (b)(1) of this section; and

(4) The claimant has provided all the
information and forms required to process
an external review.

(B) Within one business day after com-
pletion of the preliminary review, the plan
or issuer must issue a notification in writ-
ing to the claimant. If the request is com-
plete but not eligible for external review,
such notification must include the reasons
for its ineligibility and current contact in-
formation, including the phone number,
for the Employee Benefits Security Ad-
ministration. If the request is not com-
plete, such notification must describe the
information or materials needed to make
the request complete, and the plan or is-
suer must allow a claimant to perfect the
request for external review within the
four-month filing period or within the 48
hour period following the receipt of the
notification, whichever is later.

(iii) Referral to Independent Review
Organization - (A) In general. The
group health plan or health insurance is-
suer must assign an IRO that is accredited
by URAC or by similar nationally-
recognized accrediting organization to
conduct the external review. The IRO re-
ferral process must provide for the follow-
ing:

(1) The plan or issuer must ensure that
the IRO process is not biased and ensures
independence;

(2) The plan or issuer must contract
with at least three (3) IROs for assign-
ments under the plan or coverage and ro-
tate claims assignments among them (or
incorporate other independent, unbiased
methods for selection of IROs, such as
random selection); and

(3) The IRO may not be eligible for
any financial incentives based on the like-
lihood that the IRO will support the denial
of benefits.

(4) The IRO process may not impose
any costs, including filing fees, on the
claimant requesting the external review.

(B) IRO contracts. A group health plan
or health insurance issuer must include the
following standards in the contract be-
tween the plan or issuer and the IRO:

(1) The assigned IRO will utilize legal
experts where appropriate to make cover-
age determinations under the plan or cov-
erage.

(2) The assigned IRO will timely no-
tify a claimant in writing whether the re-
quest is eligible for external review. This
notice will include a statement that the
claimant may submit in writing to the
assigned IRO, within ten business days
following the date of receipt of the notice,
additional information. This additional in-
formation must be considered by the IRO
when conducting the external review. The
IRO is not required to, but may, accept
and consider additional information sub-
mitted after ten business days.

(3) Within five business days after the
date of assignment of the IRO, the plan or
issuer must provide to the assigned IRO
the documents and any information con-
sidered in making the adverse benefit de-
termination or final internal adverse ben-
efit determination. Failure by the plan or
issuer to timely provide the documents
and information must not delay the con-
duct of the external review. If the plan or
issuer fails to timely provide the docu-
ments and information, the assigned IRO
may terminate the external review and
make a decision to reverse the adverse
benefit determination or final internal ad-
verse benefit determination. Within one
business day after making the decision,
the IRO must notify the claimant and the
plan.

(4) Upon receipt of any information
submitted by the claimant, the assigned
IRO must within one business day for-
ward the information to the plan or issuer.
Upon receipt of any such information, the
plan or issuer may reconsider its adverse
benefit determination or final internal ad-
verse benefit determination that is the sub-
ject of the external review. Reconsidera-
tion by the plan or issuer must not delay
the external review. The external review
may be terminated as a result of the re-
consideration only if the plan decides,
upon completion of its reconsideration, to
reverse its adverse benefit determination
or final internal adverse benefit determi-
nation and provide coverage or payment.
Within one business day after making
such a decision, the plan must provide
written notice of its decision to the claim-
ant and the assigned IRO. The assigned

IRO must terminate the external review
upon receipt of the notice from the plan or
issuer.

(5) The IRO will review all of the
information and documents timely re-
ceived. In reaching a decision, the as-
signed IRO will review the claim de novo
and not be bound by any decisions or
conclusions reached during the plan's or
issuer's internal claims and appeals pro-
cess applicable under paragraph (b). In
addition to the documents and information
provided, the assigned IRO, to the extent
the information or documents are avail-
able and the IRO considers them appro-
priate, will consider the following in
reaching a decision:

(i) The claimant's medical records;

(ii) The attending health care profes-
sional's recommendation;

(iii) Reports from appropriate health
care professionals and other documents
submitted by the plan or issuer, claimant,
or the claimant's treating provider;

(iv) The terms of the claimant's plan or
coverage to ensure that the IRO's decision
is not contrary to the terms of the plan or
coverage, unless the terms are inconsistent
with applicable law;

(v) Appropriate practice guidelines,
which must include applicable evidence-
based standards and may include any
other practice guidelines developed by the
Federal government, national or profes-
sional medical societies, boards, and asso-
ciations;

(vi) Any applicable clinical review cri-
teria developed and used by the plan or
issuer, unless the criteria are inconsistent
with the terms of the plan or coverage or
with applicable law; and

(vii) To the extent the final IRO deci-
sion maker is different from the IRO's
clinical reviewer, the opinion of such clin-
ical reviewer, after considering informa-
tion described in this notice, to the extent
the information or documents are avail-
able and the clinical reviewer or reviewers
consider such information or documents
appropriate.

(6) The assigned IRO must provide
written notice of the final external review
decision within 45 days after the IRO re-
ceives the request for the external review.
The IRO must deliver the notice of the
final external review decision to the
claimant and the plan or issuer.

(7) The assigned IRO's written notice
of the final external review decision must
contain the following:

(i) A general description of the reason
for the request for external review, includ-
ing information sufficient to identify the
claim (including the date or dates of ser-
vice, the health care provider, the claim
amount (if applicable), and a statement
describing the availability, upon request,
of the diagnosis code and its correspond-
ing meaning, the treatment code and its
corresponding meaning, and the reason
for the plan's or issuer's denial);

(ii) The date the IRO received the as-
signment to conduct the external review
and the date of the IRO decision;

(iii) References to the evidence or doc-
umentation, including the specific cover-
age provisions and evidence-based stan-
dards, considered in reaching its decision;

(iv) A discussion of the principal rea-
son or reasons for its decision, including
the rationale for its decision and any
evidence-based standards that were relied
on in making its decision;

(v) A statement that the IRO's deter-
mination is binding except to the extent
that other remedies may be available un-
der State or Federal law to either the
group health plan or health insurance is-
suer or to the claimant, or to the extent the
health plan or health insurance issuer vol-
untarily makes payment on the claim or
otherwise provides benefits at any time,
including after a final external review de-
cision that denies the claim or otherwise
fails to require such payment or benefits;

(vi) A statement that judicial review
may be available to the claimant; and

(vii) Current contact information, in-
cluding phone number, for any applicable
office of health insurance consumer assis-
tance or ombudsman established under
PHS Act section 2793.

(viii) After a final external review de-
cision, the IRO must maintain records of
all claims and notices associated with the
external review process for six years. An
IRO must make such records available for
examination by the claimant, plan, issuer,
or State or Federal oversight agency upon
request, except where such disclosure
would violate State or Federal privacy
laws.

(iv) Reversal of plan's or issuer's de-
cision. Upon receipt of a notice of a final

external review decision reversing the ad-
verse benefit determination or final ad-
verse benefit determination, the plan or
issuer immediately must provide coverage
or payment (including immediately autho-
rizing care or immediately paying bene-
fits) for the claim.

(3) Expedited external review. A group
health plan or health insurance issuer must
comply with the following standards with
respect to an expedited external review:

(i) Request for external review. A
group health plan or health insurance is-
suer must allow a claimant to make a
request for an expedited external review
with the plan or issuer at the time the
claimant receives:

(A) An adverse benefit determination if
the adverse benefit determination involves
a medical condition of the claimant for
which the timeframe for completion of an
expedited internal appeal under paragraph
(b) of this section would seriously jeopar-
dize the life or health of the claimant or
would jeopardize the claimant's ability to
regain maximum function and the claim-
ant has filed a request for an expedited
internal appeal; or

(B) A final internal adverse benefit de-
termination, if the claimant has a medical
condition where the timeframe for com-
pletion of a standard external review
would seriously jeopardize the life or
health of the claimant or would jeopardize
the claimant's ability to regain maximum
function, or if the final internal adverse
benefit determination concerns an admis-
sion, availability of care, continued stay,
or health care item or service for which
the claimant received emergency services,
but has not been discharged from the fa-
cility.

(ii) Preliminary review. Immediately
upon receipt of the request for expedited
external review, the plan or issuer must
determine whether the request meets the
reviewability requirements set forth in
paragraph (d)(2)(ii) of this section for
standard external review. The plan or is-
suer must immediately send a notice that
meets the requirements set forth in para-
graph (d)(2)(ii)(B) for standard review to
the claimant of its eligibility determina-
tion.

(iii) Referral to independent review or-
ganization. (A) Upon a determination that
a request is eligible for expedited external

review following the preliminary review,
the plan or issuer will assign an IRO pur-
suant to the requirements set forth in para-
graph (d)(2)(iii) of this section for stan-
dard review. The plan or issuer must
provide or transmit all necessary docu-
ments and information considered in mak-
ing the adverse benefit determination or
final internal adverse benefit determina-
tion to the assigned IRO electronically or
by telephone or facsimile or any other
available expeditious method.

(B) The assigned IRO, to the extent the
information or documents are available
and the IRO considers them appropriate,
must consider the information or docu-
ments described above under the proce-
dures for standard review. In reaching a
decision, the assigned IRO must review
the claim de novo and is not bound by any
decisions or conclusions reached during
the plan's or issuer's internal claims and
appeals process.

(iv) Notice of final external review de-
cision. The plan's or issuer's contract with
the assigned IRO must require the IRO to
provide notice of the final external review
decision, in accordance with the require-
ments set forth in paragraph (d)(2)(iii)(B)
of this section, as expeditiously as the
claimant's medical condition or circum-
stances require, but in no event more than
72 hours after the IRO receives the re-
quest for an expedited external review. If
the notice is not in writing, within 48
hours after the date of providing that no-
tice, the assigned IRO must provide writ-
ten confirmation of the decision to the
claimant and the plan or issuer.

(4) Alternative, Federally-administered
external review process. Insured coverage
not subject to an applicable State external
review process under paragraph (c) of this
section may elect to use either the Federal
external review process, as set forth under
paragraph (d) of this section or the
Federally-administered external review pro-
cess, as set forth by HHS in guidance. In
such circumstances, the requirement to pro-
vide external review under this paragraph
(d) is satisfied.

(e) Form and manner of notice - (1)
In general. For purposes of this section, a
group health plan and a health insurance
issuer offering group health insurance
coverage are considered to provide rele-
vant notices in a culturally and linguisti-

cally appropriate manner if the plan or
issuer meets all the requirements of
paragraph (e)(2) of this section with re-
spect to the applicable non-English lan-
guages described in paragraph (e)(3) of
this section.

(2) Requirements. (i) The plan or issuer
must provide oral language services (such
as a telephone customer assistance ho-
tline) that includes answering questions in
any applicable non-English language
and providing assistance with filing
claims and appeals (including external
review) in any applicable non-English
language;

(ii) The plan or issuer must provide,
upon request, a notice in any applicable
non-English language; and

(iii) The plan or issuer must include in
the English versions of all notices, a state-
ment prominently displayed in any appli-
cable non-English language clearly indi-
cating how to access the language services
provided by the plan or issuer.

(3) Applicable non-English language.
With respect to an address in any United
States county to which a notice is sent, a
non-English language is an applicable
non-English language if ten percent or
more of the population residing in the
county is literate only in the same non-
English language, as determined in guid-
ance published by the Secretary.

(f) Secretarial authority. The Secretary
may determine that the external review
process of a group health plan or health
insurance issuer, in operation as of March
23, 2010, is considered in compliance
with the applicable process established
under paragraph (c) or (d) of this section if
it substantially meets the requirements of
paragraph (c) or (d) of this section, as
applicable.

(g) Applicability date. The provisions
of this section are applicable to group
health plans and health insurance issuers
for plan years beginning on or after Jan-
uary 1, 2017. Until the applicability date
for this regulation, plans and issuers are
required to continue to comply with the
interim final regulations promulgated by
the Department of Labor at 29 CFR part
2590, contained in the 29 CFR, parts 1927
to end, edition revised as of July 1, 2015.
Par.15. Section 54.9815-2719A is
added to read as follows:

## § 54.9815-2719A Patient protections.

(a) Choice of health care professional
\- (1) Designation of primary care provid-
er-(i) In general. If a group health plan,
or a health insurance issuer offering group
health insurance coverage, requires or
provides for designation by a participant
or beneficiary of a participating primary
care provider, then the plan or issuer must
permit each participant or beneficiary to
designate any participating primary care
provider who is available to accept the
participant or beneficiary. In such a case,
the plan or issuer must comply with the
rules of paragraph (a)(4) of this section by
informing each participant of the terms of
the plan or health insurance coverage re-
garding designation of a primary care pro-
vider.

(ii) Construction. Nothing in paragraph
(a)(1)(i) of this section is to be construed
to prohibit the application of reasonable
and appropriate geographic limitations
with respect to the selection of primary
care providers, in accordance with the
terms of the plan or coverage, the under-
lying provider contracts, and applicable
State law.

(iii) Example. The rules of this para-
graph (a)(1) are illustrated by the follow-
ing example:

Example. (i) Facts. A group health plan requires
individuals covered under the plan to designate a
primary care provider. The plan permits each indi-
vidual to designate any primary care provider par-
ticipating in the plan's network who is available to
accept the individual as the individual's primary care
provider. If an individual has not designated a pri-
mary care provider, the plan designates one until one
has been designated by the individual. The plan
provides a notice that satisfies the requirements of
paragraph (a)(4) of this section regarding the ability
to designate a primary care provider.

(ii) Conclusion. In this Example, the
plan has satisfied the requirements of
paragraph (a) of this section.

(2) Designation of pediatrician as pri-
mary care provider-(i) In general. If a
group health plan, or a health insurance
issuer offering group health insurance
coverage, requires or provides for the des-
ignation of a participating primary care
provider for a child by a participant or
beneficiary, the plan or issuer must permit
the participant or beneficiary to designate
a physician (allopathic or osteopathic)
who specializes in pediatrics (including
pediatric subspecialties, based on the

scope of that provider's license under ap-
plicable State law) as the child's primary
care provider if the provider participates
in the network of the plan or issuer and is
available to accept the child. In such a
case, the plan or issuer must comply with
the rules of paragraph (a)(4) of this sec-
tion by informing each participant of the
terms of the plan or health insurance cov-
erage regarding designation of a pediatri-
cian as the child's primary care provider.

(ii) Construction. Nothing in paragraph
(a)(2)(i) of this section is to be construed
to waive any exclusions of coverage under
the terms and conditions of the plan or
health insurance coverage with respect to
coverage of pediatric care.

(iii) Examples. The rules of this para-
graph (a)(2) are illustrated by the follow-
ing examples:

Example 1. (i) Facts. A group health plan's
HMO designates for each participant a physician
who specializes in internal medicine to serve as the
primary care provider for the participant and any
beneficiaries. Participant A requests that Pediatrician
B be designated as the primary care provider for A's
child. B is a participating provider in the HMO's
network and is available to accept the child.

(ii) Conclusion. In this Example 1, the HMO
must permit A's designation of B as the primary care
provider for A's child in order to comply with the
requirements of this paragraph (a)(2).

Example 2. (i) Facts. Same facts as Example 1,
except that A takes A's child to B for treatment of the
child's severe shellfish allergies. B wishes to refer
A's child to an allergist for treatment. The HMO,
however, does not provide coverage for treatment of
food allergies, nor does it have an allergist partici-
pating in its network, and it therefore refuses to
authorize the referral.

(ii) Conclusion. In this Example 2, the HMO has
not violated the requirements of this paragraph (a)(2)
because the exclusion of treatment for food allergies
is in accordance with the terms of A's coverage.

(3) Patient access to obstetrical and
gynecological care-(i) General rights-
(A) Direct access. A group health plan, or
a health insurance issuer offering group
health insurance coverage, described in
paragraph (a)(3)(ii) of this section may
not require authorization or referral by the
plan, issuer, or any person (including a
primary care provider) in the case of a
female participant or beneficiary who
seeks coverage for obstetrical or gyneco-
logical care provided by a participating
health care professional who specializes
in obstetrics or gynecology. In such a
case, the plan or issuer must comply with
the rules of paragraph (a)(4) of this sec-
tion by informing each participant that the

plan may not require authorization or re-
ferral for obstetrical or gynecological care
by a participating health care professional
who specializes in obstetrics or gynecol-
ogy. The plan or issuer may require such
a professional to agree to otherwise ad-
here to the plan's or issuer's policies
and procedures, including procedures
regarding referrals and obtaining prior
authorization and providing services
pursuant to a treatment plan (if any)
approved by the plan or issuer. For pur-
poses of this paragraph (a)(3), a health
care professional who specializes in ob-
stetrics or gynecology is any individual
(including a person other than a physi-
cian) who is authorized under applicable
State law to provide obstetrical or gyne-
cological care.

(B) Obstetrical and gynecological
care. A group health plan or health insur-
ance issuer described in paragraph
(a)(3)(ii) of this section must treat the
provision of obstetrical and gynecological
care, and the ordering of related obstetri-
cal and gynecological items and services,
pursuant to the direct access described
under paragraph (a)(3)(i)(A) of this sec-
tion, by a participating health care profes-
sional who specializes in obstetrics or gy-
necology as the authorization of the
primary care provider.

(ii) Application of paragraph. A group
health plan, or a health insurance issuer
offering group health insurance coverage,
is described in this paragraph (a)(3) if the
plan or issuer-

(A) Provides coverage for obstetrical
or gynecological care; and

(B) Requires the designation by a par-
ticipant or beneficiary of a participating
primary care provider.

(iii) Construction. Nothing in para-
graph (a)(3)(i) of this section is to be
construed to-

(A) Waive any exclusions of coverage
under the terms and conditions of the plan
or health insurance coverage with respect
to coverage of obstetrical or gynecologi-
cal care; or

(B) Preclude the group health plan or
health insurance issuer involved from re-
quiring that the obstetrical or gynecolog-
ical provider notify the primary care
health care professional or the plan or
issuer of treatment decisions.

(iv) Examples. The rules of this para-
graph (a)(3) are illustrated by the follow-
ing examples:

Example 1. (i) Facts. A group health plan re-
quires each participant to designate a physician to
serve as the primary care provider for the participant
and the participant's family. Participant A, a female,
requests a gynecological exam with Physician B, an
in-network physician specializing in gynecological
care. The group health plan requires prior authoriza-
tion from A's designated primary care provider for
the gynecological exam.

(ii) Conclusion. In this Example 1, the group
health plan has violated the requirements of this
paragraph (a)(3) because the plan requires prior au-
thorization from A's primary care provider prior to
obtaining gynecological services.

Example 2. (i) Facts. Same facts as Example 1
except that A seeks gynecological services from C,
an out-of-network provider.

(ii) Conclusion. In this Example 2, the group
health plan has not violated the requirements of this
paragraph (a)(3) by requiring prior authorization be-
cause C is not a participating health care provider.

Example 3. (i) Facts. Same facts as Example 1
except that the group health plan only requires B to
inform A's designated primary care physician of
treatment decisions.

(ii) Conclusion. In this Example 3, the group
health plan has not violated the requirements of this
paragraph (a)(3) because A has direct access to B
without prior authorization. The fact that the group
health plan requires notification of treatment deci-
sions to the designated primary care physician does
not violate this paragraph (a)(3).

Example 4. (i) Facts. A group health plan re-
quires each participant to designate a physician to
serve as the primary care provider for the participant
and the participant's family. The group health plan
requires prior authorization before providing benefits
for uterine fibroid embolization.

(ii) Conclusion. In this Example 4, the plan re-
quirement for prior authorization before providing
benefits for uterine fibroid embolization does not
violate the requirements of this paragraph (a)(3) be-
cause, though the prior authorization requirement
applies to obstetrical services, it does not restrict
access to any providers specializing in obstetrics or
gynecology.

(4) Notice of right to designate a pri-
mary care provider-(i) In general. If a
group health plan or health insurance is-
suer requires the designation by a partic-
ipant or beneficiary of a primary care pro-
vider, the plan or issuer must provide a
notice informing each participant of the
terms of the plan or health insurance cov-
erage regarding designation of a primary
care provider and of the rights -

(A) Under paragraph (a)(1)(i) of this
section, that any participating primary
care provider who is available to accept
the participant or beneficiary can be des-
ignated;

(B) Under paragraph (a)(2)(i) of this
section, with respect to a child, that any
participating physician who specializes in
pediatrics can be designated as the pri-
mary care provider; and

(C) Under paragraph (a)(3)(i) of this
section, that the plan may not require au-
thorization or referral for obstetrical or
gynecological care by a participating
health care professional who specializes
in obstetrics or gynecology.

(ii) Timing. The notice described in
paragraph (a)(4)(i) of this section must be
included whenever the plan or issuer pro-
vides a participant with a summary plan
description or other similar description of
benefits under the plan or health insurance
coverage.

(iii) Model language. The following
model language can be used to satisfy the
notice requirement described in paragraph
(a)(4)(i) of this section:

(A) For plans and issuers that require
or allow for the designation of primary
care providers by participants or benefi-
ciaries, insert:

[Name of group health plan or health insurance
issuer] generally [requires/allows] the designa-
tion of a primary care provider. You have the
right to designate any primary care provider
who participates in our network and who is
available to accept you or your family mem-
bers. [If the plan or health insurance coverage
designates a primary care provider automati-
cally, insert: Until you make this designation,
[name of group health plan or health insurance
issuer] designates one for you.] For informa-
tion on how to select a primary care provider,
and for a list of the participating primary care
providers, contact the [plan administrator or
issuer] at [insert contact information].

(B) For plans and issuers that require or
allow for the designation of a primary care
provider for a child, add:

For children, you may designate a pe-
diatrician as the primary care provider.

(C) For plans and issuers that provide
coverage for obstetric or gynecological
care and require the designation by a par-
ticipant or beneficiary of a primary care
provider, add:

You do not need prior authorization from
[name of group health plan or issuer] or from
any other person (including a primary care
provider) in order to obtain access to obstetri-
cal or gynecological care from a health care
professional in our network who specializes in
obstetrics or gynecology. The health care pro-
fessional, however, may be required to comply

with certain procedures, including obtaining
prior authorization for certain services, follow-
ing a pre-approved treatment plan, or proce-
dures for making referrals. For a list of partic-
ipating health care professionals who
specialize in obstetrics or gynecology, contact
the [plan administrator or issuer] at [insert con-
tact information].

(b) Coverage of emergency services-
(1) Scope. If a group health plan, or a
health insurance issuer offering group
health insurance coverage, provides any
benefits with respect to services in an
emergency department of a hospital, the
plan or issuer must cover emergency ser-
vices (as defined in paragraph (b)(4)(ii) of
this section) consistent with the rules of
this paragraph (b).

(2) General rules. A plan or issuer sub-
ject to the requirements of this paragraph
(b) must provide coverage for emergency
services in the following manner -

(i) Without the need for any prior au-
thorization determination, even if the
emergency services are provided on an
out-of-network basis;

(ii) Without regard to whether the
health care provider furnishing the emer-
gency services is a participating network
provider with respect to the services;

(iii) If the emergency services are pro-
vided out of network, without imposing
any administrative requirement or limita-
tion on coverage that is more restrictive
than the requirements or limitations that
apply to emergency services received
from in-network providers;

(iv) If the emergency services are pro-
vided out of network, by complying with
the cost-sharing requirements of para-
graph (b)(3) of this section; and

(v) Without regard to any other term or
condition of the coverage, other than -

(A) The exclusion of or coordination of
benefits;

(B) An affiliation or waiting period
permitted under part 7 of ERISA, part A
of title XXVII of the PHS Act, or chapter
100 of the Internal Revenue Code; or

(3) Cost-sharing requirements - (i)
Copayments and coinsurance. Any cost-
sharing requirement expressed as a co-
payment amount or coinsurance rate im-
posed with respect to a participant or
beneficiary for out-of-network emer-
gency services cannot exceed the cost-
sharing requirement imposed with re-

spect to a participant or beneficiary if
the services were provided in-network.
However, a participant or beneficiary
may be required to pay, in addition to
the in-network cost sharing, the excess
of the amount the out-of-network pro-
vider charges over the amount the plan
or issuer is required to pay under this
paragraph (b)(3)(i). A group health plan
or health insurance issuer complies with
the requirements of this paragraph
(b)(3) if it provides benefits with respect
to an emergency service in an amount at
least equal to the greatest of the three
amounts specified in paragraphs
(b)(3)(i)(A), (B), and (C) of this section
(which are adjusted for in-network cost-
sharing requirements).

(A) The amount negotiated with in-
network providers for the emergency ser-
vice furnished, excluding any in-network
copayment or coinsurance imposed with
respect to the participant or beneficiary.
If there is more than one amount nego-
tiated with in-network providers for the
emergency service, the amount de-
scribed under this paragraph
(b)(3)(i)(A) is the median of these
amounts, excluding any in-network co-
payment or coinsurance imposed with
respect to the participant or beneficiary.
In determining the median described in
the preceding sentence, the amount ne-
gotiated with each in-network provider
is treated as a separate amount (even if
the same amount is paid to more than
one provider). If there is no per-service
amount negotiated with in-network pro-
viders (such as under a capitation or
other similar payment arrangement), the
amount under this paragraph
(b)(3)(i)(A) is disregarded.

(B) The amount for the emergency ser-
vice calculated using the same method the
plan generally uses to determine payments
for out-of-network services (such as the
usual, customary, and reasonable
amount), excluding any in-network co-
payment or coinsurance imposed with re-
spect to the participant or beneficiary. The
amount in this paragraph (b)(3)(i)(B) is
determined without reduction for out-of-
network cost sharing that generally ap-
plies under the plan or health insurance
coverage with respect to out-of-network
services. Thus, for example, if a plan
generally pays 70 percent of the usual,

customary, and reasonable amount for
out-of-network services, the amount in
this paragraph (b)(3)(i)(B) for an emer-
gency service is the total (that is, 100
percent) of the usual, customary, and
reasonable amount for the service, not
reduced by the 30 percent coinsurance
that would generally apply to out-of-
network services (but reduced by the
in-network copayment or coinsurance
that the individual would be responsible
for if the emergency service had been
provided in-network).

(C) The amount that would be paid
under Medicare (part A or part B of title
XVIII of the Social Security Act, 42
U.S.C. 1395 et seq.) for the emergency
service, excluding any in-network copay-
ment or coinsurance imposed with respect
to the participant or beneficiary.

(ii) Other cost sharing. Any cost-
sharing requirement other than a copay-
ment or coinsurance requirement (such as
a deductible or out-of-pocket maximum)
may be imposed with respect to emer-
gency services provided out of network if
the cost-sharing requirement generally ap-
plies to out-of-network benefits. A deduct-
ible may be imposed with respect to out-
of-network emergency services only as
part of a deductible that generally applies
to out-of-network benefits. If an out-of-
pocket maximum generally applies to out-
of-network benefits, that out-of-pocket
maximum must apply to out-of-network
emergency services.

(iii) Special rules regarding out-of-
network minimum payment standards -
(A) The minimum payment standards set
forth under paragraph (b)(3) of this sec-
tion do not apply in cases where State law
prohibits a participant or beneficiary from
being required to pay, in addition to the
in-network cost sharing, the excess of the
amount the out-of-network provider
charges over the amount the plan or issuer
provides in benefits, or where a group
health plan or health insurance issuer is
contractually responsible for such
amounts. Nonetheless, in such cases, a
plan or issuer may not impose any copay-
ment or coinsurance requirement for out-
of-network emergency services that is
higher than the copayment or coinsurance
requirement that would apply if the ser-
vices were provided in network.

(B) A group health plan and health
insurance issuer must provide a partici-
pant or beneficiary adequate and promi-
nent notice of their lack of financial re-
sponsibility with respect to the amounts
described under this paragraph (b)(3)(iii),
to prevent inadvertent payment by the par-
ticipant or beneficiary.

(iv) Examples. The rules of this para-
graph (b)(3) are illustrated by the follow-
ing examples. In all of these examples, the
group health plan covers benefits with re-
spect to emergency services.

Example 1. (i) Facts. A group health plan im-
poses a 25% coinsurance responsibility on individ-
uals who are furnished emergency services, whether
provided in network or out of network. If a covered
individual notifies the plan within two business days
after the day an individual receives treatment in an
emergency department, the plan reduces the coinsur-
ance rate to 15%.

(ii) Conclusion. In this Example 1, the require-
ment to notify the plan in order to receive a reduction
in the coinsurance rate does not violate the require-
ment that the plan cover emergency services without
the need for any prior authorization determination.
This is the result even if the plan required that it be
notified before or at the time of receiving services at
the emergency department in order to receive a re-
duction in the coinsurance rate.

Example 2. (i) Facts. A group health plan im-
poses a $60 copayment on emergency services with-
out preauthorization, whether provided in network or
out of network. If emergency services are preautho-
rized, the plan waives the copayment, even if it later
determines the medical condition was not an emer-
gency medical condition.

(ii) Conclusion. In this Example 2, by requiring
an individual to pay more for emergency services if
the individual does not obtain prior authorization, the
plan violates the requirement that the plan cover
emergency services without the need for any prior
authorization determination. (By contrast, if, to have
the copayment waived, the plan merely required that
it be notified rather than a prior authorization, then
the plan would not violate the requirement that the
plan cover emergency services without the need for
any prior authorization determination.)

Example 3. (i) Facts. A group health plan covers
individuals who receive emergency services with
respect to an emergency medical condition from an
out-of-network provider. The plan has agreements
with in-network providers with respect to a certain
emergency service. Each provider has agreed to pro-
vide the service for a certain amount. Among all the
providers for the service: one has agreed to accept
$85, two have agreed to accept $100, two have
agreed to accept $110, three have agreed to accept
$120, and one has agreed to accept $150. Under the
agreement, the plan agrees to pay the providers 80%
of the agreed amount, with the individual receiving
the service responsible for the remaining 20%.

(ii) Conclusion. In this Example 3, the values
taken into account in determining the median are
$85, $100, $100, $110, $110, $120, $120, $120, and
$150. Therefore, the median amount among those

agreed to for the emergency service is $110, and the
amount under paragraph (b)(3)(i)(A) of this section
is 80% of $110 ($88).

Example 4. (i) Facts. Same facts as Example 3.
Subsequently, the plan adds another provider to its
network, who has agreed to accept $150 for the
emergency service.

(ii) Conclusion. In this Example 4, the median
amount among those agreed to for the emergency
service is $115. (Because there is no one middle
amount, the median is the average of the two middle
amounts, $110 and $120.) Accordingly, the amount
under paragraph (b)(3)(i)(A) of this section is 80%
of $115 ($92).

Example 5. (i) Facts. Same facts as Example 4.
An individual covered by the plan receives the emer-
gency service from an out-of-network provider, who
charges $125 for the service. With respect to services
provided by out-of-network providers generally, the
plan reimburses covered individuals 50% of the rea-
sonable amount charged by the provider for medical
services. For this purpose, the reasonable amount for
any service is based on information on charges by all
providers collected by a third party, on a zip code by
zip code basis, with the plan treating charges at a
specified percentile as reasonable. For the emer-
gency service received by the individual, the reason-
able amount calculated using this method is $116.
The amount that would be paid under Medicare for
the emergency service, excluding any copayment or
coinsurance for the service, is $80.

(ii) Conclusion. In this Example 5, the plan is
responsible for paying $92.80, 80% of $116. The
median amount among those agreed to for the emer-
gency service is $115 and the amount the plan would
pay is $92 (80% of $115); the amount calculated
using the same method the plan uses to determine
payments for out-of-network services - $116 -
excluding the in-network 20% coinsurance, is
$92.80; and the Medicare payment is $80. Thus, the
greatest amount is $92.80. The individual is respon-
sible for the remaining $32.20 charged by the out-
of-network provider.

Example 6. (i) Facts. Same facts as Example 5.
The group health plan generally imposes a $250
deductible for in-network health care. With respect
to all health care provided by out-of-network pro-
viders, the plan imposes a $500 deductible. (Covered
in-network claims are credited against the deduct-
ible.) The individual has incurred and submitted
$260 of covered claims prior to receiving the emer-
gency service out of network.

(ii) Conclusion. In this Example 6, the plan is not
responsible for paying anything with respect to the
emergency service furnished by the out-of-network
provider because the covered individual has not sat-
isfied the higher deductible that applies generally to
all health care provided out of network. However,
the amount the individual is required to pay is cred-
ited against the deductible.

(4) Definitions. The definitions in this
paragraph (b)(4) govern in applying the
provisions of this paragraph (b).

(i) Emergency medical condition. The
term emergency medical condition means
a medical condition manifesting itself by
acute symptoms of sufficient severity (in-

cluding severe pain) so that a prudent lay-
person, who possesses an average knowl-
edge of health and medicine, could
reasonably expect the absence of immedi-
ate medical attention to result in a condi-
tion described in clause (i), (ii), or (iii) of
section 1867(e)(1)(A) of the Social Secu-
rity Act (42 U.S.C. 1395dd(e)(1)(A)). (In
that provision of the Social Security Act,
clause (i) refers to placing the health of
the individual (or, with respect to a preg-
nant woman, the health of the woman or
her unborn child) in serious jeopardy;
clause (ii) refers to serious impairment to
bodily functions; and clause (iii) refers to
serious dysfunction of any bodily organ or
part.)

(ii) Emergency services. The term
emergency services means, with respect to
an emergency medical condition -

(A) A medical screening examination
(as required under section 1867 of the
Social Security Act, 42 U.S.C. 1395dd)
that is within the capability of the emer-
gency department of a hospital, including
ancillary services routinely available to
the emergency department to evaluate
such emergency medical condition, and

(B) Such further medical examination
and treatment, to the extent they are
within the capabilities of the staff and
facilities available at the hospital, as are
required under section 1867 of the Social
Security Act (42 U.S.C. 1395dd) to stabi-
lize the patient.

(iii) Stabilize. The term to stabilize,
with respect to an emergency medical
condition (as defined in paragraph
(b)(4)(i) of this section) has the meaning
given in section 1867(e)(3) of the Social
Security Act (42 U.S.C. 1395dd(e)(3)).

## § 54.9815-2719AT [Removed]

Par. 16. Section 54.9815-2719AT is
removed.

## § 54.9815-2719T [Removed]

Par. 17. Section 54.9815-2719T is re-
moved.

## Section 42 .- Low-Income Housing Credit

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month of
December 2015. See Rev. Rul. 2015-25, page 695.

## Section 280G .- Golden Parachute Payments

Federal short-term, mid-term, and long-term
rates are set forth for the month of December 2015.
See Rev. Rul. 2015-25 , page 695.

## Section 382 .- Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change

The adjusted applicable federal long-term rate is
set forth for the month of December 2015. See Rev.
Rul. 2015-25 , page 695.

## Section 412 .- Minimum Funding Standards

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month of
December 2015. See Rev. Rul. 2015-25, page 695.

## Section 467 .- Certain Payments for the Use of Property or Services

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of December 2015. See Rev. Rul. 2015-25, page
695.

## Section 468 .- Special Rules for Mining and Solid Waste Reclamation and Closing Costs

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month of
December 2015. See Rev. Rul. 2015-25, page 695.

## Section 482 .- Allocation of Income and Deductions Among Taxpayers

Federal short-term, mid-term, and long-term
rates are set forth for the month of December 2015.
See Rev. Rul. 2015-25, page 695.

## Section 483 .- Interest on Certain Deferred Payments

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month of
December 2015. See Rev. Rul. 2015-25, page 695.

## Section 642 .- Special Rules for Credits and Deductions

Federal short-term, mid-term, and long-term
rates are set forth for the month of December 2015.
See Rev. Rul. 2015-25, page 695.

## Section 807 .- Rules for Certain Reserves

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month of
December 2015. See Rev. Rul. 2015-25, page 695.

## Section 846 .- Discounted Unpaid Losses Defined

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month of
December 2015. See Rev. Rul. 2015-25, page 695.

## Section 1288 .- Treatment of Original Issue Discount on Tax-Exempt Obligations

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of December 2015. See Rev. Rul. 2015-25, page
695.

## Section 7520 .- Valuation Tables

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month of
December 2015. See Rev. Rul. 2015-25, page 695.

## Section 7872 .- Treatment of Loans With Below- Market Interest Rates

The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of December 2015. See Rev. Rul. 2015-25, page
695.

# Part III. Administrative, Procedural, and Miscellaneous

## Additional Rules Regarding Inversions and Related Transactions

## Notice 2015-79

SECTION 1. OVERVIEW

On September 22, 2014, the Depart-
ment of the Treasury (Treasury Depart-
ment) and the Internal Revenue Service
(IRS) issued Notice 2014-52, 2014-42
IRB 712. Notice 2014-52 announced that
the Treasury Department and the IRS in-
tend to issue regulations that will address
certain transactions that are structured to
avoid the purposes of sections 7874 and
367 of the Internal Revenue Code (Code),
as well as certain post-inversion tax
avoidance transactions. Notice 2014-52
also announced that the Treasury Depart-
ment and the IRS expect to issue addi-
tional guidance to further limit (i) inver-
sion transactions that are contrary to the
purposes of section 7874 and (ii) the ben-
efits of post-inversion tax avoidance trans-
actions. This notice announces some of
the additional guidance referred to in No-
tice 2014-52.

Section 2 of this notice describes reg-
ulations that the Treasury Department and
the IRS intend to issue that will address
transactions that are structured to avoid
the purposes of section 7874 by (i) requir-
ing the foreign acquiring corporation to be
subject to tax as a resident of the relevant
foreign country in order to have substan-
tial business activities in the relevant for-
eign country; (ii) disregarding certain
stock of the foreign acquiring corporation
in "third-country" transactions; and (iii)
clarifying the definition of nonqualified
property for purposes of disregarding cer-
tain stock of the foreign acquiring corpo-
ration.

Section 3 of this notice describes reg-
ulations that the Treasury Department and
the IRS intend to issue that will address
certain post-inversion tax avoidance trans-
actions by (i) defining inversion gain for
purposes of section 7874 to include cer-
tain income or gain recognized by an ex-
patriated entity from an indirect transfer
or license of property and providing for
aggregate treatment of certain transfers or

licenses of property by foreign partner-
ships for purposes of determining inver-
sion gain; and (ii) requiring an exchanging
shareholder to recognize all of the gain
realized upon an exchange of stock of a
controlled foreign corporation (as defined
in section 957) (CFC), without regard to
the amount of the CFC's undistributed
earnings and profits, if the transaction ter-
minates the status of the foreign subsid-
iary as a CFC or substantially dilutes the
interest of a United States shareholder (as
defined in section 951(b)) (U.S. share-
holder) in the CFC.

Section 4 of this notice describes cor-
rections and clarifications that the Trea-
sury Department and the IRS intend to
make with respect to certain rules an-
nounced in Notice 2014-52.

Section 5 of this notice provides the
effective dates of the regulations de-
scribed in this notice, and section 6 of this
notice requests comments and provides
contact information.

### SECTION 2. REGULATIONS TO ADDRESS TRANSACTIONS CONTRARY TO THE PURPOSES OF SECTION 7874

#### .01 Section 7874 Background

Under section 7874(a)(2)(B), a foreign
corporation (foreign acquiring corpora-
tion) generally is treated as a surrogate
foreign corporation if, pursuant to a plan
(or a series of related transactions), three
conditions are satisfied. First, the foreign
acquiring corporation completes, after
March 4, 2003, the direct or indirect ac-
quisition of substantially all of the prop-
erties held directly or indirectly by a do-
mestic corporation (acquisition). Second,
after the acquisition, at least 60 percent of
the stock (by vote or value) of the foreign
acquiring corporation is held by former
shareholders of the domestic corporation
by reason of holding stock in the domestic
corporation (at times this notice refers to
such percentage as the "ownership per-
centage," and the fraction used to calcu-
late such percentage as the "ownership
fraction"). And third, after the acquisition,
the expanded affiliated group that includes
the foreign acquiring corporation (EAG)
does not have substantial business activi-

ties in the foreign country in which, or
under the law of which, the foreign ac-
quiring corporation is created or orga-
nized (relevant foreign country) when
compared to the total business activities of
the EAG. Similar provisions apply if a
foreign acquiring corporation acquires
substantially all of the properties consti-
tuting a trade or business of a domestic
partnership. The domestic corporation or
the domestic partnership described in this
paragraph is referred to in this notice at
times as the "domestic entity." For pur-
poses of this notice, a reference to a do-
mestic corporation, a domestic partner-
ship, or a domestic entity includes a
successor, and the term "EAG" has the
meaning provided in § 1.7874-3(d)(4).

The tax treatment of an acquisition in
which the EAG does not have substantial
business activities in the relevant foreign
country varies depending on the level of
owner continuity. If the ownership per-
centage is at least 80, the foreign acquir-
ing corporation is treated as a domestic
corporation for all purposes of the Code
pursuant to section 7874(b). If, instead,
the ownership percentage is at least 60 but
less than 80 (in which case the acquisition
is referred to in this notice as an "inver-
sion transaction"), the foreign acquiring
corporation is respected as a foreign
corporation, but the domestic entity and
certain related U.S. persons are treated
as expatriated entities under section
7874(a)(2)(A). In the case of an inver-
sion transaction, section 7874(a)(1) and
(e) prevent the use of certain tax attributes
to reduce the U.S. tax owed with respect
to certain income or gain (referred to as
"inversion gain") recognized by an expa-
triated entity with respect to certain trans-
fers or licenses of property that occur as
part of, or after, the inversion transaction.
See section 3.01(a) of this notice for ad-
ditional discussion of the taxation of in-
version gain.

Under section 7874(c)(4), a transfer of
properties or liabilities (including by con-
tribution or distribution) is disregarded if
the transfer is part of a plan a principal
purpose of which is to avoid the purposes
of section 7874.

Section 7874(c)(6) grants the Secretary
authority to prescribe regulations as may

be appropriate to determine whether a cor-
poration is a surrogate foreign corpora-
tion, including regulations to treat stock as
not stock. In addition, section 7874(g)
grants the Secretary authority to provide
regulations necessary to carry out section
7874, including regulations adjusting the
application of section 7874 as necessary
to prevent the avoidance of the purposes
of section 7874, including the avoidance
of such purposes through (i) the use of
related persons, pass-through or other
non-corporate entities, or other intermedi-
aries, or (ii) transactions designed to have
persons cease to be (or not become) mem-
bers of EAGs or related persons.

Congress enacted section 7874 because
it believed that "inversion transactions re-
sulting in a minimal presence in a foreign
country of incorporation are a means of
avoiding U.S. tax and should be cur-
tailed." S. Rep. No. 192, 108th Cong., 1st.
Sess. 142 (Nov. 7, 2003) (Senate Report);
Joint Committee on Taxation, General Ex-
planation of Tax Legislation Enacted in
the 108th Congress (JCS-5-05) 343 (May
31, 2005) (JCT Explanation). Congress
expressed particular concern about how
inversion transactions "permit corpora-
tions and other entities to continue to con-
duct business in the same manner as they
did prior to the inversion, but with the
result that the inverted entity avoids U.S.
tax on foreign operations and may engage
in earnings stripping techniques to avoid
U.S. tax on domestic operations." Senate
Report at 142; JCT Explanation at 343.

#### .02 Transactions at Issue and Regulations to be Issued

(a) Substantial Business Activities of a
Foreign Acquiring Corporation that is
not Subject to Tax as a Resident of the
Relevant Foreign Country

The Treasury Department and the IRS
are aware of transactions in which the
taxpayer asserts that the EAG has substan-
tial business activities in the relevant for-
eign country (that is, the foreign country
in which, or under the law of which, the
foreign acquiring corporation is created or
organized) when compared to the EAG's
total business activities, but the foreign
acquiring corporation is not subject to in-
come taxation in the relevant foreign
country as a resident. This could occur,

for example, if the relevant foreign coun-
try determines the tax residency of an
entity based on criteria other than the
place of creation or formation, such as the
location in which the entity is managed or
controlled. If the foreign acquiring corpo-
ration is managed and controlled in a third
country, the foreign acquiring corporation
may not be subject to tax as a resident of
the relevant foreign country (or, in some
cases, of any foreign country). Alterna-
tively, the foreign acquiring corporation
may not be subject to tax as a resident of
the relevant foreign country because of
disparate entity classification rules in the
United States and the relevant foreign
country. For example, the foreign acquir-
ing corporation may be treated as a cor-
poration for U.S. tax purposes under the
entity classification regulations promul-
gated under section 7701 (including by
reason of a "check-the-box" election), but
as a fiscally transparent entity under the
tax law of the relevant foreign country. In
such a case, the foreign acquiring corpo-
ration would not be subject to tax as a
resident of the relevant foreign country.

The Treasury Department and the IRS
have determined that the policy underly-
ing the exception to section 7874 when
there are substantial business activities in
the relevant foreign country is premised
on the foreign acquiring corporation being
subject to tax as a resident of the relevant
foreign country. For this purpose, the stat-
ute's reference to country of creation or
organization reflects the U.S. standard for
determining tax residency. However, the
U.S. standard for determining tax resi-
dency does not always align with foreign
countries' standards. Allowing the excep-
tion to apply when the foreign acquiring
corporation is not subject to tax as a res-
ident of the relevant foreign country ef-
fectively permits an EAG to replace its
U.S. tax residence with tax residence in
any other country (or, in certain cases, in
no other country), without regard to the
location of any substantial business activ-
ities conducted by the EAG. The Treasury
Department and the IRS believe that this
result is contrary to the policy underlying
the substantial business activities test.

Accordingly, the Treasury Department
and the IRS intend to issue regulations
under section 7874 to provide that an
EAG cannot have substantial business ac-

tivities in the relevant foreign country
when compared to the EAG's total busi-
ness activities unless the foreign acquiring
corporation is subject to tax as a resident
of the relevant foreign country.

#### (b) Third-Country Transactions

The Treasury Department and the IRS
are aware that certain acquisitions in
which a domestic entity combines with an
existing foreign corporation are structured
by establishing a new foreign parent cor-
poration for the combined group with a
tax residence that is different from that of
the existing foreign corporation. In other
words, the parent corporation of the com-
bined group will be a tax resident of a
"third country." In such transactions, the
stock or assets of the existing foreign cor-
poration are acquired by the new third-
country parent, and the shareholders of the
existing foreign corporation receive more
than 20 percent of the stock of the new
third-country parent. Similarly, the stock
or assets of the domestic entity are ac-
quired by the new third-country parent,
and the shareholders of the domestic en-
tity receive less than 80 percent of the
stock of the new third-country parent.

In enacting section 7874, Congress be-
lieved that certain transactions in which a
U.S. parent corporation is replaced with a
new foreign parent corporation have little
or no non-tax effect or purpose and should
be disregarded for U.S. tax purposes,
while in other cases such transactions may
have sufficient non-tax effect and purpose
to be respected, but warrant that any ap-
plicable corporate-level "toll charges" for
establishing the inverted structure not be
offset by tax attributes such as net oper-
ating losses or foreign tax credits. See
Senate Report at 142, 143; JCT Explana-
tion at 343. The Treasury Department and
the IRS have considered whether certain
stock issued in an acquisition structured
with a third-country parent should be dis-
regarded pursuant to the authority under
sections 7874(c)(6) and (g) in order to
effectuate this general purpose. In partic-
ular, the Treasury Department and the IRS
are concerned that a decision to locate the
tax residence of a new foreign parent cor-
poration outside of both the United States
and the jurisdiction in which the existing
foreign corporation is tax resident gener-

ally is driven by tax planning, including
the facilitation of U.S. tax avoidance fol-
lowing the acquisition. For example, the
third country may have a more favorable
income tax treaty with the United States
than the country in which the existing
foreign corporation is tax resident, with
the result that U.S. withholding taxes on
dividends, interest, and royalties paid by
the domestic entity may be reduced or
eliminated. The third country may also
have a more favorable tax system than the
country in which the existing foreign par-
ent corporation is tax resident, including a
less restrictive regime for controlled for-
eign corporations than the country in
which the existing foreign corporation is
tax resident. Thus, a third-country parent
typically is chosen to facilitate the use of
low- or no-taxed entities to erode the U.S.
tax base following the acquisition.

The Senate Report and the JCT Expla-
nation indicate that the 80-percent thresh-
old under section 7874(b) for treating a
foreign acquiring corporation as a domes-
tic corporation reflects an assumption that,
when the existing foreign corporation's
shareholders will own more than 20 per-
cent of the interests in the combined
group, there is a sufficient likelihood of a
non-tax business purpose for replacing the
U.S. parent with a foreign parent to war-
rant respecting the new foreign parent.
However, the Treasury Department and
the IRS have concluded that, when a do-
mestic entity combines with an existing
foreign corporation by establishing a new
parent for the combined group that is tax
resident in a third country, the likelihood
that there is a sufficient non-tax business
purpose for replacing the U.S. parent with
a foreign parent is significantly lower than
Congress assumed in establishing the 80-
percent threshold.

The Treasury Department and the IRS
have accordingly determined that, in cer-
tain circumstances, the use of a third-
country parent is contrary to the policy
underlying the 80-percent threshold of
section 7874(b) and is an appropriate cir-
cumstance for the exercise of regulatory
authority under sections 7874(c)(6) and
(g). The Treasury Department and the IRS
therefore intend to issue regulations under
sections 7874(c)(6) and (g) to address
these transactions by disregarding certain
stock of a foreign acquiring corporation

that is issued to the shareholders of the
existing foreign corporation for purposes
of determining whether the 80-percent
threshold is met. The regulations will ap-
ply to an acquisition that satisfies four
requirements.

First, in a transaction related to the
acquisition (referred to in this notice as
the "foreign target acquisition"), the for-
eign acquiring corporation directly or in-
directly acquires substantially all of the
properties held directly or indirectly by
another foreign corporation (foreign target
corporation). For purposes of determining
if there is a foreign target acquisition with
respect to a foreign corporation, the prin-
ciples of section 7874(a)(2)(B)(i) (defin-
ing an acquisition) and § 1.7874-2(c) (re-
garding acquisitions of properties of a
domestic entity and stock of a foreign
corporation) apply with the following
modifications: (i) the principles of
§ 1.7874-2(c)(1) (providing rules for de-
termining whether there is an indirect ac-
quisition of properties of a domestic en-
tity) shall be applied by substituting the
term "foreign target" for "domestic"
wherever it appears, and (ii) the principles
of § 1.7874-2(c)(2) (regarding acquisi-
tions of stock of a foreign corporation that
owns a domestic corporation or partner-
ship) shall be applied by substituting the
term "domestic" for "foreign" and the
term "foreign" for "domestic" wherever
such terms appear. Furthermore, except as
provided in this paragraph, if there is a
foreign target acquisition of a foreign cor-
poration (upper-tier foreign corporation)
that owns directly stock of another foreign
corporation (lower-tier foreign corpora-
tion), for purposes of this section 2.02(b)
there is not also a foreign target acquisi-
tion with respect to the lower-tier foreign
corporation (or any foreign corporation
owned directly or indirectly by the lower-
tier foreign corporation). However, if the
upper-tier foreign corporation acquired
the stock of the lower-tier foreign corpo-
ration in a transaction related to the acqui-
sition, then there would also be a foreign
target acquisition with respect to the
lower-tier foreign corporation (which
would be treated as an upper-tier foreign
corporation for purposes of further apply-
ing the rules of this paragraph).

Second, the gross value of all property
directly or indirectly acquired by the for-

eign acquiring corporation in the foreign
target acquisition exceeds 60 percent of
the gross value of all foreign group prop-
erty (as defined in section 2.01(b) of No-
tice 2014-52), but, for this purpose, gross
value shall not include any property that is
foreign group nonqualified property (as
defined in section 2.01(b) of Notice
2014-52, but taking into account the cor-
rections to the definition of foreign group
nonqualified property described in section
4.01(b) of this notice).

Third, the tax residence of the foreign
acquiring corporation is not the same as
that of the foreign target corporation, as
determined before the foreign target ac-
quisition and any transaction related to the
foreign target acquisition. A change in the
location of the management and control of
a foreign target corporation is treated as a
transaction for this purpose.

Fourth, not taking into account the
rules announced in this section 2.02(b),
the ownership percentage is at least 60 but
less than 80.

When these four requirements are sat-
isfied, the regulations will provide that
stock of the foreign acquiring corporation
that otherwise would be included in the
denominator of the ownership fraction
will be excluded from the denominator to
the extent the stock is held by former
owners of the foreign target corporation
by reason of holding stock in the foreign
target corporation (based on the principles
of section 7874(a)(2)(B)(ii)).

If, in one or more transactions related
to the acquisition described in section
7874(a)(2)(B)(i), the foreign acquiring
corporation directly or indirectly acquires
multiple foreign target corporations that
are tax residents of the same foreign coun-
try, then, for purposes of applying the
regulations described in this section
2.02(b), all such transactions that other-
wise would separately qualify as a foreign
target acquisition will be treated as a sin-
gle foreign target acquisition and those
foreign target corporations will be treated
as a single entity.

The following examples illustrate the
regulations described in this section
2.02(b):

Example 1. (i) Facts. FA, a newly formed foreign
corporation that is a tax resident of Country Y,
acquires all the stock of DT, a domestic corporation
that is wholly owned by Individual A, solely in
exchange for 65 shares of newly issued FA stock

(DT acquisition). In a transaction related to the DT
acquisition, FA acquires all the stock of FT, a for-
eign corporation that is a tax resident of Country X
and wholly owned by Individual B, solely in ex-
change for the remaining 35 shares of newly issued
FA stock (FT acquisition).

(ii) Analysis. A portion of the FA stock is ex-
cluded from the denominator of the ownership frac-
tion because the DT acquisition satisfies the four
requirements set forth in section 2.02(b) of this no-
tice. The first requirement is satisfied because under
the principles of section 7874(a)(2)(B)(i) and
§ 1.7874-2(c) (as modified by section 2.02(b) of this
notice), FA is treated as acquiring 100 percent of the
properties held by FT as a result of the FT acquisi-
tion. Therefore, the FT acquisition is a foreign target
acquisition with respect to FT. The second require-
ment (that the gross value of all property directly or
indirectly acquired in the FT acquisition exceeds 60
percent of the gross value of all foreign group prop-
erty) is also satisfied because the foreign group prop-
erty is comprised solely of the property acquired in
the FT acquisition. The third requirement is satisfied
because the foreign country in which FA is a tax
resident (Country Y) is not the foreign country in
which FT is a tax resident (Country X). Finally, the
fourth requirement is satisfied because, absent the
rules described in section 2.02(b) of this notice, the
ownership fraction would be 65/100 and the owner-
ship percentage would be 65. Accordingly, section
2.02(b) of this notice excludes from the denominator
of the ownership fraction the 35 shares of FA stock
held by the former shareholder of FT by reason of
holding stock in FT. As a result, the ownership
fraction is 65/65 and the ownership percentage is
100. The result would be the same if FA instead had
directly acquired all of the properties held by FT in
exchange for FA stock, for example, in a transaction
that would qualify for U.S. income tax purposes as
an asset reorganization under section 368.

Example 2. (i) Facts. The facts are the same as in
Example 1 except that, before the FT acquisition, but
in a transaction related to the FT acquisition, FT
reincorporates in Country Y and, consequently, be-
comes a tax resident of Country Y.

(ii) Analysis. The analysis is the same as in
Example 1 with respect to the first, second, and
fourth requirements set forth in section 2.02(b) of
this notice. The third requirement is applied by com-
paring the foreign country in which FA is a tax
resident, which is Country Y, to the country in which
FT was a tax resident prior to the FT acquisition and
any transaction related to the FT acquisition, which
is Country X. As a result, the third requirement is
also satisfied because FA and FT are not tax resi-
dents of the same country for this purpose. Accord-
ingly, section 2.02(b) of this notice excludes from
the denominator of the ownership fraction the 35
shares of FA stock held by the former shareholder of
FT by reason of holding stock in FT. Consequently,
the ownership fraction is 65/65 and the ownership
percentage is 100.

.03 Clarification of Regulations under
§ 1.7874-4T That Disregard Certain
Stock Transferred in Exchange for
Nonqualified Property

##### (a) Background

Under section 7874(c)(2)(B) (statutory
public offering rule), stock of the foreign
acquiring corporation that is sold in a pub-
lic offering related to the acquisition is
excluded from the denominator of the
ownership fraction. Section 1.7874-4T
modifies the statutory public offering rule.
Specifically, § 1.7874-4T(b) provides
that, subject to a de minimis exception,
"disqualified stock" is not included in the
denominator of the ownership fraction.
Disqualified stock generally includes
stock of the foreign acquiring corporation
that is transferred in exchange for "non-
qualified property" when that exchange is
related to the acquisition. Section 1.7874-
4T(i)(7) provides that the term nonquali-
fied property means: (i) cash or cash
equivalents, (ii) marketable securities, (iii)
certain obligations (for example, obliga-
tions owed by members of the EAG that
includes the foreign acquiring corpora-
tion), or (iv) any other property acquired
in a transaction (or series of transactions)
related to the acquisition with a principal
purpose of avoiding the purposes of sec-
tion 7874. Section 1.7874-4T(i)(6) pro-
vides that, for this purpose, the term mar-
ketable securities has the meaning set
forth in section 453(f)(2), except that the
term does not include stock of a corpora-
tion or an interest in a partnership that
becomes a member of the expanded affil-
iated group that includes the foreign ac-
quiring corporation in a transaction (or
series of transactions) related to the acqui-
sition, unless a principal purpose for ac-
quiring such stock or partnership interest
is to avoid the purposes of section 7874.
This notice refers at times to the property
described in clauses (i), (ii), and (iii) of
this paragraph collectively as "specified
nonqualified property" and to the property
described in clause (iv) as "avoidance
property."

Example 2 of § 1.7874-4T(j) illus-
trates a transfer of stock of the foreign
acquiring corporation in exchange for
avoidance property. In this example, PRS,
a partnership with individual partners,

transfers marketable securities to FT, a
newly formed foreign corporation, in ex-
change solely for all of the FT stock. PRS
then transfers the FT stock to FA, a newly
formed foreign corporation, in exchange
solely for 25 shares of FA stock. Individ-
ual A, who is unrelated to PRS, transfers
all of the stock of DT, a domestic corpo-
ration of which Individual A is the sole
shareholder, to FA in exchange solely for
75 shares of FA stock. The facts of the
example state that FA acquires the FT
stock with a principal purpose of avoiding
the purposes of section 7874. Accord-
ingly, the example concludes that the FT
stock is nonqualified property, and, there-
fore, that the 25 shares of FA stock trans-
ferred to PRS in exchange for the FT
stock are disqualified stock and are not
included in the denominator of the own-
ership fraction.

#### (b) Transactions at Issue and Regulations to be Issued

The Treasury Department and the IRS
are concerned that some taxpayers may be
narrowly interpreting the definition of
avoidance property. In particular, taxpay-
ers may be asserting that avoidance prop-
erty is limited to property, such as stock,
that is used to indirectly transfer specified
nonqualified property to the foreign ac-
quiring corporation, as in the transaction
described in Example 2 of § 1.7874-
4T(j).

This interpretation of § 1.7874-4T is
inconsistent with both the plain language
and purpose of the regulation. In addition,
section 7874(c)(4) separately provides
that a transfer of properties or liabilities is
disregarded if the transfer is part of a plan
a principal purpose of which is to avoid
the purposes of section 7874. Accord-
ingly, the Treasury Department and the
IRS intend to issue regulations that will
clarify § 1.7874-4T to provide that
avoidance property means any property
(other than specified nonqualified prop-
erty) acquired with a principal purpose of
avoiding the purposes of section 7874,
regardless of whether the transaction in-
volves an indirect transfer of specified
nonqualified property. Furthermore, the
regulations will remove the phrase "in a
transaction (or series of transactions) re-
lated to the acquisition" from the defini-

tion of avoidance property. The inclusion
of that phrase in the definition is redun-
dant with language contained in the oper-
ative rule in § 1.7874-4T(c)(1) for iden-
tifying disqualified stock, which itself
requires, in relevant part, that there be an
exchange of nonqualified property for
stock of the foreign acquiring corporation
in a transaction that is related to the ac-
quisition. The regulations also will re-
move the phrase "unless a principal pur-
pose for acquiring such stock or
partnership interest is to avoid the pur-
poses of section 7874" from the definition
of marketable securities. The inclusion of
that phrase in the definition is redundant
with the rule for avoidance property, be-
cause if stock of a corporation or a part-
nership interest described in section
453(f)(2) does not constitute marketable
securities due to the corporation or part-
nership becoming a member of the EAG,
the stock or partnership interest is not
specified nonqualified property and, there-
fore, may be avoidance property under
§ 1.7874-4T(i)(7)(iv).

In addition, Example 1 and Example 2
of § 1.7874-4T(j) (which illustrate trans-
fers of stock of the foreign acquiring cor-
poration in exchange for marketable secu-
rities and avoidance property,
respectively) will be clarified to include a
reference to section 7874(c)(4). Finally, in
light of section 2.02(b) of this notice,
which applies to certain third-country
transactions, all the examples described in
§ 1.7874-4T(j) will be modified to pro-
vide that, unless otherwise indicated, FA,
FMS, FS, and FT are tax residents of the
same foreign country.

The following example illustrates the
clarification described in this section
2.03(b):

Example. (i) Facts. DT is a publicly traded do-
mestic corporation. PRS is a foreign partnership that
is unrelated to DT. PRS transfers certain business
assets (PRS properties) to FA, a newly formed for-
eign corporation, in exchange solely for 25 shares of
FA stock. The shareholders of DT transfer all of their
DT stock to FA in exchange solely for the remaining
75 shares of FA stock. None of the PRS properties is
specified nonqualified property, but FA acquires the
PRS properties with a principal purpose of avoiding
the purposes of section 7874.

(ii) Analysis. Under § 1.7874-4T(i)(7)(iv), the
PRS properties transferred to FA are nonqualified
property, because FA acquires the PRS properties in
a transaction related to the DT acquisition with a
principal purpose of avoiding the purposes of section
7874. Accordingly, the 25 shares of FA stock trans-

ferred by FA to PRS in exchange for the PRS prop-
erties are disqualified stock described in § 1.7874-
4T(c)(1)(i). Section 1.7874-4T(c)(2) does not apply
to reduce the amount of disqualified stock described
in § 1.7874-4T(c)(1)(i) because the transfer of FA
stock in exchange for the PRS properties increases
the fair market value of FA's assets by the fair
market value of the PRS properties. Accordingly,
pursuant to § 1.7874-4T(b), the 25 shares of FA
stock transferred to PRS in exchange for the PRS
properties are not included in the denominator of the
ownership fraction. Furthermore, even in the ab-
sence of § 1.7874-4T(i)(7)(iv), the transfer of the
PRS properties to FA would be disregarded pursuant
to section 7874(c)(4). Therefore, the only FA stock
included in the ownership fraction is the FA stock
transferred to DT's former shareholders in exchange
for their DT stock, and that FA stock is included in
both the numerator and the denominator of the
ownership fraction. Thus, the ownership fraction
is 75/75.

## SECTION 3. REGULATIONS TO ADDRESS POST-INVERSION TAX AVOIDANCE TRANSACTIONS

.01 Regulations under Section 7874
Defining Inversion Gain

### (a) Background

If an acquisition is an inversion trans-
action, section 7874(a)(1) requires that the
taxable income of an "expatriated entity"
for any taxable year that includes any por-
tion of the "applicable period" be no less
than the "inversion gain" of the entity for
the taxable year. Section 7874(a)(2)(A)
provides that the term "expatriated entity"
means a domestic corporation or a domes-
tic partnership referred to in section
7874(a)(2)(B)(i) (which describes the ac-
quisition) or any U.S. person that is re-
lated (within the meaning of section
267(b) or 707(b)(1)) to such domestic cor-
poration or domestic partnership. Section
7874(d)(1) defines the term "applicable
period" as the period beginning on the
first date properties are acquired as part of
the acquisition, and ending on the date
that is 10 years after the last date proper-
ties are acquired as part of the acquisition.
In addition, section 7874(d)(2) provides
that the term "inversion gain" means:

The income or gain recognized by rea-
son of the transfer during the applicable
period of stock or other properties by an
expatriated entity, and any income re-
ceived or accrued during the applicable
period by reason of a license of any prop-
erty by an expatriated entity-

(A) as part of the acquisition described
in subsection (a)(2)(B)(i), or

(B) after such acquisition if the transfer
or license is to a foreign related person.

Subparagraph (B), however, does not
apply to property described in section
1221(a)(1) (generally, property that is in-
ventory) in the hands of the expatriated
entity.

Section 7874(d)(3) provides that the
term "foreign related person" means, with
respect to any expatriated entity, a foreign
person that is (i) related (within the mean-
ing of section 267(b) or 707(b)(1)) to the
entity, or (ii) under the same common
control (within the meaning of section
482) as the entity.

Finally, section 7874(e)(2)(A) provides
that, in the case of an expatriated entity
that is a partnership, section 7874(a)(1)
shall apply at the partner rather than the
partnership level.

Section 7874(a)(1), together with sec-
tion 7874(e)(1) (which prevents the use of
certain credits to offset U.S. tax on inver-
sion gain), ensure that an expatriated en-
tity generally pays current U.S. tax with
respect to inversion gain. These rules are
intended to ensure that an appropriate
"toll charge" is paid on transactions that
accompany or follow an inversion trans-
action and are designed to "remove in-
come from foreign operations from the
U.S. taxing jurisdiction." See H.R. Rep.
No. 755, 108th Cong., 2nd Sess. 568, 574
(2004) (Conf. Rep.); JCT Explanation at
342, 345.

### (b) Transactions at Issue and Regulations to be Issued

The Treasury Department and the IRS
are concerned that certain indirect trans-
fers of stock or other property by an ex-
patriated entity (rather than direct trans-
fers by the expatriated entity itself) may
have the effect of removing foreign oper-
ations from U.S. taxing jurisdiction while
avoiding current U.S. tax, contrary to the
policy underlying sections 7874(a)(1) and
(e)(1). This is because under current law
the income is not inversion gain and there-
fore could be offset by tax attributes. For
example, following an inversion transac-
tion, an expatriated entity that wholly
owns a CFC could cause the CFC to trans-
fer property (including stock of a lower-

tier CFC) to a specified related person (as
defined in section 3.02(e)(i) of Notice
2014-52) in a fully taxable transaction.
Gain from the transfer may be subpart F
income of the transferor CFC and, as a
result, the expatriated entity may have an
income inclusion under section
951(a)(1)(A) attributable to the transfer.
However, such an inclusion is not inver-
sion gain under current law, and therefore
the expatriated entity's income can be off-
set by tax attributes (such as net operating
losses). Similar concerns arise in connec-
tion with a license of property by a CFC
of an expatriated entity to a specified re-
lated person.

The Treasury Department and the IRS
have determined that it is inconsistent
with the purposes of sections 7874(a)(1)
and (e) to exclude from the definition of
inversion gain income or gain recognized
by an expatriated entity from an indirect
transfer or license of property in circum-
stances analogous to those set forth in
sections 7874(d)(2)(A) and (B). Accord-
ingly, the Treasury Department and the
IRS intend to issue regulations under sec-
tion 7874(g) that will provide that inver-
sion gain includes income or gain recog-
nized by an expatriated entity from an
indirect transfer or license of property,
such as an expatriated entity's section
951(a)(1)(A) gross income inclusions
taken into account during the applicable
period that are attributable to a transfer of
stock or other properties or a license of
property, either (i) as part of the acquisi-
tion, or (ii) after such acquisition if the
transfer or license is to a specified related
person. However, clause (ii) of the pre-
ceding sentence will not apply to property
described in section 1221(a)(1) in the
hands of the CFC.

In addition, the Treasury Department
and the IRS intend to issue regulations
that will provide that, if a partnership that
is a foreign related person transfers or
licenses property, a partner of the partner-
ship shall be treated as having transferred
or licensed its proportionate share of that
property, as determined under the rules
and principles of sections 701 through
777, for purposes of determining inver-
sion gain.

The following example illustrates the
regulations described in this section
3.01(b):

Example. (i) Facts. On July 1, 2016, FA, a for-
eign corporation, acquires all the stock of DT, a
domestic corporation, in an inversion transaction.
When the inversion transaction occurred, DT wholly
owned FS, a foreign corporation that is a CFC.
During the applicable period, FS sells to FA property
that is not described in section 1221(a)(1) in the
hands of FS. Under section 951(a)(1)(A), DT has a
$100x gross income inclusion that is attributable to
FS's sale of the property.

(ii) Analysis. Pursuant to section 7874(a)(2)(A),
DT is an expatriated entity. Under section 3.01(b) of
this notice, DT's $100x gross income inclusion un-
der section 951(a)(1)(A) is inversion gain, because it
is taken into account during the applicable period
and is attributable to a transfer of property after the
inversion transaction to a specified related person
(FA). Sections 7874(a)(1) and (e) therefore prevent
the use of certain tax attributes (such as net operating
losses) to reduce the U.S. tax owed with respect to
DT's $100x gross income inclusion under section
951(a)(1)(A).

### .02 Regulations under Section 367(b) Regarding Certain Exchanges of Stock of an Expatriated Foreign Subsidiary

#### (a) Background

Section 367(b)(1) provides that, in the
case of an exchange described in section
332, 351, 354, 355, 356, or 361 in con-
nection with which there is no transfer of
property described in section 367(a)(1), a
foreign corporation shall be considered to
be a corporation except to the extent pro-
vided in regulations prescribed by the
Secretary which are necessary or appro-
priate to prevent the avoidance of Federal
income taxes. Section 367(b)(2) provides
that the regulations prescribed pursuant to
section 367(b)(1) shall include (but shall
not be limited to) regulations dealing with
the sale or exchange of stock or securities
in a foreign corporation by a United States
person, including regulations providing
the circumstances under which gain is rec-
ognized or deferred, amounts are included
in gross income as a dividend, adjust-
ments are made to earnings and profits, or
adjustments are made to the basis of stock
or securities.

In general, current regulations under
§ 1.367(b)-4(b), without regard to the
regulations described in Notice 2014-52,
require a shareholder that exchanges stock
of a foreign corporation in an exchange
subject to section 367(b) to include in
income as a deemed dividend the section
1248 amount (as defined in § 1.367(b)-
2(c)(1)) with respect to the stock ex-

changed if the exchange results in either a
loss of CFC status of the foreign corpora-
tion whose stock is exchanged or a loss of
section 1248 shareholder status of the ex-
changing shareholder (or of a shareholder
of the exchanging shareholder when there
is an exchange of stock of a lower-tier
CFC). See § 1.367(b)-4(b)(1)(i)(A) and
(B), which describe an exchanging share-
holder subject to these regulations and the
conditions under which an income inclu-
sion is required, respectively.

Notice 2014-52 announced that the
regulations under § 1.367(b)-4(b) would
be amended to require an income inclu-
sion in certain nonrecognition transactions
that occur after an inversion transaction
and that dilute the interest of a U.S. share-
holder in a CFC, because such transac-
tions could allow the U.S. shareholder to
avoid tax on the CFC's earnings and prof-
its. Specifically, subject to a de minimis
rule, section 3.02(e)(ii) of Notice
2014-52 provides that an exchanging
shareholder described in § 1.367(b)-
4(b)(1)(i)(A) will be required to include in
income as a deemed dividend the section
1248 amount with respect to stock of an
expatriated foreign subsidiary that is ex-
changed in a specified exchange during
the applicable period, without regard to
whether any condition of § 1.367(b)-
4(b)(1)(i)(B) is satisfied. The terms "ex-
patriated foreign subsidiary" and "speci-
fied exchange" are defined in sections
3.01(b) and 3.02(e)(ii), respectively, of
Notice 2014-52.

### (b) Transactions at Issue and Regulations to be Issued

The Treasury Department and the IRS
are concerned that certain nonrecognition
transactions that dilute a U.S. sharehold-
er's ownership of an expatriated foreign
subsidiary may allow the U.S. shareholder
to avoid U.S. tax on unrealized apprecia-
tion in property held by the expatriated
foreign subsidiary at the time of the ex-
change. This could occur when the
amount of realized gain in the stock of the
expatriated foreign subsidiary that is ex-
changed in the specified exchange ex-
ceeds the earnings and profits attributable
to such stock for purposes of section 1248.
For example, at the time of the exchange,
the expatriated foreign subsidiary could

hold valuable self-developed intangible
property that has not yet been brought to
market and therefore has not generated
any significant earnings and profits. Any
unrealized appreciation in the intangible
property, when recognized by the expatri-
ated foreign subsidiary after the exchange,
would create earnings and profits that are
attributable to gain that economically had
accrued at the time of the exchange.

The Treasury Department and the IRS
have determined that net unrealized
built-in gain in property held by an expa-
triated foreign subsidiary at the time of the
exchange gives rise to the same policy
concerns that arise with respect to earn-
ings and profits of the expatriated foreign
subsidiary that exist at the time of the
exchange. Therefore, to prevent the avoid-
ance of U.S. tax on such net unrealized
gain, it is appropriate to require the ex-
changing shareholder to recognize all of
the gain in the stock of the expatriated
foreign subsidiary that is exchanged, with-
out regard to the amount of the expatriated
foreign subsidiary's undistributed earn-
ings and profits. Accordingly, the Trea-
sury Department and the IRS intend to
amend the regulations under section
367(b) to provide that, if an exchanging
shareholder would be required under the
rules announced in section 3.02(e)(ii) of
Notice 2014-52 to include in income as a
deemed dividend the section 1248 amount
(if any) with respect to stock of an expa-
triated foreign subsidiary, the exchanging
shareholder also must recognize all real-
ized gain with respect to such stock, after
taking into account any increase in basis
resulting from a deemed dividend with
respect to the exchange provided in
§ 1.367(b)-2(e)(3)(ii). For this purpose,
the amount of realized gain that would be
recognized is reduced by the amount of
gain recognized under other applicable
provisions of the Code, such as section
356.

Furthermore, a conforming change will
be made to the regulations described in
section 3.02(e)(i) of Notice 2014-52,
which will recharacterize under section
7701(1) certain transfers of "specified
stock" (as defined in section 3.02(e)(i) of
Notice 2014-52), subject to the excep-
tions described in section 3.02(e)(i)(C) of
Notice 2014-52. Specifically, the first ex-
ception described in section 3.02(e)(i)(C)

applies either when a transfer of specified
stock gives rise to a deemed dividend to
the exchanging shareholder under
§ 1.367(b)-4 (including by reason of the
regulations described in section 3.02(e)(ii)
of Notice 2014-52), or when the ex-
changing shareholder is required to recog-
nize and include in income all of the gain
in the specified stock. Consistent with the
modification described in this section
3.02(b), when the regulations described in
Notice 2014-52 are issued, the first ex-
ception described in section 3.02(e)(i)(C)
will be modified to be applicable only if,
as a result of the transfer, all the gain in
the specified stock is recognized. See sec-
tion 4.03 of this notice for additional dis-
cussion of the application of this notice
and Notice 2014-52 to transfers of spec-
ified stock.

The following example illustrates the
regulations described in this section
3.02(b):

Example 1. (i) Facts. FA, a foreign corporation,
wholly owns DT, a domestic corporation, which in
turn, wholly owns FT, a foreign corporation that is a
CFC. FA wholly owns FS, a foreign corporation. FA
acquired all the stock of DT in an inversion transac-
tion that was completed on July 1, 2016. Accord-
ingly, DT is a domestic entity, FT is an expatriated
foreign subsidiary, and FA and FS are each a spec-
ified related person with respect to FT. During the
applicable period, DT transfers to FS all of the stock
of FT solely in exchange for FS voting stock repre-
senting 60% of the outstanding stock of FS, pursuant
to a reorganization described in section 368(a)(1)(B).
Immediately before the exchange, FT is a CFC in
which DT is a section 1248 shareholder. Immedi-
ately after the exchange, FS and FT are CFCs in
which DT is a section 1248 shareholder. At the time
of the exchange, the FT stock owned by DT has a
fair market value of $150x and a tax basis of $50x
(such that the FT stock has a built-in gain of $100x).
In addition, the earnings and profits of FT attribut-
able to DT's FT stock is $60x and therefore the
section 1248 amount with respect to the FT stock is
$60x (the lesser of the $60x of earnings and profits
attributable to the FT stock and the $100x gain in the
FT stock).

(ii) Analysis. Under § 1.367(b)-4(b)(1)(i), as
modified by the regulations described in section
3.02(e)(ii) of Notice 2014-52, DT must include in
income as a deemed dividend $60x, the section 1248
amount with respect to its FT stock. Because DT is
required to include in income as a deemed dividend
the section 1248 amount, if any, with respect to its
FT stock under section 3.02(e)(ii) of Notice 2014-
52, the rules in section 3.02(b) of this notice apply.
As a result, DT must also recognize all realized gain
with respect to its FT stock after taking into account
the $60x increase in basis in the FT stock under
§ 1.367(b)-2(e)(3)(ii), or $40x ($150x - ($50x +
$60x)). If instead the section 1248 amount with
respect to the FT stock were zero (because, for

example, FT had no earnings and profits), DT would
recognize all $100x of realized gain with respect to
its FT stock.

SECTION 4. CORRECTIONS AND
CLARIFYING CHANGES TO
CERTAIN RULES IN
NOTICE 2014-52

.01 Regulations under Section 7874 to
Disregard Certain Stock Attributable to
Passive Assets

(a) Background

Notice 2014-52 announced that the
Treasury Department and the IRS intend
to issue regulations under section
7874(c)(6) that will exclude from the de-
nominator of the ownership fraction cer-
tain stock of a foreign acquiring corpora-
tion that is attributable to passive assets.
Specifically, section 2.01(b) of Notice
2014-52 provides that a portion of the
stock of a foreign acquiring corporation
will be excluded from the denominator of
the ownership fraction when more than 50
percent of the gross value of all "foreign
group property" is "foreign group non-
qualified property." For this purpose, sec-
tion 2.01(b) of Notice 2014-52 provides
the general rule that foreign group non-
qualified property is foreign group prop-
erty (as defined in section 2.01(b) of No-
tice 2014-52) that is described in
§ 1.7874-4T(i)(7), other than property
that gives rise to income described in sec-
tion 1297(b)(2)(A) (PFIC banking excep-
tion) or section 954(h) or (i) (subpart F
exceptions for qualified banking or fi-
nancing income and for qualified insur-
ance income, respectively, determined by
substituting the term "foreign corpora-
tion" for the term "controlled foreign cor-
poration"). In addition, a special rule
treats certain property (referred to as “sub-
stitute property") that would not be for-
eign group nonqualified property under
the general rule as foreign group non-
qualified property if, in a transaction re-
lated to the acquisition, such property is
acquired in exchange for other property
that would be foreign group nonqualified
property under the general rule.

(b) Modification of the General
Definition of Foreign Group
Nonqualified Property

(i) Exclusion for property that gives rise
to income described in section
1297(b)(2)(B)

Notice 2014-52 did not exclude prop-
erty that gives rise to income described in
section 1297(b)(2)(B) (PFIC insurance
exception) from the general definition of
foreign group nonqualified property.
Commenters have noted that certain insur-
ance companies may not be able to satisfy
the requirements of the subpart F excep-
tion for qualified insurance income under
section 954(i), which is a narrower provi-
sion than section 1297(b)(2)(B). The
Treasury Department and the IRS have
determined that the rule described in No-
tice 2014-52 with respect to insurance
companies can lead to inappropriate re-
sults in certain cases. Accordingly, the
regulations described in section 2.01(b) of
Notice 2014-52 will provide that property
that gives rise to income described in the
PFIC insurance exception will be ex-
cluded from the general definition of for-
eign group nonqualified property, but
such property will be subject to the special
rule for substitute property. Nevertheless,
the Treasury Department and the IRS
have significant concerns about certain
corporations that do not conduct a bona
fide active insurance business or whose
investment assets exceed the amount nec-
essary to meet their obligations under in-
surance and annuity contracts, but that
nonetheless take the position that they
earn income described in section
1297(b)(2)(B) with respect to all of their
activities and investment assets. In this
regard, on April 24, 2015, proposed reg-
ulations under § 1.1297-4 were published
in the Federal Register (REG-108214-
15) to provide guidance on when a foreign
insurance company's income is excluded
from the definition of passive income un-
der the PFIC insurance exception. In the
preamble to those proposed regulations,
the Treasury Department and the IRS re-
quested comments on appropriate meth-
odologies for determining the extent to
which assets are held to meet obligations
under insurance and annuity contracts.
Accordingly, the Treasury Department
and the IRS expect to issue separate guid-

ance under section 1297(b)(2)(B) to pre-
vent companies from inappropriately ap-
plying the PFIC insurance exception.

(ii) Exclusion of property held by certain
domestic corporations

Commenters have noted that the gen-
eral definition of foreign group nonquali-
fied property in Notice 2014-52 includes
certain property held by domestic corpo-
rations engaged in the active conduct of a
banking or insurance business. This could
occur, for example, if a foreign acquiring
corporation held all the stock of a domes-
tic corporation prior to an acquisition. The
Treasury Department and the IRS have
determined that this definition may lead to
inappropriate results in certain cases. Con-
sequently, the regulations described in
section 2.01(b) of Notice 2014-52 will
provide that the general definition of for-
eign group nonqualified property does not
include property held by a domestic cor-
poration that is subject to tax as an insur-
ance company under subchapter L, pro-
vided that the property is required to
support, or is substantially related to, the
active conduct of an insurance business.
Furthermore, the regulations will provide
that the general definition of foreign group
nonqualified property does not include
property held by a domestic corporation if
that property gives rise to income de-
scribed in section 954(h), determined by
substituting the term "domestic corpora-
tion" for the term "controlled foreign cor-
poration" and without regard to the phrase
"located in a country other than the United
States" in section 954(h)(3)(A)(ii)(I) and
without regard to any inference that the
tests in section 954(h) should be calcu-
lated or determined without taking into
account transactions with customers lo-
cated in the United States. In these cases,
however, the special rule for substitute
property will apply.

.02 Regulations under Section 7874 to
Disregard Certain Distributions by the
Domestic Entity

(a) Background

Notice 2014-52 announced that the
Treasury Department and the IRS intend
to issue regulations under section 7874
that disregard certain distributions made

by a domestic entity before being acquired
by a foreign acquiring corporation. Spe-
cifically, section 2.02(b) of Notice
2014-52 provides that non-ordinary
course distributions (as defined in section
2.02(b) of Notice 2014-52) made by a
domestic entity (including a predecessor)
during the 36-month period ending on the
acquisition date (within the meaning of
§ 1.7874-3T(d)(1)) are disregarded for
purposes of section 7874.

### (b) Addition of a De Minimis Exception

Commenters have noted that the rules
announced in section 2.02(b) of Notice
2014-52 could cause section 7874 to ap-
ply to an acquisition even though the for-
mer owners of the domestic entity actually
own no, or only a de minimis amount of,
stock in the foreign acquiring corporation
after the acquisition. In general, this could
occur when stock of the foreign acquiring
corporation is disregarded for purposes of
section 7874. For example, assume that,
pursuant to a plan to purchase the stock of
a domestic corporation, which made a
non-ordinary course distribution, the pur-
chaser forms a newly formed foreign ac-
quiring corporation with cash and the for-
eign acquiring corporation uses the cash
to purchase the stock of the domestic cor-
poration. In applying the ownership per-
centage, the stock held by the sharehold-
ers of the foreign acquiring corporation is
disregarded under § 1.7874-4T(b) (which
disregards certain stock of the foreign ac-
quiring corporation received in exchange
for nonqualified property). This result is
similar to a result that could occur under
§ 1.7874-4T(b), absent the de minimis
exception provided in § 1.7874-4T(d)(1),
when the former shareholders of the do-
mestic entity in fact acquire a small inter-
est in the foreign acquiring corporation by
reason of having held an interest in the
domestic entity. The Treasury Department
and the IRS have determined that the pol-
icy reasons for providing the de minimis
exception in § 1.7874-4T are equally ap-
plicable to the regulations described in
section 2.02(b) of Notice 2014-52.

Accordingly, the Treasury Department
and the IRS intend to include in the reg-
ulations described in section 2.02(b) of
Notice 2014-52 a de minimis exception
that will implement this policy. This ex-

ception will apply to an acquisition that
meets two requirements. First, the owner-
ship percentage, determined without re-
gard to the application of § 1.7874-4T(b)
and the rules announced in sections
2.01(b) and 2.02(b) of Notice 2014-52,
must be less than five (by vote and value).
Second, after the acquisition and all trans-
actions related to the acquisition are com-
pleted, former shareholders (within the
meaning of § 1.7874-2(b)(2)) or former
partners (within the meaning of § 1.7874-
2(b)(3)), as applicable, of the domestic
entity, in the aggregate, must own (apply-
ing the attribution rules of section 318(a)
with the modifications described in sec-
tion 304(c)(3)(B)) less than five percent
(by vote and value) of the stock of (or a
partnership interest in) any member of the
EAG that includes the foreign acquiring
corporation. If these two requirements are
satisfied, the rules announced in section
2.02(b) of Notice 2014-52 will not apply
to the acquisition and, as a result, no dis-
tributions will be treated as non-ordinary
course distributions that are disregarded
under those rules. However, any distribu-
tions that are part of a plan a principal
purpose of which is to avoid the purposes
of section 7874 will be disregarded under
section 7874(c)(4).

### .03 Regulations to Address Transactions to De-Control or Significantly Dilute Ownership of Certain CFCs

#### (a) Background

Notice 2014-52 announced that the
Treasury Department and the IRS intend
to issue regulations under section 7701(l)
that will recharacterize certain post-
inversion transactions that otherwise
would de-control or significantly dilute a
U.S. shareholder's ownership of a CFC
that is an expatriated foreign subsidiary.
The general rule in section 3.02(e)(i) of
Notice 2014-52 provides that a specified
transaction completed during the applica-
ble period is recharacterized under section
7701(l) in the manner described in section
3.02(e)(i)(A) of Notice 2014-52. For this
purpose, a specified transaction is a trans-
action in which stock in an expatriated
foreign subsidiary, referred to as "speci-
fied stock," is transferred (including by
issuance) to a specified related person.
The term "expatriated foreign subsidiary"

is defined in section 3.01(b) of Notice
2014-52, and the terms "specified trans-
action," "specified stock," and "specified
related party" are defined in section
3.02(e)(i) of Notice 2014-52.

This general rule is subject to two excep-
tions described in section 3.02(e)(i)(C) of
Notice 2014-52. The first exception is dis-
cussed in section 3.02(b) of this notice. The
second exception (small dilution exception)
applies if (i) the expatriated foreign subsid-
iary is a CFC immediately after the speci-
fied transaction and all related transactions
and (ii) the amount of stock (by value) in the
expatriated foreign subsidiary (and any
lower-tier expatriated foreign subsidiary)
that is owned, in the aggregate, directly or
indirectly by the section 958(a) U.S. share-
holders (as defined in section 3.02(e)(i)(A)
of Notice 2014-52) of the expatriated for-
eign subsidiary immediately before the
specified transaction and any transactions
related to the specified transaction does not
decrease by more than 10 percent as a result
of the specified transaction and any related
transactions.

Example 1 of section 3.02(e)(iii) of
Notice 2014-52 illustrates a specified
transaction in which neither exception ap-
plies and therefore the transaction is re-
characterized in the manner described in
section 3.02(e)(i)(A) of Notice 2014-52.
In the example, FA is a foreign corpora-
tion that wholly owns DT, a domestic
corporation acquired by FA in an inver-
sion transaction completed on January 1,
2015. In addition, DT wholly owns FT, a
foreign corporation that is a CFC and an
expatriated foreign subsidiary, and FA
wholly owns FS, a foreign corporation
that is a specified related person with re-
spect to FT. Shortly after the inversion
transaction, FA acquires $10x of FT stock
from FT, representing 60 percent of total
voting power and value of the stock of FT,
in exchange for $10x of cash.

The example states that FA's acquisi-
tion of the FT stock from FT is a specified
transaction that must be recharacterized.
The small dilution exception is not appli-
cable because the amount of FT stock (by
value) that is owned (within the meaning
of section 958(a)), in the aggregate, by DT
before the specified transaction decreases
by more than 10 percent (in fact, by 60
percent, from 100 percent to 40 percent)
as a result of the specified transaction.

(b) Clarifying Change to Small Dilution
Exception

The Treasury Department and the IRS
are concerned that some taxpayers may be
inappropriately interpreting the small di-
lution exception. In particular, some tax-
payers may be comparing the value of the
stock of an expatriated foreign subsidiary
owned by a section 958(a) U.S. share-
holder immediately before a specified
transaction with the value of the stock
owned by the section 958(a) U.S. share-
holder immediately after the specified
transaction, rather than comparing the per-
centage of the stock owned (by value) by
the section 958(a) U.S. shareholder before
and after the specified transaction. This
interpretation is plainly inconsistent with
the purpose of the rules described in sec-
tion 3.02(e)(i) of Notice 2014-52 and the
small dilution exception, as well as the
analysis in Example 1 of section
3.02(e)(iii) of Notice 2014-52. Accord-
ingly, the regulations will clarify the ap-
plication of the small dilution exception
by substituting the phrase "the percentage
of stock (by value)" for the phrase "the
amount of stock (by value)." A similar
clarification will be made to the exception
described in section 3.02(e)(ii) of Notice
2014-52 (relating to the circumstances in
which an exchanging shareholder is re-
quired under section 367(b) to include in
income as a deemed dividend the section
1248 amount with respect to stock ex-
changed in a specified exchange).

## SECTION 5. EFFECTIVE DATES

Except as provided in this section 5,
the regulations described in section
2.02(a) (which requires the foreign acquir-
ing corporation to be subject to tax as a
resident of the relevant foreign country in
order to have substantial business activi-
ties in the relevant foreign country), sec-
tion 2.02(b) (which disregards certain
stock of the foreign acquiring corporation
in third-country transactions), section
2.03(b) (which clarifies the definition of
nonqualified property in § 1.7874-4T),
section 4.01(b) (which modifies the defi-
nition of foreign group nonqualified prop-
erty in Notice 2014-52), and section
4.02(b) (which provides a de minimis ex-
ception to the rules announced in Notice
2014-52 regarding certain distributions of

a domestic entity that are disregarded)
will apply to acquisitions completed on or
after November 19, 2015. In addition, ex-
cept as provided in this section 5, the
regulations described in: (i) section
3.01(b) (which provides that inversion
gain includes certain income or gain rec-
ognized by an expatriated entity from an
indirect transfer or license of property and
provides aggregate treatment for certain
foreign partnerships for purposes of deter-
mining inversion gain) will apply to trans-
fers or licenses of property occurring on
or after November 19, 2015, but only if
the inversion transaction is completed on
or after September 22, 2014; (ii) section
3.02(b) (which requires the recognition of
realized stock gain in certain specified ex-
changes) will apply to specified ex-
changes occurring on or after November
19, 2015, but only if the inversion trans-
action is completed on or after September
22, 2014; and (iii) section 4.03 (which
clarifies certain exceptions to the rules
announced in Notice 2014-52 regarding
transactions to de-control or significantly
dilute CFCs) will apply to specified trans-
actions and specified exchanges com-
pleted on or after November 19, 2015, but
only if the inversion transaction is com-
pleted on or after September 22, 2014.

Taxpayers may elect to apply the rules
in sections 4.01(b) of this notice (which
modifies the definition of foreign group
nonqualified property in Notice 2014-52)
and 4.02(b) of this notice (which provides
a de minimis exception to the rules an-
nounced in Notice 2014-52 regarding
certain distributions of a domestic entity
that are disregarded) to acquisitions com-
pleted before November 19, 2015.

No inference is intended regarding the
treatment under current law of the transac-
tions described in this notice. The IRS may
challenge such transactions under applicable
Code provisions or judicial doctrines.

## SECTION 6. REQUEST FOR COMMENTS AND CONTACT INFORMATION

The Treasury Department and the IRS
expect to issue additional guidance to fur-

ther limit (i) inversion transactions that
are contrary to the purposes of section
7874 and (ii) the benefits of post-inversion
tax avoidance transactions. In particular,
as described in section 5 of Notice 2014-
52, the Treasury Department and the IRS
continue to consider guidance to address
strategies that avoid U.S. tax on U.S. op-
erations by shifting or "stripping" U.S .-
source earnings to lower-tax jurisdictions,
including through intercompany debt. Ac-
cordingly, the Treasury Department and
the IRS reiterate the requests for com-
ments made in Notice 2014-52.

Written comments may be submitted to
the Office of Associate Chief Counsel (In-
ternational), Attention: David A. Levine and
Shane M. McCarrick, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC 20224. Alternatively, tax-
payers may submit comments electronically
to notice.comments@irscounsel.treas.gov.
Comments will be available for public in-
spection and copying.

The principal authors of this notice are
Mr. Levine and Mr. McCarrick of the
Office of Associate Chief Counsel (Inter-
national). However, other personnel from
the Treasury Department and the IRS par-
ticipated in its development. For further
information regarding this notice, contact
Mr. Levine or Mr. McCarrick at (202)
317-6934 (not a toll-free number).

## Section 529A INTERIM GUIDANCE REGARDING CERTAIN PROVISIONS OF PROPOSED REGULATIONS RELATING TO QUALIFIED ABLE PROGRAMS

Notice 2015-81

### I. PURPOSE AND OVERVIEW

This notice advises how the Treasury
Department and the Internal Revenue Ser-
vice (IRS) intend to respond to comments
by revising three provisions of the pro-
posed regulations under § 529A of the

Internal Revenue Code when those regu-
lations are finalized. Specifically, com-
menters noted that the following three re-
quirements for qualified Achieving a
Better Life Experience (ABLE) programs
in the proposed regulations would create
significant barriers to the establishment of
such programs: (1) the requirement to es-
tablish safeguards to categorize distribu-
tions from ABLE accounts, (2) the re-
quirement to request the taxpayer
identification number (TIN) of each con-
tributor to an ABLE account, and (3) the
requirements for disability certifications,
and in particular the requirement to pro-
cess disability certifications with signed
physicians' diagnoses.

# II. BACKGROUND

The Stephen Beck, Jr., Achieving a
Better Life Experience Act of 2014
(ABLE Act) was enacted on December
19, 2014, as part of The Tax Increase
Prevention Act of 2014 (P.L. 113-295).
The ABLE Act added § 529A to the Code.
Section 529A allows a State (or State
agency or instrumentality) to establish and
maintain a tax-advantaged savings pro-
gram under which contributions may be
made to an account (an ABLE account)
for the purpose of providing for the qual-
ified disability expenses of the designated
beneficiary of the account. The designated
beneficiary generally must be a resident of
that State who has a disability that com-
menced before the designated beneficia-
ry's 26th birthday and who meets the stat-
utory eligibility requirements. In general,
neither the ABLE account nor distribu-
tions from the account are treated as in-
come or resources of a designated benefi-
ciary who is an eligible individual in
determining that designated beneficiary's
qualification for federal benefits.1 The un-
distributed income earned in an ABLE
account is not taxable and distributions
made from an ABLE account for qualified
disability expenses of the designated ben-
eficiary are not included in the designated
beneficiary's gross income for federal in-
come tax purposes. However, the earnings
portion of distributions from an ABLE

1While section 103 of the ABLE Act (not a tax provision) generally provides that a designated beneficiary's ABLE account is disregarded in determining the designated beneficiary's
eligibility under certain federal means-tested programs, there are two exceptions. In the case of the Supplemental Security Income program under title XVI of the Social Security Act,
distributions for certain housing expenses are not disregarded and the balance (including earnings) in an ABLE account is considered a resource of the designated beneficiary to the extent
that balance exceeds $100,000. Section 103 also addresses the impact of an excess balance on the designated beneficiary's eligibility under the Supplemental Security Income program and
Medicaid.

account in excess of qualified disability
expenses generally is includible in the
gross income of the designated benefi-
ciary.

The Treasury Department and the IRS
released proposed regulations concerning
qualified ABLE programs on June 19,
2015, which were published in the Federal
Register on June 22, 2015 (80 Fed. Reg.
35602). Although the comments received
to date generally have been positive re-
garding most aspects of the proposed reg-
ulations, commenters raised concerns that
the provisions in the proposed regulations
requiring a qualified ABLE program to
establish safeguards to categorize distri-
butions, collect taxpayer identification
numbers (TINs) from contributors, and
process disability certifications with
signed physicians' diagnoses, if un-
changed in the final regulations, would
impose substantial administrative and cost
burdens on the States administering qual-
ified ABLE programs. States indicated
that these burdens were sufficiently signif-
icant that they were encountering substan-
tial hurdles in moving forward with cre-
ating their ABLE programs because they
did not know if the final regulations would
resolve their concerns regarding these re-
quirements. Several commenters re-
quested that the Treasury Department and
the IRS issue interim guidance on these
three requirements in order to facilitate
the establishment of qualified ABLE pro-
grams by the States.

# III. DISTRIBUTIONS FOR QUALIFIED DISABILITY EXPENSES

Consistent with § 529A(e)(5),
§ 1.529A-1(b)(16) of the proposed regu-
lations defines the term "qualified disabil-
ity expenses" as expenses incurred that
relate to the blindness or disability of the
designated beneficiary of an ABLE ac-
count and that are for the benefit of the
designated beneficiary in maintaining or
improving his or her health, indepen-
dence, or quality of life. As stated in the
preamble to the proposed regulations, the
Treasury Department and the IRS recog-
nize that this term should be broadly con-
strued to permit the inclusion of basic
living expenses and should not be limited
to expenses for items for which there is a
medical necessity or which provide no
benefit to others in addition to the benefit

to the eligible individual. Section 1.529A-
2(h)(1) of the proposed regulations pro-
vides that a qualified ABLE program must
establish safeguards to allow the ABLE
program to distinguish between distribu-
tions used to pay for qualified disability
expenses and other distributions, and to
permit the identification of amounts dis-
tributed for housing expenses as defined
for purposes of the Supplemental Security
Income program of the Social Security
Administration.

Commenters noted that, because the
identification of housing expenses is rele-
vant only for purposes of determining el-
igibility for certain Social Security bene-
fits and has no relevance for federal
income tax purposes, any reference to
classifying distributions as housing ex-
penses should be eliminated from the reg-
ulations. The Treasury Department and
the IRS agree, and the final regulations
will not require a qualified ABLE pro-
gram to identify or record whether distri-
butions were made for housing expenses.

Commenters also expressed concerns
regarding the requirement that a qualified
ABLE program establish safeguards to
distinguish between distributions for qual-
ified disability expenses and other distri-
butions. Commenters emphasized that re-
quiring a qualified ABLE program to
determine how a distribution will be used
prior to making the distribution would be
unduly burdensome for both the program
and the designated beneficiary and ex-
plained that the particular use of a distri-
bution might not be known when the dis-
tribution is made. The commenters
recommended that any requirement or
suggestion that qualified ABLE programs
will have to classify distributions should
be eliminated from the regulations.

Consistent with the reporting require-
ments in § 1.529A-6 of the proposed reg-
ulations, which require that qualified
ABLE programs report only aggregate
distributions and distinguish such distri-
butions as basis, earnings, or returned
contributions, the Treasury Department
and the IRS confirm that the final regula-
tions will not require, for any federal in-
come tax purpose, a qualified ABLE pro-
gram to establish safeguards to distinguish
between distributions used for the pay-
ment of qualified disability expenses and
other distributions. The designated bene-

ficiary, however, will have to categorize
distributions in order to properly deter-
mine the designated beneficiary's federal
income tax obligations.

# IV. REPORTING REQUIREMENTS REGARDING CONTRIBUTORS

Consistent with §§ 529A(b)(2)(B) and
(b)(6), §§ 1.529A-2(g)(2) and (3) of the
proposed regulations provide that a qual-
ified ABLE program must provide that no
contribution to an ABLE account will be
accepted to the extent that such contribu-
tion exceeds certain stated limits. Specif-
ically, the total contributions (whether
from the designated beneficiary or one or
more other persons) to the designated ben-
eficiary's ABLE account made during the
designated beneficiary's taxable year must
not exceed the amount in effect under
§ 2503(b) (the annual gift tax exclusion
amount) for the calendar year in which the
designated beneficiary's taxable year be-
gins. In addition, the aggregate amount of
contributions to an ABLE account must
not exceed the limit established by the
State under § 529(b)(6) (the limit on con-
tributions to a qualified tuition program).
If an excess contribution under § 1.529A-
2(g)(2) or an excess aggregate contribu-
tion under § 1.529A-2(g)(3) is allocated
to or deposited into the ABLE account of
a designated beneficiary, § 1.529A-
2(g)(4) of the proposed regulations re-
quires the qualified ABLE program to re-
turn that excess contribution or excess
aggregate contribution (with any net in-
come attributable to it, as determined un-
der the applicable rules) to the person who
made that contribution. Because the in-
come earned on that excess contribution
or excess aggregate contribution (if any)
will be taxable to that contributor,
§ 1.529A-6(d) of the proposed regula-
tions requires a qualified ABLE program
to request the TIN for each contributor to
the ABLE account at the time a contribu-
tion is made if the program does not al-
ready have a record of that person's cor-
rect TIN.

One commenter suggested that excess
contributions instead could be required to
be paid to the designated beneficiary so
there would be no need for a qualified
ABLE program to procure a contributor's
TIN. The Treasury Department and the
IRS do not agree with this suggestion be-

cause the designated beneficiary's receipt
of such an excess amount could put the
designated beneficiary at risk of being dis-
qualified for his or her federal benefits that
are income or resource based, a result that
would be inconsistent with the purposes
of the statute.

Commenters are concerned about the
substantial burdens imposed on qualified
ABLE programs if they must request the
TIN of every contributor (if the program
does not already have a record of that
person's correct TIN) at the time a contri-
bution is made. Commenters explained
that it is likely that contributions will
come from multiple sources and will be
made in a variety of ways (payroll deduc-
tion, check, debit, automated clearing
house (ACH) transfers, or others), making
it difficult as a practical matter to obtain
the TIN of the contributor. Commenters
also stated that some contributors, espe-
cially those making small gifts, may be
reluctant to make a contribution if a TIN
were required to be provided. Further,
several commenters indicated that sys-
tems would be used that would ensure that
qualified ABLE programs do not accept
contributions that would exceed applica-
ble limits.

As an alternative, commenters sug-
gested that a contributor's TIN be re-
quired to be collected only by those qual-
ified ABLE programs that do not have
systems in place to prevent the acceptance
and/or deposit to the ABLE account of a
particular designated beneficiary of an ex-
cess contribution or excess aggregate con-
tribution. The commenters expect that
most qualified ABLE programs will adopt
the infrastructure currently utilized by
State § 529 qualified tuition programs ei-
ther to reject such excess contributions or
to escrow and immediately refund the ex-
cess contributions. Other commenters rec-
ommend that the obligation to request a
contributor's TIN should only arise in the
unlikely circumstance in which an excess
contribution or excess aggregate contribu-
tion has been deposited into an individual's
ABLE account and has accrued earnings or
losses. One commenter suggested eliminat-
ing the TIN requirement altogether while
another suggested the collection of TINs
should be required only in the case of con-
tributions over a specified dollar amount.

In consideration of these comments,
the Treasury Department and the IRS be-
lieve that a modification to § 1.529A-6(d)
of the proposed regulations is appropriate.
Consequently, it is anticipated that the
final regulations will eliminate the re-
quirement to request the TIN of each con-
tributor at the time a contribution is made
(if the program does not already have a
record of that person's correct TIN) if the
qualified ABLE program has a system in
place to identify and reject excess contri-
butions and excess aggregate contribu-
tions before they are deposited into an
ABLE account. However, in the event an
excess contribution or excess aggregate
contribution is deposited into an ABLE
account, the qualified ABLE program will
be required to request the TIN of the con-
tributor making the excess contribution or
excess aggregate contribution.

# V. ELIGIBLE INDIVIDUAL, FILING OF DISABILITY CERTIFICATION AND PHYSICIAN DIAGNOSIS

Consistent with § 529A(e)(1),
§ 1.529A-2(d)(1) of the proposed regula-
tions provides that a qualified ABLE pro-
gram must specify the documentation that
an individual must furnish, both at the
time an ABLE account is established for
the designated beneficiary of that account
and thereafter, to ensure that the desig-
nated beneficiary of the ABLE account is,
and continues to be, an eligible individual.
One way to qualify as an eligible individ-
ual under § 529A(e)(1) is to have a dis-
ability certification filed with the Secre-
tary of the Treasury. Under the proposed
regulations, a disability certification is
deemed to be filed with the Secretary once
the qualified ABLE program has received
the disability certification or a disability
certification is deemed to have been re-
ceived under the rules of the qualified
ABLE program, which information the
qualified ABLE program must file with
the IRS in accordance with the filing re-
quirements under § 1.529A-5(c)(2)(iv).
Section 529A(e)(2)(A) defines a disability
certification as "a certification to the sat-
isfaction of the Secretary" by the individ-
ual or the parent or guardian of the indi-
vidual that (i) certifies that the individual
meets the disability standard and (ii) in-
cludes a copy of the individual's diagnosis
signed by a licensed physician. Section

1.529A-2(e) defines the disability certifi-
cation to include the required certifica-
tions and a copy of the signed diagnosis,
but also provides for certain conditions to
be deemed to meet the requirements of
filing a disability certification.

States and potential qualified ABLE
program administrators expressed con-
cerns about their responsibilities and po-
tential liabilities for receiving and safe-
guarding medical information contained
in a signed diagnosis, particularly when
they do not anticipate having any exper-
tise or ability to evaluate that medical
information. The commenters emphasized
that qualified ABLE programs would in-
cur unmanageable costs and burdens in
trying to comply with applicable laws im-
posing system and other requirements on
those in possession of medical records, as
well as in implementing systems to re-
ceive and store paper documentation. The
commenters also expressed the concern
that, if these costs and burdens cannot be
minimized, some States may not proceed
with the implementation of qualified
ABLE programs for their residents. The
commenters recommended that a qualified
ABLE program be permitted to open an
ABLE account on the basis of a certifica-
tion by the person opening the ABLE ac-
count, signed under penalties of perjury,
that the individual has a condition that
meets all of the required elements to qual-
ify as an eligible individual and that a
diagnosis signed by a physician regarding
the relevant impairment or impairments
has been obtained.

After consideration of these comments,
the Treasury Department and the IRS
have concluded that a certification under
penalties of perjury that the individual (or
the individual's agent under a power of
attorney or a parent or legal guardian of
the individual) has the signed physician's
diagnosis, and that the signed diagnosis
will be retained and provided to the ABLE
program or the IRS upon request, is ade-
quate to satisfy the Secretary with regard
to the requirements of §§ 529A(e)(1)(B)
and 529A(e)(2)(A) pertaining to the filing
of a disability certification. Accordingly,
the Treasury Department and the IRS in-
tend, in the final regulations, to permit
such a certification of eligibility for pur-
poses of satisfying the requirement for
filing a disability certification. The Trea-

sury Department and the IRS anticipate
that the final regulations will contain fur-
ther details with regard to the information
required to be included in the certification,
annual recertifications, and annual report-
ing. Based on the comments received, the
required information is likely to include
the statutory basis for the individual's el-
igibility (blindness or disability under title
II or XVI of the Social Security Act, or a
disability certification); confirmation that
the blindness or disability occurred before
age 26; the existence of an impairment
that satisfies the required level of marked
and severe functional limitations, if nec-
essary for eligibility; and, if necessary for
eligibility, confirmation of receipt of a
written diagnosis relating to the disability,
the name and address of the diagnosing
physician, the date of the diagnosis, and
identification of the applicable diagnostic

code from those listed on Form 5498-
QA. The final regulations may also pro-
vide that the certification may include in-
formation provided by the physician as to
the categorization of the disability that
could determine, under the particular
State's program, the appropriate fre-
quency of required recertifications.

# VI. RELIANCE

The Treasury Department and the IRS
intend that the final regulations, when is-
sued, will address the three identified is-
sues in the manner indicated in this notice.
Pending the issuance of final regulations,
taxpayers may rely on the guidance con-
tained in this notice. In particular, if a
certification used to open a qualified
ABLE account before the issuance of final
regulations is consistent with the discus-
sion in section V of this notice but does

not contain other information required by
the final regulations, the account will not
lose its qualification as an ABLE account
solely for that reason. To the extent that
additional information is required by the
final regulations, the final regulations will
provide a transition period to facilitate
compliance with the additional require-
ments.

# VII. DRAFTING INFORMATION

The principal authors of this notice are
Terri Harris and Sean Barnett, Office of
Associate Chief Counsel (Tax Exempt
and Government Entities). For further
information regarding this notice, con-
tact Ms. Harris at (202) 317-4541, or
Mr. Barnett at (202) 317-5800 (not toll-
free numbers).

Note. This revenue procedure will be reproduced as the next revision of IRS Publication 1167, General Rules and Specifications for
Substitute Forms and Schedules.

Rev. Proc. 2015-55

TABLE OF CONTENTS

Part 1 - INTRODUCTION TO SUBSTITUTE FORMS

789

Section 1.1 - Overview of Revenue Procedure 2015-55

789

Section 1.2 - IRS Contacts

790

Section 1.3 - What's New

791

Section 1.4 - Definitions

791

Section 1.5 - Agreement

792

Part 2 - GENERAL GUIDELINES FOR SUBMISSIONS AND APPROVALS.

793

Section 2.1 - General Specifications for Approval

793

Section 2.2 - Highlights of Permitted Changes and Requirements

795

Section 2.3 - Vouchers

795

Section 2.4 - Restrictions on Changes

797

Section 2.5 - Guidelines for Obtaining IRS Approval

798

Section 2.6 - Office of Management and Budget (OMB) Requirements for All Substitute Forms

801

Part 3 - PHYSICAL ASPECTS AND REQUIREMENTS

801

Section 3.1 - General Guidelines for Substitute Forms

801

Section 3.2 - Paper

803

Section 3.3 - Printing

804

Section 3.4 - Margins.

805

Section 3.5 - Examples of Approved Formats.

806

Section 3.6 - Miscellaneous Information for Substitute Forms

806

Part 4 - ADDITIONAL RESOURCES

807

Section 4.1 - Guidance From Other Revenue Procedures

807

Section 4.2 - Electronic Tax Products

807

Section 4.3 - System Requirements and Ordering Forms and Instructions

1158

Part 5 - REQUIREMENTS FOR SPECIFIC TAX RETURNS

807

Section 5.1 - Tax Returns (Forms 1040, 1040A, 1120, etc.)

807

Section 5.2 - Changes Permitted to Graphics (Forms 1040A and 1040)

808

Section 5.3 - Changes Permitted to Form 1040A Graphics

810

Section 5.4 - Changes Permitted to Form 1040 Graphics

810

Part 6 - FORMAT AND CONTENT OF SUBSTITUTE RETURNS

811

Section 6.1 - Acceptable Formats for Substitute Forms and Schedules

811

Section 6.2 - Additional Instructions for All Forms.

812

Part 7 - MISCELLANEOUS FORMS AND PROGRAMS

814

Section 7.1 - Specifications for Substitute Schedules K-1

814

Section 7.2 - Guidelines for Substitute Forms 8655

819

Part 8 - ADDITIONAL INFORMATION

819

Section 8.1 - Forms for Electronically Filed Returns

819

Section 8.2 - Effect on Other Documents

820

## Part 1 Introduction to Substitute Forms

### Section 1.1 - Overview of Revenue Procedure 2015-55

#### 1.1.1 Purpose

The purpose of this revenue procedure is to provide guidelines and general requirements for the
development, printing, and approval of substitute tax forms. Approval will be based on these guidelines.
After review and approval, submitted forms will be accepted as substitutes for official IRS forms.

#### 1.1.2 Unique Forms

Certain unique specialized forms require the use of other additional publications to supplement
this publication. See Part 4.

#### 1.1.3 Scope

The IRS accepts quality substitute tax forms that are consistent with the official forms and have no
adverse impact on our processing. The IRS Substitute Forms Unit administers the formal acceptance
and processing of these forms nationwide. While this program deals with paper documents, it also
reviews for approval other processing and filing forms such as those used in electronic filing.

Only those substitute forms that comply fully with these requirements are acceptable. This revenue
procedure is updated as required to reflect pertinent tax year form changes and to meet processing
and/or legislative requirements.

### 1.1.4 Forms Covered by This Revenue Procedure

The following types of forms are covered by this revenue procedure:

· IRS tax forms and their related schedules,

· Worksheets as they appear in instruction packages,

· Applications for permission to file returns electronically and forms used as required documentation
for electronically filed returns,

· Powers of Attorney,

· Over-the-counter estimated tax payment vouchers, and

· Forms and schedules relating to partnerships, exempt organizations, and employee plans.

### 1.1.5 Forms Not Covered by This Revenue Procedure

The following types of forms are not covered by this revenue procedure.

· W-2 and W-3 (see Pub. 1141 for information on these forms).

· W-2c and W-3c (see Pub. 1223 for information on these forms).

. 941, Schedule B (Form 941), Schedule D (Form 941), and Schedule R (Form 941) (see Pub. 4436
for information on these forms).

· 1096, 1097-BTC, 1098 series, 1099 series, 3921, 3922, 5498 series, W-2G, 1042-S, and 8935 (see
Pub. 1179 for information on these forms).

· 1095-A, 1094-B, 1095-B, 1094-C, and 1095-C (see Pub. 5223 for information on these forms).

· 8027 (see Pub. 1239 for information on this form).

· Forms 1040-ES (OCR) and 1041-ES (OCR), which may not be reproduced.

· Forms 5500 (for more information on these forms, see the Department of Labor website at
www.efast.dol.gov).

· Forms 5300, 5307, 8717, and 8905, bar-coded forms requiring separate approval.

· Forms used internally by the IRS.

· State tax forms.

· Forms developed outside the IRS.

## 1.1.6 Other Information Not Covered by This Revenue Procedure

The following information is not covered by this revenue procedure.

· Requests for information or documentation initiated by the IRS.

· General Instructions and Specific Instructions (these are not reviewed by the Substitute Forms
Program Unit).

## Section 1.2 - IRS Contacts

### 1.2.1 Where To Send Substitute Forms

Send your substitute forms for approval to the following offices (do not send forms with taxpayer
data):

Form

Office and Address

5500

Check EFAST2 information at the Department of Labor's website at www.efast.dol.gov

5300, 5307, 8717, and 8905

Sandra.K.Barnes@irs.gov

Software developer vouchers (see Sections 2.3.7 - 2.3.9)

Internal Revenue Service Attn: Doris Bethea 5000 Ellin Road, C5-226 Lanham, MD 20706 Doris.E.Bethea@irs.gov

Software developers and form producers must mail Forms 1094-B, 1095-B, 1094-C, and 1095-C for testing (for more information, see Pub. 5223)

scrips@irs.gov

All others covered by this publication

Internal Revenue Service Attn: Substitute Forms Program SE:W:CAR:MP:P:TP 5000 Ellin Road, C6-440 Lanham, MD 20706

For questions about:

· Forms W-2 and W-3, refer to Pub. 1141, General Rules and Specifications for Substitute Forms
W-2 and W-3.

· Forms W-2c and W-3c, refer to Pub. 1223, General Rules and Specifications for Substitute Forms
W-2c and S-3c.

· Form 941 and Schedules B, D, and R, refer to Pub. 4436, General Rules and Specifications for
Substitute Form 941, Schedule B (Form 941), Schedule D (Form 941), and Schedule R (Form 941).

· Forms 1096, 1097-BTC, 1098, 1099, 3921, 3022, 5498, W-2G, and 1042-S, refer to Pub. 1179,
General Rules and Specifications for Substitute Forms 1096, 1098, 1099, 5498, and Certain Other
Information Returns.

· For Forms 1095-A, 1094-B, 1095-B, 1094-C, and 1095-C, refer to Pub. 5223, General Rules &
Specifications for Affordable Care Act Substitute Forms 1095-A, 1094-B, 1095-B, 1094-C, and
1095-C.

· Form 8027, refer to Pub. 1239, Specifications for Filing Form 8027, Employer's Annual Informa-
tion Return of Tip Income and Allocated Tips, Electronically.

Section 1.3 - What's New

1.3.1 What's New

The following changes have been made to this year's revenue procedure. . . 01 Editorial Changes. We made editorial changes throughout and redundancies were eliminated as much as possible. . . 02 Publication 5223. Information about ACA forms has been included in this publication. For further information about ACA forms, see Pub. 5223, General Rules &amp; Specifications for Afford- able Care Act Substitute Forms 1095-A, 1094-B, 1095-B, 1094-C, and 1095-C.

Section 1.4 - Definitions

1.4.1 Substitute Form

A tax form (or related schedule) that differs in any way from the official version and is intended to replace the form that is printed and distributed by the IRS. This term also covers those approved substitute forms exhibited in this revenue procedure.

1.4.2 Printed/ Preprinted Form

A form produced using conventional printing processes, or a printed form which has been reproduced by photocopying or a similar process.

1.4.3 Preprinted Pin- Fed Form

A printed form that has marginal perforations for use with automated and high-speed printing equipment.

1.4.4 Computer Prepared Substitute Form

A preprinted form in which the taxpayer's tax entry information has been inserted by a computer, computer printer, or other computer-type equipment.

1.4.5 Computer Generated Substitute Tax Return or Form

A tax return or form that is entirely designed and printed using a computer printer on plain white paper. This return or form must conform to the physical layout of the corresponding IRS form, although the typeface may differ. The text should match the text on the officially printed form as closely as possible. Condensed text and abbreviations will be considered on a case-by-case basis. Exception. All jurats (perjury statements) must be reproduced verbatim.

1.4.6 Manually Prepared Form

A preprinted reproduced form in which the taxpayer's tax entry information is entered by an individual using a pen, pencil, typewriter, or other non-automated equipment.

1.4.7 Graphics

Parts of a printed tax form that are not tax amount entries or required text. Examples of graphics are line numbers, captions, shadings, special indicators, borders, rules, and strokes created by typesetting, photographics, photocomposition, etc.

1.4.8 Acceptable Reproduced Form

A legible photocopy or an exact replica of an original form.

1.4.9 Supporting Statement (Supplemental Schedule)

A document providing detailed information to support a line entry on an official or approved substitute form and filed with (attached to) a tax return. Note. A supporting statement is not a tax form and does not take the place of an official form.

1.4.10 Specific Form Terms

The following specific terms are used throughout this revenue procedure in reference to all substitute forms: format, sequence, line reference, item caption, and data entry field.

1.4.11 Format

The overall physical arrangement and general layout of a substitute form.

1.4.12 Sequence

Sequence is an integral part of the total format requirement. The substitute form should show the same numeric and logical placement order of data, as shown on the official form.

1.4.13 Line Reference

The line numbers, letters, or alphanumerics used to identify each captioned line on an official form. These line references are printed to the immediate left of each caption and/or data entry field.

1.4.14 Item Caption

The text on each line of a form, which identifies the data required.

1.4.15 Data Entry Field

Designated areas for the entry of data such as dollar amounts, quantities, responses, and checkboxes.

1.4.16 Advance Draft

A draft version of a new or revised form may be posted to the IRS website (www.irs.gov/ap/ picklist/list/draftTaxForms.html) for information purposes. Substitute forms may be submitted based on these advance drafts, but any submitter that receives forms approval based on these early drafts is responsible for monitoring and revising forms to mirror any revisions in the final forms provided by the IRS.

1.4.17 Approval

Generally, approval could be in writing or assumed after 20 business days from our receipt for forms that have not been substantially changed by the IRS. This does not apply to newly created or substantially revised IRS forms. However, the Substitute Forms Unit reserves the right to notify vendors of any inaccuracies even after 20 business days have lapsed.

Section 1.5 - Agreement

1.5.1 Important Stipulation of This Revenue Procedure

Any person or company who uses substitute forms and makes all or part of the changes specified in this revenue procedure agrees to the following stipulations. · The IRS presumes that any required changes are made in accordance with these procedures and will not be disruptive to the processing of the tax return. · Should any of the changes be disruptive to the IRS's processing of the tax return, the person or company agrees to accept the determination of the IRS as to whether the form may continue to be filed. . The person or company agrees to work with the IRS in correcting noted deficiencies. Notification of deficiencies may be made by any combination of letter, email, or phone contact and may include the request for the re-submission of unacceptable forms.

### 1.5.2 Response Policy and Stipulations

The Substitute Forms Unit (the Unit) will email confirmation of receipt of your forms submission,
if possible. Even if you do not receive emailed confirmation of receipt, you will receive an
emailed "submission receipt," which will provide feedback on your submission. If the Unit
anticipates problems in completing the review of your submission within the 20 business day
period, the Unit will send an interim email notifying you of the extended period for review.

Once the substitute forms have been approved by the Substitute Forms Unit, you can release them
after the final versions of the forms have been issued by the IRS. Before releasing the forms, you
are responsible for updating forms approved as draft and for making form changes we requested.

The policy has the following stipulations.

· This 20-day policy applies to electronic submissions only. It does not apply to substitute forms
submitted for approval by paper.

· The policy applies to submissions of 15 (optimal) or fewer items and submissions containing 75
pages or less. Submissions of more than 15 items may require additional review time.

· If you send a large number of submissions within a short period of time, processing may be delayed.

· Delays in processing could occur if the Unit finds significant errors in your submission or has
experienced an increase in submissions. The Unit will send you an interim email in this case.

· Any anticipated problems in processing your submission within the 20-day period will generate an
interim email on or about the 15th business day.

· If any significant inaccuracies are discovered after the 20-day period, the Unit reserves the right to
inform you and will require that changes be made to correct the inaccuracies.

· The policy does not apply to substantially revised forms or to new forms created by the IRS for
which you have already made an initial submission.

## Part 2 General Guidelines for Submissions and Approvals

### Section 2.1 - General Specifications for Approval

2.1.1 Overview

If you produce any substitute tax forms that fully comply or follow the changes specifically outlined by the Substitute Forms Unit, then you can generate your own substitute forms without further approval. If your changes are more extensive, you must get IRS approval before using substitute forms. More extensive changes include the use of a different typeface, font size, data entry font size and type layout, and the condensing of line item descriptions to save space. Note. The 20-day turnaround policy may not apply to extensive changes.

2.1.2

The Substitute Forms Program accepts substitute forms submissions via email. The email address is substituteforms@irs.gov. Please include the term "PDF Submissions" on the subject line. Follow these guidelines.

Email Submissions

· Your submission should include all the forms you wish to submit in one attached PDF file. Do not
email each form individually. Do not attach each individual form to an email.

· The emailed submission should include a maximum of 3 PDFs to include: a check sheet, a cover
letter or accompanying statement, and a single PDF that includes all of the forms listed on your
check sheet, cover letter, or accompanying statement.

· A submission should contain a maximum of 15 forms.

. An approval check sheet listing the forms you are submitting should always be included in the PDF
file along with the forms. Excluding the check sheet can slow the reviewing process down, which
can result in a delayed response to your submission. See a sample check sheet in Exhibit D.

· Optimize PDF files before submitting.

· The maximum allowable email attachment is 2.5 megabytes.

· The Substitute Forms Unit accepts zip files.

· To alleviate delays during the peak time of September through December, submit advance draft
forms as early as possible.

If the guidelines are not followed, you may need to resubmit.

Emailing PDF submissions will not expedite review and approval. Submitting your substitute forms
package via email is the preferred and suggested method for submitting forms for review. If, for some
reason, you are not able to email your submission(s), you can mail your submission(s) to: Internal
Revenue Service

Attn: Substitute Forms Program

SE:W:CAR:MP:P:TP

5000 Ellin Road, C6-440

Lanham, MD 20706

#### 2.1.3 Expediting the Process

Follow these basic guidelines for expediting the process:

· Always include a check sheet for the Substitute Forms Unit's response.

· Include an accompanying statement identifying most, if not all, of the deviations your substitute
forms may include which the official IRS version of the form does not.

· Follow the guidance in this publication for general substitute form guidelines. Follow the guidance
in specialized publications produced by the Substitute Forms Unit for other specific forms.

· To spread out the workload, send in draft versions of substitute forms when they are posted. Note.
Be sure to make any changes to approved drafts before releasing final versions.

#### 2.1.4 Schedules

Schedules are considered to be an integral part of a complete tax return. A schedule may be
included as part of a form or printed separately.

#### 2.1.5 Examples of Schedules That Must Be Submitted with the Return

Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, is an example of
this situation. Its Schedules A through U have pages numbered as part of the basic return. For
Form 706 to be considered for approval, the entire form, including Schedules A through PC, must
be submitted.

2.1.6
Examples of Schedules
That Can Be Submitted
Separately

However, Schedules C, D, E, and Form 1040 are examples of schedules that can be submitted
separately. Although printed by the IRS as a supplement to Form 1040, none of these schedules
are required to be filed with Form 1040. These schedules may be separated from Form 1040 and
submitted as substitute forms.

# 2.1.7 Use and Distribution of Unapproved Forms

The IRS is continuing a program to identify and contact tax return preparers, forms developers,
and software publishers who use or distribute unapproved forms that do not conform to this
revenue procedure. The use of unapproved forms hinders the processing of the returns.

# Section 2.2 - Highlights of Permitted Changes and Requirements

## 2.2.1 Methods of Reproducing Internal Revenue Service Forms

There are methods of reproducing IRS printed tax forms suitable for use as substitutes without
prior approval:

. You can photocopy most tax forms and use them instead of the official ones. The entire substitute
form, including entries, must be legible.

· You can reproduce any current tax form as cut sheets, snap sets, and marginally punched, pin-fed
forms as long as you use an official IRS version as the master copy.

. You can reproduce a form that requires a signature as a valid substitute form. Many tax forms
(including returns) have a taxpayer signature requirement as part of the form layout. The jurat/
perjury statement/signature line areas must be retained and worded exactly as on the official form.
The requirement for a signature, by itself, does not prohibit a tax form from being properly
computer generated.

## Section 2.3 - Vouchers

### 2.3.1 Overview

All payment vouchers (Forms 940-V, 941-V, 943-V, 945-V, 1040-ES, 1040-V, 1041-V, and
2290-V) must be reproduced in conjunction with their forms. Substitute vouchers must be the
same size as the officially printed vouchers. Vouchers that are prepared for printing on a laser
printer may include a scan line.

### 2.3.2 Scan Line Specifications

NNNNNNNNNAA
XXXX
NN
N
NNNNNN

NNN

Item:

D
E

A.
Social Security Number/Employer Identification Number (SSN/EIN) has 9 numeric (N)
spaces.

B.
Check Digits have 2 alpha (A) spaces.

C.
Name Control has 4 alphanumeric (X) spaces.

D.
Master File Tax (MFT) Code has 2 numeric (N) spaces (see below).

E.
Taxpayer Identification Number (TIN) Type has 1 numeric (N) space (see below).

F.
Tax Period has 6 numeric (N) spaces in year/month format (YYYYMM).

G.
Transaction Code has 3 numeric (N) spaces.

### 2.3.3 MFT Code

Code Number for Forms:

· 1040 (family) - 30,

· 940 - 10,

· 941 - 01,

· 943 - 11,

· 944 - 14,

· 945 - 16,

· 1041-V - 05,

· 2290 - 60, and

· 4868 - 30.

### 2.3.4 TIN Type

Type Number for:

· Form 1040 (family), 4868 - 0, and

· Forms 940, 941, 943, 944, 945, 1041-V, and 2290 - 2.

### 2.3.5 Voucher Size

The voucher size must be exactly 8.0" x 3.25" (Forms 1040-ES and 1041-ES must be 7.625" x
3.0"). The document scan line must be vertically positioned 0.25 inches from the bottom of the
scan line to the bottom of the voucher. The last character on the right of the scan line must be
placed 3.5 inches from the right leading edge of the document. The minimum required horizontal
clear space between characters is .014 inches. The line to be scanned must have a clear band 0.25
inches in height from top to bottom of the scan line, and from border to border of the document.
"Clear band" means no printing except for dropout ink.

### 2.3.6 Print and Paper Weight

Vouchers must be imaged in black ink using OCR A, OCR B, or Courier 10. These fonts may not
be mixed in the scan line. The horizontal character pitch is 10 CPI. The preferred paper weight
is 20 to 24 pound OCR bond.

### 2.3.7 Specifications for Software Developers

Certain vouchers may be reproduced for use in the IRS lockbox system. These include the
1040-V, 1040-ES, 1041-V, the 940 family, and 2290 vouchers. Software developers must
follow these specific guidelines to produce scannable vouchers strictly for lockbox purposes. Also
see Exhibit C:

· The total depth must be 3.25 inches.

· The scan line must be .5 inches from the bottom edge and 1.75 inches from the left edge of the
voucher and left-justified.

· Software developers vouchers must be 8.5 inches wide (instead of 8 inches with a cut line).
Therefore, no vertical cut line is required.

· Scan line positioning must be exact.

. Do not use the over-the-counter format voucher and add the scan line to it.

· All scanned data must be in 12-point OCR A font.

· The 4-digit NACTP ID code should be placed under the payment indicator arrow.

· Windowed envelopes must not display the scan line in order to avoid disclosure and privacy issues.

Note. All software developers must ensure that their software uses OCR A font so taxpayers will be
able to print the vouchers in the correct font.

# 2.3.8 Specific Line Positions

Follow these line specifications for entering taxpayer data in the lockbox vouchers.

Line Specifications for Taxpayer Data:

Start Row

Start Column

Width

End Column

Taxpayer Name

Taxpayer Address, Apt.

Taxpayer City, State,

ZIP

Foreign Country Name

Foreign Province/ Country

Foreign Postal Code Line Specifications for Mail To Data:

Mail Name

Mail Address

Mail City, State, ZIP

Line Specifications for:

n/a

Scan Line

# 2.3.9 How to Get Approval

To receive approval, please send in 25 voucher samples yearly for each form type or scenarios,
by December 12, 2016, for testing to the following address.

Internal Revenue Service

Attn: Doris Bethea, C5-226

5000 Ellin Road

Lanham, MD 20706

For further information, contact Doris Bethea, Doris.E.Bethea@irs.gov, at 240-613-5922.

# Section 2.4 - Restrictions on Changes

## 2.4.1 What You Cannot Do to Forms Suitable for Substitute Tax Forms

You cannot, without prior IRS approval, change any IRS tax form or use your own (non-
approved) versions including graphics, unless specifically permitted by this revenue procedure.
See Sections 2.5.7 to 2.5.11.

You cannot adjust any of the graphics on Forms 1040, 1040A, and 1040EZ (except in those areas
specified in Part 5 of this revenue procedure) without prior approval from the IRS Substitute
Forms Unit.

You cannot re-arrange or re-distribute data entry fields, and/or allow data entry fields to flow from
one page onto the next (i.e., each page of a substitute form must contain the exact number of data
entry fields as there are on the official IRS form). The order and flow of information on the
substitute form must be identical to the IRS version of the form. Some reproduced substitute
recipient statements can be in different formation, provided that the information required by the
regulations is supplied to the recipient. Publications for specific substitute forms will state these
allowances.

Note. The 20-day turnaround policy may not apply to extensive changes.

# Section 2.5 - Guidelines for Obtaining IRS Approval

2.5.1 Basic Requirements

Preparers who submit substitute privately designed, privately printed, computer-generated, or computer-prepared tax forms must develop these substitutes using the guidelines established in this part. These forms, unless there is an exception outlined by the revenue procedure, must be approved by the IRS before being filed.

2.5.2 Conditional Approval Based on Advanced Drafts

The IRS cannot grant final approval of your substitute form until the official form has been published. However, the IRS posts advance draft forms on its website at: www.irs.gov/app/ picklist/list/draftTaxForms.html.

We encourage submission of proposed substitutes of these advance draft forms and will grant conditional approval based solely on these early drafts. These advance drafts are subject to significant change before forms are finalized. If these advance drafts are used as the basis for your substitute forms, you will be responsible for subsequently updating your final forms to agree with the final official version. These revisions need not be resubmitted for further approval.

Note. Approval of forms based on advance drafts will not be granted after the final version of an official form is published.

2.5.3 Submission Procedures

Follow these general guidelines when submitting substitute forms for approval.

· Any alteration of forms must be within the limits acceptable to the IRS. It is possible that, from one filing period to another, a change in law or a change in internal need (processing, audit, compliance, etc.) may change the allowable limits for the alteration of the official form. · When approval of any substitute form (other than those exceptions specified in Part 1, Section 1.2 - IRS Contacts) is requested, a sample of the proposed substitute form should be emailed for consideration to the Substitute Forms Unit at the address shown in Section 1.2.1. · Schedules and forms (for example, Forms 3468, 4136, etc.) that can be used with more than one type of return (for example, 1040, 1041, 1120, etc.) should be submitted only once for approval, regardless of the number of different tax returns with which they may be associated. Also, all pages of multi-page forms or returns should be submitted in the same package.

2.5.4 Approving Offices

Because only the Substitute Forms Unit is authorized to approve substitute forms, unnecessary delays may occur if forms are sent to the wrong office. You may receive an interim letter about the delay. The Substitute Forms Unit may then coordinate the response with the originator responsible for revising that particular form. Such coordination may include allowing the originator to officially approve the form. No IRS office is authorized to allow deviations from this revenue procedure.

2.5.5 IRS Review of Software Programs, etc.

The IRS does not review or approve the logic of specific software programs, nor does the IRS confirm the calculations on the forms produced by these programs. The accuracy of the program remains the responsibility of the software package developer, distributor, or user.

The Substitute Forms Unit is primarily concerned with the pre-filing quality review of the final forms that are expected to be processed by IRS field offices. For this purpose, you should submit forms without including any taxpayer information such as names, addresses, monetary amounts, etc.

If the software used is programmed to produce copies with populated fields only, then you must use dummy information . This will allow the Unit to review and provide feedback or approval. Vendors should use "0" for all number values and "X" for any information that requires alpha characters.

2.5.6 When To Send Proposed Substitutes

Proposed substitutes, which are required to be submitted per this revenue procedure, should be sent as much in advance of the filing period as possible. This is to allow adequate time for analysis and response.

2.5.7 Accompanying Statement

When submitting sample substitutes, you should include an accompanying statement that lists each form number and its changes from the official form (position, arrangement, appearance, line numbers, additions, deletions, etc.). With each of the items you should include a detailed reason for the change.

When requesting approval, please include a check sheet. Check sheets expedite the approval process. The check sheet may look like the example in Exhibit D displayed in the back of this procedure or may be one of your own design. Please include your email address on the check sheet. If the Unit will need to fax the check sheet, the number will be requested at that time.

2.5.8 Approval/Non- Approval Notice

The Substitute Forms Unit will email the check sheet or an approval letter to the originator, unless: · The requester has asked for a faxed response or for a formal letter, or · Significant corrections to the submitted forms are required.

Notice of approval may impose qualifications before using the substitutes. Notices of unapproved forms may specify the changes required for approval and require re-submission of the form(s) in question. When appropriate, you will be contacted by telephone.

2.5.9 Duration of Approval

Most signature tax returns and many of their schedules and related forms have the tax (liability) year printed in the upper right corner. Approvals for these annual forms are usually good for one calendar year (January through December of the year of filing). Quarterly tax forms in the 94X series and Form 720 require approval for any quarter in which the form has been revised.

Because changes are usually made to an annual form every year, each new filing season generally requires a new submission of a substitute form. Very rarely is updating the preprinted year the only change made to an annual form. However, if no significant content, formatting, or layout changes were made to a tax form, then review and approval received for the prior tax year can be carried over into the current tax year.

2.5.10 Limited Continued Use of an Approved Change

Limited changes approved for one tax year may be allowed for the same form in the following tax year. Examples are the use of abbreviated words, revised form spacing, compressed text lines, and shortened captions, etc., which do not change the integrity of lines or text on the official forms.

If substantial changes are made to the form, new substitutes must be submitted for approval. If only minor editorial changes are made to the form, it is not subject to review. It is the responsibility of each vendor who has been granted permission to use substitute forms to monitor and revise forms to mirror any revisions to official forms made by the Service. If there are any questions, please contact the Substitute Forms Unit.

2.5.11 When Approval Is Not Required

If you received approval for a specific change on a form last year, you may make the same change this year if the item is still present on the official form: · The new substitute form does not have to be submitted to the IRS and approval based on that change is not required. . However, the new substitute form must conform to the official current year IRS form in other respects: date, Office of Management and Budget (OMB) approval number, attachment sequence number, Paperwork Reduction Act Notice statement, arrangement, item caption, line number, line reference, data sequence, etc. · The new substitute form must also comply with changes to the guidelines in this revenue procedure. The procedure may have eliminated, added to, or otherwise changed the guideline(s) that affected the change approved in the prior year. · An approved change is authorized only for the period from a prior tax year substitute form to a current tax year substitute form.

Exception. Forms with temporary, limited, or interim approvals (or with approvals that state a change is not allowed in any other tax year) are subject to review in subsequent years.

2.5.12 Continuous-Use Forms

Forms without preprinted tax years are called "continuous-use" forms. Continuous-use forms are revised when a legislative change affects the form or a change will facilitate processing. These forms frequently have revision dates that are valid for longer than one year.

2.5.13 Required Copies

Generally, you must send us one copy of each form being submitted for approval. However, if you are producing forms for different computer systems (for example, Microsoft compatible vs. Apple) or different types of printers and these forms differ significantly in appearance, submit one copy for each type of system or printer.

2.5.14 Requestor's Responsibility

Following receipt of an initial approval for a substitute forms package or a software output program to print substitute forms, it is the responsibility of the originator (designer or distributor) to provide client firms or individuals with forms that meet the IRS's requirements for continuing acceptability. Examples of this responsibility include:

· Using the prescribed print paper, font size, legibility, state tax data deletion, etc., and · Informing all users of substitute forms of the legal requirements of the Paperwork Reduction Act Notice, which is generally found in the instructions for the official IRS forms.

2.5.15 Source Code

The Substitute Forms Unit will assign a unique source code to each firm that submits substitute paper forms for approval. This source code will be a permanent identifier that must be used on every submission by a particular firm. The source code consists of three alpha characters and should generally be printed under or to the left of the "Paperwork Reduction Act" statement. Vendors must ensure that the source code is not printed too close to or within the left 1/2 inch margin to avoid the source code from being cut off during printing.

## Section 2.6 - Office of Management and Budget (OMB) Requirements for All Substitute Forms

2.6.1 OMB Requirements for All Substitute Forms

There are legal requirements of the Paperwork Reduction Act of 1995 (the Act). Public Law 104-13 requires the following.

· OMB approves all IRS tax forms that are subject to the Act. · Each IRS form contains (in the upper right corner) the OMB number, if assigned. · Each IRS form (or its instructions) states why the IRS needs the information, how it will be used, and whether or not the information is required to be furnished to the IRS. This information must be provided to every user of official or substitute IRS forms or instructions.

2.6.2

On forms that have been assigned OMB numbers:

Application of the Paperwork Reduction Act

· All substitute forms must contain in the upper right corner the OMB number that is on the official form, and

· The required format is: OMB No. 1545-XXXX (Preferred) or OMB # 1545-XXXX (Acceptable).

2.6.3 Required Explanation to Users

You must inform the users of your substitute forms of the IRS use and collection requirements stated in the instructions for official IRS forms.

. If you provide your users or customers with the official IRS instructions, each form must retain either the Paperwork Reduction Act Notice (or Disclosure, Privacy Act, and Paperwork Reduction Act Notice), or a reference to it as the IRS does on the official forms (usually in the lower left corner of the forms). · This notice reads, in part, "We ask for tax return information to carry out the tax laws of the United States .... "

Note. If no IRS instructions are provided to users of your forms, the exact text of the Paperwork Reduction Act Notice (or Disclosure, Privacy Act, and Paperwork Reduction Act Notice) must be furnished separately or on the form.

2.6.4 Finding the OMB Number and Paperwork Reduction Act Notice

The OMB number and the Paperwork Reduction Act Notice, or references to it, may be found printed on an official form (or its instructions). The number and the notice are included on the official paper format and in other formats produced by the IRS.

Part 3 Physical Aspects and Requirements

Section 3.1 - General Guidelines for Substitute Forms

3.1.1 General Information

The official form is the standard. Because a substitute form is a variation from the official form, you should know the requirements of the official form for the year of use before you modify it to meet your needs. To obtain the most frequently used tax forms, visit www.irs.gov/orderforms.

### 3.1.2 Design

Each form must follow the design of the official form as to format arrangement, item caption, line
numbers, line references, and sequence.

### 3.1.3 State Tax Information Prohibited

Generally, state tax information must not appear on the federal tax return, associated form,
or schedule that is filed with the IRS. Exceptions occur when amounts are claimed on, or
required by, the federal return (for example, state and local income taxes, on Schedule A of
Form 1040).

### 3.1.4 Vertical Alignment of Amount Fields

IF a form is to be ...

THEN ...

Manually prepared

1. The entry column must have a vertical line or some type of indicator in the amount field to separate dollars from cents.

2. The cents column must be at least 3 10" wide.

Computer generated

1. . Vertically align the amount entry fields where

possible.

2. Use one of the following amount formats:

a) 0,000,000, or

b) 0,000,000.00.

Computer prepared

1. You may remove the vertical line in the amount field that separates dollars from cents.

2. Use one of the following amount formats: a) 0,000,000, or b) 0,000,000.00.

### 3.1.5 Attachment Sequence Number

Many individual income tax forms have a required "attachment sequence number" located just
below the year designation in the upper right corner of the form. The IRS uses this number to
indicate the order in which forms are to be attached to the tax return for processing. Some of the
attachment sequence numbers may change from year to year.

The following applies to computer-prepared forms.

· The sequence number may be printed in no less than 12-point boldface type and centered below the
form's year designation.

· The sequence number may also be placed following the year designation for the tax form and
separated with an asterisk.

· The actual number may be printed without labeling it the "Attachment

· Sequence Number."

### 3.1.6 Assembly of Forms

When developing software or forms for use by others, please inform your customers/clients that
the order in which the forms are arranged may affect the processing of the package. A return must
be arranged in the order indicated below.

IF the form is ...

THEN the sequence is ...

1040

· Form 1040, and · Schedules and forms in attach- ment sequence number order.

Any other tax return (Form 1120, 1120S, 1065, 1041, etc.)

· The tax returns, · Directly associated schedules (Schedule D, etc.), . Directly associated forms,

Additional schedules in alphabetical order, and · Additional forms in numerical order.

Supporting statements should then follow in the same sequence as the forms they support.
Additional information required should be attached last.

In this way, the forms are received in the order in which they must be processed. If you do not
send returns to the IRS in order, processing may be delayed.

### 3.1.7 Paid Preparer's Information and Signature Area

On Forms 1040EZ, 1040A, 1040, and 1120, etc., the "Paid Preparer Use Only" area may not be
rearranged or relocated. You may, however, add three extra lines to the paid preparer's address
area without prior approval. This applies to other tax forms as well.

### 3.1.8 Some Common Reasons for Requiring Changes to Substitute Forms

Some reasons that substitute form submissions may require changes include the following.

· Failing to preprint certain amounts in entry spaces. Shading areas incorrectly.

· Failing to include a reference to the location of the Paperwork Reduction

· Act Notice.

· Not including parentheses for losses.

· Not including "Attach Statement" when appropriate.

· Including line references or entry spaces that do not match the official form.

· Printing text that is different from the official form.

· Altering the jurat (perjury statement).

### Section 3.2 - Paper

#### 3.2.1 Paper Content

The paper must be:

· Chemical wood writing paper that is equal to or better than the quality used for the official form,

· At least 18 pound (17" x 22", 500 sheets), or

· At least 50 pound offset book (25" x 38", 500 sheets).

#### 3.2.2 Paper with Chemical Transfer Properties

There are several kinds of paper prohibited for substitute forms. These are:

1\. Carbon-bonded paper, and

2\. Chemical transfer paper except when the following specifications are met:

a. Each ply within the chemical transfer set of forms must be labeled, and

b. Only the top ply (ply one and white in color), the one that contains chemical on the back
only (coated back), may be filed with the IRS.

3.2.3 Example

A set containing three plies would be constructed as follows: ply one (coated back), "Federal Return, File with IRS"; ply two (coated front and back), "Taxpayer's copy"; and ply three (coated front), "Preparer's copy." The file designation, "Federal Return, File with IRS" for ply one, must be printed in the bottom right margin (just below the last line of the form) in 12-point boldface type. It is not mandatory, but recommended, that the file designation "Federal Return, File with IRS" be printed in a contrasting ink for visual emphasis.

3.2.4 Paper and Ink Color

It is preferred that the color and opacity of paper substantially duplicates that of the original form. This means that your substitute must be printed in black ink and may be on white or on the colored paper the IRS form is printed on. Forms 1040A and 1040 substitute reproductions may be in black ink without the colored shading. The only exception to this rule is Form 1041-ES, which should be printed with a PMS 100 yellow shading in the color screened area. This is necessary to assist us in expeditiously separating this form from the very similar Form 1040-ES.

3.2.5 Page Size

Substitute or reproduced forms and computer-prepared/-generated substitutes may be the same size as the official form or they may be the standard commercial size (81/2" x 11"). The thickness of the stock cannot be less than .003 inches.

Section 3.3 - Printing

3.3.1 Printing Medium

The private printing of all substitute tax forms must be by conventional printing processes, photocopying, computer graphics, or similar reproduction processes.

3.3.2 Legibility

All forms must have a high standard of legibility as to printing, reproduction, and fill-in matter. Entries of taxpayer data may be no smaller than eight points. The IRS reserves the right to reject those with poor legibility. The ink and printing method used must ensure that no part of a form (including text, graphics, data entries, etc.) develops "smears" or similar quality deterioration. This standard must be followed for any subsequent copies or reproductions made from an approved master substitute form, either during preparation or during IRS processing.

3.3.3 Type Font

Many federal tax forms are printed using "Helvetica" as the basic type font. It is preferred that you use this type font when composing substitute forms.

3.3.4 Print Spacing

Substitute forms should be printed using a 6 lines/inch vertical print option. They should also be printed horizontally in 10 pitch pica (that is, 10 print characters per inch) or 12 pitch elite (that is, 12 print positions per inch).

3.3.5 Image Size

The image size of a printed substitute form should be as close as possible to that of the official form. You may omit any text on both computer-prepared and computer-generated forms that is solely instructional.

3.3.6 Title Area Changes

To allow a large top margin for marginal printing and more lines per page, the title line(s) for all substitute forms (not including the form's year designation and sequence number, when present), may be photographically reduced by 40 percent or reset as one line of type. When reset as one line, the type size may be no smaller than 14-point. You may omit "Department of the Treasury-Internal Revenue Service" and all reference to instructions in the form's title area.

3.3.7 Remove Government Printing Office Symbol and IRS Catalog Number

When privately printing substitute tax forms, the Government Printing Office (GPO) symbol and/or jacket number must be removed. In the same place using the same type size, print the Employer Identification Number (EIN) of the printer or designer or the IRS assigned source code. (We prefer this last number be printed in the lower left area of the first page of each form.) Also, remove the IRS Catalog Number (Cat. No.) and the recycle symbol if the substitute is not produced on recycled paper.

3.3.8 Printing on One Side of Paper

Even though the IRS uses both sides of the paper for printing official paper forms or schedules, the IRS will accept your forms if only one side of the paper is used.

3.3.9 Photocopy Equipment

The IRS does not undertake to approve or disapprove the specific equipment or process used in reproducing official forms. Photocopies of forms must be entirely legible and satisfy the conditions stated in this and other revenue procedures.

3.3.10 Reproductions

Reproductions of official forms and substitute forms that do not meet the requirements of this revenue procedure may not be filed instead of the official forms. Illegible photocopies are subject to being returned to the filer for re-submission of legible copies.

3.3.11 Removal of Instructions

Generally, you may remove references to instructions. No prior approval is needed. However, in some instances, you may be requested to include references to instructions.

Exception. The words "For Paperwork Reduction Act Notice, see instructions" must be retained, or a similar statement indicating the location of the Notice, must be provided on each form.

Section 3.4 - Margins

3.4.1 Margin Size

The format of a reproduced tax form when printed on the page must have margins on all sides at least as large as the margins on the official form. This allows room for IRS employees to make necessary entries on the form during processing. A 41/2-inch to 41/4-inch margin must be maintained across the top, bottom, and both sides of all substitute forms. · The marginal, perforated strips containing pin-fed holes must be removed from all forms prior to filing with the IRS.

##### 3.4.2 Marginal Printing

Prior approval is not required for the marginal printing allowed when printed on an official form
or on a photocopy of an official form.

· With the exception of the actual tax forms (for example, Forms 1040, 1040A, 1040EZ, 1120,
940, 941, etc.), you may print in the left vertical margin and in the left half of the bottom
margin.

· Printing is never allowed in the top right margin of the tax form (for example, Forms 1040,
1040A, 1040EZ, 1120, 940, 941, etc.). The Service uses this area to imprint a Document
Locator Number for each return. There are no exceptions to this requirement.

# Section 3.5 - Examples of Approved Formats

## 3.5.1 Examples of Approved Formats From the Exhibits

Two sets of exhibits (Exhibits A-1 and 2; B-1 and 2) at the end of this revenue procedure are
examples of how these guidelines may be used. Vertical spacing is six (6) lines to the inch. A
combination of upper-case and lower-case print font is acceptable in producing substitute forms.

The same logic may be applied to any IRS form that is normally reproducible as a substitute form,
with the exception of the tax return forms as discussed elsewhere.

Note. These exhibits may be from a prior year and are not to be used as current substitute forms.

# Section 3.6 - Miscellaneous Information for Substitute Forms

## 3.6.1 Filing Substitute Forms

To be acceptable for filing, a substitute form must print out in a format that will allow the filer
to follow the same instructions that accompany official forms. The form must be legible, must be
on the appropriately sized paper, and must include a jurat (perjury statement) where one appears
on the published form.

## 3.6.2 Caution to Software Publishers

The IRS has received returns produced by software packages with approved output where either
the form heading was altered or the lines were spaced irregularly. This produces an illegible or
unrecognizable return or a return with the wrong number of pages. We realize that many of these
problems are caused by individual printer differences but they may delay input of return data and,
in some cases, generate correspondence to the taxpayer. Therefore, in the instructions to the
purchasers of your product, both individual and professional, please stress that their returns will
be processed more efficiently if they are properly formatted. This includes:

· Having the correct form numbers, six-digit form identifying numbers, and titles at the top of
the return, and

· Submitting the same number of pages as if the form were an official IRS form with the line
items on the proper pages.

## 3.6.3 Caution to Producers of Software Packages

If you are producing a software package that generates name and address data onto the tax return,
do not under any circumstances program either the IRS preprinted check digits or a practitioner
derived name control to appear on any return prepared and filed with the IRS.

### 3.6.4 Programming to Print Forms

Whenever applicable:

. Use only the following label information format for single filers: JOHN Q. DOE 000 OAK
DRIVE HOMETOWN, STATE 00000

. Use only the following information for joint filers: JOHN Q. DOE MARY Q. DOE 000 OAK
DRIVE HOMETOWN, STATE 00000

#### Part 4 Additional Resources

##### Section 4.1 - Guidance From Other Revenue Procedures

## 4.1.1 General

The IRS publications listed below provide guidance for substitute tax forms not covered in this
revenue procedure. These publications are available on the IRS website. Identify the requested
document by the IRS publication number.

· Pub. 1141, General Rules and Specifications for Substitute Forms W-2 and W-3.

· Pub. 1179, Rules and Specifications for Substitute Forms 1096, 1098, 1099, 5498, W-2G, and
1042-S.

· Pub. 1223, General Rules and Specifications for Substitute Forms W-2c and W-3c.

· Pub. 4436, General Rules and Specifications for Substitute Form 941, Schedule B (Form 941),
Schedule D (Form 941), and Schedule R (Form 941).

· Pub. 5223, General Rules and Specifications for Affordable Care Act Substitute Forms 1095-A,
1094-B, 1095-B, 1094-C, and 1095-C.

# Section 4.2 - Electronic Tax Products

## 4.2.1 The IRS Website

Copies of tax forms, their instructions, publications, fillable forms, and prior year forms and
publications, may be found on the IRS website at www.irs,gov/ formspubs.

Draft forms and instructions may be found at www.irs.gov/draftforms.
Other tax-related information may be found at www.irs.gov.

## 4.2.2 System Requirements and Ordering Forms and Instructions

For system requirements, contact the National Technical Information Service (NTIS) at www.n-
tis.gov. Prices are subject to change.

You can order IRS forms and other tax material at IRS.gov. Click on the Forms and Pubs link
and then the Order Forms and Pubs link.

Part 5
Requirements for Specific Tax Returns

# Section 5.1 - Tax Returns (Forms 1040, 1040A, 1120, etc.)

## 5.1.1 Acceptable Forms

Tax forms (such as Forms 1040, 1040A, and 1120) require a signature and establish tax liability.
Computer-generated versions are acceptable under the following conditions.

· These substitute forms must be printed on plain white paper. Substitute forms must
conform to the physical layout of the corresponding IRS form although the typeface may
differ. The text should match the text on the officially published form as closely as
possible. Condensed text and abbreviations will be considered on a case-by-case basis.
Caution. All jurats (perjury statements) must be reproduced verbatim. No text can be
added, deleted, or changed in meaning.

· Various computer graphic print media such as laser printing, inkjet printing, etc., may be used to
produce the substitute forms.

· The substitute form must be the same number of pages and contain the same line text as the official
form.

· All substitute forms must be submitted for approval prior to their original use. You do not need
approval for a substitute form if its only change is the preprinted year and you had received a prior
year approval letter.

Exception. If the approval letter specifies a one-time exception for your form, the next year's
form must be approved.

## 5.1.2 Prohibited Forms

The following are prohibited.

Computer-generated tax forms (for example, Form 1040, etc.) on lined or color barred paper.

Tax forms that differ from the official IRS forms in a manner that makes them non-standard or
unable to process.

## 5.1.3 Changes Permitted to Forms 1040 and 1040A

Certain changes (listed in Sections 5.2 through 5.4) are permitted to the graphics of the form
without prior approval, but these changes apply to only acceptable preprinted forms. Changes not
requiring prior approval are good only for the annual filing period, which is the current tax year.
Such changes are valid in subsequent years only if the official form does not change.

## 5.1.4 Other Changes Not Listed

All changes not listed in Sections 5.2 through 5.4 require approval from the IRS before the form
can be filed.

### Section 5.2 - Changes Permitted to Graphics (Forms 1040A and 1040)

#### 5.2.1 Adjustments

You may make minor vertical and horizontal spacing adjustments to allow for computer or word
processing printing. This includes widening the amount columns or tax entry areas if the
adjustments comply with other provisions stated in revenue procedures. No prior approval is
needed for these changes.

#### 5.2.2 Name and Address Area

The horizontal rules and instructions within the name and address area may be removed and the
entire area left blank. No line or instruction can remain in the area. The heavy ruled border (when
present) that outlines the name, address area, and social security number must not be removed,
relocated, expanded, or contracted.

#### 5.2.3 Required Format

When the name and address area is left blank, the following format must be used when printing
the taxpayer's name and address.

· 1st name line (35 characters maximum).

· 2nd name line (35 characters maximum).

· In-care-of name line (35 characters maximum).

· City, state (25 characters maximum), one blank character, and ZIP code.

##### 5.2.4 Conventional Name and Address Data

When there is no in-care-of name line, the name and address will consist of only three lines
(single filer) or four lines (joint filer). Name and address (joint filer) with no in-care-of name line:

JOHN Q. DOE
MARY Q. DOE
000 ANYWHERE ST., APT. 000
ANYTOWN, STATE 00000

5.2.5
Example of In- Care-Of
Name Line

Name and address (single filer) with in-care-of name line:

JOHN Q. DOE

C/O JOHN R. DOE

0000 SOMEWHERE AVE.

SAMETOWN, STATE 00000

5.2.6
SSN and Employer
Identification Number
(EIN) Area

The broken vertical lines separating the format arrangement of the SSN/EIN may be removed.
When the vertical lines are removed, the SSN and EIN formats must be 000-00-0000 or
00-0000000, respectively.

5.2.7
Cents Column

. You may remove the vertical rule that separates the dollars from the cents.

. All entries in the amount column should have a decimal point following the whole dollar amounts
whether or not the vertical line that separates the dollars from the cents is present.

· You may omit printing the cents, but all amounts entered on the form must follow a consistent
format. You are strongly urged to round off the figures to whole dollar amounts, following the
official form instructions.

· When several amounts are summed together, the total should be rounded off after addition (that is,
individual amounts should not be rounded off for computation purposes).

· When printing money amounts, you must use one of the following formats: (a) 0,000,000 .; (b)
0,000,000.00.

· When there is no entry for a line, leave the line blank.

5.2.8
"Paid Preparer's Use
Only" Area

On all forms, the paid preparer's information area may not be rearranged or relocated. You may
add three lines and remove the horizontal rules in the preparer's address area.

# Section 5.3 - Changes Permitted to Form 1040A Graphics

5.3.1 General

No prior approval is needed for the following changes (for use with computer-prepared forms only).

5.3.2 Line 4 of Form 1040A

This line may be compressed horizontally (to allow for same line entry for the name of the qualifying child) by using the following caption: "Head of household; child's name" (name field).

5.3.3 Other Lines

Any line with text that takes up two or more vertical lines may be compressed to one line by using contractions, etc., and by removing instructional references.

5.3.4 Page 2 of Form 1040A

All lines must be present and numbered in the order shown on the official form. These lines may also be compressed.

5.3.5 Color Screening

It is not necessary to duplicate the color screening used on the official form. A substitute Form 1040A may be printed in black and white only with no color screening.

5.3.6 Other Changes Prohibited

No other changes to the Form 1040A graphics are allowed without prior approval except for the removal of instructions and references to instructions.

Section 5.4 - Changes Permitted to Form 1040 Graphics

5.4.1 General

No prior approval is needed for the following changes (for use with computer-prepared forms only). Specific line numbers in the following headings may have changed due to tax law changes.

5.4.2 Line 4 of Form 1040

This line may be compressed horizontally (to allow for a larger entry area for the name of the qualifying child) by using the following caption: "Head of household; child's name" (name field).

5.4.3 Line 6c of Form 1040

The vertical lines separating columns (1) through (4) may be removed. The captions may be shortened to allow a one-line caption for each column.

5.4.4 Other Lines

Any other line with text that takes up two or more vertical lines may be compressed to one line by using contractions, etc., and by removing instructional references.

5.4.5 Line 21 - Other Income

The fill-in portion of this line may be expanded vertically to three lines. The amount entry box must remain a single entry.

5.4.6 Line 44 of Form 1040 - Tax

You may change the line caption to read "Tax" and computer print the words "Total includes tax from" and either "Form(s) 8814" or "Form 4972" or "962 election." If both forms are used, print both form numbers. This specific line number may have changed.

5.4.7 Line 54 of Form 1040 - Other Credits

You may change the caption to read: "Other credits from Form" and computer print only the form(s) that apply.

5.4.8 Color Screening

It is not necessary to duplicate the color screening used on the official form. A substitute Form 1040 may be printed in black and white only with no color screening.

5.4.9 Other Changes Prohibited

No other changes to the Form 1040 graphics are permitted without prior approval except for the removal of instructions and references to instructions.

Part 6 Format and Content of Substitute Returns

Section 6.1 - Acceptable Formats for Substitute Forms and Schedules

6.1.1 Exhibits and Use of Acceptable Formats

Exhibits of acceptable formats for Schedule A, usually attached to the Form 1040, and Form 2106-EZ are shown in the exhibits section of this revenue procedure.

· If your computer-generated forms appear exactly like the exhibits, no prior authorization is needed. · You may computer-generate forms not shown here, but you must design them by following the manner and style of those in the exhibits section. · Take care to observe other requirements and conditions in this revenue procedure. The IRS encourages the submission of all proposed forms covered by this revenue procedure.

6.1.2 Instructions

The format of each substitute form or schedule must follow the format of the official form or schedule as to item captions, line references, line numbers, sequence, form arrangement and format, etc. Basically, try to make the form look like the official one, with readability and consistency being primary factors. You may use periods and/or other similar special characters to separate the various parts and sections of the form. Do not use alpha or numeric characters for these purposes. All line numbers and items must be printed even though an amount is not entered on the line.

6.1.3 Line Numbers

When a line on an official form is designated by a number or a letter, that designation (reference code) must be used on a substitute form. The reference code must be printed to the left of the text of each line and immediately preceding the data entry field, even if no reference code precedes the data entry field on the official form. If an entry field contains multiple lines and shows the line references once on the left and right side of the form, use the same number of line references on the substitute form. In addition, the reference code that is immediately before the data field must either be followed by a period or enclosed in parentheses. There also must be at least two blank spaces between the period or the right parenthesis and the first digit of the data field. (See Section 6.1.4.)

## 6.1.4 Decimal Points

A decimal point (that is, a period) should be used for each money amount regardless of whether the
amount is reported in dollars and cents or in whole dollars, or whether or not the vertical line that separates
the dollars from the cents is present. The decimal points must be vertically aligned when possible.

### Example:

STATE &amp; LOCAL INC. TAXES

000.00

REAL ESTATE TAXES

PERSONAL PROPERTY TAXES

000.00

STATE &amp; LOCAL INC. TAXES

(5)

000.00

REAL ESTATE TAXES

(6)

PERSONAL PROPERTY TAXES

(7)

000.00

## 6.1.5 Multi-Page Forms

When submitting a multi-page form, send all its pages in the same package.

Exception. If you will not be producing certain pages, please note that in your cover letter.

# Section 6.2 - Additional Instructions for All Forms

## 6.2.1 Use of Your Own Internal Control Numbers and Identifying Symbols

You may show the computer-prepared internal control numbers and identifying symbols on the
substitute if using such numbers or symbols is acceptable to the taxpayer and the taxpayer's
representative. Such information must not be printed in the top 1/2-inch clear area of any form or
schedule requiring a signature. Except for the actual tax return form (Forms 1040, 11ID Number
on 20, 940, 941, etc.), you may print in the left vertical and bottom left margins. The bottom left
margin you may use extends 31/2 inches from the left edge of the form. You may print internal
control numbers in place of the removed IRS catalog number.

## 6.2.2 Required Software ID Number (Source Code) on Computer- Prepared Substitutes

In the February 2009 Government Accountability Office (GAO) report, "Many Taxpayers Rely on
Tax Software and IRS Needs to Assess Associated Risks" (GAO-09-297), GAO recommended that
IRS require a software identification number on all individual returns to specifically identify the
software package used to prepare each tax return. IRS already has this capability for all e-filed returns.
In addition, many tax preparation software firms already print an IRS-issued 3-letter Source Code on
paper returns that are generated by their individual tax software. This Source Code was assigned when
the firms were seeking substitute forms approval under this current publication.

In order to respond properly to this GAO recommendation, the IRS will require all tax preparation
software firms to include the 3-letter Source Code on all paper tax returns created by their individual
tax preparation software. The many firms that currently have and display their Source Code on paper
returns generated from their software should continue to do so, and no change is necessary.

We have reviewed all software companies that passed PATS testing last filing season and have
determined that some firms do not currently have a Source Code. To save you the burden of
contacting us and for your convenience, we have assigned Source Codes to those firms.

You should program your Source Code to be placed in the bottom left-hand corner of page one
of each paper form that will be generated by your individual tax return package. You do not need
to apply for a new Source Code annually.

If you already use a 3-letter Source Code and we have issued you one in error, you are unsure if
you were ever issued one, or have other questions or concerns, you may contact Tax Forms and
Publications Special Services Section at substituteforms@irs.gov.

6.2.3 Descriptions for Captions, Lines, etc.

Descriptions for captions, lines, etc., appearing on the substitute forms may be limited to one print line by using abbreviations and contractions, and by omitting articles, prepositions, etc. However, sufficient key words must be retained to permit ready identification of the caption, line, or item.

6.2.4 Determining Final Totals

Explanatory detail and/or intermediate calculations for determining final line totals may be included on the substitute. We prefer that such calculations be submitted in the form of a supporting statement. If intermediate calculations are included on the substitute, the line on which they appear may not be numbered or lettered. Intermediate calculations may not be printed in the right column. This column is reserved only for official numbered and lettered lines that corre- spond to the ones on the official form. Generally, you may choose the format for intermediate calculations or subtotals on supporting statements to be submitted.

6.2.5 Instructional Text on the Official Form

Text on the official form, which is solely instructional (for example, "See instructions." etc.), may generally be omitted from the substitute form.

6.2.6 Mixing Forms on the Same Page Prohibited

You may not show more than one form or schedule on the same printout page. Both sides of the paper may be printed for multi-page official forms, but it is unacceptable to intermix single page schedules of forms. For instance, Schedule E can be printed on both sides of the paper because the official form is multi-page, with page 2 continued on the back. However, do not print Schedule E on the front page and Schedule SE on the back, or Schedule A on the front and Form 8615 on the back, etc. Both pages of a substitute form must match the official form. The back page may be left blank if the back page of the official form contains only the instructions.

6.2.7 Identifying Substitutes

Identify all computer-prepared substitutes clearly. Print the form designation 1/2 inch from the top margin and 11/2 inches from the left margin. Print the title centered on the first line of print. Print the taxable year and, where applicable, the sequence number on the same line 1/2 inch to 1 inch from the right margin. Include the taxpayer's name and SSN on all forms and attachments. Also, print the OMB number as reflected on the official form.

6.2.8 Negative Amounts

Negative (or loss) amount entries should be enclosed in brackets or parentheses or include a minus sign. This assists in accurate computation and input of form data. The IRS pre-prints parentheses in negative data fields on many official forms. These parentheses should be retained or inserted on printouts of affected substitute forms.

# Part 7 Miscellaneous Forms and Programs

## Section 7.1 - Specifications for Substitute Schedules K-1

### 7.1.1 Requirements for Schedules K-1 That Accompany Forms 1041, 1065, 1065-B, and 1120S

Because of significant changes to improve processing, prior approval is now required for
substitute Schedules K-1 that accompany Form 1041 (for estates and trusts), Form 1065 (for
partnerships), Form 1065-B (for electing large partnerships), or Form 1120S (for S corporations).
Substitute Schedules K-1 should be as close as possible to exact replicas of copies of the official
IRS schedules and follow the same process for submitting other substitute forms and schedules.
Before releasing their substitute forms, software vendors are responsible for making any subse-
quent changes that have been made to the final official IRS forms after the draft forms have been
posted.

You must include all information on the form. Submit Schedules K-1 to the IRS at
substituteforms@irs.gov with "Attn: PDF Submissions" on the subject line or at:

Internal Revenue Service

Attn: Substitute Forms Program

SE:W:CAR:MP P TP
5000 Ellin Road, C6-440
Lanham, MD 20706

Submit Schedule K-1 forms, in PDF format, to scrips@irs.gov for scannability acceptance. IRS
will review and provide feedback of any changes needed so that your forms can be recognized
correctly.

Include the 6-digit form ID code in the upper right of Schedules K-1 of Forms 1041, 1065, and
1120S. Please allow white space around the 6-digit code.

· 661113 for Form 1041,

· 651113 for Form 1065, and

· 671113 for Form 1120S.

Schedules K-1 that accompany Forms 1041, 1065, 1065-B, or 1120S must meet all specifications. The
specifications include, but are not limited to, the following requirements.

. You will no longer be able to produce Schedules K-1 that contain only those lines or boxes that
taxpayers are required to use. All lines must be included.

· The words "*See attached statement for additional information." must be preprinted in the lower
right-hand side on Schedules K-1 of Forms 1041, 1065, and 1120S.

. All K-1s that are filed with the IRS should be printed on standard 8.5" x 11" paper (the international
standard (A4) of 8.27" x 11.69" may be substituted).

· Each recipient's information must be on a separate sheet of paper. Therefore, you must separate all
continuously printed substitutes, by recipient, before filing with the IRS.

· No carbon copies or pressure-sensitive copies will be accepted.

· The Schedule K-1 must contain the name, address, and SSN or EIN of both the entity (estate, trust,
partnership, or S corporation) and the recipient (beneficiary, partner, or shareholder).

· The Schedule K-1 must contain the tax year, the OMB number, the schedule number (K-1), the
related form number (1041, 1065, 1065-B, or 1120S), and the official schedule name in substan-
tially the same position and format as shown on the official IRS schedule.

. The Schedule K-1 must contain all the line items as shown on the official form, except for the
instructions, if any are printed on the back of the official Schedule K-1.

. The line items or boxes must be in the same order and arrangement as those on the official form.

. The amount of each recipient's share of each item must be shown. A partial percent should be
reflected as a decimal (example: 501/2% should be 50.5%). Furnishing a total amount of each item
and a percentage (or decimal equivalent) to be applied to such total amount by the recipient does
not satisfy the law and the specifications of this revenue procedure.

· State or local tax-related information may not be included on the Schedules K-1 filed with the IRS.

· The entity may have to pay a penalty if substitute Schedules K-1 are filed that do not conform to
specifications.

. Additionally, the IRS may consider the Schedules K-1 that do not conform to specifications as not
being able to be processed and may return Forms 1041, 1065, 1065-B, or 1120S to the filer to be
filed correctly.

Schedules K-1 that are 2-D bar-coded will continue to require prior approval from the IRS (see
Sections 7.1.3 through 7.1.5).

7.1.2
Special Requirements for
Recipient Copies of
Schedules K-1

Standardization for reporting information is required for recipient copies of substitute Schedules
K-1 of Forms 1041, 1065, 1065-B, and 1120S. Uniform visual standards are provided to increase
compliance by allowing recipients and practitioners to more easily recognize a substitute Sched-
ule K-1. The entity must furnish to each recipient a copy of Schedule K-1 that meets the following
requirements.

· Include the 6-digit form ID code in the upper right of Schedules K-1 of Forms 1041, 1065, and
1120S. Please allow white space around the 6-digit code.

· 661113 for Form 1041,

· 651113 for Form 1065, and

· 671113 for Form 1120S.

. You will no longer be able to produce Schedules K-1 that contain only those lines or boxes that
taxpayers are required to use. All lines must be included.

· The words "*See attached statement for additional information." must be preprinted in the
lower right-hand side on Schedules K-1 of Forms 1041, 1065, and 1120S.

· The Schedule K-1 must contain the name, address, and SSN or EIN of both the entity and
recipient.

· The Schedule K-1 must contain the tax year, the OMB number, the schedule number (K-1), the
related form number (1041, 1065, 1065-B, or 1120S), and the official schedule name in
substantially the same position and format as shown on the official IRS schedule.

· All applicable amounts and information required to be reported must be titled and numbered
in the same manner as shown on the official IRS schedule. The line items or boxes must be in
the same order and arrangement and must be numbered like those on the official IRS schedule.

· The Schedule K-1 must contain all items required for use by the recipient. The instructions to
the schedule must identify the line or box number and code, if any, for each item as shown in
the official IRS schedule.

· The amount of each recipient's share of each item must be shown. A partial percent should be
reflected as a decimal (example 501/2% should be 50.5%). Furnishing a total amount of each
line item and a percentage (or decimal equivalent) to be applied to such total amount by the
recipient does not satisfy the law and the specifications of this revenue procedure.

· Instructions to the recipient that are substantially similar to those on or accompanying the
official IRS schedule must be provided to aid in the proper reporting of the items on the
recipient's income tax return. Where items are not reported to a recipient because they do not
apply, the related instructions may be omitted.

. The quality of the ink or other material used to generate recipients' schedules must produce
clearly legible documents. In general, black chemical transfer inks are preferred.

. In order to assure uniformity of substitute Schedules K-1, the paper size should be standard
8.5" x 11" (the international standard (A4) of 8.27" x 11.69" may be substituted.)

· The paper weight, paper color, font type, font size, font color, and page layout must be such
that the average recipient can easily decipher the information on each page. The preferred font
is "Helvetica" and a minimal of 10pt. font.

· State or local tax-related information may be included on recipient copies of substitute
Schedules K-1. All non-tax-related information should be separated from the tax information
on the substitute schedule to avoid confusion for the recipient.

· The legend "Important Tax Return Document Enclosed" must appear in a bold and conspic-
uous manner on the outside of the envelope that contains the substitute recipient copy of
Schedule K-1.

· The entity may have to pay a penalty if a substitute Schedule K-1 furnished to any recipient
does not conform to the specifications of this revenue procedure and results in impeding
processing.

7.1.3
Requirements for
Schedules K-1 with Two-
Dimensional (2- D) Bar
Codes

Electronic filing is now and will continue to be the preferred method of filing; however, 2-D bar
code is the best alternative method for paper processing.

In an effort to improve efficiency and at the same time increase data accuracy, the IRS partnered
with the tax software development community on a two-dimensional bar code project in 2003.
Certain tax software packages have been modified to generate 2-D bar codes on Schedules K-1.
As a result, when K-1s are printed using these programs, a bar code will print on the page.

Rather than manually transcribe information from the Schedule K-1, the IRS will scan the bar
code and electronically upload the information from the K-1. The results will be more efficient
operation within the IRS and fewer transcription errors for your clients.

Note. If software vendors do not want to produce bar-coded Schedules K-1, they may produce the
official IRS Schedules K-1 but cannot use the expedited process for approving bar-coded K-1s
and their parent returns as outlined in Section 7.1.6.

In addition to the requirements in Sections 7.1.1 and 7.1.2, the bar-coded Schedules K-1 must
meet the following specifications.

· The bar code should print in the space labeled "For IRS Use Only" on each Schedule K-1. The
entire bar code must print within the "For IRS Use Only" box surrounded by a white space of at
least 1/4 inch.

· Bar codes must print in PDF 417 format.

· The bar codes must always be in the specified format with every field represented by at least a field
delimiter (carriage return). Leaving out a field in a bar code will cause every subsequent field to be
misread.

. Be sure to include the 6-digit form ID code in the upper right of Schedules K-1 of Forms 1041,
1065, and 1120S. Please allow white space around the 6-digit code.

. 661113 for Form 1041,

. 651113 for Form 1065, and

· 671113 for Form 1120S.

7.1.4
2-D Bar Code
Specifications for Schedules
K-1

· Numeric fields -

· Do not include leading zeros (except Taxpayer Identification Numbers, Zip Codes, and per-
centages).

· If negative value, the minus sign "-" must be present immediately to the left of the number and
part of the 12 position field.

· Do not use non-numeric characters except that the literal "STMT" can be put in money fields.

. All money fields should be rounded to the nearest whole dollar amount - if a money amount
ends in 00 to 49 cents, drop the cents; if it ends in 50 to 99 cents, truncate the cents and increment
the dollar amount by one. Use the same rounding technique for the bar-coded and the printed K-1s.
· All numeric-only fields are right justified (except Taxpayer Identification Numbers and Zip Codes).

· All field lengths are expressed as maximum lengths. If the value in the field has fewer positions
or the software program does not support that many positions, put in the bar code only those
positions actually used.

· Alpha fields -

· Do not include leading blanks (left justified).

· Do not include trailing blanks.

· Use uppercase alpha characters only.

· Variable fields -

· Do not include leading blanks (left justified).

· Do not include trailing blanks.

· Use uppercase alpha characters, numerics, and special characters as defined in each field.

· Delimit each field with a carriage return.

· Express percentages as 6-digit numbers without the percent sign. Left justify with leading
zero(s) (for percentages less than 100%) and no decimal point (decimal point is assumed
between 3rd and 4th positions). Examples: 25.32% expressed as "025320"; 105% expressed as
"105000"; 8.275% expressed as "008275"; 10.24674% expressed as "010247".

. It is vital that the print routine reinitialize the bar code prior to printing each succeeding K-1.
Failure to do this will result in each K-1 for a parent return having the same bar code as the
document before it.

7.1.5
Approval Process for
Bar-Coded Schedules K-1

Prior to releasing commercially available tax software that creates bar-coded Schedules K-1, the
printed schedule and the bar code must both be tested. If your company is creating bar-coded
Schedules K-1, you must receive certification for both the printed K-1, as well as the bar code
before offering your product for sale. Bar-code testing must be done using the final official IRS
Schedule K-1. Bar-code approval requests must be resubmitted for any subsequent changes to the
official IRS form that would affect the bar code. Below are instructions and a sequence of events
that will comprise the testing process.

· The IRS has released the final Schedule K-1 bar-code specifications by publishing them on the
IRS.gov website (see www.irs.gov/uac/Schedule- K-1,-Two-Dimensional-Bar-Code-Specifications-
and-Certification- Process).

. The IRS will publish a set of test documents that will be used to test the ability of tax preparation
software to create bar codes in the correct format.

· Software developers will submit two identical copies of the test documents - one to the IRS and
one to a contracted testing vendor. The IRS will use one set to ensure the printed schedules comply
with standard substitute forms specifications.

. If the printed forms fail to meet the substitute form criteria, the IRS will inform the software
developer of the reason for noncompliance.

· The software developer must resubmit the Schedule(s) K-1 until they pass the substitute forms
criteria.

· The testing vendor will review the bar codes to ensure they meet the published bar-code specifi-
cations.

. If the bar code(s) does not meet published specifications, the testing vendor will contact the
software developer directly informing them of the reason for noncompliance.

· Software developers must submit new bar-coded schedules until they pass the bar-code test.

· When the bar code passes, the testing vendor will inform the IRS that the developer has passed the
bar-code test and the IRS will issue an overall approval for both the substitute form and the bar
code.

· After receiving this consolidated response, the software vendor is free to release software for tax
preparation as long as any subsequent revisions to the schedules do not change the fields.

· Find the mailing address for the testing vendor below. Separate and simultaneous mailings to the
IRS and the vendor will reduce testing time.

### 7.1.6 Procedures for Reducing Testing Time

In order to help provide incentives to the software development community to participate in the
Schedule K-1 2-D project, the IRS has committed to expediting the testing of bar-coded
Schedules K-1 and their associated parent returns. To receive this expedited service, follow the
instructions below.

· Mail the parent returns (Forms 1065, 1120S, 1041) and associated bar-coded Schedule(s) K-1 to the
appropriate address below in a separate package from all other approval requests.

Internal Revenue Service
Attn: Bar-Coded K-1

SE:W:CAR:MP:T:M:S, IR 6526
1111 Constitution Avenue, NW
Washington, DC 20224

. Mail one copy of the parent form(s) and Schedule(s) K-1 to the IRS and another copy to the testing
vendor at the address below.

Northrop Grumman Information Systems
Attn: Twanna Wiley
7555 Colshire Drive
McLean, VA 22102
Phone: 703-483-5678

· Include multiple email and phone contact points in the packages.

· While the IRS can expedite bar-coded Schedules K-1 and their associated parent returns, it cannot
expedite the approval of non-associated tax returns.

· Vendors should comply with all NACTP guidelines especially in regards to mil size and error-
correction level.

· Submissions should include vendor ID code printed and in the bar code.

· If a change is made to the bar code after approval, be sure to increment the version number.

## Section 7.2 - Guidelines for Substitute Forms 8655

### 7.2.1 Increased Standardization for Forms 8655

Increased standardization for reporting information on substitute Forms 8655 is now required
to aid in processing and for compliance purposes. Please follow the guidelines in Section
7.2.2.

### 7.2.2 Requirements for Substitute Forms 8655

Please follow these specific requirements when producing substitute Forms 8655.

· The first line of the title must be "Reporting Agent Authorization."

· If you want to include a reference to "State Limited Power of Attorney," it can be in parentheses
under the title. "State" must be the first word within the parentheses.

. You must include "Form 8655" on the form.

· While the line numbers do not have to match the official form, the sequence of the information must
be in the same order.

· The size of any variable data must be printed in a font no smaller than 10-point.

· For adequate disclosure checks, the following must be included for each taxpayer:

· Name,

· EIN, and

· Address.

. At this time, Form 944 will not be required if Form 941 is checked. Only those forms that the
reporting agent company supports need to be listed.

· The jurat (perjury statement) must be identical with the exception of references to line numbers.

· A contact name and number for the reporting agent is not required.

· You must include line 17, or the equivalent line, and it must include two checkboxes.

· Any state information included should be contained in a separate section of the substitute form.
Preferably this information will be in the same area as line 19 of the official form.

· All substitute Forms 8655 must be approved by the Substitute Forms Unit as outlined in the Form
8655 specifications in this current publication.

· If you have not already been assigned a 3-letter Source Code, you will be given one when your
substitute form is submitted for approval. This Source Code should be included in the lower left
corner of the form.

· The 20-day assumed approval policy does not apply to Form 8655 approvals.

#### Part 8 Additional Information

##### Section 8.1 - Forms for Electronically Filed Returns

8.1.1 Electronic Filing Program

Electronic filing is a method by which authorized providers transmit tax return information to an IRS Service Center in the format of the official IRS forms. The IRS accepts both refund and balance due forms that are filed electronically.

8.1.2 Applying to Participate in IRS e-file

Anyone wishing to participate in IRS e-file of tax returns must submit an e-file application. The application can be completed and submitted electronically on the IRS website at IRS.gov after first registering for e-services on the website.

### 8.1.3 Obtaining the Taxpayer Signature/ Submission of Required Paper Documents

Taxpayers choosing to electronically prepare and file their return will be required to use the
Self-Select PIN method as their signature.

Electronic Return Originators (EROs) can e-file individual income tax returns only if the returns
are signed electronically using either the Self-Select or Practitioner PIN method.

Taxpayers must use Form 8453, U.S. Individual Income Tax Transmittal for an IRS e-file Return,
to send supporting documents that are required to be submitted to the IRS.

For specific information about electronic filing, refer to Pub. 1345, Handbook for Authorized IRS
e-file Providers of Individual Income Tax Returns.

### 8.1.4 Guidelines for Preparing Substitute Forms in the Electronic Filing Program

A participant in the electronic filing program who wants to develop a substitute form should
follow the guidelines throughout this publication and send a sample form for approval to the
Substitute Forms Unit at the address in Part 1. If you do not prepare Substitute Form 8453 using
a font in which all IRS wording fits on a single page, the form will not be accepted.

Note. Use of unapproved forms could result in suspension of the participant from the electronic
filing program.

## Section 8.2 - Effect on Other Documents

8.2.1
Effect on Other
Documents

This revenue procedure supersedes Revenue Procedure 2015-18, 2015-8, I.R.B. 620.

# Schedule A (Preferred Format)

## Exhibit A-1 SCHEDULE A (Form 1040)

## Itemized Deductions

OMB No. 1545-0074

2014

Department of the Internal Revenue

Treasury Service (99)

Information about Schedule A and its separate instructions is at Attach to Form 1040.

www.irs.gov/schedulea.

Attachment Sequence No. 07

Name(s) shown on

Form

1040

Your social security number

Caution. Do not include expenses reimbursed or paid by others.

Medical

Medical and dental expenses (see instructions)

and

Enter amount from Form 1040, line 38 2

Dental

Multiply line 2 by 10% (.10). But if either you or your spouse was

Expenses

born before January 2, 1950, multiply line 2 by 7.5% (.075) instead

Subtract line 3 from line 1. If line 3 is more than line 1, enter -0-

Taxes You

State and local (check only one box):

Paid

☐ Income taxes, or

} ☐ General sales taxes

Real estate taxes (see instructions)

Personal property taxes

Other taxes. List type and amount

Add lines 5 through 8

Interest

Home mortgage interest and points reported to you on Form 1098

You Paid

Home mortgage interest not reported to you on Form 1098. If paid

the person from whom you bought the home, see instructions

Note.

and show that person's name, identifying no., and address

Your mortgage interest

deduction may

be limited (see

Points not reported to you on Form 1098. See instructions for

instructions).

special rules .

Mortgage insurance premiums (see instructions)

Investment interest. Attach Form 4952 if required. (See instructions.)

Add lines 10 through 14

Gifts to

Gifts by cash or check. If you made any gift of $250 or more,

Charity

see instructions .

If you made a

Other than by cash or check. If any gift of $250 or more, see

gift and got a

instructions. You must attach Form 8283 if over $500

benefit for it,

Carryover from prior year

see instructions.

Add lines 16 through 18

Casualty and

Theft Losses

Casualty or theft loss(es). Attach Form 4684. (See instructions.)

Job Expenses

21 1

Unreimbursed employee expenses-job travel, union dues,

and Certain

job education, etc. Attach Form 2106 or 2106-EZ if required.

Miscellaneous

(See instructions.)

Deductions

Tax preparation fees

Other expenses-investment, safe deposit box, etc. List type

and amount

Add lines 21 through 23

Enter amount from Form 1040, line 38 25

Multiply line 25 by 2% (.02)

Subtract line 26 from line 24. If line 26 is more than line 24, enter

-0-

Other

Other-from list in instructions. List type and amount

Miscellaneous

Deductions

Total

29 Is

Form 1040, line 38, over $152,525?

Itemized

☐ No. Your deduction is not limited. Add the amounts in the far

right column

Deductions

for lines 4 through 28. Also, enter this amount on Form 1040, line 40.

☐ Yes. Your deduction may be limited. See the Itemized Deductions

Worksheet in the instructions to figure the amount to enter.

30 If

you elect to itemize deductions even though they are less

than your standard

deduction, check here

☐

For Paperwork Reduction Act Notice, see Form 1040 instructions.

Cat. No. 17145C

Schedule A (Form 1040) 2014

# Schedule A (Acceptable Format)

## Exhibit A-2 SCHEDULE A (Form 1040)

## Itemized Deductions

OMB No. 1545-0074

Department of the

Treasury

Information about Schedule A and its separate instructions is at (99) Attach to Form 1040.

www.irs.gov/schedulea.

2014

Internal Revenue

Service

Attachment Sequence No. 07

Name(s) shown on

Form

1040

Your social security number

Caution. Do not include expenses reimbursed or paid by others.

Medical

Medical and dental expenses (see instructions)

and

Enter amount from Form 1040, line 38 2

Dental

Multiply line 2 by 10% (.10). But if either you or your spouse was

Expenses

born before January 2, 1950, multiply line 2 by 7.5% (.075) instead

Subtract line 3 from line 1. If line 3 is more than line 1, enter -0-

Taxes You

State and local (check only one box):

Paid

a ☐ Income taxes, or }

b ☐ General sales taxes

Real estate taxes (see instructions)

Personal property taxes

Other taxes. List type and amount

Add lines 5 through 8

Interest

Home mortgage interest and points reported to you on Form 1098

You Paid

Home mortgage interest not reported to you on Form 1098. If paid

to the person from whom you bought the home, see instructions

Note.

and show that person's name, identifying no., and address

Your mortgage interest

deduction may

be limited (see instructions).

Points not reported to you on Form 1098. See instructions for special rules

Mortgage insurance premiums (see instructions)

Investment interest. Attach Form 4952 if required. (See instructions.)

Add lines 10 through 14

Gifts to

Gifts by cash or check. If you made any gift of $250 or more,

Charity

see instructions .

If you made a

Other than by cash or check. If any gift of $250 or more, see

gift and got a

instructions. You must attach Form 8283 if over $500

benefit for it,

Carryover from prior year

see instructions.

Add lines 16 through 18

Casualty and

Theft Losses

Casualty or theft loss(es). Attach Form 4684. (See instructions.)

Job Expenses

Unreimbursed employee expenses-job travel, union dues,

and Certain

job education, etc. Attach Form 2106 or 2106-EZ if required.

Miscellaneous

(See instructions.)

Deductions

Tax preparation fees

Other expenses-investment, safe deposit box, etc. List type and amount

Add lines 21 through 23

Enter amount from Form 1040, line 38 25

Multiply line 25 by 2% (.02)

Subtract line 26 from line 24. If line 26 is more than line 24, enter

-0-

Other

Other-from list in instructions. List type and amount

Miscellaneous

Deductions

Total

Is Form 1040, line 38, over $152,525?

Itemized

☐ No. Your deduction is not limited. Add the amounts in the far

right

column

Deductions

for lines 4 through 28. Also, enter this amount on Form 1040,

line

40.

☐ Yes. Your deduction may be limited. See the Itemized Deductions

Worksheet in the instructions to figure the amount to enter.

If you elect to itemize deductions even though they are less than

your standard

deduction, check here

☐

For Paperwork Reduction Act Notice, see Form 1040 instructions.

Cat. No. 17145C

Schedule A (Form 1040) 2014

## Form 2106-EZ (Preferred Format)

Exhibit B-1

Form
2106-EZ

Department of the Treasury
Internal Revenue Service (99)

Unreimbursed Employee Business Expenses

Attach to Form 1040 or Form 1040NR.

Information about Form 2106 and its separate instructions is available at www.irs.gov/form2106.

OMB No. 1545-0074

2014
Attachment
Sequence No.

129A

Your name

Occupation in which you incurred expenses

Social security number

You Can Use This Form Only if All of the Following Apply.

. You are an employee deducting ordinary and necessary expenses attributable to your job. An ordinary expense is one that is
common and accepted in your field of trade, business, or profession. A necessary expense is one that is helpful and appropriate for
your business. An expense does not have to be required to be considered necessary.

. You do not get reimbursed by your employer for any expenses (amounts your employer included in box 1 of your Form W-2 are not
considered reimbursements for this purpose).

. If you are claiming vehicle expense, you are using the standard mileage rate for 2014.

Caution: You can use the standard mileage rate for 2014 only if: (a) you owned the vehicle and used the standard mileage rate for the first year
you placed the vehicle in service, or (b) you leased the vehicle and used the standard mileage rate for the portion of the lease period after 1997.

### Part I Figure Your Expenses

1 Complete Part II. Multiply line 8a by 56¢ (.56). Enter the result here

2 Parking fees, tolls, and transportation, including train, bus, etc., that did not involve overnight travel or commuting to and from work

3 Travel expense while away from home overnight, including lodging, airplane, car rental, etc. Do not include meals and entertainment

4 Business expenses not included on lines 1 through 3. Do not include meals and entertainment

5 Meals and entertainment expenses: $ × 50% (.50). (Employees subject to Department of Transportation (DOT) hours of service limits: Multiply meal expenses incurred while away from home on business by 80% (.80) instead of 50%. For details, see instructions.)

6 Total expenses. Add lines 1 through 5. Enter here and on Schedule A (Form 1040), line 21 (or on Schedule A (Form 1040NR), line 7). (Armed Forces reservists, fee-basis state or local government officials, qualified performing artists, and individuals with disabilities: See the instructions for special rules on where to enter this amount.)

### Part II Information on Your Vehicle. Complete this part only if you are claiming vehicle expense on line 1.

7
When did you place your vehicle in service for business use? (month, day, year)
1
/

8
Of the total number of miles you drove your vehicle during 2014, enter the number of miles you used your vehicle for:

a
Business

b Commuting (see instructions)
c Other

9
Was your vehicle available for personal use during off-duty hours?
☐
Yes
☐
No

10 Do you (or your spouse) have another vehicle available for personal use?
☐
Yes
☐
No

11a Do you have evidence to support your deduction?
☐
Yes
☐
No

b If "Yes," is the evidence written?
☐
Yes
☐
No

For Paperwork Reduction Act Notice, see your tax return instructions.
Cat. No. 20604Q

### Form 2106-EZ (Acceptable Format)

Exhibit B-2

Form

2106-EZ

## Unreimbursed Employee Business Expenses Attach to Form 1040 or Form 1040NR.

OMB No. 1545-0074

2015
Attachment
Sequence No. 129A

Department of the Treasury
Internal Revenue Service
(99)
Information about Form 2106 and its separate instructions is available at www.irs.gov/form2106.

Your name

Occupation in which you incurred expenses

Social security number

You Can Use This Form Only if All of the Following Apply.

. You do not get reimbursed by your employer for any expenses (amounts your employer included in box 1 of your Form W-2 are not
considered reimbursements for this purpose).

. If you are claiming vehicle expense, you are using the standard mileage rate for 2015.

Caution: You can use the standard mileage rate for 2015 only if: (a) you owned the vehicle and used the standard mileage rate for the first year
you placed the vehicle in service, or (b) you leased the vehicle and used the standard mileage rate for the portion of the lease period after 1997.

Part I Figure Your Expenses

Complete Part II. Multiply line 8a by 57.5¢ (.575). Enter the result here

2 Parking fees, tolls, and transportation, including train, bus, etc., that did not involve overnight travel or commuting to and from work 2

3 Travel expense while away from home overnight, including lodging, airplane, car rental, etc. Do not include meals and entertainment .

Business expenses not included on lines 1 through 3. Do not include meals and entertainment

Meals and entertainment expenses: $ × 50% (.50). (Employees subject to Department of Transportation (DOT) hours of service limits: Multiply meal expenses incurred while away from home on business by 80% (.80) instead of 50%. For details, see instructions.)

### Part II Information on Your Vehicle. Complete this part only if you are claiming vehicle expense on line 1.

7 When did you place your vehicle in service for business use? (month, day, year)
/
/

8 Of the total number of miles you drove your vehicle during 2015, enter the number of miles you used your vehicle for:

a Business
b Commuting (see instructions)
c Other

9 Was your vehicle available for personal use during off-duty hours?
☐
Yes
☐
No

10 Do you (or your spouse) have another vehicle available for personal use?
☐
Yes
☐
No

11a Do you have evidence to support your deduction?
☐
Yes
☐
No

b If "Yes," is the evidence written?
☐
Yes
☐
No

For Paperwork Reduction Act Notice, see your tax return instructions.
Cat. No. 20604Q

Software Developers Voucher
Exhibit C
Software Developers Voucher

Tear off here

Form

1040-ES
Department of the Treasury
Internal Revenue Service

2015 Estimated Tax

Payment
Voucher
1
OMB No. 1545-0074

File only if you are making a payment of estimated tax by check or money order. Mail this
voucher with your check or money order payable to "United States Treasury." Write your
social security number and "2015 Form 1040-ES" on your check or money order. Do not send
cash. Enclose, but do not staple or attach, your payment with this voucher.

Calendar year-Due April 15, 2015

Amount of estimated tax you are paying

by check or money order.

Dollars

Cents

0,000

xxxx

John Q Doe
000 Someplace Somewhere Blvd.
City, ST 00000

PO BOX 000000
City, ST 00000 - 0000

000000000 XX DOE 00 0 201512 000

# IRS Check Sheet

# Exhibit D

Check Sheet of IRS Substitute Forms
20 :
Submitted on

Company:

Contact:

Phone:

Fax:

Source Code:

Form Number

Approved

Approved With Corrections

Comments

Authorized

Name:

Title:

Reviewer's

Name:

Telephone:

Date:

26 CFR 1.263(a)-3: Amounts paid to improve tan-
gible property.(Also Part 1, §§ 162, 168, 263, 263A,
and 446; 1.168(i)-1, 1.168(i)-8, 1.446-1.)

Rev. Proc. 2015-56

## SECTION 1. PURPOSE

This revenue procedure provides cer-
tain taxpayers engaged in the trade or
business of operating a retail establish-
ment or a restaurant with a safe harbor
method of accounting for determining
whether expenditures paid or incurred to
remodel or refresh a qualified building
(as defined in section 4.02) are deduct-
ible under § 162(a) of the Internal Rev-
enue Code (Code), must be capitalized
as improvements under § 263(a), or
must be capitalized as the costs of prop-
erty produced by the taxpayer for use in
its trade or business under § 263A. This
revenue procedure also provides proce-
dures for obtaining automatic consent to
change to the safe harbor method of
accounting permitted by this revenue
procedure.

# SECTION 2. BACKGROUND

.01 Taxpayers operating in the retail
and restaurant industries regularly incur
expenditures to remodel or refresh build-
ings used in the trade or business of sell-
ing tangible personal property or services
to the general public. A project to remodel
or refresh a retail establishment or a res-
taurant is generally referred to as a "re-
model" or a "refresh," depending on the
extent of work performed (collectively re-
ferred to as a "remodel-refresh project" as
defined in section 4.03). Generally, a retail
or restaurant taxpayer undertakes a
remodel-refresh project to remain compet-
itive and to improve the customer experi-
ence. These projects typically involve a
planned undertaking to alter the physical
appearance and layout of the building to
maintain a contemporary and attractive
environment, to more efficiently locate
different functions and products, to con-
form to current industry standards and
practices, to standardize the customer ex-
perience, to offer the most relevant goods,
food, or beverages, and to address
changes in demographics by changing of-
ferings and their presentation. Typically,
taxpayers also perform routine repairs and

maintenance during a remodel-refresh
project.

.02 Section 162 generally allows a de-
duction for all the ordinary and necessary
expenses paid or incurred during the tax-
able year in carrying on any trade or busi-
ness, including the costs of repairs and
maintenance. Section 263(a) generally re-
quires the capitalization of amounts paid
to acquire, produce, or improve tangible
property.

.03 Section 1.162-4 allows taxpayers
to deduct amounts paid for repairs and
maintenance of tangible property if the
amounts are not otherwise required to be
capitalized. Section 1.263(a)-3 generally
requires taxpayers to capitalize amounts
paid to improve a unit of property. Section
1.263(a)-3(d) defines improvements as
amounts paid that are for a betterment to a
unit of property, that restore a unit of
property, or that adapt a unit of property to
a new or different use. Sections 1.263(a)-
3(j), (k), and (l) provide detailed criteria
for determining whether amounts fall into
any of these categories. Section 1.263(a)-
3(e)(2) provides for the application of
these criteria to the building unit of prop-
erty by applying the criteria separately to
the building structure and specifically des-
ignated building systems.

.04 Although § 1.263(a)-3 provides
several examples that apply the improve-
ment criteria and the unit of property rules
to remodel or refresh costs, many
remodel-refresh projects are more compli-
cated and diverse than the scenarios in-
cluded in the examples. Because remodel-
refresh projects frequently involve work
performed on building structures and a
variety of building systems, the final tan-
gible property regulations generally re-
quire taxpayers performing remodel-
refresh projects to apply separate legal
analyses to many different components of
the building. These analyses become es-
pecially difficult in situations where, as
part of their remodel-refresh projects, tax-
payers adapt portions of space to a new
and different use. Moreover, the applica-
tion of the improvement rules to particular
buildings can be complex because
remodel-refresh projects vary so much in
frequency, quality, and degree. Conse-
quently, taxpayers and the IRS frequently
encounter questions regarding whether the
costs for a particular remodel-refresh proj-

ect should be characterized as repairs,
maintenance, or an improvement of the
taxpayers' property, causing taxpayers
and the IRS to expend significant re-
sources on this factually intensive issue.

.05 In addition, § 263A requires the
capitalization of the direct and allocable
indirect costs of real or tangible property
produced by a taxpayer for use in its trade
or business or acquired for resale. See also
§ 1.263A-1(a)(3)(ii). Section 263A and
its regulations apply to a retail or restau-
rant taxpayer's self-constructed property
and, therefore, require the capitalization
of the direct and allocable indirect costs of
property constructed, built, installed, or
improved during a remodel-refresh proj-
ect. See § 1.263A-2(a)(1). Thus, the rules
under § 263A require taxpayers to apply
an additional analysis to their remodel-
refresh projects to determine which costs
must be capitalized as the direct or allo-
cable indirect costs of producing property
used in their trade or business.

.06 To reduce disputes regarding the
deductibility or capitalization of remodel-
refresh costs (as defined in section 4.04),
this revenue procedure provides a safe
harbor approach under which qualified
taxpayers (as defined in section 4.01(1)-
(3)) may determine the portions of their
remodel-refresh costs that may be de-
ducted or must be capitalized for purposes
of §§ 162(a), 263(a), and 263A(b)(1). This
safe harbor method minimizes the need to
perform a detailed factual analysis to de-
termine whether each remodel-refresh
cost incurred during a remodel-refresh
project is for repair and maintenance un-
der § 1.162-4 or for an improvement un-
der § 1.263(a)-3. In addition, because this
safe harbor method is applied to the entire
building unit of property, the safe harbor
method also eliminates the need to apply
these rules separately to each building
structure and each building system desig-
nated under § 1.263(a)-3(e). Moreover,
the safe harbor eases the factual inquiry
into whether costs incurred during a
remodel-refresh project adapt property to
a new or different use, requiring qualified
taxpayers to exclude from the safe harbor
only amounts that adapt more than 20
percent of the total square footage of the
building to a new or different use. Finally,
the safe harbor removes the qualified tax-
payer's requirement to complete a sepa-

rate analysis under § 263A and the corre-
sponding regulations to determine
whether any remodel-refresh costs, in-
cluding interest, must be capitalized as
direct and allocable indirect costs of pro-
ducing property used in its trade or busi-
ness.

.07 Section 4 provides definitions for
purposes of applying the remodel-refresh
safe harbor. This section defines qualified
taxpayers, qualified projects, and remodel
or refresh costs that are eligible for treat-
ment under the safe harbor. Section 4 also
defines excluded remodel-refresh costs for
purposes of determining which costs in-
curred during a qualified project must be
excluded in determining the total qualified
costs (as defined in section 4.07) subject
to the safe harbor. Excluded remodel-
refresh costs generally consist of amounts
that are clearly characterized as capital
expenditures, amounts that are paid for
properties that are not part of a qualified
building, and amounts that are properly
analyzed under Code and regulation pro-
visions outside the context of this revenue
procedure. To summarize, the remodel-
refresh costs eligible for the safe harbor
are the costs incurred in a typical remodel-
refresh project for § 1250 property that are
often subject to controversy regarding the
proper treatment for federal income tax
purposes.

.08 Section 5 provides a remodel-
refresh safe harbor method. Section
5.02(1) provides the allocation ratio for
determining the portion of qualified costs
that may be deducted under § 162(a) and
the portion that must be capitalized as
improvements under § 263(a) or as prop-
erty produced by the qualified taxpayer
for use in its trade or business under
§ 263A(b)(1). The allocation ratio takes
into account non-inventory § 263A costs,
amounts that adapt a portion of a qualified
building to a new or different use, and
losses on the dispositions of relevant
building assets (or portions thereof). The
allocation ratio is based on an analysis of
data compiled from taxpayers, IRS Exam-
ination, and IRS Appeals.

.09 Section 5.02(3) provides rules un-
der the remodel-refresh safe harbor for the
capitalization, depreciation, and disposi-
tion of a qualified building (or a portion
thereof) to which the qualified taxpayer

has applied the remodel-refresh safe har-
bor.

.10 Sections 5.02(4), 5.02(5), and
5.02(6) provide limitations on how the
disposition rules may be applied by a
qualified taxpayer using the remodel-
refresh safe harbor. Because the allocation
ratio takes into account losses on the dis-
positions of relevant building assets (or
portions thereof), these limitations exist to
ensure that a taxpayer using the remodel-
refresh safe harbor does not use the allo-
cation ratio to determine its deductible
costs for a remodel-refresh project while
also claiming a disposition loss on the
related assets disposed of.

.11 Section 1.168(i)-1 provides rules
for general asset accounts. Section
1.168(i)-8 provides rules for dispositions
of property depreciated under § 168. Sec-
tions 1.168(i)-1(e)(2)(viii)(B)(1) and
1.168(i)-8(c)(4)(ii)(A) provide that each
building, including its structural compo-
nents, is the asset for tax disposition pur-
poses, except as otherwise provided in the
final disposition regulations. Where a tax-
payer places in service an improvement or
addition to the building after the original
building is placed in service, the improve-
ment or addition is the asset for depreci-
ation and disposition purposes in accor-
dance with §§ 168(i)(6), 1.168(i)-
1(e)(2)(viii)(B)(1), and 1.168(i)-
8(c)(4)(ii)(D).

.12 Section 1.168(i)-8(d)(2) permits a
taxpayer to elect in most cases to treat the
disposed portion of an asset as a disposi-
tion (for example, the disposition of a roof
(or a portion of the roof)) in the taxable
year in which the portion is disposed of. If
an asset is not included in a general asset
account, a taxpayer generally must recog-
nize gain or loss and cease depreciation on
the disposition of (1) the asset (for ex-
ample, the original building, including
its structural components, or the build-
ing addition or improvement) or (2) a
portion thereof for which the taxpayer
makes the partial disposition election.
See § 1.168(i)-8(e). If an asset is in-
cluded in a general asset account, a tax-
payer generally does not realize a loss
upon disposition of the asset or a portion
thereof, and continues to depreciate the
disposed asset or disposed portion of an
asset. See § 1.168(i)-1(e)(2)(i).

.13 Because the safe harbor allocation
ratio takes into account losses on the dis-
positions of relevant building assets (or
portions thereof), section 5.02(4) provides
that a qualified taxpayer using the
remodel-refresh safe harbor method pro-
vided in this revenue procedure may not
make the partial disposition election under
§ 1.168(i)-8(d)(2), Prop. Reg. § 1.168(i)-
8(d)(2), section 6.33 of the Appendix of
Rev. Proc. 2011-14, 2011-4 I.R.B. 330,
as modified by section 3.03(1) of Rev.
Proc. 2014-17, 2014-12 I.R.B. 661, 677,
and section 3.02(4) of Rev. Proc. 2014-
54, 2014-41 I.R.B. 675, 679, or section
6.33 of Rev. Proc. 2015-14, 2015-5
I.R.B. 450, 483, to dispose of a portion of
a qualified building, including an asset
placed in service and disposed of in a
taxable year prior to the year that the safe
harbor was utilized by the taxpayer. Sec-
tion 5.02(4)(b) provides the time and man-
ner of revoking a partial disposition elec-
tion that is related to a qualified building
and made in a prior taxable year. If the
taxpayer does not make this revocation,
section 5.02(4)(c) provides that the
change in method of accounting to utilize
the safe harbor is made on a cut-off basis
for the qualified building to which the
unrevoked partial disposition election per-
tains.

.14 In addition, if a qualified taxpayer
recognized a gain or loss on the disposi-
tion of a component of a qualified build-
ing under § 1.168(i)-1T or § 1.168(i)-8T,
as applicable, or in a taxable year begin-
ning before January 1, 2012, section
5.02(5) provides that the taxpayer must
change its method of accounting to be in
accord with § 1.168(i)-1(e)(2)(viii) or
§ 1.168(i)-8(c)(4) (determination of asset
disposed of), as applicable, and must take
into account the entire amount of the
§ 481(a) adjustment in computing taxable
income for the year of change. If the tax-
payer does not make this change in
method of accounting, the remodel-
refresh safe harbor provided in this reve-
nue procedure does not apply to any qual-
ified building for which the taxpayer
recognized a gain or loss on the disposi-
tion of a component under § 1.168(i)-1T
or § 1.168(i)-8T, or in a taxable year
beginning before January 1, 2012.

.15 Section 5.02(6) provides that a
qualified taxpayer using the remodel-

refresh safe harbor method must include
in general asset accounts the assets com-
prised of the capitalized portion of the
qualified costs and assets previously
placed in service and subject to the
remodel-refresh safe harbor method. Sec-
tion 5.02(6)(d) permits qualified taxpayers
utilizing the remodel-refresh safe harbor
to make a late general asset account elec-
tion under § 168(i)(4) and § 1.168(i)-1 for
assets previously placed in service and
subject to the safe harbor method.

.16 A taxpayer's method for determin-
ing whether an amount is deducted or is
capitalized is a method of accounting un-
der § 446. Except as otherwise expressly
provided in the Code or in Treasury reg-
ulations, § 446(e) and § 1.446-1(e)(2)
require a taxpayer to secure the consent of
the Commissioner of Internal Revenue
(Commissioner) before changing a
method of accounting for federal income
tax purposes. Section 1.446-1(e)(3)(ii)
authorizes the Commissioner to prescribe
administrative procedures setting forth the
limitations, terms, and conditions neces-
sary to permit a taxpayer to obtain consent
to change a method of accounting. Section
7 provides the procedures for a qualified
taxpayer to obtain automatic consent for a
change in method of accounting to use the
safe harbor method provided by this rev-
enue procedure.

## SECTION 3. SCOPE

.01 In general. This revenue procedure
applies to a qualified taxpayer as defined
in section 4.01 that pays qualified costs
defined under section 4.07 in the course of
performing a remodel-refresh project de-
fined under section 4.03 on a qualified
building defined under section 4.02.

.02 Exclusions. This revenue procedure
does not apply:

(1) To excluded remodel-refresh costs
defined under section 4.06;

(2) To de minimis costs defined under
section 5.05(1);

(3) To remodel-refresh costs that, if
capitalized, are not depreciated by the
qualified taxpayer under § 168;

(4) To expenditures treated as qualified
lessee construction allowances under
§ 110 and the accompanying regulations;

(5) If the qualified taxpayer made a
partial disposition election under
§ 1.168(i)-8(d)(2), Prop. Reg. § 1.168(i)-

8(d)(2), section 6.33 of the Appendix of
Rev. Proc. 2011-14, or section 6.33 of
Rev. Proc. 2015-14 for any portion of a
qualified building and the qualified tax-
payer has not revoked the partial disposi-
tion election within the time and in the
manner provided in section 5.02(4)(b)(ii),
to qualified costs paid for that qualified
building prior to the year of change (as
defined in section 3.19 of Rev. Proc.
2015-13, 2015-5 I.R.B. 419, 429 (or its
predecessor)) for the change in method of
accounting to utilize the remodel-refresh
safe harbor. See section 5.02(4)(c);

(6) If the qualified taxpayer recognized
a gain or loss upon the disposition of a
component of a qualified building under
§ 1.168(i)-1T or § 1.168(i)-8T, or in a
taxable year beginning before January 1,
2012, and the qualified taxpayer (i) has
not changed its method of accounting (in-
cluding changes initiated by the IRS) un-
der section 6.38(3)(a) or 6.40(3)(a) of
Rev. Proc. 2015-14, 2015-5 I.R.B. 450
(or its predecessor), as applicable, for that
qualified building (change in method of
accounting to be in accord with
§ 1.168(i)-1(e)(2)(viii) or § 1.168(i)-
8(c)(4) (determination of asset disposed
of)) on or before the first taxable year that
the qualified taxpayer uses the remodel-
refresh safe harbor, and (ii) has not taken
the entire amount of the § 481(a) adjust-
ment into account in computing the qual-
ified taxpayer's income for the year of
change, to any qualified costs paid for that
qualified building prior to the year of
change (as defined in section 3.19 of Rev.
Proc. 2015-13) for a change made by the
qualified taxpayer or the IRS under sec-
tion 6.38(3)(a) or 6.40(3)(a) of Rev. Proc.
2015-14, as applicable, for that qualified
building. See section 5.02(5)(b) of this
revenue procedure; or

(7) To any direct or allocable indirect
costs of acquiring property described in
§ 1221(a) for resale, and therefore, subject
to capitalization under §§ 263A(a)(1)(A)
and (b)(2). See § 1.263A-3.

.03 Scope determined at entity level for
consolidated groups and pass-through en-
tities. The determination of whether a
qualified taxpayer is within the scope of
this revenue procedure is made separately
with respect to each member of a consol-
idated group and with respect to each part-
nership, S corporation, or trust.

# SECTION 4. DEFINITIONS

The following definitions apply solely
for the purposes of this revenue proce-
dure:

.01 Qualified taxpayer means a tax-
payer that has an Applicable Financial
Statement, as defined in section 4.08, and
that-

(1) Is in the trade or business of selling
merchandise to customers at retail, for
which the taxpayer reports or conducts
activities within NAICS codes 44 or 45,
except those taxpayers that primarily re-
port or conduct activities within the fol-
lowing codes:

(a) Code 4411 (automotive dealers);

(b) Code 4412 (other motor vehicle
dealers);

(d) Code 45393 (manufactured home
dealers); and

(e) Code 454 (nonstore retailers); or

(2) Is in the trade or business of pre-
paring and selling meals, snacks, or bev-
erages to customer order for immediate
on-premises and/or off-premises con-
sumption, for which the taxpayer reports
or conducts activities within NAICS code
722 except:

(a) Those taxpayers that are primarily
in the trade or business of operating hotels
and motels; civic or social organizations;
or amusement parks, theaters, casinos,
country clubs, or similar recreation facil-
ities; and

(b) Those taxpayers that primarily re-
port or conduct activities within code
7223 (special food services, i.e., food ser-
vice contractors, caterers, and mobile food
services); or

(3) Owns, or leases, a qualified build-
ing as defined under section 4.02 that is
leased, or sublet, to a taxpayer that meets
the requirements of section 4.01(1) or (2)
and incurs remodel-refresh costs as de-
fined under section 4.04 .

.02 Qualified building means each
building unit of property used by a qual-
ified taxpayer primarily for selling mer-
chandise to customers at retail or primar-
ily for preparing and selling food or
beverages to customer order for immedi-
ate on-premises and/or off-premises con-
sumption. For these purposes, selling mer-
chandise to customers at retail includes
the sale of identical goods to resellers if

the sales to resellers are conducted in the
same building and in the same manner as
retail sales to non-reseller customers (for
example, warehouse clubs, home im-
provement stores). For purposes of this
revenue procedure, a building unit of
property is comprised of each building, as
defined in § 1.48-1(e)(1), and its struc-
tural components, as defined in § 1.48-
1(e)(2), modified by the following, as ap-
plicable:

(1) Condominium. In the case of an
individual unit in a building with multiple
units (such as a condominium), the build-
ing unit of property is each individual unit
owned by the qualified taxpayer and the
structural components that are part of the
unit.

(2) Cooperative. In the case of an in-
terest in a cooperative housing corpora-
tion, the building unit of property is the
portion of the building in which the qual-
ified taxpayer has possessory rights and
the structural components that are part of
the portion of the building subject to the
qualified taxpayer's possessory rights.

(3) Leased building. In the case of a
lease of an entire building to a qualified
taxpayer, the building unit of property is
the building and its structural components
subject to the lease. In the case of a lease
of a portion of a building (such as a store,
a floor, or certain square footage) to a
qualified taxpayer, the building unit of
property is the portion of the building and
the associated structural components sub-
ject to the lease.

.03 Remodel-refresh project.

(1) In general. A remodel-refresh proj-
ect means a planned undertaking by a
qualified taxpayer on a qualified building
to alter its physical appearance and/or lay-
out for one or more of the following pur-
poses:

(a) To maintain a contemporary and
attractive appearance;

(b) To more efficiently locate retail or
restaurant functions and products;

(d) To standardize the consumer expe-
rience if a qualified taxpayer operates
more than one qualified building;

(e) To offer the most relevant and pop-
ular goods within the industry; or

(f) To address changes in demograph-
ics by changing product or service offer-
ings and their presentations.

(2) Exception. A remodel-refresh proj-
ect does not include a planned undertak-
ing solely to repaint or to clean the interior
or exterior of an existing qualified build-
ing.

.04 Remodel-refresh costs mean
amounts paid by a qualified taxpayer for
remodel, refresh, repair, maintenance, or
similar activities performed on a qualified
building as part of a remodel-refresh proj-
ect. See section 4.06 for excluded
amounts. For purposes of the remodel-
refresh safe harbor method of accounting
provided in section 5, remodel-refresh
costs are not treated as paid or incurred
("paid"), and therefore are not taken into
account, until the taxable year when the
capital expenditure portion under the safe
harbor, as determined under section
5.02(1), is placed in service within the
meaning of § 1.46-3(d)(1)(ii). However,
if the qualified building is sold or other-
wise disposed of before the capital expen-
diture portion is placed in service, then the
remodel-refresh costs are treated as paid
in the taxable year such building is sold or
otherwise disposed of. For purposes of
this revenue procedure, an amount paid
does not include an amount reimbursed to
the qualified taxpayer, such as a lessee
construction allowance.

.05 Remodel, refresh, repair, mainte-
nance, or similar activities include, but
are not limited to, the following activities:

(1) Painting, polishing, or finishing in-
terior walls;

(2) Adding, replacing, repairing, main-
taining, or relocating permanent floor,
ceiling, or wall coverings, including mill-
work;

(3) Adding, replacing, repairing, main-
taining, or relocating kitchen fixtures;

(4) Adding, replacing, or modifying
signage or fixtures;

(5) Relocating departments, eating ar-
eas, check-out areas, kitchen areas, bever-
age areas, management space, storage
space, or similar areas, within the existing
footprint of the qualified building;

(6) Increasing or decreasing the square
footage of departments, eating areas,
check-out areas, kitchen areas, beverage
areas, management space, storage space,

or similar areas within the existing foot-
print of the qualified building;

(7) Adding, relocating, or removing a
room or rooms (for example, dressing
rooms, "private" dining space, front office
space, or break rooms) within the existing
footprint of the qualified building;

(8) Moving, constructing, or altering
walls within the existing footprint of the
qualified building;

(9) Adding, relocating, removing, re-
placing, or re-lamping lighting fixtures, or
adding reflectors, mirrors, or other similar
devices to existing lighting fixtures;

(10) Repairing, maintaining, retrofit-
ting, relocating, adding, or replacing
building systems defined in § 1.263(a)-
3(e)(2)(ii)(B) within the existing footprint
of the qualified building;

(11) Making non-structural changes to
exterior facades;

(12) Relocating, replacing, or adding
windows or doors (including replacing a
manual door with an automatic door)
within the existing footprint of the quali-
fied building;

(13) Repairing, maintaining, or replac-
ing the roof or portion of the roof within
the existing footprint of the qualified
building;

(14) Replacing façade materials around
windows and entrances;

(15) Repair and maintenance to the
qualified building that directly benefits or
is incurred by reason of a remodel-refresh
project;

(16) Removal and demolition, other
than demolition subject to § 280B, of
structural components of a qualified build-
ing (for example, insulation, windows,
drywall, and similar property) that directly
benefit or are incurred by reason of a
remodel-refresh project;

(17) Obtaining permits or other similar
authorizations that directly benefit or are
incurred by reason of a remodel-refresh
project; and

(18) Architectural, engineering, and
similar services that directly benefit or are
incurred by reason of a remodel-refresh
project.

.06 Excluded remodel-refresh costs
mean amounts paid during a remodel-
refresh project for-

(1) Section 1245 property (as defined
in § 1245(a)(3));

(2) An intangible under § 1.263(a)-
4(b), including the creation or mainte-
nance of computer software;

(3) Land, including nondepreciable
land improvements, or depreciable land
improvements described in Asset Class
00.3 of Rev. Proc. 87-56, 1987-2 C.B.
674 (for example, sidewalks, parking lots,
depreciable landscaping);

(4) The initial acquisition, production,
or lease of a qualified building, including
purchase price, construction costs, trans-
action costs, and the costs of work per-
formed prior to the date that the qualified
building is initially placed in service by
the qualified taxpayer;

(5) The initial build-out of a leased
qualified building, or a portion thereof, for
a new lessee;

(6) Activities to rebrand a qualified
building performed within two taxable
years following the closing date of (1) an
acquisition or initial lease of the qualified
building by the qualified taxpayer or a
person related, within the meaning of
§ 267(b) or § 707(b), to the qualified tax-
payer or (2) the acquisition by the quali-
fied taxpayer or a person related, within
the meaning of § 267(b) or § 707(b), to the
qualified taxpayer of a controlling interest
in the qualified building or in a lease of
the qualified building;

(7) Activities performed to ameliorate
a material condition or defect that existed
prior to the qualified taxpayer's acquisi-
tion or lease of the qualified building or
that arose during the production of the
qualified building (generally, an unusual
event in the retail or restaurant business),
regardless of whether the qualified tax-
payer was aware of the condition or defect
at the time of acquisition or production;

(8) Material additions to a qualified
building, including the building systems
defined in § 1.263(a)-3(e)(2)(ii)(B).
Solely for purposes of this revenue proce-
dure, additions mean enlarging, expand-
ing, or extending the square footage of the
qualified building, or enlarging, expand-
ing, or extending the building systems in
conjunction with enlarging, expanding, or
extending the square footage of the qual-
ified building.

(9) Restoration caused by damage to
the qualified building for which the qual-
ified taxpayer is required to take a basis
adjustment as a result of a casualty loss

under § 165, or relating to a casualty event
described in § 165, subject to the limita-
tion in § 1.263(a)-3(k)(4);

(10) Adapting more than twenty per-
cent (20%) of the total square footage of a
qualified building to new or different use
or uses, as described in § 1.263(a)-3(1), as
part of a remodel-refresh project. For this
purpose, square footage is measured based
on the total square footage of the qualified
building prior to the remodel-refresh proj-
ect at issue.

(11) Remodel-refresh costs incurred
during a temporary closing. A temporary
closing is closing the qualified building
during normal business hours for more
than 21 consecutive calendar days.

(12) The cost of any property for which
the qualified taxpayer has claimed a de-
duction under § 179, § 179D, or § 190.

.07 Qualified costs are the qualified
taxpayer's remodel-refresh costs less the
qualified taxpayer's excluded remodel-
refresh costs. For documentation require-
ments for the qualified costs, see section
5.02(2).

.08 Applicable Financial Statement
means an applicable financial statement
defined under § 1.263(a)-1(f)(4). If the
qualified taxpayer's financial results are
reported on an applicable financial state-
ment defined under § 1.263(a)-1(f)(4) for
a group of entities, then for purposes of
this revenue procedure and the application
of the remodel-refresh safe harbor pro-
vided in section 5, the group's applicable
financial statement is the applicable finan-
cial statement of the qualified taxpayer.

## SECTION 5. REMODEL-REFRESH SAFE HARBOR METHOD OF ACCOUNTING

.01 In general. This section 5 provides
the remodel-refresh safe harbor method of
accounting for a qualified taxpayer within
the scope of this revenue procedure. This
safe harbor determines the amount of the
qualified costs that are deducted under
§ 162 and the amount of such costs that
are required to be capitalized under
§§ 263(a) and 263A. The safe harbor also
provides for the treatment of the capital-
ized amount for depreciation and disposi-
tion purposes. Except as provided in sec-
tion 5.02(4)(c) or 5.02(5)(b), the remodel-
refresh safe harbor applies to all of the
qualified taxpayer's qualified costs paid

(within the meaning of section 4.04) dur-
ing the taxable year. Except as provided in
section 5.02(4)(c) or 5.02(5)(b), a quali-
fied taxpayer within the scope of this rev-
enue procedure who uses the remodel-
refresh safe harbor is required to use the
method for all of its qualified costs (de-
fined in section 4.07) until the qualified
taxpayer secures permission from the IRS
to use another method of accounting.

.02 Remodel-refresh safe harbor. To
use the remodel-refresh safe harbor, the
qualified taxpayer is required to comply
with sections 5.02(1), 5.02(2), 5.02(3),
5.02(4), 5.02(5), and 5.02(6).

(1) Allocation of qualified costs. The
qualified taxpayer must treat 75% of its
qualified costs paid during the taxable
year as amounts deductible under § 162(a)
("the deduction portion") and must treat
the remaining 25% of its qualified costs
paid during the taxable year as costs for
improvements to a qualified building un-
der § 263(a) and as costs for the produc-
tion of property for use in the qualified
taxpayer's trade or business under § 263A
("the capital expenditure portion").

(2) Documentation requirements. A
qualified taxpayer utilizing the remodel-
refresh safe harbor provided in this sec-
tion 5 must document its qualified costs in
a manner substantially similar to the stan-
dard set forth in Appendix A to this rev-
enue procedure.

(3) Treatment of the capital expendi-
ture portion.

(a) Capitalized amounts. The capital
expenditure portion must be charged to
capital account.

(b) Depreciation of capitalized
amounts.

(i) General rule. The capital expendi-
ture portion for each qualified building is
a separate asset (or separate assets if the
remodel-refresh project produces property
qualifying under §§ 168(e)(2)(B) and
168(e)(6), (e)(7), or (e)(8)) for deprecia-
tion purposes and is depreciated under
§§ 167 and 168 beginning when the cap-
ital expenditure portion is placed in ser-
vice by the qualified taxpayer, taking into
account the applicable convention under
§ 168(d). The qualified taxpayer must
make an election to include the capital
expenditure portion in a general asset ac-
count under § 168(i)(4) and § 1.168(i)-1.

See section 5.02(6) for the general asset
account election.

(ii) Classification under § 168(e). For
purposes of determining the appropriate
classification under § 168(e), the capital
expenditure portion is treated as qualified
leasehold improvement property (as de-
fined in § 168(e)(6)) under
§ 168(e)(3)(E)(iv), as qualified restaurant
property (as defined in § 168(e)(7)) under
§ 168(e)(3)(E)(v), or as qualified retail
improvement property (as defined in
§ 168(e)(8)) under § 168(e)(3)(E)(ix), as
applicable, only to the extent that the qual-
ified taxpayer can substantiate that the
capital expenditure portion is qualified
leasehold improvement property, quali-
fied restaurant property, or qualified retail
improvement property, as applicable. The
remaining capital expenditure portion is
classified as nonresidential real property
under § 168(e)(2)(B). Also, if
§ 168(e)(3)(E)(iv), (v), or (ix), as applica-
ble, is not in effect when the qualified
taxpayer places in service the capital ex-
penditure portion, the capital expenditure
portion is classified as nonresidential real
property under § 168(e)(2)(B).

(c) Disposition of capitalized amounts.
The capital expenditure portion for each
qualified building is a separate asset (or
separate assets if the remodel-refresh proj-
ect produces property qualifying under
§§ 168(e)(2)(B) and 168(e)(6), (e)(7), or
(e)(8)) for disposition purposes. See
§ 1.168(i)-1(e)(2)(viii)(B)(4).

(4) Limitation on partial disposition
elections.

(a) General rule. A qualified taxpayer
must not make the partial disposition elec-
tion under § 1.168(i)-8(d)(2), Prop. Reg.
§ 1.168(i)-8(d)(2), section 6.33 of the
Appendix of Rev. Proc. 2011-14, or sec-
tion 6.33 of Rev. Proc. 2015-14 for any
portion of an original qualified building or
any portion of any improvement or addi-
tion to an original qualified building.

(b) Revocation of partial disposition
election made in a prior year.

(i) General rule. If a qualified taxpayer
made the partial disposition election under
§ 1.168(i)-8(d)(2), Prop. Reg. § 1.168(i)-
8(d)(2), section 6.33 of the Appendix of
Rev. Proc. 2011-14, or section 6.33 of
Rev. Proc. 2015-14 for any portion of an
original qualified building, or any portion
of an improvement or addition to an orig-

inal qualified building, prior to the first
taxable year that the qualified taxpayer
uses the remodel-refresh safe harbor, the
qualified taxpayer must revoke that partial
disposition election.

(ii) Time and manner of revoking prior
year's partial disposition election. If, un-
der section 5.02(4)(b)(i), a qualified tax-
payer must revoke a partial disposition
election, the Commissioner grants the
qualified taxpayer consent to revoke that
election provided the qualified taxpayer
makes this revocation within the time and
in the manner described in this section
5.02(4)(b)(ii). The qualified taxpayer may
revoke the partial disposition election by
filing either:

(A) An amended federal tax return for
the taxable year for which the partial dis-
position election was made if the period of
limitations on assessment under § 6501(a)
for that taxable year has not expired be-
fore the date stated in the next sentence.
This amended return must be filed no later
than the due date, including extensions, of
the qualified taxpayer's federal tax return
for the first taxable year that the qualified
taxpayer uses the remodel-refresh safe
harbor. This amended return must include
the adjustment to taxable income for the
revocation of the partial disposition elec-
tion and any collateral adjustments to tax-
able income or to tax liability (for exam-
ple, allowable depreciation in that taxable
year for the portion of the asset to which
the revocation pertains). Such collateral
adjustments must also be made on
amended federal tax returns for any af-
fected succeeding taxable year; or

(B) A Form 3115, Application for
Change in Accounting Method, with the
qualified taxpayer's timely filed original
federal tax return for the qualified taxpay-
er's first or second taxable year beginning
after December 31, 2013. The revocation
of the partial disposition election under
this section 5.02(4)(b)(ii)(B) will be
treated as a change in method of account-
ing only during this limited period of time.
The manner of making this revocation is
described in section 7.02(1). This Form
3115 must include under § 481(a) the ad-
justment to taxable income for the revo-
cation of the partial disposition election
and any collateral adjustments to taxable
income (for example, allowable deprecia-
tion in that taxable year for the portion of

the asset to which the revocation pertains).
The qualified taxpayer must take the en-
tire amount of the § 481(a) adjustment
into account in computing its taxable in-
come for the year of change.

(c) Qualified taxpayer does not revoke
the partial disposition election. If, under
section 5.02(4)(b)(i), a qualified taxpayer
must revoke a partial disposition election
but the qualified taxpayer does not make
this revocation within the time and in the
manner provided in section 5.02(4)(b)(ii),
then the change in method of accounting
to utilize the remodel-refresh safe harbor
is made on a cut-off basis for the qualified
building to which the unrevoked partial
disposition election pertains.

(5) Disposition of a component of a
qualified building.

(a) General rule. This section 5.02(5)
applies to a qualified taxpayer that recog-
nized a gain or loss upon the disposition
of a component of a qualified building, a
structural component of a qualified build-
ing, or a component of such structural
component (i) under § 1.168(i)-1T or
§ 1.168(i)-8T, as applicable, and that
component or structural component is not
an improvement or addition as described
in § 1.168(i)-1T(e)(2)(viii)(B)(5) or
§ 1.168(i)-8T(c)(4)(ii)(E), as applicable,
or (ii) in a taxable year beginning before
January 1, 2012, and that component or
structural component is MACRS property
(as defined in § 1.168(b)-1(a)(2)). If the
qualified taxpayer or the IRS changed the
qualified taxpayer's method of accounting
to be in accord with § 1.168(i)-
1(e)(2)(viii) or § 1.168(i)-8(c)(4) (deter-
mination of asset disposed of), as applica-
ble, and to make a partial disposition
election for such disposition under
§ 1.168(i)-1, § 1.168(i)-8, Prop. Reg.
§ 1.168(i)-1, Prop. Reg. § 1.168(i)-8,
section 6.33 of the Appendix of Rev. Proc.
2011-14, or section 6.33 of Rev. Proc.
2015-14, as applicable (thereby, for ex-
ample, changing from recognizing gain or
loss under § 1.168(i)-1T or § 1.168(i)-
8T, as applicable, to recognizing the gain
or loss under § 1.168(i)-1 or § 1.168(i)-8,
as applicable, for the partial disposition),
section 5.02(4) applies instead of this sec-
tion 5.02(5).

(b) Change in method of accounting. If
this section 5.02(5) applies, the qualified
taxpayer must (i) change its present

method of accounting to be in accord with
§ 1.168(i)-1(e)(2)(viii) or § 1.168(i)-
8(c)(4) (determination of asset disposed
of), as applicable, on or before the first
taxable year that the qualified taxpayer
uses the remodel-refresh safe harbor, and
(ii) take the entire amount of the § 481(a)
adjustment into account in computing the
qualified taxpayer's taxable income for
that year of change. See sections
6.38(3)(a) and 6.38(8)(a) of Rev. Proc.
2015-14, 2015-5 I.R.B. 450 (or its suc-
cessor) (building or structural compo-
nent), and sections 6.40(3)(a) and
6.40(6)(a) of Rev. Proc. 2015-14 (general
asset account). A qualified taxpayer that
does not comply with these conditions is
not eligible to use the remodel-refresh
safe harbor for any qualified costs paid
prior to the year of change (for a change
made by the qualified taxpayer or the IRS
under section 6.38(3)(a) or 6.40(3)(a) of
Rev. Proc. 2015-14, as applicable) for the
qualified building to which the gain or
loss pertains.

(6) Requirement to use general asset
accounts.

(a) General rule. A qualified taxpayer
must make a general asset account elec-
tion under § 168(i)(4) and § 1.168(i)-1(1)
to include in a general asset account any
asset that is MACRS property and that
comprises a qualified building. Thus, a
qualified taxpayer must include in general
asset accounts:

(i) The capital expenditure portion;

(ii) Existing qualified buildings (in-
cluding their structural components) that
are MACRS property (see section
5.02(6)(d) for making a late general asset
account election); and

(iii) Prior years' improvements that are
MACRS property and made to a qualified
building (even if the qualified building is
not MACRS property) (see section
5.02(6)(d) for making a late general asset
account election).

(b) Exception. If a qualified taxpayer is
not eligible to use the remodel-refresh
safe harbor for certain qualified costs pur-
suant to section 5.02(4)(c) or section
5.02(5)(b), the qualified taxpayer is not
required to include in general asset ac-
counts:

(i) The existing qualified building (in-
cluding its structural components) to
which those qualified costs pertain; and

(ii) Improvements made to that quali-
fied building and placed in service prior to
the first taxable year that the qualified
taxpayer uses the remodel-refresh safe
harbor.

(i) General rule. In establishing a gen-
eral asset account, all assets that are
MACRS property, that comprise qualified
buildings, that are placed in service in the
same taxable year, and that meet the re-
quirements in § 1.168(i)-1(c)(2), must be
grouped in the same general asset account.
However, see section 5.02(6)(c)(ii) for an
exception to this general rule.

(ii) Original qualified buildings (in-
cluding their structural components). A
qualified taxpayer may include in one
general asset account the original cost of
an original qualified building, including
its original structural components, if such
building and structural components are
MACRS property and meet the require-
ments in § 1.168(i)-1(c)(2). If a qualified
taxpayer has multiple qualified buildings,
the qualified taxpayer may have separate
general asset accounts for the original cost
of each original qualified building, includ-
ing the original structural components of
that building. Any improvement made to a
qualified building cannot be included in
the general asset account or accounts per-
mitted under this section 5.02(6)(c)(ii).

(d) Late general asset account election.
A qualified taxpayer must make a late
general asset account election under
§ 168(i)(4) and § 1.168(i)-1 to include in
a general asset account any asset that is
MACRS property, that comprises a qual-
ified building, that was placed in service
in a taxable year prior to the first taxable
year that the qualified taxpayer uses the
remodel-refresh safe harbor, and that is
owned by the qualified taxpayer at the
beginning of the first taxable year that the
qualified taxpayer uses the remodel-
refresh safe harbor. The qualified taxpayer
must make this late election on its original
federal tax return for the first taxable year
that the qualified taxpayer uses the
remodel-refresh safe harbor. The IRS will
treat the making of the late general asset
account election under this section
5.02(6)(d) as a change in method of ac-
counting under § 446(e). The manner of

making this change in method of account-
ing is described in section 7.02(2).

(e) Effect of late election. By making
the general asset account election under
section 5.02(6)(d), the qualified taxpayer
consents to, and agrees to apply, all of the
provisions of § 1.168(i)-1 to the assets
included in a general asset account. See
§ 1.168(i)-1(1)(1). Accordingly, if the
qualified taxpayer's present methods of
accounting are not in accord with
§ 1.168(i)-1, the qualified taxpayer must
change to the methods of accounting per-
mitted under § 1.168(i)-1 no later than the
first taxable year that the qualified tax-
payer uses the remodel-refresh safe har-
bor. For example, if the qualified taxpay-
er's present method of accounting is not in
accord with § 1.168(i)-1(e)(2)(viii) (de-
termination of asset disposed of), the qual-
ified taxpayer must change to the appro-
priate asset as determined under
§ 1.168(i)-1(e)(2)(viii) by making the
change specified in section 6.40(3)(a) of
Rev. Proc. 2015-14 no later than the first
taxable year that the qualified taxpayer
uses the remodel-refresh safe harbor. But
if the qualified taxpayer recognized a gain
or loss under § 1.168(i)-1T, § 1.168(i)-
8T, or in a taxable year beginning before
January 1, 2012, as applicable, on the
disposition of a portion of the asset (as
determined under § 1.168(i)-1(e)(2)(viii))
in a taxable year prior to the year of
change, see section 5.02(5)(b).

(f) Qualifying dispositions. The cessa-
tion, termination, or disposition of an en-
tire qualified building, other than by trans-
fer to a supplies, scrap, or similar account,
is a qualifying disposition under
§ 1.168(i)-1(e)(3)(iii)(B)(3), provided
that all other requirements in § 1.168(i)-
1(e)(3)(iii)(B) are met. If a lessee termi-
nates the lease for an entire qualified
building and irrevocably disposes of or
abandons the leasehold improvements as-
sociated with that qualified building other
than by transfer to a supplies, scrap, or
similar account, such disposition is a qual-
ifying disposition under § 1.168(i)-
1(e)(3)(iii)(B)(3), provided that all other
requirements in § 1.168(i)-1(e)(3)(iii)(B)
are met. However, the disposition of an
improvement as a result of a remodel-
refresh project does not constitute a qual-
ifying disposition under § 1.168(i)-
1(e)(3)(iii)(B)(3).

.03 Applicability of § 263A. Amounts
paid to which the qualified taxpayer ap-
plies the remodel-refresh safe harbor are
not capitalized separately under
§ 263A(a)(1)(B) and (b)(1) as a direct or
indirect cost of producing property used in
the qualified taxpayer's trade or business.
However, a qualified taxpayer that pro-
duces for sale or acquires for resale prop-
erty described in § 1221(a) must capitalize
separately under § 263A the direct costs
of producing or acquiring such property
and the property's properly allocable
share of indirect costs. See §§ 1.263A-2
and 1.263A-3.

.04 Treatment of excluded remodel-
refresh costs. Excluded remodel-refresh
costs under section 4.06 are not eligible
for the remodel-refresh safe harbor. Ac-
cordingly, excluded remodel-refresh costs
must be deducted or capitalized in accor-
dance with the provisions of the Code and
regulations that are otherwise applicable.
See, for example, § 1.162-4 (repairs);
§ 1.263(a)-2 (amounts paid to acquire and
produce tangible property); § 1.263(a)-3
(costs to improve units of property); and
§ 263A (capitalization and inclusion in
inventory costs of certain costs). For de-
preciation and dispositions of excluded
remodel-refresh costs that are capital ex-
penditures, see § 168 and §§ 1.168(i)-1
and 1.168(i)-8, as applicable.

.05 Coordination with other safe har-
bor methods and elections.

(1) Treatment of amounts eligible for
safe harbor for small taxpayers under
§ 1.263(a)-3(h). A qualified taxpayer that
uses the remodel-refresh safe harbor may
not elect to apply the safe harbor for small
taxpayers under § 1.263(a)-3(h) to
amounts paid for repair, maintenance, im-
provement, or similar activities related to
a remodel-refresh project during the tax-
able year.

(2) Treatment of amounts eligible for
the safe harbor for routine maintenance.
A qualified taxpayer that uses the
remodel-refresh safe harbor may not uti-
lize the safe harbor for routine mainte-
nance under § 1.263(a)-3(i) for amounts
paid for qualified costs that are subject to
the remodel-refresh safe harbor method.
This rule does not apply to amounts paid
for excluded remodel-refresh costs or
amounts not incurred in a remodel-refresh
project.

## SECTION 6. EXAMPLES

The following examples illustrate the
application of this revenue procedure. In
each example, it is assumed that V, W, X,
and Y are qualified taxpayers within the
scope of this revenue procedure, that V,
W, X, and Y file their federal income tax
returns on a calendar year basis, that they
have not elected to apply the de minimis
safe harbor under § 1.263(a)-1(f) during
such taxable year, and that, unless other-
wise stated, they use the remodel-refresh
safe harbor method of accounting. It is
also assumed that § 110 does not apply to
the amounts paid by V, W, X, and Y, that
any amounts paid by V, W, X, and Y that
qualify as capital expenditures are depre-
ciated under §§ 167 and 168, and that
section 5.02(4) and section 5.02(5) do not
apply to any of V's, W's, and Y's qualified
buildings. The following examples do not
address the requirement or computation of
the § 481(a) adjustment, if applicable, for
purposes of changing the qualified taxpay-
ers' methods of accounting under section
7 of this revenue procedure.

Example 1. (i) V is in the trade or business of
operating a nationwide chain of retail stores that sell
a variety of retail goods to customers. To maintain a
contemporary and attractive environment, to con-
tinue to offer the most relevant and popular products,
and to reflect the changing demographics of its cus-
tomers, V periodically undertakes planned projects
whereby it incurs amounts to alter the physical ap-
pearance and layout of the buildings it uses for its
retail sales. These projects often include the remodel,
refresh, repair, and maintenance of § 1250 property
that is comprised of V's qualified buildings and
§ 1245 property that is located within these qualified
buildings. Each project includes activities such as
relocating or changing the square footage of certain
departments, check-out areas, storage spaces, and
dressing rooms within the footprint of the existing
buildings; removing, constructing, and altering walls
within the footprint of the existing buildings; moving
lighting and replacing lighting fixtures with more
efficient lighting; replacing bathroom fixtures with
more updated and efficient fixtures; replacing or
reconfiguring display tables and racks; patching and
repainting interior walls and exterior structures; and
replacing floor tiles, ceiling tiles, and signage. These
projects also include changes to the electrical sys-
tems, HVAC systems, and plumbing systems within
the buildings' existing footprints to accommodate
the structural changes, new product offerings, and
bathroom upgrades. V's retail stores remain open to
customers during the project, although parts of the
store buildings are closed at different times during
the process. In Year 1, V pays $3 million for these
activities to be performed on one of its qualified
buildings and places the related property into ser-
vice. Of the $3 million, V pays $1 million for § 1245

property, including new display tables and racks,
information kiosks, check-out counters, and other
equipment. For Year 1, V files a change in method of
accounting to use the remodel-refresh safe harbor
method of accounting.

(ii) V's $3 million project on its build-
ing is a remodel-refresh project as de-
scribed in section 4.03 because V pays
amounts to alter the physical appearance
and layout of its retail sales building to
maintain a contemporary and attractive
environment, to continue to offer the most
relevant and popular products, and to re-
flect the changing demographics of its
customers. Of the $3 million remodel-
refresh costs paid for the project, $1 mil-
lion was paid for § 1245 property, which
is treated as excluded remodel-refresh
costs under section 4.06(1). Accordingly,
under section 4.07 V incurs $2 million of
qualified costs ($3 million remodel-
refresh costs less $1 million excluded
remodel-refresh costs). Under the
remodel-refresh safe harbor method of ac-
counting: (A) V treats 75% of the $2 mil-
lion qualified costs ($1,500,000,00) as
amounts deductible under § 162 in Year 1,
the taxable year the improvements to the
qualified building are placed in service,
and V treats the remaining 25% of the $2
million qualified costs ($500,000) as im-
provements to the qualified building that
must be capitalized in Year 1 under
§§ 263(a) and 263A; (B) V depreciates the
$500,000 of improvements under §§ 167
and 168, and classifies the $500,000 of
improvements under § 168(e) in accor-
dance with section 5.02(3)(b)(ii); and (C)
V makes a general asset account election
to include the $500,000 of improvements
in a general asset account (or multiple
general asset accounts if the costs are for
improvements with different recovery pe-
riods). Because Year 1 is the first taxable
year that V uses the remodel-refresh safe
harbor method of accounting, V also must
make a late general asset account election
to include in general asset accounts all
assets that are MACRS property that com-
prise the qualified building, that are placed
in service by V before Year 1, and that are
owned by V at the beginning of Year 1.
Because the qualified building (including
the structural components) is in a general
asset account, V would not recognize a
loss for, and would continue to depreciate,
the amounts allocable to the portions of
the building and building systems re-

moved as part of the remodel-refresh proj-
ect. Finally, to determine the tax treatment
of the $1 million it paid for excluded
remodel-refresh costs (costs for § 1245
property), V must analyze these costs un-
der §§ 162, 263, and 263A, and the cor-
responding regulations.

Example 2. Assume the same facts as Example 1,
except during V's remodel-refresh project, a portion of
the $2 million paid for the project is for constructing an
addition to the back of the qualified building to increase
its storage and unloading space. This addition materi-
ally increases the square footage of the qualified build-
ing. The work also involves adding extensions to the
electrical system and the HVAC system of the building
to provide lighting, power, and ventilation throughout
the new space. As part of the material addition to the
qualified building, the extensions of the electrical sys-
tem and HVAC system also constitute material addi-
tions. Thus, the amounts paid for these additions, in-
cluding related removals costs for the previously
existing wall and any removed HVAC and electrical
system components, are excluded remodel-refresh
costs under section 4.06(8) and, as such, are excluded
from the qualified costs for purposes of applying the
remodel-refresh safe harbor.

For purposes of applying the remodel-
refresh safe harbor, V must exclude from
qualified costs the amount paid for con-
structing the addition to the back of the
qualified building and extending the electri-
cal and HVAC systems through this addi-
tion, and these excluded costs must be ana-
lyzed separately under §§ 162, 263, and
263A, and the corresponding regulations,
and be treated in accordance with those pro-
visions (or any other applicable provisions).
However, V may apply the remodel-refresh
safe harbor method to the amounts in Ex-
ample 1 that are qualified costs ($2 million
less the amount paid for constructing the
addition to the back of the qualified building
and extending the electrical and HVAC sys-
tems through this addition). In addition, be-
cause the qualified building (including its
structural components) is in a general asset
account, V would not recognize a loss for, and
would continue to depreciate, the amounts al-
locable to the portions of the building, electri-
cal system, and HVAC system removed as
part of the remodel-refresh project.

Example 3. Assume the same facts as Example 1,
except during V's remodel-refresh project, V pays
$100,000 (of the $3 million total) to reinforce the
foundation of the qualified building by sealing cracks
and adding additional structural support to the build-
ing's basement. Beginning prior to the date V acquired
the qualified building, the building began shifting and
sinking as a result of inadequate foundation support.
The sealing and addition of structural support in the
building's basement consist of activities that ameliorate
the inadequate foundation support, a material condition

or defect that existed prior to V's acquisition of the
building. Accordingly, the amounts paid by V for this
work constitute excluded remodel-refresh costs under
section 4.06(7) of this revenue procedure and are not
included in determining qualified costs for purposes of
applying the remodel-refresh safe harbor.

Thus, V must exclude the $100,000 paid
to reinforce the foundation of the qualified
building from qualified costs, and these ex-
cluded costs must be analyzed under §§ 162,
263, and 263A, and corresponding regula-
tions, and treated in accordance with those
provisions (or any other applicable provi-
sions). However, V may still apply the
remodel-refresh safe harbor method to the
$1,900,000 of qualified costs ($3,000,000
less $1,100,000). In addition, because the
qualified building (including its structural
components) is in a general asset account, V
would not recognize a loss for, and would
continue to depreciate, the amounts alloca-
ble to the portions of the qualified building
removed by reason of this work.

Example 4. Assume the same facts as Example 1,
except V is in the trade or business of operating a
nationwide chain of hardware stores that sell a vari-
ety of home maintenance and home improvement
goods to customers. As a part of V's remodel-refresh
project on its qualified building, V pays $80,000 (of
the $3 million total) in Year 1 to add an office suite
that uses 20% of the square footage of the qualified
building's existing footprint, measured prior to be-
ginning the remodel-refresh project. V intends to use
this suite to offer home design and architectural
services that will be provided in addition to V's
primary business of selling retail hardware goods.

Because the addition of the new office
suite is part of V's remodel-refresh project
and consists of adding rooms within the
existing footprint of the building, the
amounts paid to construct the office suite
constitute remodel-refresh costs under sec-
tions 4.04 and 4.05. Moreover, because the
addition of the new suite does not expand or
extend the square footage of the qualified
building and does not adapt more than 20%
of the floor space of the qualified building to
a new or different use under § 1.263(a)-3(1),
the amounts paid to construct the office suite
do not constitute excluded remodel-refresh
costs under section 4.06(10). Therefore,
provided that no other exclusion under sec-
tion 4.06 applies, the amounts paid to con-
struct the office suite are part of the $2
million of qualified costs under the remodel-
refresh safe harbor method. In addition, be-
cause the qualified building (including its
structural components) must be placed in a
general asset account, V would not recog-
nize a loss for, and would continue to de-

preciate, the amounts allocable to the portions
of the building and building systems removed
as part of the remodel-refresh project.

Example 5. W is in the trade or business of
operating several restaurants that prepare and sell
meals, snacks, and beverages to customer order for
immediate on-premises and/or off-premises con-
sumption. W periodically undertakes remodel-
refresh projects of the buildings it uses for its res-
taurants. For these projects, which W performs every
5 years, W qualified for and adopted the remodel-
refresh safe harbor method in Year 1. W completed
the last remodel-refresh project on qualified building
A in Year 1 and applied the remodel-refresh safe
harbor to that remodel-refresh project's qualified
costs. In Year 3, W experiences climate control prob-
lems in the dining area of its qualified building A and
consults with a contractor to determine the cause.
The contractor recommends that W replace one of
the two roof mounted HVAC units that provide
heating and cooling to qualified building A. In Year
3, W pays amounts to replace one of the HVAC units
as recommended by the contractor. Because the re-
placement of components of the HVAC system in
qualified building A is not undertaken by W to alter
the physical appearance or layout of qualified build-
ing A, the amounts paid for the HVAC component
replacement are not remodel-refresh costs as defined
under section 4.04. Accordingly, the remodel-refresh
safe harbor method does not apply to the amounts
paid by W to replace the HVAC unit. Rather, W's
costs must be analyzed separately under §§ 162, 263,
and 263A, and the corresponding regulations, and
treated in accordance with those provisions (or any
other applicable provisions). In addition, because
qualified building A and its structural components
are in general asset accounts, W would not recognize
a loss for, and would continue to depreciate, the
remaining adjusted basis of the HVAC unit replaced.

Example 6. X is in the trade or business of oper-
ating a nationwide chain of retail stores that sell a
variety of retail goods to customers. X periodically
undertakes remodel-refresh projects for the buildings it
uses for its retail sales. With its federal tax return for the
taxable year ended December 31, 2012, X filed a Form
3115 to change its method of accounting for disposi-
tions to be in accord with § 1.168(i)-8T(c)(4) and to
recognize a loss upon the disposition of the roof of
qualified building B. In 2015, X pays for a remodel-
refresh project on qualified building B. For the 2013
through 2015 taxable years, X did not file a Form 3115
to change its method of accounting to be in accord with
§ 1.168(i)-8. With its federal tax return for the taxable
year ending December 31, 2015, X files a Form 3115 to
begin using the remodel-refresh safe harbor. Pursuant
to section 5.02(5)(b), X cannot apply the remodel-
refresh safe harbor to the amounts paid for any
remodel-refresh project on qualified building B before
the year of change applicable to a Form 3115 filed by
X to change its method of accounting to be in accord
with § 1.168(i)-8. Therefore, the remodel-refresh safe
harbor does not apply to the costs paid in 2015 for the
2015 remodel-refresh project on qualified building B.

Example 7. The facts are the same as in Example
6, except that X files a Form 3115 with its federal tax
return for the taxable year ending December 31,
2016, to change its method of accounting to be in
accord with § 1.168(i)-8 and takes the entire amount

of the net positive § 481(a) adjustment into account in
computing its taxable income for that taxable year.
Also, in 2019, X pays for a new remodel-refresh project
on qualified building B. Pursuant to section 5.02(5)(b),
X cannot apply the remodel-refresh safe harbor to the
amounts paid for any remodel-refresh project on qual-
ified building B before the year of change applicable to
a Form 3115 filed by X to change its method of ac-
counting to be in accord with § 1.168(i)-8. Therefore,
the remodel-refresh safe harbor does not apply to any
costs paid before 2016 for any remodel-refresh project
on qualified building B. However, X filed the applica-
ble Form 3115 in 2016 and took the entire amount of
the net positive § 481(a) adjustment into account in
computing its taxable income for that taxable year.
Therefore, the remodel-refresh safe harbor applies to
the costs paid in 2019 for the 2019 remodel-refresh
project on qualified building B.

Example 8. The facts are the same as in Example
6, except X filed a Form 3115 with its federal tax return
for the taxable year ended December 31, 2014, to
change its method of accounting to be in accord with
§ 1.168(i)-8 and to make a late partial disposition
election for the roof of qualified building B. For the
2015 taxable year, X has not revoked such partial
disposition election. Pursuant to section 5.02(4)(c), X
cannot apply the remodel-refresh safe harbor to the
amounts paid for any remodel-refresh project for qual-
ified building B that are paid before the taxable year in
which X changes its method of accounting to utilize the
remodel-refresh safe harbor. Therefore, the remodel-
refresh safe harbor does not apply to the costs paid
before 2015 for any remodel-refresh project on quali-
fied building B but does apply to the costs paid in 2015
and subsequent taxable years for any remodel-refresh
project on qualified building B.

Example 9. The facts are the same as in Example
8, except X files a Form 3115 to begin using the
remodel-refresh safe harbor with its federal tax return
for the taxable year ending December 31, 2016. Pur-
suant to section 5.02(4)(c), X cannot apply the remodel-
refresh safe harbor to the amounts paid for any
remodel-refresh project for qualified building B that are
paid before the taxable year in which X changes its
method of accounting to utilize the remodel-refresh safe
harbor. Therefore, the remodel-refresh safe harbor does
not apply to the costs paid before 2016 for any remodel-
refresh project on qualified building B but does apply to
the costs paid in 2016 and subsequent taxable years for
any remodel-refresh project on qualified building B.

Example 10. Y is in the trade or business of
operating two restaurants that prepare and sell meals,
snacks, and beverages to customer order for imme-
diate on-premises and/or off-premises consumption.
The two restaurant buildings that Y uses for prepar-
ing and selling food are qualified building E and
qualified building F. Y acquired both buildings and
placed them in service in March 2007. In February
2010, Y completed a remodel-refresh project on
qualified building E and paid $8 million in qualified
costs for that project. At the same time, Y also
completed a remodel-refresh project on qualified
building F and paid $4 million in qualified costs for
that project. With its federal tax return for the taxable
year ended December 31, 2015, Y filed a Form 3115
to begin using the remodel-refresh safe harbor. As a
result, for the February 2010 project for qualified
building E, Y treats 75% of the $8 million qualified

costs ($6 million) as amounts deductible under § 162
and treats the remaining 25% of the $8 million
qualified costs ($2 million) as improvements to qual-
ified building E that must be capitalized under
§§ 263(a) and 263A. In addition, for the February
2010 project for qualified building F, Y treats 75% of
the $4 million qualified costs ($3 million) as
amounts deductible under § 162 and treats the re-
maining 25% of the $4 million qualified costs ($1
million) as improvements to qualified building F that
must be capitalized under §§ 263(a) and 263A. On
the same Form 3115, Y made a late general asset
account (GAA) election to include in general asset
accounts the original cost of qualified building E and
its $2 million of improvements and the original cost
of qualified building F and its $1 million of improve-
ments. Qualified buildings E and F and their im-
provements are nonresidential real property for pur-
poses of § 168. In accordance with section 5.02(6)(c)
and § 1.168(i)-1(c)(2), Y establishes three general
asset accounts: one for the original cost of qualified
building E (GAA #1), one for the original cost of
qualified building F (GAA #2), and one for the
improvements in the total amount of $3 million to
qualified buildings E and F (GAA #3).

Example 11. The facts are the same as in Exam-
ple 10, except Y sells qualified building F to an
unrelated party in 2016. This transaction is a quali-
fying disposition under § 1.168(i)-1(e)(3)(iii)(B)(3)
and section 5.02(6)(f). Also, because GAA #2 in-
cludes only one asset, the original qualified building F,
Y has disposed of all of the assets in GAA #2. As a
result, Y may do the following: (A) elect to apply
§ 1.168(i)-1(e)(3)(ii) to terminate GAA #2 and recog-
nize gain or loss for GAA #2; and (B) elect to apply
§ 1.168(i)-1(e)(3)(iii) to remove the improvements for
qualified building F (original cost of $1 million) from
GAA #3 and to put such improvements into a single
asset account under § 1.168(i)-7, as of January 1, 2016.
If Y makes the election under § 1.168(i)-1(e)(3)(iii), Y
will recognize gain or loss for the improvements for
qualified building F under § 1.168(i)-8.

## SECTION 7. CHANGE IN METHOD OF ACCOUNTING

.01 In general. Except as provided in
section 7.02(1), a change to the remodel-
refresh safe harbor method of accounting
provided in section 5.02 for remodel-refresh
costs is a change in method of accounting to
which the provisions of §§ 446 and 481, and
the corresponding regulations, apply. A
qualified taxpayer that wants to change to
the method of accounting described in this
revenue procedure must use the automatic
change procedures in Rev. Proc. 2015-13,
2015-5 I.R.B. 419, or its successor, except
as otherwise provided in section 7.02.

.02 Automatic change.

(1) Rev. Proc. 2015-14 is modified to
add new section 6.43 to read as follows:

6.43 Revocation of partial disposition
election under the remodel-refresh safe
harbor described in Rev. Proc. 2015-56

(1) Description of change.

(a) Applicability. This change applies to
a qualified taxpayer as defined in section
4.01 of Rev. Proc. 2015-56 and that is
within the scope of Rev. Proc. 2015-56 and
wants to revoke a partial disposition elec-
tion, as provided in section 5.02(4)(b)(ii)(B)
of Rev. Proc. 2015-56, related to a qualified
building, as defined in section 4.02 of Rev.
Proc. 2015-56, for which the qualified tax-
payer uses the remodel-refresh safe harbor
method of accounting provided in section
5.02 of Rev. Proc. 2015-56. See section
10.13 for making a change to this safe har-
bor method of accounting.

(b) Inapplicability. The IRS will treat
the revocation of the partial disposition
election specified in section 6.43(1)(a) as
a change in method of accounting only for
the taxable years specified in section
6.43(2). This treatment does not apply to a
qualified taxpayer, as described in section
6.43(1)(a), that makes this revocation be-
fore or after the time specified in section
6.43(2), and any such revocation is not a
change in method of accounting pursuant
to § 1.446-1(e)(2)(ii)(d)(3)(iii).

(2) Time for making the change. The
change under this section 6.43 must be
made for the qualified taxpayer's first or
second taxable year beginning after De-
cember 31, 2013.

(3) Certain eligibility rules temporarily
inapplicable.

(a) In general. The eligibility rules in
sections 5.01(1)(d) and (f) of Rev. Proc.
2015-13, 2015-5 I.R.B. 419, do not apply
to this change for the qualified taxpayer's
first or second taxable year beginning af-
ter December 31, 2013.

(b) Concurrent automatic change. If a
qualified taxpayer makes both a change
under this section 6.43 and a change under
section 10.13 for its first or second taxable
year beginning after December 31, 2013,
on a single Form 3115 for the same asset
for the same year of change in accordance
with section 6.43(6)(b), the eligibility
rules in sections 5.01(1)(d) and (f) of Rev.
Proc. 2015-13 do not apply to the quali-
fied taxpayer for either change.

(4) Section 481(a) adjustment period.
A qualified taxpayer making this change
must take the entire § 481(a) adjustment
into account in computing taxable income
for the year of change.

(5) Reduced filing requirement for
qualified small taxpayers. A qualified
small taxpayer, as defined in section
6.01(4)(b), may complete only the follow-
ing information on Form 3115 (Rev. De-
cember 2009):

(a) The identification section of page 1
(above Part I);

(b) The signature section at the bottom
of page 1;

(d) Part II, all lines except lines 11, 13,
14, 15, and 17;

(e) Part IV, lines 24, 25, and 26; and

(f) Schedule E.

(6) Concurrent automatic change.

(a) A qualified taxpayer making this
change for more than one asset for the
same year of change should file a single
Form 3115 for all such assets. The single
Form 3115 must provide a single net
§ 481(a) adjustment for all such changes.

(b) A qualified taxpayer making this
change and a change under section 10.13
for the same year of change should file a
single Form 3115 for both changes and
must enter the designated automatic ac-
counting method change numbers for the
changes on the appropriate line on the
Form 3115. See section 6.03(1)(b) of Rev.
Proc. 2015-13 for information on making
concurrent changes.

(7) Designated automatic accounting
method change number. The designated
automatic accounting method change
number for a change to the method of
accounting under this section 6.43 is
"221."

(8) Contact information. For further in-
formation regarding a change under this
section, contact Elizabeth R. Binder at
(202) 317-7003 (not a toll-free number).

(2) Rev. Proc. 2015-14 is modified to
add new section 10.13 to read as follows:

10.13 Remodel-refresh safe harbor
method.

(1) Description of change.

(a) Applicability. This change applies
to a qualified taxpayer as defined in sec-
tion 4.01 of Rev. Proc. 2015-56 and
within the scope of Rev. Proc. 2015-56
that wants to change to the remodel-
refresh safe harbor method of accounting
provided in section 5.02 of Rev. Proc.
2015-56 for its qualified costs, including
the making of a late general asset account

election as provided under section
5.02(6)(d) of Rev. Proc. 2015-56.

(b) Inapplicability. This change does
not apply to the following:

(i) The revocation of a partial disposi-
tion election that is made pursuant to sec-
tion 5.02(4)(b)(ii)(B) of Rev. Proc. 2015-
56. See section 6.43 for making this
revocation;

(ii) A change in determination of the
asset disposed of described in section
5.02(5) of Rev. Proc. 2015-56 (which is
made under section 6.38(3)(a) or
6.40(3)(a)). See section 10.13(6)(b) for
making the change under section
6.38(3)(a) or 6.40(3)(a) as a concurrent
change;

(iii) The making of a late general asset
account election not provided under sec-
tion 5.02(6)(d) of Rev. Proc. 2015-56;

(iv) If section 5.02(4)(c) of Rev. Proc.
2015-56 applies to a qualified building
(partial disposition election made in a
prior year and the qualified taxpayer did
not revoke such election within the time
and in the manner provided in section
5.02(4)(b)(ii) of Rev. Proc. 2015-56), any
qualified costs paid for that qualified
building prior to the year of change for a
Form 3115 filed to make the change to the
remodel-refresh safe harbor method of ac-
counting under this section 10.13; or

(v) If section 5.02(5)(b) of Rev. Proc.
2015-56 applies to a qualified building
(recognized gain or loss under
§ 1.168(i)-1T or § 1.168(i)-8T, or in a
taxable year beginning before January 1,
2012, for disposition of a component of a
qualified building) and the qualified tax-
payer did not make the required change in
method of accounting to be in accord with

§ 1.168(i)-1(e)(2)(viii) or § 1.168-
8(c)(4) on or before the first taxable year
that the qualified taxpayer uses the
remodel-refresh safe harbor and take the
entire amount of the § 481(a) adjustment
into account in computing the qualified
taxpayer's taxable income for that year of
change, any qualified costs paid for that
qualified building prior to the first taxable
year that the qualified taxpayer or the IRS
makes the change specified in section
6.38(3)(a) or 6.40(3)(a), as applicable, for
that qualified building and takes into ac-
count the entire amount of the § 481(a)
adjustment in computing taxable income
for the year of change.

(2) Certain eligibility rules inapplica-
ble.

(a) In general. The eligibility rules in
sections 5.01(1) (d) and (f) of Rev. Proc.
2015-13, 2015-5 I.R.B. 419, do not apply
to a qualified taxpayer that changes to a
method of accounting provided under this
section 10.13 for its first or second taxable
year beginning after December 31, 2013.

(b) Concurrent automatic change. If a
qualified taxpayer makes both a change
under this section 10.13 and a change
under section 6.37(3)(b), 6.38(3)(a),
and/or 6.40 for its first or second taxable
year beginning after December 31, 2013,
on a single Form 3115 for the same asset
for the same year of change in accordance
with section 10.13(7)(b), the eligibility
rules in sections 5.01(1) (d) and (f) of
Rev. Proc. 2015-13 do not apply to the
qualified taxpayer for either change.

(3) No audit protection. If section
5.02(4)(c) or 5.02(5)(b) of Rev. Proc.
2015-56 applies to a qualified building
(and, in the case of section 5.02(5)(b), the
qualified taxpayer does not make the re-
quired change on or before the first tax-
able year that the qualified taxpayer uses
the remodel-refresh safe harbor), the qual-
ified taxpayer does not receive audit pro-
tection under section 8.01 of Rev. Proc.
2015-13 in connection with this change
for that qualified building. See section
8.02(2) of Rev. Proc. 2015-13.

(4) Manner of making change.

(a) Reduced filing requirement for
qualified small taxpayers. A qualified
small taxpayer, as defined in section
6.01(4)(b), may complete only the follow-
ing information on Form 3115 (Rev. De-
cember 2009):

(i) The identification section of page 1
(above Part I);

(ii) The signature section at the bottom
of page 1;

(iii) Part I, line 1(a);

(iv) Part II, all lines except lines 11, 13,
14, 15, and 17;

(v) Part IV, lines 24, 25, and 26;

(vi) Schedule E; and

(vii) if applicable, the election state-
ment described in section 10.13(4)(b)(ii).

(b) Late general asset account election.

(i) In general. If under section
5.02(6)(d) of Rev. Proc. 2015-56 the
qualified taxpayer is required to make a
late general asset account election, the late

general asset account election change is
made using a modified cut-off method un-
der which the unadjusted depreciable basis
and the depreciation reserve of the asset as
of the beginning of the year of change are
accounted for using the new method of ac-
counting. The late general asset account
election change requires the general asset
account to include a beginning balance for
both the unadjusted depreciable basis and
the depreciation reserve. The beginning bal-
ance for the unadjusted depreciable basis of
each general asset account is equal to the
sum of the unadjusted depreciable bases as
of the beginning of the year of change for all
assets included in that general asset account.
The beginning balance of the depreciation
reserve of each general asset account is
equal to the sum of the greater of the depre-
ciation allowed or allowable as of the be-
ginning of the year of change for all assets
included in that general asset account.

(ii) Election statement. The qualified
taxpayer (including a qualified small tax-
payer) must attach to its Form 3115 a
statement providing that the qualified tax-
payer agrees to the following additional
terms and conditions:

(A) The qualified taxpayer consents to,
and agrees to apply, all of the provisions
of § 1.168(i)-1 to the assets that are sub-
ject to the election specified in section
5.02(6)(d) of Rev. Proc. 2015-56; and

(B) Except as provided in § 1.168(i)-
1(c)(1)(iii)(A),(e)(3), (g), or (h), the elec-
tion made by the qualified taxpayer under
section 5.02(6)(d) of Rev. Proc. 2015-56
is irrevocable and will be binding on the
qualified taxpayer for computing taxable
income for the year of change and for all
subsequent taxable years with respect to
the assets that are subject to this election.

(i) If section 5.02(4)(c) of Rev. Proc.
2015-56 applies to a qualified building,
the change to the remodel-refresh safe
harbor method of accounting for that qual-
ified building, and any improvements to
that qualified building, is made using a
cut-off method and applies only to quali-
fied costs paid or incurred for that quali-
fied building, and any improvements to
that qualified building, beginning in the
year of change for the change made to the
remodel-refresh safe harbor method of ac-
counting.

(ii) If section 5.02(5)(b) of Rev. Proc.
2015-56 applies to a qualified building
and the qualified taxpayer does not change
its present method of accounting to be in
accord with § 1.168(i)-1(e)(2)(viii) or
§ 1.168(i)-8(c)(4), as applicable, on or
before the first taxable year that the quali-
fied taxpayer used the remodel-refresh safe
harbor and take the entire amount of the
§ 481(a) adjustment into account in comput-
ing the qualified taxpayer's taxable income
for that year of change, the change to the
remodel-refresh safe harbor method of ac-
counting for that qualified building, and any
improvements to that qualified building, is
made using a cut-off method and applies
only to qualified costs paid or incurred for
that qualified building, and any improve-
ments to that qualified building, beginning
in the year of change for the change made to
comply with § 1.168(i)-1(e)(2)(viii) or
§ 1.168(i)-8(c)(4). See section 6.38(3)(a)
and section 6.40(3)(a).

(5) Section 481(a) adjustment.

(a) In general. A qualified taxpayer
changing its method of accounting under
this section 10.13 must apply § 481(a) and
take into account any applicable § 481(a)
adjustment in the manner provided in sec-
tion 7.03 of Rev. Proc. 2015-13. However,
a § 481(a) adjustment is neither required nor
permitted for the late general asset account
election under section 5.02(6)(d) of Rev.
Proc. 2015-56 or, if section 5.02(4)(c) or
5.02(5)(b) of Rev. Proc. 2015-56 applies to
a qualified building, and an improvement to
a qualified building (and, in the case of
section 5.02(5)(b), the qualified taxpayer did
not make the required change on or before
the first taxable year that the qualified tax-
payer uses the remodel-refresh safe harbor),
for the change to the remodel-refresh safe
harbor method of accounting for that quali-
fied building and an improvement to that
qualified building.

(b) Repair allowance property. A qual-
ified taxpayer changing to the method of
accounting provided under this section
10.13 must not include in the § 481(a)
adjustment any amount attributable to
property for which the qualified taxpayer
elected to apply the repair allowance un-
der § 1.167(a)-11(d)(2) for any taxable
year in which the repair allowance elec-
tion was made.

ing under this section 10.13 may use sta-
tistical sampling in determining the
§ 481(a) adjustment only by following the
sampling procedures provided in Rev.
Proc. 2011-42, 2011-37 I.R.B. 318.

(6) Concurrent automatic change.

(b) A qualified taxpayer making this
change, a change under section 6.38(3)(a)
or 6.43, and any change listed in section
6.37(4)(b) or section 6.40 for the same
year of change should file a single Form
3115 for all such changes and must enter
the designated automatic accounting
method change numbers for the changes
on the appropriate line on the Form 3115.
See section 6.03(1)(b) of Rev. Proc.
2015-13 for information on making con-
current changes.

(7) Designated automatic accounting
method change number. The designated
automatic accounting method change
number for a change to the method of
accounting under this section 10.13 is
"222."

(8) Contact information. For further in-
formation regarding a change under this
section, contact Elizabeth R. Binder at
(202) 317-7003 (not a toll-free number).

# SECTION 8. EFFECT ON OTHER DOCUMENTS

Rev. Proc. 2015-14 is modified to in-
clude the accounting method changes pro-
vided in section 7.02 in sections 6 and 10
of Rev. Proc. 2015-14, as applicable.

# SECTION 9. EFFECTIVE DATE

This revenue procedure is effective for
taxable years beginning on or after Janu-
ary 1, 2014.

# SECTION 10. DRAFTING INFORMATION

The principal author of this revenue
procedure is Elizabeth R. Binder of the
Office of Associate Chief Counsel (In-
come Tax & Accounting). For further in-
formation regarding this revenue proce-
dure, contact Ms. Binder at (202) 317-
7003 (not a toll-free number).

# Appendix A Documentation Standards

In addition to the information required to be included in the Form 3115, qualified taxpayers using the remodel-refresh safe harbor
provided by this revenue procedure must document this accounting method with the appropriate books and records, including work
papers that identify:

1\) The total cost of book fixed asset additions placed in service, within the meaning of § 1.46-3(d)(1)(ii), for the taxable year,
reconciled to total capital expenditures reported in the qualified taxpayer's Applicable Financial Statement (as defined in
§ 4.08).

2\) The total cost of tax fixed asset additions placed in service, within the meaning of § 1.46-3(d)(1)(ii), for the taxable year, after
all tax reclassifications for tax depreciation attributes and before application of this revenue procedure to remodel-refresh costs,
reconciled to the total cost of book fixed asset additions.

· The tax depreciation attribute identification should show the adjustments made to determine the adjusted basis of the tax
fixed assets under § 1011. In other words, any adjustments required under § 1016 to remodel-refresh costs or excluded
remodel-refresh costs for all qualified buildings prior to the following exclusions:

(1) Basis adjustments attributable to changes in the qualified taxpayer's definition of units of property made through a prior
change in accounting implemented before changing to the method provided in this revenue procedure;

(2) Adjustments made as described in § 1016(a)(2) or § 1016(a)(3); and

(3) Adjustments made that require tax basis to be reduced before depreciation is computed (for example §§ 179 and 179D;
§§ 44 and 50(c)).

The summary work papers should identify the tax fixed asset additions subtotaled for each excluded remodel-refresh cost
described in section 4.06. For these purposes, the timing rules provided in section 4.04 apply to determine when the fixed asset
additions, including excluded remodel-refresh costs, are taken into account.

The summary work papers should describe the methods and procedures used by the qualified taxpayer to identify the tax fixed
assets for the excluded remodel-refresh costs. If excluded remodel-refresh costs are identified by fields within the fixed asset system,
the description should list the applicable fixed asset system fields, including, for example, the following:

· Book classification/life;

· Tax classification/life;

· Project identifier;

· Store or restaurant unit identifier;

· Date the store or restaurant is initially placed in service (i.e., new versus existing);

· Date the remodel-refresh project assets are placed in service;

· Capital expenditure request identifier; and,

· Building-type identifier (e.g., retail versus non-retail building; restaurant versus non-restaurant building).

The summary work papers should identify source document references for any applicable documentation outside the fixed asset
system needed to account for excluded remodel-refresh costs when the fixed asset system does not include pertinent identifiers. For
example, reference to source documentation outside the fixed asset system is necessary if the fixed asset system does not identify
whether an asset is related to a restoration caused by damage to a qualified building for which the qualified taxpayer is required to
take a basis adjustment as a result of a casualty loss under § 165.

# Appendix B Example Schedule of Qualified Costs Subject to Remodel-Refresh Safe Harbor

## Change Between Beginning of Year and End of Year Applicable Financial Statement ("AFS") Fixed Assets

Beginning of year balance of consolidated U.S. fixed assets*

$ XXXXXX

Additions during year:

XXXXX

(1)

Less sales/disposals:

(XXX)

Other transfers to/from account:

(X)

End of year balance of consolidated U.S. fixed assets :*

$ XXXXXX

AFS Additions Converted to Capitalized Cost Additions for Tax:

(1) Additions during year per AFS:

$ XXXXX

Less reductions for all tax reclassifications for tax depreciation attributes:

(XX)

Capitalized cost additions for tax:

$ XXXX

(2)

Qualified Costs Subject to Safe Harbor:

(2) Capitalized cost additions for tax:

$ XXXX

Less the following excluded remodel-refresh costs for:

Section 1245 property (section 4.06(1))

$ XX

Intangibles per Reg. § 1.263(a)-4(b) (section 4.06(2))

Land or depreciable land improvements (section 4.06(3))

Initial acquisition, production, or lease of qualified building

(section 4.06(4))

The initial build-out of a leased qualified building, or a portion

thereof, for a new lessee (section 4.06(5))

Activities performed to rebrand, refresh, remodel, repair, or maintain a qualified building (section 4.06(6))

Activities performed to ameliorate an existing material condition or defect (section 4.06(7))

Material additions to a qualified building (section 4.06(8))

Restoration costs to a damaged qualified building subject to

§ 165 (section 4.06(9))

Costs to adapt more than 20% of a qualified building to a new or

different use (section 4.06(10))

Costs incurred during temporary store or restaurant closings of

more than 21 days (section 4.06(11))

Cost of any property for which the qualified taxpayer has claimed a

deduction under § 179, § 179D, or § 190 (section 4.06(12))

Total excluded remodel-refresh costs included in AFS additions:

$ (XX)

Qualified Costs Subject to Safe Harbor:

$ XXX

*Amount should reconcile to applicable BOY or EOY AFS balance sheet fixed assets account.

# Part IV. Items of General Interest

## Correction to Revenue Procedure 2015-51, I.R.B. 2015-42

### Announcement 2015-31

This document contains corrections to
Revenue Procedure 2015-51, as pub-
lished on Monday, October 19, 2015
(I.R.B. 2015-42, 583). In particular, this
announcement corrects certain specifica-
tions for checkboxes on Form W-2 and
the address to send sample substitute
forms to receive approval from the SSA.

Correction 1:

In Section 2.1 Specifications for Red-
Ink Substitute Form W-2 (Copy AP
and Form W-3 Filed with the SSA, the
measurements under 2.1(11) for the place-
ment of the checkboxes are incorrect.

Section 2.1(11) should read as follows:
11. The checkboxes in box 13 of Form
W-2 (Copy A) must be .14 inches each;
the space before the first checkbox is .24
inches; the spacing between the three
checkboxes is .36 inches; the space after
the last checkbox is .32 inches (see Ex-
hibit A). The checkboxes in box b of Form
W-3 must also be .14 inches.

Correction 2:

The Room number in the address in
Section 2.2(04) for sending sample sub-
stitute black-and-white Copy A and W-3
forms to the SSA has changed. The ad-
dress is:

Social Security Administration
Data Operations Center
Attn: Substitute Black-and-White
Copy A Forms, Room 341
1150 E. Mountain Drive
Wilkes-Barre, PA 18702-7997

Section 7428(c) Validation
of Certain Contributions
Made During Pendency of
Declaratory Judgment
Proceedings

Announcement 2015-32

This announcement serves notice to
potential donors that the organization
listed below has recently filed a timely
declaratory judgment suit under section
7428 of the Code, challenging revocation

of its status as an eligible donee under
section 170(c)(2).

Protection under section 7428(c) of the
Code begins on the date that the notice of
revocation is published in the Internal
Revenue Bulletin and ends on the date on
which a court first determines that an or-
ganization is not described in section
170(c)(2), as more particularly set forth in
section 7428(c)(1).

In the case of individual contributors,
the maximum amount of contributions
protected during this period is limited to
$1,000.00, with a husband and wife being
treated as one contributor. This protection
is not extended to any individual who was
responsible, in whole or in part, for the
acts or omissions of the organization that
were the basis for the revocation. This
protection also applies (but without limi-
tation as to amount) to organizations de-
scribed in section 170(c)(2) which are ex-
empt from tax under section 501(a). If the
organization ultimately prevails in its de-
claratory judgment suit, deductibility of
contributions would be subject to the nor-
mal limitations set forth under section
170.

Name of Organization

Date Suit Filed

Effective Date of Revocation

Location

American Housing Foundation

11/19/2014

1/1/2006

Amarillo, TX

Academy of America, a Michigan Non-Profit Corporation

03/25/2015

07/01/2001

Oak Park, MI

International Center For Earth Concerns

12/19/2014

1/1/2008

Ojai, CA

Conservation Endowment Fund

12/19/2014

1/1/2008

Ojai, CA

Taft Foundation

12/19/2014

1/1/2008

Ojai, CA

Educational Assistance Foundation For The Descendants of Hungarian Immi- grants in The Performing Arts, Inc.

8/30/2011

12/24/2003

Aventura, FL

The United Fund For The Education Of Russian Immigrant Children In Israel, Inc.

3/10/2014

1/1/2000

Brooklyn, NY

## Deletions From Cumulative List of Organizations, Contributions to Which are Deductible Under Section 170 of the Code

### Announcement 2015-33

The Internal Revenue Service has re-
voked its determination that the organiza-
tions listed below qualify as organizations
described in sections 501(c)(3) and
170(c)(2) of the Internal Revenue Code of
1986.

Generally, the IRS will not disallow
deductions for contributions made to a
listed organization on or before the date of

announcement in the Internal Revenue
Bulletin that an organization no longer
qualifies. However, the IRS is not pre-
cluded from disallowing a deduction for
any contributions made after an organiza-
tion ceases to qualify under section
170(c)(2) if the organization has not
timely filed a suit for declaratory judg-
ment under section 7428 and if the con-
tributor (1) had knowledge of the revoca-
tion of the ruling or determination letter,
(2) was aware that such revocation was
imminent, or (3) was in part responsible
for or was aware of the activities or omis-
sions of the organization that brought
about this revocation.

If on the other hand a suit for declara-
tory judgment has been timely filed, con-

tributions from individuals and organiza-
tions described in section 170(c)(2) that
are otherwise allowable will continue to
be deductible. Protection under section
7428(c) would begin on December 07,
2015 and would end on the date the court
first determines the organization is not
described in section 170(c)(2) as more
particularly set for in section 7428(c)(1).
For individual contributors, the maximum
deduction protected is $1,000, with a hus-
band and wife treated as one contributor.
This benefit is not extended to any indi-
vidual, in whole or in part, for the acts or
omissions of the organization that were
the basis for revocation.

NAME OF ORGANIZATION

Effective Date of Revocation

LOCATION

Community Education Foundation

1/1/2008

Baltimore, MD

# Relief from Joint and Several Liability REG-134219-08

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains
proposed regulations relating to relief
from joint and several liability under sec-
tion 6015 of the Internal Revenue Code
(Code). The regulations reflect changes in
the law made by the Tax Relief and
Health Care Act of 2006 as well as
changes in the law arising from litigation.
The regulations provide guidance to mar-
ried individuals who filed joint returns and
later seek relief from joint and several
liability.

DATES: Written or electronic comments
and requests for a public hearing must be
received by February 18, 2016.

ADDRESSES: Send submissions to: CC:
PA:LPD:PR (REG-134219-08), room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand-

delivered Monday through Friday between
the hours of 8 a.m. and 4 p.m. to CC:PA:
LPD:PR (REG-134219-08), Courier's
Desk, Internal Revenue Service, 1111 Con-
stitution Avenue, N.W., Washington, DC;
or sent electronically via the Federal eRule-
making Portal at www.regulations.gov (IRS
REG-134219-08).

## FOR FURTHER INFORMATION

CONTACT: Concerning the proposed
regulations, Nancy Rose at (202) 317-
6844; concerning submissions of com-
ments contact Oluwafunmilayo Taylor,
(202) 317-6901 (not toll-free numbers).

## SUPPLEMENTARY INFORMATION: Background

This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR part 1) for relief from joint
and several liability under section 6015 of
the Code and relief from the operation of
state community property law under sec-
tion 66.

Section 6013(a) permits a husband and
wife to file a joint income tax return. Sec-
tion 6013(d)(3) provides that spouses fil-
ing a joint income tax return are jointly
and severally liable for liabilities for tax
arising from that return. The term "tax"

includes additions to tax, additional
amounts, penalties, and interest. See sec-
tions 6665(a)(2) and 6601(e)(1). Joint and
several liability allows the IRS to collect
the entire liability from either spouse who
signed the joint return, without regard to
whom the items of income, deduction,
credit, or basis that gave rise to the liabil-
ity are attributable. Prior to 1998, section
6013(e) provided limited relief from joint
and several liability. In 1998, Congress
enacted the Internal Revenue Service Re-
structuring and Reform Act of 1998, Pub-
lic Law No. 105-206, 112 Stat. 685
(1998), which repealed section 6013(e)
and replaced it with section 6015. Section
6015 applies to liabilities arising after July
22, 1998, and liabilities that arose on or
before July 22, 1998, but remained unpaid
as of that date.

Section 6015 provides three avenues
for relief from joint and several liability
\- sections 6015(b), (c) and (f). To be
eligible for relief from joint and several
liability, a spouse must request relief. Un-
der section 6015(b), a requesting spouse
may be entitled to relief from joint and
several liability for an understatement of
tax attributable to erroneous items of the
nonrequesting spouse. Section 6015(c)
permits a taxpayer who is divorced, sep-

arated, widowed, or who had been living
apart from the other spouse for 12 months
to allocate his or her tax deficiency be-
tween the spouses as if separate returns
had been filed. Claims for relief under
section 6015(b) and (c) must be made
within two years of the IRS's first collec-
tion activity against the requesting spouse.
Finally, section 6015(f) confers discretion
upon the Commissioner to grant equitable
relief from joint and several liability for
understatements and underpayments,
based on all the facts and circumstances.
Regulations under section 6015 were first
prescribed in TD 9003, Federal Register
(67 FR 47278) on July 18, 2002.

These proposed amendments are nec-
essary to carry out the provisions of sec-
tion 6015 and to reflect changes in the law
since the publication of TD 9003. On De-
cember 20, 2006, Congress enacted the
Tax Relief and Health Care Act of 2006,
Public Law No. 109-432, div. C, title IV,
section 408, 120 Stat. 2922, 3061-62
(2006) (the 2006 Act). The 2006 Act
amended section 6015 to provide the
United States Tax Court with jurisdiction
to review the Commissioner's determina-
tion to deny equitable relief under section
6015(f) when the Commissioner has not
determined a deficiency and to suspend
the period of limitation for collection un-
der section 6502 when relief is requested
only under section 6015(f). The proposed
regulations also provide clarification and
additional guidance on procedural and
substantive issues related to the three
types of relief from joint and several lia-
bility under section 6015.

Section 66 provides relief for a spouse
who did not file a joint return in a com-
munity property state and did not include
in gross income an item of community
income that would be attributable solely
to the nonrequesting spouse but for the
operation of state community property
law. Regulations under section 66 were
first prescribed in TD 9074, Federal Reg-
ister (68 FR 41067) on July 10, 2003. The
proposed regulations under section 66
contain only non-substantive changes.

Recently, other amendments to the reg-
ulations under section 6015 were pro-
posed in a notice of proposed rulemaking
(REG-132251-11) published in the Fed-
eral Register (78 FR 49242) on August
13, 2013. Those regulations proposed

changes to § 1.6015-5 to remove the two-
year deadline for taxpayers to file requests
for equitable relief under section 6015(f),
and other changes related to the time and
manner for requesting relief. Additionally,
on September 16, 2013, the IRS issued
Rev. Proc. 2013-34 (2013-2 CB 397).
Rev. Proc. 2013-34 revised the factors
used in determining if a requesting spouse
is eligible for equitable relief under sec-
tions 66(c) and 6015(f).

### Explanation of Provisions

These regulations propose to make a
number of significant changes to the ex-
isting regulations. These changes include
providing additional guidance on the judi-
cial doctrine of res judicata and the sec-
tion 6015(g)(2) exception to res judicata
when a requesting spouse did not mean-
ingfully participate in a prior court pro-
ceeding. The regulations propose to add a
list of acts to be considered in making the
determination as to whether the requesting
spouse meaningfully participated in a
prior proceeding and provide examples of
the operation of these rules. The regula-
tions also (1) propose a definition of un-
derpayment or unpaid tax for purposes of
section 6015(f); (2) provide detailed rules
regarding credits and refunds in innocent
spouse cases; (3) expand the rule that pen-
alties and interest are not separate items
from which relief can be obtained to cases
involving underpayments; (4) incorporate
an administratively developed rule that at-
tribution of an erroneous item follows the
attribution of the underlying item that
caused the increase to adjusted gross in-
come (AGI); (5) update the discussion of
the allocation rules under section 6015(c)
and (d); and (6) revise the rules regarding
prohibition on collection and suspension
of the collection statute.

#### 1. Section 1.6015-1

The procedures for requesting relief on
Form 8857, "Request for Innocent Spouse
Relief," under section 6015 have changed
since 2006 because of the amendments to
section 6015(e) made by Section 408 of
Title IV of Division C of the 2006 Act.
The amendments to section 6015(e) con-
ferred jurisdiction on the Tax Court to
review the Commissioner's denial of re-
lief under section 6015(f) in cases in

which a deficiency had not been asserted.
The amendments also provided for a pro-
hibition on collection and a corresponding
tolling of the collection statute under sec-
tion 6502 upon the filing of a request for
relief under section 6015(f). The amend-
ments apply to any liability for taxes aris-
ing on or after December 20, 2006, and to
any liability for taxes arising before De-
cember 20, 2006, and remaining unpaid as
of that date. As a result of the amend-
ments, any request for relief under section
6015 will toll the collection statute, mak-
ing it unnecessary for a spouse to elect or
request a particular type of relief as re-
quired under § 1.6015-1(a)(2) of the cur-
rent regulations. Accordingly, § 1.6015-1
and all sections referencing an election
under §§ 1.6015-2 and 1.6015-3 or a re-
quest for relief under § 1.6015-4 are pro-
posed to be revised to reflect that a re-
questing spouse is no longer required to
elect or request relief under a specific pro-
vision of section 6015. Thus, beginning
with the June 2007 revision to the Form
8857, a requesting spouse makes a single
request for relief on Form 8857. Section
1.6015-1 is also being revised to provide
that the IRS will consider in all cases
whether the requesting spouse is eligible
for relief under § 1.6015-2 or § 1.6015-3,
and if relief is not available under either of
those sections, under § 1.6015-4.

Section 6015(g)(2) provides an excep-
tion to the common law doctrine of res
judicata except in a case in which relief
under section 6015 was at issue in a prior
court proceeding or if a requesting spouse
meaningfully participated in a prior pro-
ceeding in which relief under section 6015
could have been raised. Current § 1.6015-
1(e) is being revised in these proposed
regulations to provide more detailed guid-
ance on how the exception to res judicata
and the meaningful participation rule
work, and to reflect developments in the
case law since 2002 (described below).
Proposed § 1.6015-1(e)(1) restates the
general rule from the current regulations.

Proposed § 1.6015-1(e)(2) incorpo-
rates the holding in Deihl v. Commis-
sioner, 134 T.C. 156 (2010) (When a re-
questing spouse generally raises relief
under section 6015 in a proceeding but
does not specifically plead relief under
any subsection of section 6015, relief un-
der section 6015(c) will not be treated as

being at issue in that proceeding if the
requesting spouse was not eligible to elect
relief under section 6015(c) because the
requesting spouse was not divorced, wid-
owed, legally separated, or living apart for
12 months at any time during the prior
proceeding).

Proposed § 1.6015-1(e)(3) provides
guidance on the meaningful participation
exception to res judicata provided by sec-
tion 6015(g)(2). A requesting spouse
meaningfully participated in the prior pro-
ceeding if the requesting spouse was in-
volved in the proceeding so that the re-
questing spouse could have raised the
issue of relief under section 6015 in that
proceeding. Meaningful participation is a
facts and circumstances determination. A
nonexclusive list of acts was added in
proposed § 1.6015-1(e)(3) to provide in-
dicators of "meaningful participation"
within the context of a bar against relief
based on the judicial doctrine of res judi-
cata. Whether a requesting spouse mean-
ingfully participated in a prior proceeding
is based on all the facts and circum-
stances. No one act necessarily determines
the outcome. The degree of importance of
each act varies depending on the request-
ing spouse's facts and circumstances. The
following acts, derived from case law and
experience since 2002, are among the acts
the IRS and courts consider in making the
determination regarding meaningful par-
ticipation: whether the requesting spouse
participated in the IRS Appeals process
while the prior case was docketed;
whether the requesting spouse partici-
pated in discovery; whether the requesting
spouse participated in pretrial meetings,
settlement negotiations, or trial; whether
the requesting spouse signed court docu-
ments; and whether the requesting spouse
was represented by counsel in the prior
proceedings.

Proposed § 1.6015-1(e)(3)(i) provides
a new rule under which the requesting
spouse will not be considered to have
meaningfully participated in the prior pro-
ceeding if the requesting spouse estab-
lishes that the requesting spouse per-
formed any of the acts listed in proposed
§ 1.6015-1(e)(3) because the nonrequest-
ing spouse abused or maintained control
over the requesting spouse, and the re-
questing spouse did not challenge the non-
requesting spouse for fear of the nonre-

questing spouse's retaliation. Proposed
§ 1.6015-1(e)(3)(ii) restates the rule from
the current regulations that a requesting
spouse did not meaningfully participate in
a prior proceeding if, due to the effective
date of section 6015, relief under section
6015 was not available in that proceeding.

Proposed § 1.6015-1(e)(3)(iii) pro-
vides that in a case petitioned from a
statutory notice of deficiency under sec-
tion 6213, the fact that the requesting
spouse did not have the ability to effec-
tively contest the underlying deficiency is
irrelevant for purposes of determining
whether the requesting spouse meaning-
fully participated in the prior proceeding.
Treasury and the IRS disagree with the
holding in Harbin v. Commissioner, 137
T.C. 93 (2011), in which the Tax Court
concluded that Mr. Harbin did not mean-
ingfully participate in the deficiency case
in part because he could not effectively
contest the part of the deficiency related to
his ex-wife's gambling losses without her.
The Tax Court found that Mr. Harbin
could not effectively contest this part of
the deficiency without his ex-wife because
she "was the one with personal knowledge
of the winnings and losses from the gam-
bling activities" and was the one "who
maintained and provided all of the docu-
mentation relating to the gambling activ-
ities." The Tax Court concluded that this
knowledge and control of the documenta-
tion resulted in Mr. Harbin's ex-wife ef-
fectively exercising "exclusive control" of
the case. Harbin v. Commissioner, 137
T.C. at 98.

Treasury and the IRS believe that the
Tax Court applied the incorrect standard
to determine whether a taxpayer meaning-
fully participated in a proceeding for pur-
poses of section 6015(g)(2). The purpose
of the meaningful participation exception
to res judicata is not to ensure that a
taxpayer had the opportunity to contest
the deficiency but rather to ensure that the
taxpayer could have raised relief under
section 6015. Moore v. Commissioner,
T.C. Memo. 2007-156. This is evident
because, if section 6015 relief was at issue
in the prior case, the taxpayer is not per-
mitted to raise section 6015 relief in a
subsequent proceeding regardless of the
degree to which the taxpayer participated
or whether the taxpayer's ability to contest

the deficiency was impaired. See Deihl v.
Commissioner, 134 T.C. 156, 161 (2010).

Proposed § 1.6015-1(e)(4) provides
examples of how the rules in paragraphs
(e)(1), (e)(2), and (e)(3) work. Proposed
§ 1.6015-1(e)(5) restates the collateral es-
toppel rule from current § 1.6015-1(e)
without change.

Proposed § 1.6015-1(h)(1) and (h)(5)
are being revised to remove the distinction
between electing and requesting relief as
discussed earlier in this preamble.

Proposed § 1.6015-1(h)(6) defines
"unpaid tax" for purposes of § 1.6015-4.
For purposes of § 1.6015-4, the regula-
tions propose that the terms "unpaid tax"
and "underpayment" have the same mean-
ing. The unpaid tax or underpayment on a
joint return is the balance shown as due on
the return reduced by the tax paid with the
return or paid on or before the due date for
payment (without considering any exten-
sion of time to pay). The balance due is
determined after applying withholding
credits, estimated tax payments, payments
with an extension, and other credits ap-
plied against the total tax reported on the
return. Payments made with the return
include payments made by check in the
same envelope with the return or remitted
at a later date (but before the due date for
payment) with Form 1040-V, "Payment
Voucher." Payments made with the return
also include remittances made by direct
debit, credit card, or other commercially
acceptable means under section 6311 on
or before the due date for payment. The
determination of the existence and amount
of unpaid tax is made as of the date the
joint return is filed, or as of the due date
for payment if payments are made after
the return is filed but on or before the due
date.

If the payments made with the joint
return, including any payments made on
or before the due date for payment (with-
out considering any extension of time for
payment), completely satisfy the balance
due shown on the return, then there is no
unpaid tax for purposes of § 1.6015-4. A
requesting spouse is not entitled to be
considered for relief (credit or refund) un-
der § 1.6015-4 for any tax paid with the
joint return (including a joint amended
return). Payments made after the later of
the date the joint return is filed or the due
date for payment (without considering any

extension of time for payment), including
offsets of overpayments from other tax
years, do not change the amount of unpaid
tax reported on the joint return. Under
§ 1.6015-4, a requesting spouse can only
get relief from the unpaid tax on the re-
turn, and if refunds are available, from
any payments made on the liability after
the later of the date the joint return was
filed or the due date for payment (without
considering any extension of time for pay-
ment).

Proposed § 1.6015-1(h)(7) and (h)(8)
define understatement and deficiency, re-
spectively. Section 6015(b)(3) provides
that an "understatement" for purposes of
section 6015 has the same meaning given
to that term by section 6662(d)(2)(A). The
definition of understatement is in current
§ 1.6015-2(b) and therefore only applies
to requests under that section. The term
"understatement," however, is a term that
is relevant to relief under sections
6015(b), (c), and (f). These regulations
propose to move the definition of "under-
statement" to proposed § 1.6015-1(h)(7)
to allow a consistent definition to apply
throughout the regulations. Likewise, pro-
posed § 1.6015-1(h)(8) adds a definition
of deficiency, by reference to section 6211
and the regulations under section 6211, to
clarify that the term deficiency has the
same meaning throughout the regulations.

Section 6015(g)(1) provides that re-
questing spouses generally can receive a
credit or refund of payments made on the
joint liability if the requesting spouse is
entitled to relief under section 6015. This
general rule is set forth in proposed
§ 1.6015-1(k)(1). Section 6015(g) also
provides some limitations on the avail-
ability of credit or refund. New § 1.6015-
1(k)(2) through (5) discuss these and other
limitations on credit or refund when a
requesting spouse is eligible for relief.

Proposed § 1.6015-1(k)(2) sets forth
the limitation on refunds from section
6015(g)(3) when a requesting spouse is
entitled to relief under § 1.6015-3. Pro-
posed § 1.6015-1(k)(3) sets forth the rule
from current § 1.6015-4(b) that relief un-
der § 1.6015-4 is not available when the
requesting spouse is entitled to full relief
under § 1.6015-3 but is not entitled to a
refund because of the limitation in section
6015(g)(3) and proposed § 1.6015-
1(k)(2). Proposed § 1.6015-1(k)(4) incor-

porates, consistent with section
6015(g)(1), the limitations on credit or
refund provided by sections 6511 (general
limitations on credits or refunds) and
6512(b) (limitations on credits or refunds
where the Tax Court determines that a
taxpayer made an overpayment). This sec-
tion also clarifies that, in general, Form
8857 will be treated as the requesting
spouse's claim for credit or refund.

Proposed § 1.6015-1(k)(5) sets forth
the general rule that a requesting spouse
who is entitled to relief is generally not
eligible for a credit or refund of joint
payments made with the nonrequesting
spouse. Under the proposed rule, a re-
questing spouse, however, may be eligible
for a credit or refund of the requesting
spouse's portion of the requesting and
nonrequesting spouse's joint overpayment
from another tax year that was applied to
the joint income tax liability to the extent
that the requesting spouse can establish
his or her contribution to the overpay-
ment. Both spouses have an interest in a
joint overpayment relative to each
spouse's contribution to the overpayment.
See, for example, Gordon v. United
States, 757 F.2d 1157, 1160 (11th Cir.
1985) ("Where spouses claim a refund
under a joint return, the refund is divided
between the spouses, with each receiving
a percentage of the refund equivalent to
his or her proportion of the withheld tax
payments."). If the requesting spouse con-
tributed to the joint overpayment through
withholding, estimated tax, or other pay-
ments, then the requesting spouse may be
entitled to a refund of that portion of the
overpayment that was applied to the joint
liability. Under the proposed rule, a re-
questing spouse in a state that is not a
community property state may establish
his or her portion of a joint overpayment
using the allocation rules of Rev. Rul.
80-7 (1980-1 CB 296), or successor
guidance. A requesting spouse in a com-
munity property state may establish his or
her portion of a joint overpayment using
the allocation rules of Rev. Rul. 2004-71
(2004-2 CB 74), Rev. Rul. 2004-72
(2004-2 CB 77), Rev. Rul. 2004-73
(2004-2 CB 80), or Rev. Rul. 2004-74
(2004-2 CB 84), or successor guidance,
whichever is applicable to the state in
which the requesting spouse is domiciled.
For copies of Revenue Procedures, Reve-

nue Rulings, notices, and other guidance
published in the Internal Revenue Bulle-
tin, please visit the IRS website at http://
www.irs.gov.

These proposed regulations reflect the
elimination of the more restrictive rule
regarding credit or refund when relief is
granted under § 1.6015-4 in cases involv-
ing a deficiency, as provided by Rev.
Proc. 2013-34. A credit or refund, subject
to the limitations in § 1.6015-1(k), is
available to a requesting spouse who is
entitled to relief under § 1.6015-4 in both
underpayment and deficiency cases.

Current § 1.6015-1(h)(4) provides, in
part, that penalties and interest are not
separate erroneous items from which a
requesting spouse can be relieved separate
from the tax. Rather, relief from penalties
and interest related to an understatement
or deficiency will generally be determined
based on the proportion of the total erro-
neous items from which the requesting
spouse is relieved.

Thus, under the existing regulations, a
requesting spouse who is determined not
to be eligible for relief from the under-
statement or deficiency stemming from an
erroneous item cannot be separately re-
lieved from a penalty, such as the
accuracy-related penalty, related to the
item under section 6015. If a requesting
spouse is entitled to partial relief (such as
relief from two of three erroneous items
giving rise to the understatement or defi-
ciency), then the requesting spouse will be
entitled to relief from the accuracy-related
penalty applicable to those two items.

These regulations propose to move the
discussion in current § 1.6015-1(h)(4) to
proposed § 1.6015-1(m). Proposed
§ 1.6015-1(m) additionally clarifies, con-
sistent with the statutory interpretation in
current § 1.6015-1(h)(4), that penalties
and interest on an underpayment also are
not separate items from which a request-
ing spouse may obtain relief under
§ 1.6015-4. Rather, relief from penalties
and interest on the underpayment will be
determined based on the amount of relief
from the underpayment to which the re-
questing spouse is entitled. If a requesting
spouse remains liable for a portion of the
underpayment after application of
§ 1.6015-4, the requesting spouse is not
eligible for relief under section 6015 for
the penalties and interest related to that

portion of the underpayment. Cf. Weiler v.
Commissioner, T.C. Memo. 2003-255 (a
requesting spouse is not relieved from li-
abilities for penalties and interest resulting
from items attributable to the requesting
spouse). This position is consistent with
how the IRS currently treats relief from
penalties and interest after determining
the relief from the underlying tax. See
IRM 25.15.3.4.1.1(2) (Revised 03/08/
2013).

If an assessed deficiency is paid in full,
or the unpaid tax reported on the joint
return is later paid in full, but penalties
and interest remain unpaid, under the pro-
posed rule, a requesting spouse may be
considered for relief from the penalties
and interest under section 6015. The de-
termination of relief from the penalties
and interest is made by considering
whether the requesting spouse would be
entitled to relief from the underlying tax
and not considering the penalties and in-
terest as if they were separate items. A
requesting spouse may be relieved from
the penalties and interest even if relief in
the form of a refund of the payments made
on the underlying tax is barred (for exam-
ple, § 1.6015-1(k)(2) (no refunds allowed
under § 1.6015-3) or § 1.6015-1(k)(4)
(refund barred by the limitations of sec-
tions 6511 or 6512(b)).

Proposed § 1.6015-1(n) provides attri-
bution rules for a portion of an understate-
ment or deficiency relating to the disal-
lowance of certain items. Specifically,
§ 1.6015-1(n) addresses items that are
otherwise not erroneous items, but are dis-
allowed solely due to the increase of ad-
justed gross income (or modified adjusted
gross income) over a phase-out threshold
as a result of an erroneous item attribut-
able to the nonrequesting spouse. One
common example of this is when the non-
requesting spouse's omitted income in-
creases adjusted gross income so that the
Earned Income Tax Credit (EITC) is
phased out and the understatement or de-
ficiency partially represents the recapture
of the refunded EITC.

Under proposed § 1.6015-1(n), the un-
derstatement or deficiency related to the
item disallowed due to the increase to
adjusted gross income will be attributable
to the spouse whose erroneous item
caused the increase to adjusted gross in-
come, unless the evidence shows that a

different result is appropriate. If the in-
crease to adjusted gross income is the
result of erroneous items of both spouses,
the item disallowed due to the increase to
adjusted gross income will be attributable
to the requesting spouse in the same ratio
as the amount of the item or items attrib-
utable to the requesting spouse over the
total amount of the items that resulted in
the increase to adjusted gross income.
Corresponding rules are proposed to be
added to §§ 1.6015-2(b) and 1.6015-
3(c)(2)(i) to provide that a requesting
spouse knows or has reason to know of
the item disallowed due to the increase in
adjusted gross income if the requesting
spouse knows or has reason to know of
the erroneous item or items that resulted
in the increase to adjusted gross income.
Likewise, for purposes of proposed
§ 1.6015-4 and Rev. Proc. 2013-34, a
requesting spouse knows or has reason to
know of the portion of an understatement
or deficiency related to an item attribut-
able to the nonrequesting spouse under
§ 1.6015-1(n) if the requesting spouse
knows or has reason to know of the non-
requesting spouse's erroneous item or
items that resulted in the increase to ad-
justed gross income.

Examples are provided to illustrate
how this rule applies in situations involv-
ing the EITC, the phase-out of itemized
deductions, and the application of the al-
ternative minimum tax. This rule, how-
ever, can be implicated in other situations.
It should be noted that this proposed rule
would not apply if there is another reason
for disallowing the item, such as no qual-
ifying child for the EITC, no substantia-
tion for a claimed deduction, or the lack of
any basis in law or fact for the deduction.
In this situation, the normal attribution
rules applicable to §§ 1.6015-2,
1.6015-3, and 1.6015-4 apply.

Proposed § 1.6015-1(o) provides a
definition of abuse for purposes of pro-
posed §§ 1.6015-2(b) and 1.6015-
3(c)(vi). The definition of abuse is taken
directly from Rev. Proc. 2013-34, section
4.03(2)(c)(iv).

#### 2. Section 1.6015-2

Only minor substantive changes are
proposed to current § 1.6015-2. The pro-
posed amendments reorganize the section,

update references, and provide clarifica-
tion where needed. Proposed § 1.6015-
2(a) changes the language in the existing
regulations, "the requesting spouse elects
the application of this section," to "the
requesting spouse requests relief" consis-
tent with the discussion earlier in this pre-
amble. The definition of "understatement"
in current § 1.6015-2(b) is removed as the
definition will now be located in proposed
§ 1.6015-1(h)(7). Current § 1.6015-2(c)
is redesignated as proposed § 1.6015-
2(b), adds additional facts and circum-
stances from Rev. Proc. 2013-34 to con-
sider in determining whether a requesting
spouse had reason to know, adds a knowl-
edge rule to correspond to proposed
§ 1.6015-1(n) as discussed earlier in this
preamble, and clarifies, consistent with
the changes made in Rev. Proc. 2013-34,
that abuse or financial control by the non-
requesting spouse will result in the re-
questing spouse being treated as not hav-
ing knowledge or reason to know of the
items giving rise to the understatement.
Current § 1.6015-2(d) is redesignated as
proposed § 1.6015-2(c) and provides an
updated cross-reference to the most recent
revenue procedure providing the criteria
to be used in determining equitable relief,
Rev. Proc. 2013-34. Current § 1.6015-
2(e)(1) is redesignated as proposed
§ 1.6015-2(d)(1) and the word "only" is
removed to clarify the rule. Current
§ 1.6015-2(e)(2) is redesignated as pro-
posed § 1.6015-2(d)(2) and the example
is updated to use more current years and
dates, but otherwise no substantive
changes were made.

#### 3. Section 1.6015-3

Among other clarifying changes, these
regulations propose to clarify the differ-
ence between full and partial relief under
section 6015(c) and to reflect case law
regarding the tax benefit rule of section
6015(d)(3)(B), including new examples.

Proposed § 1.6015-3(a) provides a re-
vised heading and a cross-reference to the
definition of deficiency in proposed
§ 1.6015-1(h)(8).

Section 6015(g)(3) provides that no
credit or refund is allowed as a result of an
allocation of a deficiency under section
6015(c). Proposed § 1.6015-3(c)(1) clar-
ifies the existing regulations and provides

that whether relief is available to a re-
questing spouse under section 6015(c) is
not dependent on the availability of credit
or refund. Thus, if a requesting spouse is
eligible to allocate the entire deficiency to
the nonrequesting spouse, the requesting
spouse has received full relief even if the
requesting spouse made payments on the
deficiency and is not entitled to a refund
of those payments because of section
6015(g)(3). Further, the requesting spouse
is not eligible to be considered for relief
(and a refund) under section 6015(f) for
the amount of any paid liability because a
prerequisite to relief under section 6015(f)
is the unavailability of relief under section
6015(b) or (c) and the spouse received full
relief under section 6015(c). A requesting
spouse may still be considered for relief
(and a refund) under section 6015(b) for
the amount of any paid liability. If a re-
questing spouse only receives partial re-
lief (for example, some part of the defi-
ciency is still allocated to the requesting
spouse), then the requesting spouse may
be considered for relief under section
6015(f) for the portion of the deficiency
allocable to the requesting spouse. A new
sentence is added to § 1.6015-3(c)(2)(i) to
add a knowledge rule to correspond to
proposed § 1.6015-1(n), which, as dis-
cussed earlier in this preamble, provides
an attribution rule for the portion of a
deficiency relating to the disallowance or
reduction of an otherwise valid item
solely due to the increase in AGI as a
result of the disallowance of an erroneous
item.

Proposed § 1.6015-3(d)(2)(i) illus-
trates that, under the tax benefit rule of
section 6015(d)(3)(B), the amount of an
erroneous item allocated to a requesting
spouse may increase or decrease depend-
ing upon the tax benefit to the requesting
and nonrequesting spouses. Thus, these
proposed regulations adopt the holding of
Hopkins v. Commissioner, 121 T.C. 73
(2003) (a requesting spouse was entitled
to relief from her own item under the tax
benefit rule of section 6015(d)(3)(B) be-
cause the nonrequesting spouse was the
only person who reported income on the
returns, and therefore, the only one who
received any tax benefit from the item). In
addition, five new examples have been
added to § 1.6015-3(d)(5) to provide ad-
ditional guidance on the application of the

tax benefit rule of § 1.6015-3(d)(2)(i).
Example 7 demonstrates the application of
§ 1.6015-3(d)(2)(i)(B), which provides
that each spouse's hypothetical separate
taxable income may need to be deter-
mined to properly apply the tax benefit
rule. Example 8 demonstrates the holding
in Hopkins by showing that a requesting
spouse's allocated portion of a deficiency
will be decreased when the nonrequesting
spouse receives a tax benefit from the
item. Example 9 demonstrates the alloca-
tion of a liability when the erroneous item
is a loss from a jointly-owned investment.
Example 10 demonstrates how the tax
benefit rule works when the erroneous
item is a loss from a jointly-owned invest-
ment. In addition, Example 11 is added to
demonstrate how the rule in § 1.6015-
3(d)(2)(ii) regarding fraud works.

Section 1.6015-3(c)(2)(iv) currently
provides that the requesting spouse's joint
ownership (with the nonrequesting
spouse) of the property that resulted in the
erroneous item is a factor that may be
relied upon in demonstrating that the re-
questing spouse had actual knowledge of
the item. Under the tax benefit rule of
§ 1.6015-3(d)(2)(i), as stated earlier in
this preamble, a requesting spouse can be
relieved of liability for the requesting
spouse's own erroneous item if the item is
otherwise allocable in full or in part to the
nonrequesting spouse under section
6015(d). Therefore, proposed § 1.6015-
3(c)(2)(iv) revises the current regulations
to clarify that the requesting spouse's sep-
arate ownership of the erroneous item is
also a factor that may be relied upon in
demonstrating that the requesting spouse
had actual knowledge of the item. Current
§ 1.6015-3(c)(2)(v) is redesignated as
proposed § 1.6015-3(c)(2)(vi) and the dis-
cussion of community property in current
§ 1.6015-3(c)(iv) is removed and is now
located in proposed § 1.6015-3(c)(2)(v).
Proposed § 1.6015-3(c)(vi) is revised to
clarify, consistent with the changes made
in Rev. Proc. 2013-34, that abuse or fi-
nancial control by the nonrequesting
spouse will result in the requesting spouse
being treated as not having actual knowl-
edge of the items giving rise to the under-
statement.

#### 4. Section 1.6015-4

No substantive changes are proposed
to current § 1.6015-4. The proposed
amendments update references and pro-
vide a clarifying change consistent with
proposed § 1.6015-3(c)(1), which pro-
vides the rule that refunds are not allowed
under section 6015(c).

Proposed § 1.6015-4(a) was revised to
provide a cross-reference to the defini-
tions of unpaid tax, understatement, and
deficiency in proposed §§ 1.6015-1(h)(6),
(h)(7), and (h)(8).

Proposed § 1.6015-4(b) was revised to
provide a cross-reference to proposed
§ 1.6015-1(k)(3). The paragraph also
clarifies that if only partial relief is avail-
able under § 1.6015-3, then relief may be
considered under § 1.6015-4 for the por-
tion of the deficiency for which the re-
questing spouse remains liable.

Proposed § 1.6015-4(c) replaces the
citation to Rev. Proc. 2000-15 (2000-1
CB 447) with Rev. Proc. 2013-34, which
revised the factors used in determining if
the requesting spouse is eligible for equi-
table relief under section 6015(f).

#### 5. Section 1.6015-5

A notice of proposed rulemaking
(REG-132251-11) was published in the
Federal Register (78 FR 49242) on Au-
gust 13, 2013. Those regulations proposed
changes to § 1.6015-5 to remove the two-
year deadline for taxpayers to file requests
for equitable relief under section 6015(f),
and other changes related to the time and
manner for requesting relief. These pro-
posed regulations revise the notice of
proposed rulemaking published on Au-
gust 13, 2013 to add an effective date
provision.

##### 6. Section 1.6015-6

The changes in proposed § 1.6015-6
are intended to update the current regula-
tions to reflect existing practice and guid-
ance. Proposed § 1.6015-6(a)(1) replaces
the term "election" under § 1.6015-2 or
§ 1.6015-3 with "request for relief." Pro-
posed § 1.6015-6(a)(2) includes a refer-
ence to Rev. Proc. 2003-19 (2003-1 CB
371), which provides guidance on a non-

requesting spouse's right to appeal a pre-
liminary determination to IRS Appeals.

##### 7. Section 1.6015-7

Section 1.6015-7 was revised to reflect
the amendments to section 6015(e) in the
2006 Act that, as noted earlier in this
preamble, conferred jurisdiction on the
United States Tax Court to review the
IRS's denial of relief in cases in which
taxpayers requested equitable relief under
section 6015(f), without regard to whether
the IRS has determined a deficiency. Prior
to these amendments, the United States
Tax Court lacked jurisdiction to review
section 6015(f) determinations if no defi-
ciency had been determined. The amend-
ments apply to any liability for tax that
arose on or after December 20, 2006, and
any liability for tax that arose before De-
cember 20, 2006, but remained unpaid as
of that date. Proposed § 1.6015-7(c) re-
vises the current regulations to reflect the
changes to the restrictions on collection
and corresponding tolling of the collection
statute under section 6502. On versions of
the Form 8857 dated before June 2007 a
requesting spouse could request relief un-
der just one subsection of section 6015.
For claims for relief that were made under
sections 6015(b) and (c) (and the corre-
sponding §§ 1.6015-2 and 1.6015-3), the
IRS is prohibited from collecting against
the requesting spouse (and the collection
statute is tolled) beginning on the date the
claim is filed. For requests for relief made
solely under section 6015(f) (and the cor-
responding § 1.6015-4), the IRS is pro-
hibited from collecting against the re-
questing spouse (and the collection statute
is tolled) only for liabilities arising on or
after December 20, 2006, or liabilities
arising before December 20, 2006, but
remaining unpaid as of that date. For re-
quests for relief made solely under
§ 1.6015-4, the restrictions on collection
and tolling of the collection statute do not
start until December 20, 2006, for any
requests filed before that date, assuming
the tax remained unpaid as of that date.
The restrictions on collection and tolling
of the collection statute start as of the date
the request is filed for requests filed on or
after December 20, 2006.

8\. Section 1.66-4

The only changes to the existing regu-
lations under section 66 are non-
substantive changes. Proposed § 1.66-
4(a)(3) and (b) replace the citation to Rev.
Proc. 2000-15 with Rev. Proc. 2013-34,
which revised the factors used in deter-
mining whether a requesting spouse is el-
igible for equitable relief under section
66(c).

#### 9. Effective and Applicability Dates

Additionally, the effective and applica-
bility date sections in the regulations un-
der section 66 and section 6015 are reor-
ganized to move the effective and
applicability date sections within the spe-
cific regulation to which the dates apply.
The separate effective date sections under
§§ 1.66-5 and 1.6015-9 are removed.

### Special Analyses

Certain IRS regulations, including this
one, are exempt from the requirements of
Executive Order 12866, as supplemented
and reaffirmed by Executive Order 13563.
Therefore, a regulatory impact assessment
is not required. It has also been deter-
mined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations. In
addition, because the regulations do not
impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Accordingly, a regulatory flexibility anal-
ysis is not required under the Regulatory
Flexibility Act (5 U.S.C. chapter 6). Pur-
suant to section 7805(f) of the Code, this
notice of proposed rulemaking has been
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administra-
tion for comment on its impact on small
business.

#### Comments and Requests for Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are
submitted timely to the IRS as prescribed
in the preamble under the "Addresses"
heading. Treasury and the IRS request
comments on all aspects of the proposed

regulations. All comments will be avail-
able at www.regulations.gov or upon re-
quest. 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 hear-
ing will be published in the Federal Reg-
ister.

### Drafting Information

The principal author of these regula-
tions is Nancy Rose of the Office of the
Associate Chief Counsel (Procedure and
Administration).

* * * * *

### Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:

PART 1-Income Taxes

Paragraph 1. The authority citation for
part 1 is amended by adding the following
entries in numerical order as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.66-1 also issued under 26
U.S.C. 66(c).
Section 1.66-2 also issued under 26
U.S.C. 66(c).

Section 1.66-3 also issued under 26
U.S.C. 66(c).

*****

Par. 2. Section 1.66-1 is amended by
adding paragraph (d) to read as follows:

§ 1.66-1 Treatment of community
income.

* * * * *

(d) Effective/applicability date. This
section is applicable beginning July 10,
2003.

Par. 3. Section 1.66-2 is amended by
adding paragraph (e) to read as follows:

§ 1.66-2 Treatment of community
income where spouses live apart.

* * * * *

(e) Effective/applicability date. This
section is applicable beginning July 10,
2003.

Par. 4. Section 1.66-3 is amended by
adding paragraph (d) to read as follows:

§ 1.66-3 Denial of the Federal income
tax benefits resulting from the operation
of community property law where
spouses not notified.

* * * * *

(d) Effective/applicability date. This
section is applicable beginning July 10,
2003.

Par. 5. Section 1.66-4 is amended by:
1\. The last sentences of paragraphs
(a)(3) and (b) are revised.

2\. Paragraph (l) is added and reserved.

3\. Paragraph (m) is added.

The revisions and additions read as fol-
lows:

§ 1.66-4 Request for relief from the
Federal income tax liability resulting
from the operation of community
property law.

(a) * * *

(3) * * * Factors relevant to whether it
would be inequitable to hold a requesting
spouse liable, more specifically described
under the applicable administrative proce-
dure issued under section 66(c) (Rev.
Proc. 2013-34 (2013-2 CB 397) (See
§ 601.601(d)(2) of this chapter), or other
applicable guidance published by the Sec-
retary), are to be considered in making a
determination under this paragraph (a).

(b) * * * Factors relevant to whether it
would be inequitable to hold a requesting
spouse liable, more specifically described
under the applicable administrative proce-
dure issues under section 66(c) (Rev.
Proc. 2013-34 (2013-2 CB 397) (See
§ 601.601(d)(2) of this chapter), or other
applicable guidance published by the Sec-
retary), are to be considered in making a
determination under this paragraph (b).
* * * * *

(l) [Reserved]

(m) Effective/applicability date. This
section is applicable beginning July 10,
2003, except that paragraphs (a)(3) and
(b) of this section will be applicable on the
date of publication of a Treasury Decision
adopting these rules as final regulations in
the Federal Register.

§ 1.66-5 [Removed]

Par. 6. Section 1.66-5 is removed.

Par. 7. Section 1.6015-0 is amended
by:

1\. In § 1.6015-1, entries for paragraphs
(e)(1), (e)(2), (e)(3), (e)(4), (e)(5), (h)(6),

(h)(7), (h)(8), (k), (l), (m), (n), (o), and (p)
are added and the entry for paragraph
(h)(5) is revised.

2\. In § 1.6015-2, entries for paragraphs
(b), (c), (d), and (e) are revised and the
entries for paragraphs (e)(1) and (e)(2) are
removed.

3\. In § 1.6015-3, entries for paragraphs
(a) and (c)(2)(v) are revised and entries
for paragraphs (c)(2)(vi), (d)(2)(i)(A),
(d)(2)(i)(B), and (e) are added.

4\. In § 1.6015-4, an entry for para-
graph (d) is added.

5\. In § 1.6015-5, an entry for para-
graph (d) is added.

6\. In § 1.6015-6, an entry for para-
graph (d) is added.

7\. In § 1.6015-7, entries for paragraphs
(c)(1) and (c)(4)(iii) are revised and en-
tries for paragraphs (c)(1)(i), (c)(1)(ii),
(c)(1)(iii), and (d) are added.

8\. In § 1.6015-8, an entry for para-
graph (d) is added.

9\. Section 1.6015-9 entry is removed.

The revisions and additions read as fol-
lows:

§ 1.6015-0 Table of contents.

* * * * *

§ 1.6015-1 Relief from joint and several
liability on a joint return.

* * * * *

(e) * * *

(1) In general.

(2) Situations in which relief under
§ 1.6015-3 will not be considered to have
been at issue in the prior proceeding.

(3) Meaningful participation.

(4) Examples.

(5) Collateral estoppel.

* * * * *

(h) * * *

(5) Request for relief.

(6) Unpaid tax and underpayment.

(7) Understatement.

(8) Deficiency.

* * * * *

(k) Credit or refund.

(1) In general.

(2) No credit or refund allowed under
§ 1.6015-3.

(3) No circumvention of §§ 1.6015-
1(k)(2) and 1.6015-3(c)(1).

(4) Limitations on credit or refund.

(5) Requesting spouse limited to credit
or refund of payments made by the re-
questing spouse.

(l) [Reserved]

(m) Penalties and interest.

(n) Attribution of understatement or
deficiency resulting from an increase to
adjusted gross income.

(1) In general.

(2) Examples.

(o) Abuse by nonrequesting spouse.

(p) Effective/applicability date.

#### § 1.6015-2 Relief from liability applicable to all qualifying joint filers.

* * * * *

(b) Know or reason to know.

(d) Partial relief.

(1) In general.

(2) Example.

(e) Effective/applicability date.

§ 1.6015-3 Allocation of deficiency for
individuals who are no longer married,
are legally separated, or are not
members of the same household.

(a) Allocation of deficiency.

* * * * *

(2) * * *

(v) Actual knowledge and community
property.

(vi) Abuse exception.

* * * * *

(d) * * *

(2) * * *

(i) * * *

(A) In general.

(B) Calculating separate taxable in-
come and tax due.

(e) Effective/applicability date.

§ 1.6015-4 Equitable relief.

(d) Effective/applicability date.

§ 1.6015-5 Time and manner for
requesting relief.

* * * * *

(d) Effective/applicability date.

§ 1.6015-6 Nonrequesting spouse's
notice and opportunity to participate in
administrative proceedings.

* * * * *

(d) Effective/applicability date.

§ 1.6015-7 Tax Court review.

* * * * *

(1) Restrictions on collection.

(i) Restrictions on collection for re-
quests for relief made on or after Decem-
ber 20, 2006.

(ii) Restrictions on collection for re-
quests for relief made before December
20, 2006.

(iii) Rules for determining the period
of the restrictions on collection.

* * * * *

(4) * * *

(iii) Assessment to which the request
relates.

(d) Effective/applicability date.

§ 1.6015-8 Applicable liabilities.

* * * * *

(d) Effective/applicability date.

Par. 8. Section 1.6015-1 is amended
by:

1\. Paragraphs (a)(2), (e), (h)(1), and
(h)(5) are revised.

2\. The last three sentences of paragraph
(h)(4) are removed.

3\. Paragraphs (h)(6), (7), and (8) and
(k) are added.

4\. Paragraph (l) is added and reserved.

5\. Paragraphs (m), (n), (o), and (p) are
added.

The revisions and additions read as fol-
lows:

§ 1.6015-1 Relief from joint and several
liability on a joint return.

(a) * * *

(2) A requesting spouse may submit a
single request for relief under
§§ 1.6015-2, 1.6015-3, and 1.6015-4.
Upon submitting a request for relief, the
IRS will consider whether relief is appro-
priate under §§ 1.6015-2 and 1.6015-3
and, to the extent relief is unavailable
under both of those provisions, under
§ 1.6015-4. Equitable relief under
§ 1.6015-4 is available only to a request-

ing spouse who fails to qualify for relief
under §§ 1.6015-2 and 1.6015-3.

* * * * *

(e) Res judicata and collateral estop-
pel-(1) In general. A requesting spouse
is barred from relief from joint and several
liability under section 6015 by res judicata
for any tax year for which a court of
competent jurisdiction has rendered a final
decision on the requesting spouse's tax
liability if relief under section 6015 was at
issue in the prior proceeding, or if the
requesting spouse meaningfully partici-
pated in that proceeding and could have
raised the issue of relief under section
6015.

(2) Situations in which relief under
§ 1.6015-3 will not be considered to have
been at issue in the prior proceeding. Re-
lief under § 1.6015-3 will not be consid-
ered to have been at issue in a prior pro-
ceeding if the requesting spouse only
raised the issue of relief under section
6015 in general and did not specify under
which subsection relief was being re-
quested, and the requesting spouse was
not eligible for relief under § 1.6015-3
during the prior proceeding because the
requesting spouse was not divorced, wid-
owed, or legally separated, or had been a
member of the same household as the
nonrequesting spouse during the prior 12
months.

(3) Meaningful participation. A re-
questing spouse meaningfully participated
in the prior proceeding if the requesting
spouse was involved in the proceeding so
that the requesting spouse could have
raised the issue of relief under section
6015 in that proceeding. Meaningful par-
ticipation is a facts and circumstances de-
termination. Absent abuse as set forth in
paragraph (i) of this section, the following
is a nonexclusive list of acts to be consid-
ered in making the facts and circum-
stances determination: whether the re-
questing spouse participated in the IRS
Appeals process while the prior proceed-
ing was docketed; whether the requesting
spouse participated in pretrial meetings;
whether the requesting spouse partici-
pated in discovery; whether the requesting
spouse participated in settlement negotia-
tions; whether the requesting spouse
signed court documents, such as a peti-
tion, a stipulation of facts, motions, briefs,
or any other documents; whether the re-

questing spouse participated at trial (for
example, the requesting spouse was pres-
ent or testified at the prior proceeding);
and whether the requesting spouse was
represented by counsel in the prior pro-
ceeding. No one act necessarily deter-
mines the outcome. The degree of impor-
tance of each act varies depending on the
requesting spouse's facts and circum-
stances.

(i) Notwithstanding the fact that a re-
questing spouse performed any of the acts
listed in paragraph (e)(3) of this section in
the prior proceeding, the requesting
spouse will not be considered to have
meaningfully participated in the prior pro-
ceeding if the requesting spouse estab-
lishes that the requesting spouse per-
formed the acts because the nonrequesting
spouse abused (as described in paragraph
(o) of this section) or maintained control
over the requesting spouse, and the re-
questing spouse did not challenge the non-
requesting spouse for fear of the nonre-
questing spouse's retaliation.

(ii) A requesting spouse did not mean-
ingfully participate in a prior proceeding
if, due to the effective date of section
6015, relief under section 6015 was not
available in that proceeding.

(iii) In a case petitioned from a statu-
tory notice of deficiency under section
6213, the fact that the requesting spouse
did not have the ability to effectively con-
test the underlying deficiency is irrelevant
for purposes of determining whether the
requesting spouse meaningfully partici-
pated in the court proceeding for purposes
of paragraph (e)(1) of this section.

(4) Examples. The following examples
illustrate the rules of this paragraph (e):

Example 1. In a prior court proceeding involving
a petition from a notice of deficiency related to a
joint income tax return, H and W were still married
and filed a timely joint petition to the United States
Tax Court. The petition stated that W was entitled to
relief under section 6015 without specifying under
which subsection she was requesting relief. Before
trial, H negotiates with the IRS Chief Counsel attor-
ney and settles the case. W did not meaningfully
participate. A stipulated decision was entered that
did not mention relief under section 6015. One year
later W files a request for relief under section 6015.
While W did not meaningfully participate in the
prior court proceeding, because relief under section
6015 was at issue in that case, res judicata applies
except with respect to relief under § 1.6015-3. Be-
cause W did not specify that she was requesting
relief under § 1.6015-3, and W was not eligible to
request relief under that section because she was still

married to the nonrequesting spouse throughout the
court proceeding, relief under § 1.6015-3 is not
considered to have been at issue in that case. Thus,
W is not barred by res judicata from raising relief
under § 1.6015-3 in a later case. However, any later
claim from W requesting relief under § 1.6015-2 or
§ 1.6015-4 would be barred by res judicata.

Example 2. Same facts as in Example 1 of this
paragraph (e)(4) except that H and W are divorced at
the time the petition was filed. Because W was
eligible to request relief under § 1.6015-3 as she was
divorced from H, relief under § 1.6015-3 is consid-
ered to be at issue in the prior court proceeding and
W is barred by res judicata from raising relief under
§ 1.6015-3 in a later case. Thus, any later claim from
W requesting relief under any subsection of section
6015 would be barred by res judicata.

Example 3. The IRS issued a notice of deficiency
to H and W determining a deficiency on H and W's
joint income tax return based on H's Schedule C
business. H and W timely filed a petition in the
United States Tax Court. W signed the petition and
numerous other documents, participated in discus-
sions regarding the case with the IRS Chief Counsel
attorney, and ultimately agreed to a settlement of the
case. W could have raised any issue, but W did not
have any access to H's records regarding his Sched-
ule C business, over which H maintained exclusive
control. Relief under section 6015 was never raised
in the court proceeding. If W were to later file a
request for relief under section 6015, W's claim
would be barred by res judicata. Considering these
facts and circumstances, W meaningfully partici-
pated in the prior court proceeding regarding the
deficiency. The fact that W could not have effec-
tively contested the underlying deficiency because
she had no access to H's Schedule C records is not
relevant to the determination of whether W mean-
ingfully participated. Instead the meaningful partic-
ipation exception looks to W's involvement in the
prior court proceeding and her ability to raise relief
under section 6015 as a defense.

Example 4. Same facts as Example 3 of this
paragraph (e)(4), except that W's participation in
discussions with the IRS Chief Counsel attorney
were clearly controlled by H, and W was fearful of H
when she agreed to settle the case. In this situation,
her involvement in the prior proceeding would not
be considered meaningful participation because W
was able to establish that H maintained control over
her and that she did not challenge H for fear of the
H's retaliation. If W were to later file a request for
relief under section 6015, her claim would not be
barred by res judicata.

Example 5. In March 2014, the IRS issued a
notice of deficiency to H and W determining a de-
ficiency on H and W's joint income tax return for tax
year 2011. H and W timely filed a pro se petition in
the United States Tax Court for redetermination of
the deficiency. W signed the petition, but otherwise,
H handled the entire litigation, from discussing the
case with the IRS Chief Counsel attorney to agreeing
to a settlement of the case. Relief under section 6015
was never raised. W signed the decision document
that H had agreed to with the IRS Chief Counsel
attorney. If W were to later file a claim requesting
relief under section 6015, W's claim would not be
barred by res judicata. Considering these facts and

circumstances, W's involvement in the prior court
proceeding regarding the deficiency did not rise to
the level of meaningful participation.

Example 6. Same facts as in Example 5 of this
paragraph (e)(4) except that W also participated in
settlement negotiations with the IRS Chief Counsel
attorney that resulted in the decision document en-
tered in the case. Considering these facts and cir-
cumstances-signing the petition and the decision
document, along with participating in the negotia-
tions that led to the settlement reflected in the deci-
sion document-W meaningfully participated in the
prior court proceeding regarding the deficiency be-
cause W could have raised relief under section 6015.
Any later claim from W requesting relief under sec-
tion 6015 would be barred by res judicata.

Example 7. In a prior court proceeding involving
a petition from a notice of deficiency, H and W hired
counsel, C, to represent them in the United States
Tax Court. W agreed to C's representation, but oth-
erwise, only H met and communicated with C about
the case. C signed and filed the petition, discussed
the case with the IRS Chief Counsel attorney, and
agreed to a settlement of the case after discussing it
with H. Relief under section 6015 was never raised.
C signed the decision document on behalf of H and
W. If W were to later file a claim requesting relief
under section 6015, W's claim would not be barred
by res judicata. Even though W was represented by
counsel in the prior court proceeding regarding the
deficiency, considering all the facts and circum-
stances, W's involvement in the prior court proceed-
ing did not rise to the level of meaningful participa-
tion.

Example 8. In a prior court proceeding involving
a petition from a notice of deficiency, H did not sign
the petition or other court documents, participate in
the Appeals or Counsel settlement negotiations, at-
tend pretrial meetings, or hire separate counsel. H
did, however, attend the trial and testify. Considering
these facts and circumstances, H's participation in
the trial is sufficient to establish that H meaningfully
participated in the prior court proceeding regarding
the deficiency because H's participation provided H
with a definite opportunity to raise relief under sec-
tion 6015 in that proceeding. Any later claim from H
requesting relief under section 6015 would be barred
by res judicata.

Example 9. The IRS issued a joint notice of
deficiency to H and W determining a deficiency on H
and W's joint income tax return based on H's Sched-
ule C business. Only W timely filed a petition in the
United States Tax Court. W conceded the deficiency
shortly before trial and signed a decision document.
W did not raise relief under section 6015. If W were
to later file a claim requesting relief under section
6015, W's claim would be barred by res judicata.
Because W was the only petitioner in the prior court
proceeding, W's participation in that proceeding was
meaningful participation.

(5) Collateral estoppel. Any final deci-
sions rendered by a court of competent
jurisdiction regarding issues relevant to
section 6015 are conclusive, and the re-
questing spouse may be collaterally es-
topped from relitigating those issues.

* * * * *

(h) Definitions-(1) Requesting
spouse. A requesting spouse is an individ-
ual who filed a joint income tax return and
requests relief from Federal income tax
liability arising from that return under
§ 1.6015-2, § 1.6015-3, or § 1.6015-4.
* * * * *

(5) Request for relief. A qualifying re-
quest under § 1.6015-2, § 1.6015-3, or
§ 1.6015-4 is the first timely request for
relief from joint and several liability for
the tax year for which relief is sought. A
qualifying request also includes a request-
ing spouse's second request for relief
from joint and several liability for the
same tax year under § 1.6015-3 when the
additional qualifications of paragraphs
(h)(5)(i) and (ii) of this section are met-

(i) The requesting spouse did not qual-
ify for relief under § 1.6015-3 at the time
of the first request solely because the qual-
ifications of § 1.6015-3(a) were not satis-
fied; and

(ii) At the time of the second request,
the qualifications for relief under
§ 1.6015-3(a) were satisfied.

(6) Unpaid tax and underpayment. Un-
paid tax and underpayment for purposes
of § 1.6015-4 means the balance due
shown on the joint return, reduced by the
tax paid with the joint return. The balance
due shown on the joint return is deter-
mined after application of the credits for
tax withheld under section 31, any
amounts paid as estimated income tax,
any amounts paid with an extension of
time to file, or any other credits applied
against the total tax reported on the return.
Tax paid with the joint return includes a
check or money order remitted with the
return or Form 1040-V, "Payment
Voucher," or payment by direct debit,
credit card, or other commercially accept-
able means under section 6311. If the joint
return is filed on or before the last day
prescribed for filing under section 6072
(determined without regard to any exten-
sion of time to file under section 6081),
the tax paid with the joint return includes
any tax paid on or before the last day
prescribed for payment under section
6151. If the joint return is filed after the
last day prescribed for filing, the tax paid
with the joint return includes any tax paid
on or before the date the joint return is
filed. A requesting spouse is not entitled to
be considered for relief under § 1.6015-4

for any tax paid with the joint return. If the
tax paid with the joint return completely
satisfies the balance due shown on the
return, then there is no unpaid tax for
purposes of § 1.6015-4.

(7) Understatement. The term under-
statement means the excess of the amount
of tax required to be shown on the return
for the taxable year over the amount of the
tax imposed which is shown on the return,
reduced by any rebate (within the mean-
ing of section 6211(b)(2)).

(8) Deficiency. The term deficiency has
the same meaning given to that term in
section 6211 and § 301.6211-1 of this
chapter.

* * * * *

(k) Credit or refund-(1) In general.
Except as provided in paragraphs (k)(2)
through (5) of this section, a requesting
spouse who is eligible for relief can re-
ceive a credit or refund of payments made
to satisfy the joint income tax liability,
whether the liability resulted from an un-
derstatement or an underpayment.

(2) No credit or refund allowed under
§ 1.6015-3. A requesting spouse is not
entitled to a credit or refund of any pay-
ments made on the joint income tax lia-
bility as a result of allocating the defi-
ciency under § 1.6015-3. See section
6015(g)(3) and § 1.6015-3(c)(1).

(3) No circumvention of §§ 1.6015-
1(k)(2) and 1.6015-3(c)(1). Section
1.6015-4 may not be used to circumvent
the limitation of § 1.6015-3(c)(1) (such
as, no refunds under § 1.6015-3). There-
fore, relief is not available under this sec-
tion to obtain a credit or refund of liabil-
ities already paid, for which the requesting
spouse would otherwise qualify for relief
under § 1.6015-3. For purposes of deter-
mining whether the requesting spouse
qualifies for relief under § 1.6015-3, the
fact that a refund was barred by section
6015(g)(2) and paragraph (k)(2) of this
section does not mean that the requesting
spouse did not receive full relief. A re-
questing spouse is entitled to full relief
under § 1.6015-3 if the requesting spouse
was eligible to allocate the deficiency in
full to the nonrequesting spouse.

(4) Limitations on credit or refund. The
availability of credit or refund is subject to
the limitations provided by sections 6511
and 6512(b). Generally the filing of Form
8857, "Request for Innocent Spouse Re-

lief," will be treated as the filing of a claim
for credit or refund even if the requesting
spouse does not specifically request a
credit or refund. The amount allowable as
a credit or refund, assuming the requesting
spouse is eligible for relief, includes pay-
ments made after the filing of the Form
8857, as well as payments made within
the applicable look-back period provided
by section 6511(b).

(5) Requesting spouse limited to credit
or refund of payments made by the re-
questing spouse. A requesting spouse is
only eligible for a credit or refund of
payments to the extent the requesting
spouse establishes that he or she provided
the funds used to make the payment for
which he or she seeks a credit or refund.
Thus, a requesting spouse is not eligible
for a credit or refund of payments made
by the nonrequesting spouse. A requesting
spouse is also generally not eligible for a
credit or refund of joint payments made
with the nonrequesting spouse. A request-
ing spouse, however, may be eligible for a
credit or refund of the requesting spouse's
portion of an overpayment from a joint
return filed with the nonrequesting spouse
that was offset under section 6402 to the
spouses' joint income tax liability, to the
extent that the requesting spouse can es-
tablish his or her contribution to the over-
payment.

##### (l) [Reserved]

(m) Penalties and interest. Generally, a
spouse who is entitled to relief under
§ 1.6015-2, § 1.6015-3, or § 1.6015-4 is
also entitled to relief from related penal-
ties, additions to tax, additional amounts,
and interest (collectively, penalties and in-
terest). Penalties and interest, however,
are not separate erroneous items (as de-
fined in paragraph (h)(4) of this section)
from which a requesting spouse can be
relieved separate from the tax. Rather re-
lief from penalties and interest related to
an understatement or deficiency will
generally be determined based on the
proportion of the total erroneous items
from which the requesting spouse is re-
lieved. For penalties that relate to a par-
ticular erroneous item, see § 1.6015-
3(d)(4)(iv)(B). Penalties and interest on
an underpayment are also not separate
items from which a requesting spouse
may obtain relief under § 1.6015-4. Re-
lief from penalties and interest on the un-

derpayment will be determined based on
the amount of relief from the underpay-
ment to which the requesting spouse is
entitled. If the underlying tax liability
(whether an assessed deficiency or an un-
derpayment) was paid in full after the
joint return was filed but penalties and
interest remain unpaid, the requesting
spouse may be relieved from the penalties
and interest if the requesting spouse is
entitled to relief from the underlying tax.
The fact that the requesting spouse is en-
titled to relief from the underlying tax but
is not entitled to a refund because of
§ 1.6015-1(k) does not prevent the re-
questing spouse from being relieved from
liability for the penalties and interest.

(n) Attribution of understatement or
deficiency resulting from an increase to
adjusted gross income-(1) In general.
Any portion of an understatement or de-
ficiency relating to the disallowance of an
item (or increase to an amount of tax)
separately listed on an individual income
tax return solely due to the increase of
adjusted gross income (or modified ad-
justed gross income or other similar
phase-out thresholds) as a result of an
erroneous item solely attributable to the
nonrequesting spouse will also be attrib-
utable to the nonrequesting spouse unless
the evidence shows that a different result
is appropriate. If the increase to adjusted
gross income is the result of an erroneous
item(s) of both the requesting and nonre-
questing spouses, the item disallowed (or
increased tax) due to the increase to ad-
justed gross income will be attributable to
the requesting spouse in the same ratio as
the amount of the item or items attribut-
able to the requesting spouse over the total
amount of the items that resulted in the
increase to adjusted gross income.

(2) Examples. The following examples
illustrate the rules of this paragraph (n):

Example 1. H and W file a joint Federal income
tax return. After applying withholding credits there
is a tax liability of $500. Based on the earned income
reported on the return and the number of qualifying
children, H and W are entitled to an Earned Income
Tax Credit (EITC) in the amount of $1,500. The
EITC satisfies the $500 in tax due and H and W
receive a refund in the amount of $1,000. Later the
IRS concludes that H had additional unreported in-
come, which increased the tax liability on the return
to $1,000 and resulted in H and W's EITC being
reduced to zero due to their adjusted gross income
exceeding the maximum amount. The IRS deter-
mines a deficiency in the amount of $2,000 - $1,500

of which relates to the EITC and $500 of which
relates to H's erroneous item - the omitted income.
If W requests relief under section 6015, the entire
$2,000 deficiency is attributable to H because the
EITC was disallowed solely due to the increase of
adjusted gross income as a result of H's omitted
income. W satisfies the attribution factor of
§ 1.6015-2(a)(2) and the threshold condition in sec-
tion 4.01(7) of Rev. Proc. 2013-34 with respect to
the entire deficiency. Under § 1.6015-3(d)(4)(ii), the
portion of the deficiency related to the disallowance
of the EITC is initially allocated to H.

Example 2. H and W file a joint Federal income
tax return reporting a total tax liability of $22,000.
Later the IRS concludes that H had additional unre-
ported income in the amount of $20,000, which
increased H and W's adjusted gross income and their
alternative minimum taxable income. As a result, H
and W now owe the Alternative Minimum Tax
(AMT). The IRS determines a deficiency in the
amount of $5,250 - $250 of which relates to H and
W's AMT liability as determined under section 55
and $5,000 of which relates to the increase in H and
W's section 1 income tax liability. If W requests
relief under section 6015, the entire $5,250 defi-
ciency is attributable to H because H and W owe the
AMT solely due to H's erroneous item - the omitted
income. W satisfies the attribution factor of
§ 1.6015-2(a)(2) and the threshold condition in sec-
tion 4.01(7) of Rev. Proc. 2013-34 with respect to
the entire deficiency. Under § 1.6015-3(d)(4)(ii), the
portion of the deficiency related to the AMT is
initially allocated to H.

Example 3. H and W file a joint Federal income
tax return reporting itemized deductions on Schedule
A, "Itemized Deductions," in the amount of $50,000.
Later the IRS concludes that $10,000 of W's ex-
penses reported on her Schedule C, "Profit or Loss
From Business," were not allowable, which in-
creased H and W's adjusted gross income. As a
result, H and W's itemized expenses are reduced to
$45,000 as their adjusted gross income exceeded the
phase-out amount. The IRS determines a deficiency
in the amount of $5,000. If H requests relief under
section 6015, the entire $5,000 deficiency is attrib-
utable to W because the itemized deductions were
reduced solely due to the increase of adjusted gross
income as a result of W's erroneous item - the
Schedule C expenses. H satisfies the attribution fac-
tor of § 1.6015-2(a)(2) and the threshold condition
in section 4.01(7) of Rev. Proc. 2013-34 with re-
spect to the entire deficiency. Under § 1.6015-
3(d)(2)(iv), the portion of the deficiency related to
the disallowance of the Schedule A deductions is
initially allocated to W.

Example 4. H and W file a joint Federal income
tax return reporting itemized deductions on Schedule
A in the amount of $50,000. Later the IRS concludes
that H had additional unreported income in the
amount of $4,000 and W had additional unreported
income in the amount of $6,000, which increased H
and W's adjusted gross income. As a result, H and
W's itemized expenses are reduced to $45,000 as
their adjusted gross income exceeded the phase-out
amount. The IRS determines a deficiency in the
amount of $6,000 - $1,500 of which relates to H's
erroneous item, $2,500 of which relates to W's er-
roneous item, and $2,000 of which relates to the

reduced itemized deductions. Assuming the condi-
tions for relief under section 6015 are otherwise
satisfied, the $2,500 deficiency from W's omitted
income is attributable to W and the $1,500 defi-
ciency from H's omitted income is attributable to H.
Because the increase to adjusted gross income as a
result of both H and W's erroneous items reduced
the itemized deductions, the portion of the deficiency
related to the disallowed itemized deductions is par-
tially attributable to both H and W. Of the $2,000
deficiency from the disallowed itemized deductions,
$800 is attributable to H because 40 percent ($4,000/
$10,000) of the items that resulted in the increase to
adjusted gross income are attributable to H, and
$1,200 is attributable to W because 60 percent
($6,000/$10,000) of the items that resulted in the
increase to adjusted gross income are attributable to
W. If both H and W requested relief the most H
could be relieved from is $3700, the amount attrib-
utable to W ($2500 + $1200), and the most W could
be relieved from is $2300, the amount attributable to
H ($1500 + $800).

(o) Abuse by the nonrequesting spouse.
Abuse comes in many forms and can in-
clude physical, psychological, sexual, or
emotional abuse, including efforts to con-
trol, isolate, humiliate, and intimidate the
requesting spouse, or to undermine the
requesting spouse's ability to reason inde-
pendently and be able to do what is re-
quired under the tax laws. All the facts
and circumstances are considered in de-
termining whether a requesting spouse
was abused. The impact of a nonrequest-
ing spouse's alcohol or drug abuse is also
considered in determining whether a re-
questing spouse was abused. Depending
on the facts and circumstances, abuse of
the requesting spouse's child or other
family member living in the household
may constitute abuse of the requesting
spouse.

(p) Effective/applicability date. This
section will be applicable on the date of
publication of a Treasury decision adopt-
ing these rules as final regulations in the
Federal Register.

Par. 9. Section 1.6015-2 is amended
by:

1\. Paragraph (a) introductory text is
revised.

2\. Paragraph (b) is removed.

3\. Paragraphs (c), (d), and (e) are re-
designated as paragraphs (b), (c), and (d).

4\. Newly designated paragraph (b) is
revised.

5\. The last sentence of newly desig-
nated paragraph (c) is revised.

6\. Newly designated paragraph (d) is
revised.

7\. Paragraph (e) is added.

The revisions and addition read as fol-
lows:

# § 1.6015-2 Relief from liability applicable to all qualifying joint filers.

(a) In general. A requesting spouse
may be relieved from joint and several
liability for tax (including related addi-
tions to tax, additional amounts, penalties,
and interest) from an understatement for a
taxable year under this section if the re-
questing spouse requests relief in accor-
dance with §§ 1.6015-1(h)(5) and
1.6015-5, and-

* * * * *

(b) Knowledge or reason to know. A
requesting spouse has knowledge or rea-
son to know of an understatement if he or
she actually knew of the understatement,
or if a reasonable person in similar cir-
cumstances would have known of the un-
derstatement. For rules relating to a re-
questing spouse's actual knowledge, see
§ 1.6015-3(c)(2). All of the facts and cir-
cumstances are considered in determining
whether a requesting spouse had reason to
know of an understatement. The facts and
circumstances that are considered include,
but are not limited to, the nature of the
erroneous item and the amount of the er-
roneous item relative to other items; any
deceit or evasiveness of the nonrequesting
spouse; the couple's financial situation;
the requesting spouse's educational back-
ground and business experience; the ex-
tent of the requesting spouse's participa-
tion in the activity that resulted in the
erroneous item; the requesting spouse's
involvement in business or household fi-
nancial matters; whether the requesting
spouse failed to inquire, at or before the
time the return was signed, about items on
the return or omitted from the return that a
reasonable person would question; any
lavish or unusual expenditures compared
with past spending levels; and whether the
erroneous item represented a departure
from a recurring pattern reflected in prior
years' returns (for example, omitted in-
come from an investment regularly re-
ported on prior years' returns). A request-
ing spouse has knowledge or reason to
know of the portion of an understatement
related to an item attributable to the non-
requesting spouse under § 1.6015-1(n) if
the requesting spouse knows or has reason

to know of the nonrequesting spouse's
erroneous item or items that resulted in
the increase to adjusted gross income. De-
pending on the facts and circumstances, if
the requesting spouse was abused by the
nonrequesting spouse (as described in
§ 1.6015-1(o)), or the nonrequesting
spouse maintained control of the house-
hold finances by restricting the requesting
spouse's access to financial information,
and because of the abuse or financial con-
trol, the requesting spouse was not able to
challenge the treatment of any items on
the joint return for fear of the nonrequest-
ing spouse's retaliation, the requesting
spouse will be treated as not having
knowledge or reason to know of the items
giving rise to the understatement. If, how-
ever, the requesting spouse involuntarily
executed the return, the requesting spouse
may choose to establish that the return
was signed under duress. In such a case,
§ 1.6013-4(d) applies.

(c) * * * For guidance concerning the
criteria to be used in determining whether
it is inequitable to hold a requesting
spouse jointly and severally liable under
this section, see Rev. Proc. 2013-34
(2013-2 CB 397), or other guidance pub-
lished by the Treasury and IRS (see
§ 601.601(d)(2) of this chapter).

(d) Partial relief-(1) In general. If a
requesting spouse had no knowledge or
reason to know of a portion of an errone-
ous item, the requesting spouse may be
relieved of the liability attributable to that
portion of that item, if all other require-
ments are met with respect to that portion.

(2) Example. The following example
illustrates the rules of this paragraph (d):

Example. H and W are married and file their
2014 joint income tax return in March 2015. In April
2016, H is convicted of embezzling $2 million from
his employer during 2014. H kept all of his embez-
zlement income in an individual bank account, and
he used most of the funds to support his gambling
habit. H and W had a joint bank account into which
H and W deposited all of their reported income. Each
month during 2014, H transferred an additional
$10,000 from the individual account to H and W's
joint bank account. Although H paid the household
expenses using this joint account, W regularly re-
ceived the bank statements relating to the account. W
did not know or have reason to know of H's embez-
zling activities. W did, however, know or have rea-
son to know of $120,000 of the $2 million of H's
embezzlement income at the time she signed the
joint return because that amount passed through the
couple's joint bank account and she regularly re-
ceived bank statements showing the monthly depos-

its from H's individual account. Therefore, W may
be relieved of the liability arising from $1,880,000 of
the unreported embezzlement income, but she may
not be relieved of the liability for the deficiency
arising from $120,000 of the unreported embezzle-
ment income of which she knew and had reason to
know.

(e) Effective/applicability date. This
section will be applicable on the date of
publication of a Treasury decision adopt-
ing these rules as final regulations in the
Federal Register.

Par. 10. Section 1.6015-3 is amended by:

1\. The paragraph heading and first sen-
tence of paragraph (a) are revised.

2\. Paragraphs (c)(1) and (c)(2)(iv) are
revised.

3\. A sentence is added at the end of
paragraph (c)(2)(i).

4\. Paragraph (c)(2)(v) is redesignated
as paragraph (c)(2)(vi) and paragraph
(c)(2)(v) is added.

5\. Newly redesignated paragraph
(c)(2)(vi) is revised.

6\. Paragraphs (d)(2)(i) and (d)(5) intro-
ductory text are revised.

7\. In paragraph (d)(5), Examples 7, 8,
9, 10, and 11 are added.

8\. Paragraph (e) is added.

The revisions and additions read as fol-
lows:

§ 1.6015-3 Allocation of deficiency for
individuals who are no longer married,
are legally separated, or are not
members of the same household.

(a) Allocation of deficiency. A request-
ing spouse may allocate a deficiency (as
defined in § 1.6015-1(h)(8)) if, as defined
in paragraph (b) of this section, the re-
questing spouse is divorced, widowed, or
legally separated, or has not been a mem-
ber of the same household as the nonre-
questing spouse at any time during the
12-month period ending on the date the
request for relief is filed. * * *

(c) * * * (1) No refunds. Although a
requesting spouse may be eligible to allo-
cate the deficiency to the nonrequesting
spouse, refunds are not authorized under
this section. Refunds of paid liabilities for
which a requesting spouse was entitled to
allocate the deficiency under this section
may be considered under § 1.6015-2 but
not under § 1.6015-4. See § 1.6015-
1(k)(3).

(2) * * * (i) * * * A requesting spouse
has actual knowledge of the portion of an

understatement related to an item attribut-
able to the nonrequesting spouse under
§ 1.6015-1(n) and allocable to the nonre-
questing spouse under paragraph (d) of this
section if the requesting spouse has actual
knowledge of the nonrequesting spouse's
erroneous item or items that resulted in the
increase to adjusted gross income.

* * * * *

(iv) Factors supporting actual knowl-
edge. To demonstrate that a requesting
spouse had actual knowledge of an errone-
ous item at the time the return was signed,
the Internal Revenue Service (IRS) will con-
sider all the facts and circumstances, includ-
ing but not limited to, whether the request-
ing spouse made a deliberate effort to avoid
learning about the item to be shielded from
liability; whether the erroneous item would
have been allocable to the requesting spouse
but for the tax benefit rule in paragraph
(d)(2)(i) of this section; and whether the
requesting spouse and the nonrequesting
spouse jointly owned the property that re-
sulted in the erroneous item. These factors,
together with all other facts and circum-
stances, may demonstrate that the requesting
spouse had actual knowledge of the item. If
the requesting spouse had actual knowledge of
an erroneous item, the portion of the defi-
ciency with respect to that item will not be
allocated to the nonrequesting spouse.

(v) Actual knowledge and community
property. A requesting spouse will not be
considered to have had an ownership in-
terest in an item based solely on the op-
eration of community property law.
Rather, a requesting spouse who resided
in a community property state at the time
the return was signed will be considered
to have had an ownership interest in an
item only if the requesting spouse's name
appeared on the ownership documents, or
there otherwise is an indication that the
requesting spouse asserted dominion and
control over the item. For example, as-
sume H and W live in State A, a commu-
nity property state. After their marriage, H
opens a bank account in his name. Under
the operation of the community property
laws of State A, W owns one-half of the
bank account. Assuming there is no other
indication that she asserted dominion and
control over the item, W does not have an
ownership interest in the account for pur-
poses of this paragraph (c)(2)(v) because
she does not hold the account in her name.

(vi) Abuse exception. Depending on the
facts and circumstances, if the requesting
spouse was abused by the nonrequesting
spouse (as described in § 1.6015-1(o)), or
the nonrequesting spouse maintained con-
trol of the household finances by restricting
the requesting spouse's access to financial
information, and because of the abuse or
financial control, the requesting spouse was
not able to challenge the treatment of any
items on the joint return for fear of the
nonrequesting spouse's retaliation, the lim-
itation on the requesting spouse's ability to
allocate the deficiency because of actual
knowledge will not apply. The requesting
spouse will be treated as not having knowl-
edge of the items giving rise to the defi-
ciency. If, however, the requesting spouse
involuntarily executed the return, the re-
questing spouse may choose to establish that
the return was signed under duress. In such
a case, § 1.6013-4(d) applies.

* * * * *

(d) * * *

(2) * * *

(i) Benefit on the return-(A) In general.
An erroneous item that would otherwise be
allocated to one spouse is allocated to the
second spouse to the extent that the second
spouse received a tax benefit on the joint

return and the first spouse did not receive a
tax benefit. An erroneous item under this
paragraph can be allocated to a requesting
spouse or a nonrequesting spouse, but only a
spouse who requests relief under this section
may allocate the deficiency. A spouse who
does not request relief under section 6015
remains fully liable for the deficiency. An
allocation from a requesting spouse to a
nonrequesting spouse reduces the amount
for which a requesting spouse remains liable
while an allocation from a nonrequesting
spouse to a requesting spouse increases the
amount for which a requesting spouse re-
mains liable.

(B) Calculating separate taxable in-
come and tax due. Under section
6015(d)(3)(A), the items giving rise to the
deficiency must be allocated to each
spouse in the same manner as the items
would have been allocated if the spouses
had filed separate returns. In determining
whether a spouse received a tax benefit
from the item, it may be necessary to
calculate each spouse's hypothetical sep-
arate return taxable income, determined
without regard to the erroneous items, and
taking into consideration adjusted gross
income, allowable deductions and losses,
and allowable credits against tax.

* * * * *

(5) Examples. The following examples
illustrate the rules of this paragraph (d). In
each example, assume that the requesting
spouse or spouses qualify to allocate the de-
ficiency, that a request under section 6015 was
timely made, and that the deficiency remains
unpaid. In addition, unless otherwise stated,
assume that neither spouse actually knew of
the erroneous items allocable to the other
spouse. The examples are as follows:

* * * * *

Example 7. Calculation of tax benefit based on
taxable income. (i) On their joint Federal income
tax return for tax year 2009, H reports $60,000 of
wage income; W reports $25,000 of wage income;
and H and W report joint interest income of
$2,000 and joint ordinary income from invest-
ments in the amount of $6,000. In addition, H and
W properly deduct $30,000 for their two personal
exemptions and itemized deductions, and W erro-
neously reports a loss from her separate invest-
ment in a partnership in the amount of $20,000.
On May 3, 2012, a $5,000 deficiency is assessed
with respect to their 2009 joint return. W dies in
November 2012. H requests innocent spouse re-
lief. The deficiency on the joint return results from
a disallowance of all of W's $20,000 loss (which
is initially allocable to W).

(ii) After taking all sources of income and all
allowable deductions into consideration, H's sepa-
rate taxable income is $49,000 and W's separate
taxable income is $14,000, calculated as follows:

Wages

$60,000

$25,000

Interest Income

$1,000

Investment Income

$3,000

Adj. Gross Income

$64,000

$29,000

Exemptions and Deductions

($15,000)

Taxable Income

$49,000

$14,000

W's Disallowed Loss

($20,000)

Tax Benefit Not Used by W

($6,000)

Tax Benefit to W

($14,000)

Tax Benefit to H

($6,000)

(iii) As W only used $14,000 of her $20,000
loss from her separate investment in a partnership
to offset her separate taxable income, H benefited
from the other $6,000 of the disallowed loss used
to offset his separate taxable income. Therefore,
$14,000 of the disallowed $20,000 loss is
allocable to W (7/10) and $6,000 of the disallowed
loss is allocable to H (3/10). H's liability

is limited to $1,500 (3/10 of the $5,000 defi-
ciency).

Example 8. Nonrequesting spouse receives a
benefit on the joint return from the requesting
spouse's erroneous item. (i) On their joint Federal
income tax return for tax year 2008, W reports
$40,000 of wage income and H reports $12,000 of
wage income. In addition, H and W properly deduct

$20,000 for their two personal exemptions and item-
ized deductions, H erroneously deducts a casualty
loss in the amount of $5,000 related to a loss on his
separately held property, and W erroneously takes a
loss in the amount of $7,000 from an investment in
a tax shelter. H and W legally separate in 2010, and
on October 21, 2011, a $2,400 deficiency is assessed
with respect to their 2008 joint return. H requests

innocent spouse relief. The deficiency on the joint
return results from a disallowance of all of H's
$5,000 loss and all of W's $7,000 loss (which is
allocable to W and for which H did not have actual
knowledge).

(ii) The $5,000 casualty loss is initially allocated
to H. As H's separate taxable income is only $2,000
($12,000 wage income less $10,000 - 50 percent of
the exemptions and itemized deductions), H only
used $2,000 of his $5,000 casualty loss to offset his
separate taxable income, and W benefited from the
other $3,000 of the disallowed loss, which offset a
portion of her separate taxable income. Therefore,
$3,000 of the disallowed loss is allocable to W
even though the loss is H's item, and $2,000 of the
loss is allocable to H. The $7,000 tax shelter loss
is also allocable to W as H did not have knowledge
of the facts that made the tax shelter item unal-
lowable as a loss. H's allocation percentage is 1/6
($2,000/$12,000) and H's liability is limited to
$400 (1/6 of $2,400 deficiency). The IRS may
collect up to $400 from H and up to $2,400 from
W (although the total amount collected may not
exceed $2,400).

(iii) If the IRS could establish that H had knowl-
edge of the facts that made the deduction for his
casualty loss unallowable, the entire $5,000 casualty
loss would be allocable to H. H's allocation percent-
age would be 5/12 ($5,000/$12,000) and H's liability
would be limited to $1,000 (5/12 of $2,400 defi-
ciency).

(iv) If W also requested innocent spouse relief
(and H did not have knowledge of the facts that
made his loss unallowable), there would be no re-
maining joint and several liability, and the IRS
would be permitted to collect $400 from H (1/6
($2,000/$12,000) of the $2,400 deficiency) and
$2,000 (5/6 ($10,000/$12,000) of $2,400 deficiency)
from W. If the IRS could establish that W had
knowledge of the facts that made the deduction for
the casualty loss unallowable, W would then be
liable for the entire $2,400 deficiency, while H
would remain liable for up to $400.

Example 9. Allocation of liability based on joint
erroneous loss item. (i) On their joint Federal income
tax return for tax year 2009, H reports $100,000 of
wage income and W reports $50,000 of wage in-
come. In addition, H and W properly deduct $40,000
for their two personal exemptions and itemized de-
ductions, and erroneously report a loss in the amount
of $50,000 from a jointly-held investment in a tax
shelter. H and W divorce in 2011, and on August 14,
2012, a $12,000 deficiency is assessed with respect
to their 2009 joint return. W requests innocent
spouse relief. The deficiency on the joint return
results from a disallowance of all of the $50,000
loss.

(ii) Under paragraph (d)(2)(iv) of this section, in
the absence of clear and convincing evidence sup-
porting a different allocation, an erroneous deduction
item related to a jointly-owned investment is gener-
ally allocated 50 percent to each spouse. Thus,
$25,000 of the loss is allocated to each spouse. In
determining the effect, if any, of the tax benefit rule
of § 1.6015-1(d)(2)(i), H's separate taxable income
is $80,000: $100,000 wage income minus $20,000,
or 50 percent of the exemptions and itemized deduc-
tions; and W's separate taxable income is $30,000:

$50,000 minus $20,000. As both H's and W's sep-
arate taxable income exceeds their allocated share of
the disallowed loss, no additional amount is allo-
cated between the spouses. W's allocation percent-
age is 1/2 ($25,000/$50,000) and W's liability is
limited to $6,000 (1/2 of $12,000 deficiency). The
IRS may collect up to $6,000 from W and up to
$12,000 from H (although the total amount collected
may not exceed $12,000).

(iii) If the IRS could establish that W had knowl-
edge of the facts that made the loss unallowable,
both H and W would then remain jointly and sever-
ally liable for the $12,000 deficiency.

Example 10. Calculation of tax benefit based on
joint erroneous item. Assume the same facts as in
Example 9 of this paragraph (d)(5), except that W's
wage income is only $40,000. W's separate taxable
income would then be only $20,000 ($40,000 wage
income minus $20,000 - 50 percent of the exemp-
tions and itemized deductions). W would only be
able to use $20,000 of the $25,000 loss from the tax
shelter to offset her separate taxable income. Ac-
cordingly, H benefited from the other $5,000 of the
disallowed loss, which was used to offset a portion
of his separate taxable income. Therefore, $20,000
of the disallowed loss is allocable to W, and $30,000
is allocable to H: $25,000 (H's 50 percent of the
disallowed loss) plus $5,000 (the portion of W's 50
percent that is allocable to H because H received a
tax benefit). W's allocation percentage is 2/5
($20,000/$50,000) and W's liability is limited to
$4,800 (2/5 of $12,000 deficiency). The IRS may
collect up to $4,800 from W and up to $12,000 from
H (although the total amount collected may not ex-
ceed $12,000).

Example 11. Allocation of erroneous item based
on fraud of the nonrequesting spouse. During 2009,
W fraudulently accesses H's brokerage account to
sell stock that H had separately received from an
inheritance. W deposits the funds from the sale in a
separate bank account to which H did not have
access. H and W file a joint Federal income tax
return for tax year 2009. The return did not include
the income from the sale of the stock. H and W
divorce in November 2010. The divorce decree
states that W committed forgery and defrauded H
with respect to his brokerage account. The IRS com-
mences an audit in March 2011 and determines a
deficiency based on the omission of the income from
the sale of the stock. H requests innocent spouse
relief. Under paragraph (d)(2)(iii) of this section,
items of investment income are generally allocated
to the spouse who owned the investment, which in
this case would be H. Under paragraph (d)(2)(ii) of
this section, however, the IRS may allocate any item
between the spouses if the IRS determines that the
allocation is appropriate due to fraud by one or both
spouses. The IRS determines that W committed
fraud with respect to H and as a result it is appro-
priate to allocate the deficiency to W under para-
graph (d)(2)(ii).

(e) Effective/applicability date. This
section will be applicable on the date of
publication of a Treasury decision adopt-
ing these rules as final regulations in the
Federal Register.

Par. 11. Section 1.6015-4 is revised to
read as follows:

§ 1.6015-4 Equitable relief.

(a) A requesting spouse who files a
joint return for which an understatement
or deficiency (as defined by § 1.6015-
1(h)(7) and (8)) was determined or for
which there was unpaid tax (as defined by
§ 1.6015-1(h)(6)), and who does not qual-
ify for full relief under § 1.6015-2 or
§ 1.6015-3, may be entitled to equitable
relief under this section. The Internal Rev-
enue Service (IRS) has the discretion to
grant equitable relief from joint and sev-
eral liability to a requesting spouse when,
considering all of the facts and circum-
stances, it would be inequitable to hold the
requesting spouse jointly and severally li-
able.

(b) This section may not be used to
circumvent the limitation of § 1.6015-
3(c)(1). Therefore, relief is not available
under this section to obtain a refund of
liabilities already paid, for which the re-
questing spouse would otherwise qualify
for relief under § 1.6015-3. See § 1.6015-
1(k)(3). If the requesting spouse is only
eligible for partial relief under § 1.6015-3
(i.e., some portion of the deficiency is
allocable to the requesting spouse), then
the requesting spouse may be considered
for relief under this section with respect to
the portion of the deficiency for which the
requesting spouse was not entitled to re-
lief.

(c) For guidance concerning the crite-
ria to be used in determining whether it is
inequitable to hold a requesting spouse
jointly and severally liable under this sec-
tion, see Rev. Proc. 2013-34 (2013-1 IRB
397), or other guidance published by the
Treasury and IRS (see § 601.601(d)(2) of
this chapter).

(d) Effective/applicability date. This
section will be applicable on the date of
publication of a Treasury decision adopt-
ing these rules as final regulations in the
Federal Register.

Par. 12. Section 1.6015-5 is amended
by adding paragraph (d) to read as fol-
lows:

§ 1.6015-5. Time and manner for
requesting relief.

* * * * *

(d) Effective/applicability date. This
section will be applicable on the date of
publication of a Treasury decision adopt-
ing these rules as final regulations in the
Federal Register.

Par. 13. Section 1.6015-6 is amended
by revising the first sentence of paragraph
(a)(1), adding a sentence at the end of
paragraph (a)(2), and adding paragraph
(d) to read as follows:

§ 1.6015-6 Nonrequesting spouse's
notice and opportunity to participate in
administrative proceedings.

(a) * * * (1) When the Internal Reve-
nue Service (IRS) receives a request for
relief under § 1.6015-2, § 1.6015-3, or
§ 1.6015-4, the IRS must send a notice to
the nonrequesting spouse's last known ad-
dress that informs the nonrequesting
spouse of the requesting spouse's request
for relief. * * *

(2) * * * For guidance concerning the
nonrequesting spouse's right to appeal the
preliminary determination to IRS Ap-
peals, see Rev. Proc. 2003-19 (2003-1
CB 371), or other guidance published by
the Treasury Department and the IRS (see
§ 601.601(d)(2) of this chapter).

* * * * *

(d) Effective/applicability date. This
section will be applicable on the date of
publication of a Treasury decision adopt-
ing these rules as final regulations in the
Federal Register.

Par. 14. In § 1.6015-7, paragraphs (b),
(c)(1), (c)(3), and (c)(4)(iii) are revised
and paragraph (d) is added to read as
follows:

§ 1.6015-7 Tax Court review.

* * * * *

(b) Time period for petitioning the Tax
Court. Pursuant to section 6015(e), the
requesting spouse may petition the Tax
Court to review the denial of relief under
§ 1.6015-1 within 90 days after the date
the Internal Revenue Service's (IRS) final
determination is mailed by certified or
registered mail (the 90-day period). If the
IRS does not mail the requesting spouse a
final determination letter within 6 months

of the date the requesting spouse files a
request for relief under section 6015, the
requesting spouse may petition the Tax
Court to review the request at any time
after the expiration of the 6-month period
and before the expiration of the 90-day
period. The Tax Court also may review a
request for relief if the Tax Court has
jurisdiction under another section of the
Internal Revenue Code, such as section
6213(a) or section 6330(d). This para-
graph (b) applies to liabilities arising on or
after December 20, 2006, or arising prior
to December 20, 2006, and remaining un-
paid as of that date. For liabilities arising
prior to December 20, 2006, which were
fully paid prior to that date, the requesting
spouse may petition the Tax Court to re-
view the denial of relief as discussed
above, but only with respect to denials of
relief involving understatements under
§ 1.6015-2, § 1.6015-3, or § 1.6015-4.

(c) Restrictions on collection and sus-
pension of the running of the period of
limitations-(1) Restrictions on collec-
tion-(i) Restrictions on collection for re-
quests for relief made on or after Decem-
ber 20, 2006. Unless the IRS determines
that collection will be jeopardized by de-
lay, no levy or proceeding in court shall be
made, begun, or prosecuted against a
spouse requesting relief under § 1.6015-2,
§ 1.6015-3, or § 1.6015-4 (except for
certain requests for relief made solely un-
der § 1.6015-4) for the collection of any
assessment to which the request relates
until the expiration of the 90-day period
described in paragraph (b) of this section,
or, if a petition is filed with the Tax Court,
until the decision of the Tax Court be-
comes final under section 7481. For re-
quests for relief made solely under
§ 1.6015-4, the restrictions on collection
only apply if the liability arose on or after
December 20, 2006, or arose prior to De-
cember 20, 2006, and remained unpaid as
of that date. The restrictions on collection
begin on the date the request is filed.

(ii) Restriction on collection for re-
quests for relief made before December
20, 2006. Unless the IRS determines that
collection will be jeopardized by delay, no
levy or proceeding in court shall be made,
begun, or prosecuted against a requesting
spouse requesting relief under § 1.6015-2
or § 1.6015-3 for the collection of any
assessment to which the request relates

until the expiration of the 90-day period
described in paragraph (b) of this section,
or if a petition is filed with the Tax Court,
until the decision of the Tax Court be-
comes final under section 7481. The re-
strictions on collection begin on the date
the request is filed with the IRS. For re-
quests for relief made solely under
§ 1.6015-4, the restrictions on collection
do not begin until December 20, 2006,
and only apply with respect to liabilities
remaining unpaid on or after that date.

(iii) Rules for determining the period of
the restrictions on collection. For more
information regarding the date on which a
decision of the Tax Court becomes final,
see section 7481 and the regulations there-
under. Notwithstanding paragraphs
(c)(1)(i) and (ii) of this section, if the
requesting spouse appeals the Tax Court's
decision, the IRS may resume collection
of the liability from the requesting spouse
on the date the requesting spouse files the
notice of appeal, unless the requesting
spouse files an appeal bond pursuant to
the rules of section 7485. Jeopardy under
paragraphs (c)(1)(i) and (ii) of this section
means conditions exist that would require
an assessment under section 6851 or 6861
and the regulations thereunder.

* * * * *

(3) Suspension of the running of the
period of limitations. The running of the
period of limitations in section 6502 on
collection against the requesting spouse of
the assessment to which the request under
§ 1.6015-2, § 1.6015-3, or § 1.6015-4
relates is suspended for the period during
which the IRS is prohibited by paragraph
(c)(1) of this section from collecting by
levy or a proceeding in court and for 60
days thereafter. If the requesting spouse,
however, signs a waiver of the restrictions
on collection in accordance with para-
graph (c)(2) of this section, the suspension
of the period of limitations in section 6502
on collection against the requesting
spouse will terminate on the date that is 60
days after the date the waiver is filed with
the IRS.

(4) * * *

(iii) Assessment to which the request
relates. For purposes of this paragraph (c),
the assessment to which the request re-
lates is the entire assessment of the under-
statement or the balance due shown on the
return to which the request relates, even if

the request for relief is made with respect
to only part of that understatement or bal-
ance due.

(d) Effective/applicability date. This
section will be applicable on the date of
publication of a Treasury decision adopt-
ing these rules as final regulations in the
Federal Register.

Par. 15. Section 1.6015-8 is amended
by adding paragraph (d) to read as fol-
lows:

§ 1.6015-8 Applicable liabilities.

* * * * *

(d) Effective/applicability date. This
section will be applicable on the date of
publication of a Treasury decision adopt-
ing these rules as final regulations in the
Federal Register.

§ 1.6015-9 [Removed]

§§ 1.6015-3 and 1.6015-8 [Amended]

Par. 17. For each entry in the "Section"
column remove the language in the "Re-
move" column and add the language in
the "Add" column in its place.

Par. 16. Section 1.6015-9 is removed.

Section

Remove

Add

1.6015-3(c)(4) Example 4 (ii), (iii), (iv), and (v), first sentence

Example 5

Example 4

1.6015-3(c)(4) Example 5 (ii), (iii), and (iv), first sentence

Example 6

Example 5

1.6015-8(c) Example 1, fifth sentence

6015(b)

6015

John Dalrymple,
Deputy Commissioner for
Services and Enforcement.

(Filed by the Office of the federal Register on November 19,
2015, 8:45 a.m., and published in the issue of the Federal
Register for November 20, 2015, 80 F.R. 72649)

## 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
effect:

Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the 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 with
modified, below).

Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.

Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.

Modified is 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
with amplified and clarified, above).

Obsoleted describes 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.

Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.

Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the new
ruling does more than restate the sub-

stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes 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
published ruling is first modified and then,
as modified, is superseded.

Supplemented is 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
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.

Suspended is 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 following abbreviations in current
use and formerly used will appear in ma-
terial published in the Bulletin.

A-Individual.

Acq .- Acquiescence.

B-Individual.

BE-Beneficiary.

F.R .- Federal Register.

FUTA-Federal Unemployment Tax Act.

FX-Foreign corporation.

G.C.M .- Chief Counsel's Memorandum.

GE-Grantee.

TFE-Transferee.

TFR-Transferor.

CI-City.

GR-Grantor.

T.I.R .- Technical Information Release.

TP-Taxpayer.

Ct.D .- Court Decision.

I.R.B .- Internal Revenue Bulletin.

TR-Trust.

CY-County.

LE-Lessee.

TT-Trustee.

D-Decedent.

LP-Limited Partner.

LR-Lessor.

X-Corporation.

DE-Donee.

Del. Order-Delegation Order.

Nonacq .- Nonacquiescence.

O Organization.

DR-Donor.

P-Parent Corporation.

PHC-Personal Holding Company.

PO-Possession of the U.S.

PR-Partner.

PRS-Partnership.

PTE-Prohibited Transaction Exemption.
Pub. L .- Public Law.

REIT-Real Estate Investment Trust.

Rev. Proc .- Revenue Procedure.

Rev. Rul .- Revenue Ruling.

S-Subsidiary.

S.P.R .- Statement of Procedural Rules.

Stat .- Statutes at Large.

T-Target Corporation.

T.C .- Tax Court.

C-Individual.

T.D .- Treasury Decision.

C.B .- Cumulative Bulletin.

CFR-Code of Federal Regulations.

GP-General Partner.

COOP-Cooperative.

IC-Insurance Company.

U.S.C .- United States Code.

DC-Dummy Corporation.

M-Minor.

Y-Corporation.

Z-Corporation.

DISC-Domestic International Sales Corporation.

E-Estate.

EE-Employee.

E.O .- Executive Order.

ER-Employer.

ERISA-Employee Retirement Income Security Act.
EX-Executor.

F-Fiduciary.

FC-Foreign Country.

FICA-Federal Insurance Contributions Act.

FISC-Foreign International Sales Company.

FPH-Foreign Personal Holding Company.

BK-Bank.

B.T.A .- Board of Tax Appeals.

### Numerical Finding List1

Bulletins 2015-27 through 2015-49

#### Announcements:

2015-17, 2015-28 I.R.B. 67
2015-18, 2015-33 I.R.B. 198
2015-19, 2015-32 I.R.B. 157
2015-20, 2015-38 I.R.B. 355
2015-21, 2015-34 I.R.B. 220
2015-22, 2015-35 I.R.B. 288
2015-23, 2015-36 I.R.B. 311
2015-24, 2015-36 I.R.B. 313
2015-25, 2015-39 I.R.B. 422
2015-26, 2015-47 I.R.B. 677
2015-27, 2015-48 I.R.B. 694
2015-28, 2015-46 I.R.B. 673
2015-29, 2015-46 I.R.B. 673
2015-30, 2015-46 I.R.B. 673
2015-31, 2015-49 I.R.B. 841
2015-32, 2015-49 I.R.B. 841
2015-33, 2015-49 I.R.B. 842

#### Notices:

2015-43, 2015-29 I.R.B. 73
2015-46, 2015-28 I.R.B. 64
2015-47, 2015-30 I.R.B. 76
2015-48, 2015-30 I.R.B. 77
2015-49, 2015-30 I.R.B. 79
2015-50, 2015-30 I.R.B. 81
2015-51, 2015-31 I.R.B. 133
2015-52, 2015-35 I.R.B. 227
2015-53, 2015-33 I.R.B. 190
2015-54, 2015-34 I.R.B. 210
2015-55, 2015-34 I.R.B. 217
2015-56, 2015-35 I.R.B. 235
2015-57, 2015-36 I.R.B. 294
2015-58, 2015-37 I.R.B. 322
2015-59, 2015-40 I.R.B. 459
2015-60, 2015-43 I.R.B. 604
2015-61, 2015-39 I.R.B. 408
2015-62, 2015-39 I.R.B. 411
2015-63, 2015-40 I.R.B. 461
2015-64, 2015-40 I.R.B. 464
2015-65, 2015-40 I.R.B. 466
2015-66, 2015-41 I.R.B. 541
2015-67, 2015-41 I.R.B. 546
2015-68, 2015-41 I.R.B. 547
2015-69, 2015-41 I.R.B. 550
2015-70, 2015-43 I.R.B. 604
2015-71, 2015-43 I.R.B. 606
2015-72, 2015-44 I.R.B. 613
2015-73, 2015-46 I.R.B. 660
2015-74, 2015-46 I.R.B. 663
2015-75, 2015-46 I.R.B. 668
2015-76, 2015-46 I.R.B. 669
2015-77, 2015-47 I.R.B. 676
2015-78, 2015-48 I.R.B. 690

Notices :- Continued

2015-79, 2015-49 I.R.B. 775
2015-80, 2015-48 I.R.B. 691
2015-81, 2015-49 I.R.B. 784

### Proposed Regulations:

REG-140379-02, 2015-45 I.R.B. 653

Treasury Decisions:

REG-134219-08, 2015-49 I.R.B. 842

REG-136459-09, 2015-37 I.R.B. 332

9723, 2015-31 I.R.B. 84

REG-155164-09, 2015-41 I.R.B. 560

9726, 2015-31 I.R.B. 98

REG-109370-10, 2015-33 I.R.B. 198

9727, 2015-32 I.R.B. 154

REG-112997-10, 2015-39 I.R.B. 422

9728, 2015-33 I.R.B. 169

REG-103033-11, 2015-37 I.R.B. 325

9729, 2015-35 I.R.B. 221

REG-109813-11, 2015-37 I.R.B. 330

9730, 2015-35 I.R.B. 223

REG-138344-13, 2015-41 I.R.B. 557

9731, 2015-37 I.R.B. 314

REG-139483-13, 2015-40 I.R.B. 475

9732, 2015-39 I.R.B. 371

REG-148998-13, 2015-45 I.R.B. 653

9733, 2015-41 I.R.B. 494

REG-115452-14, 2015-32 I.R.B. 158

9734, 2015-41 I.R.B. 500

REG-127895-14, 2015-41 I.R.B. 556

9735, 2015-37 I.R.B. 316

REG-132075-14, 2015-35 I.R.B. 288

9736, 2015-39 I.R.B. 402

REG-138526-14, 2015-28 I.R.B. 67

9737, 2015-40 I.R.B. 449

REG-143800-14, 2015-37 I.R.B. 347

9738, 2015-40 I.R.B. 453

REG-102648-15, 2015-31 I.R.B. 134

9739, 2015-41 I.R.B. 528

REG-102837-15, 2015-27 I.R.B. 43

9740, 2015-42 I.R.B. 573

REG-121496-15, 2015-46 I.R.B. 674

9741, 2015-45 I.R.B. 628

REG-123640-15, 2015-37 I.R.B. 350

9742, 2015-46 I.R.B. 657

9743, 2015-48 I.R.B. 679

Revenue Procedures:

9744, 2015-49 I.R.B. 700

2015-34, 2015-27 I.R.B. 4

2015-36, 2015-27 I.R.B. 20

2015-38, 2015-36 I.R.B. 295

2015-39, 2015-33 I.R.B. 195

2015-40, 2015-35

I.R.B. 236

2015-41, 2015-35 I.R.B. 263

2015-42, 2015-36 I.R.B. 310

2015-43, 2015-40 I.R.B. 467

2015-44, 2015-38 I.R.B. 354

2015-45, 2015-39 I.R.B. 412

2015-46, 2015-39 I.R.B. 414

2015-47, 2015-39

I.R.B. 419

2015-48, 2015-40 I.R.B. 469

2015-49, 2015-41 I.R.B. 555

2015-50, 2015-42 I.R.B. 583

2015-51, 2015-42 I.R.B. 583

2015-52, 2015-45

I.R.B. 638

2015-53, 2015-44

I.R.B. 615

2015-54, 2015-45

I.R.B. 648

2015-55, 2015-49 I.R.B. 788

2015-56, 2015-49 I.R.B. 827

### Revenue Rulings:

2015-15, 2015-27 I.R.B. 1
2015-16, 2015-31 I.R.B. 130

2015-17, 2015-39 I.R.B. 358
2015-18, 2015-34 I.R.B. 209
2015-19, 2015-36 I.R.B. 291
2015-20, 2015-38 I.R.B. 353

Revenue Rulings :- Continued

2015-21, 2015-40 I.R.B. 447
2015-22, 2015-44 I.R.B. 610
2015-24, 2015-48 I.R.B. 687
2015-25, 2015-49 I.R.B. 695
2015-26, 2015-49 I.R.B. 696

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2015-01 through 2015-26 is in Internal Revenue Bulletin
2015-26, dated June 29, 2015.

### Finding List of Current Actions on Previously Published Items1

Bulletins 2015-27 through 2015-49

Notices:

2011-55
Amplified by
Notice 2015-77, 2015-47 I.R.B. 676

2013-7
Amplified by
Notice 2015-77, 2015-47 I.R.B. 676

2014-4
Modified by
Notice 2015-51, 2015-31 I.R.B. 133

2014-17
Superseded by
Notice 2015-67, 2015-41 I.R.B. 546

#### Proposed Regulations:

2009-57
Obsoleted by
REG-112997-10 2015-39 I.R.B. 422

2013-17
Obsoleted by
REG-148998-13 2015-45 I.R.B. 653

#### Revenue Procedures:

1992-75
Clarified by
Rev. Proc. 2015-40, 2015-35 I.R.B. 236

2003-40
Modified by
Rev. Proc. 2015-40, 2015-35 I.R.B. 236

2003-78
Modified by
Rev. Proc. 2015-46, 2015-39 I.R.B. 414

2006-9
Modified by
Rev. Proc. 2015-41, 2015-35 I.R.B. 263

2006-9
Superseded by
Rev. Proc. 2015-41, 2015-35 I.R.B. 263

2006-54
Modified by
Rev. Proc. 2015-40, 2015-35 I.R.B. 236

2006-54
Superseded by
Rev. Proc. 2015-40, 2015-35 I.R.B. 236

### Revenue Procedures :- Continued

2008-31
Modified by
Rev. Proc. 2015-41, 2015-35 I.R.B. 263

2008-31
Superseded by
Rev. Proc. 2015-41, 2015-35 I.R.B. 263

2011-49
Modified by
Rev. Proc. 2015-36, 2015-27 I.R.B. 20

2011-49
Superseded by
Rev. Proc. 2015-36, 2015-27 I.R.B. 20

2015-8
Superseded by
Rev. Proc. 2015-55, 2015-49 I.R.B. 788

2015-14
Modified by
Rev. Proc. 2015-39, 2015-33 I.R.B. 195

2015-14
Modified by
Rev. Proc. 2015-56, 2015-49 I.R.B. 827

2015-18
Superseded by
Rev. Proc. 2015-55, 2015-49 I.R.B. 788

2015-40
Amplified by
Rev. Proc. 2015-41, 2015-35 I.R.B. 263

2015-41
Amplified by
Rev. Proc. 2015-40, 2015-35 I.R.B. 236

#### Revenue Rulings:

2014-30
Supplemented by
Rev. Rul. 2015-24, 2015-48 I.R.B. 687

2014-30
Superseded by
Rev. Rul. 2015-24, 2015-48 I.R.B. 687

Treasury Decisions:

58-422
Obsoleted by
T.D. 9739 2015-41 I.R.B. 528

66-284
Obsoleted by
T.D. 9739 2015-41 I.R.B. 528

Treasury Decisions :- Continued

79-250
Obsoleted by
T.D. 9739 2015-41 I.R.B. 528

79-289
Obsoleted by
T.D. 9739 2015-41 I.R.B. 528

96-29
Obsoleted by
T.D. 9739 2015-41 I.R.B. 528

# Internal Revenue Service Washington, DC 20224

Official Business
Penalty for Private Use, $300

# INTERNAL REVENUE BULLETIN

The Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue
Bulletins are available at www.irs.gov/irb/.

# We Welcome Comments About the Internal Revenue Bulletin

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Internal Revenue Bulletin 2015-49 (PDF rendition): IRS Revenue Procedures

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