Internal Revenue Bulletin 2015-2 (PDF rendition): IRS Revenue Procedures

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Bulletin No. 2015-2
January 12, 2015

# Internal Revenue bulletin

## 7HIGHLIGHTS 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-109187-11, page 277.

The proposed regulations provide the general rule that a trans-
feror of an installment obligation does not recognize gain or
loss under section 453B on certain dispositions of an install-
ment obligation if gain or loss is not recognized on the dispo-
sition under another provision of the Code. The proposed
regulations also provide that this general rule does not apply to
the satisfaction of an installment obligation.

### Notice 2015-1, page 249.

This notice provides the maximum vehicles values for use with
the special valuation rules under regulation section 1.61-21 (d)
and (e) for 2014. These values are adjusted fro inflation and
must be adjusted annually be reference to the Consumer Price
Index.

### Rev. Proc. 2015-12, page 265.

Rev. Proc. 2015-12 provides guidance that taxpayers may
use to determine whether expenditures to maintain, replace, or
improve cable system network assets may be deducted under
§ 162 or must be capitalized under § 263(a), as well as
guidance on computing depreciation for certain cable system
network assets under §§ 167 and 168.

### T.D. 9707, page 247.

These regulations remove a provision on filing Form 5472,
"Information Return of a 25% Foreign-Owned U.S. Corporation
or a Foreign Corporation Engaged in a U.S. Trade or Business",
when the filer's income tax return will be late. Form 5472 will
always be required to be filed with the filer's income tax return,
by the due date (including extensions) of that return.

## EMPLOYEE PLANS

REG-132751-14, page 279.

This document contains proposed rules that would amend the
regulations regarding excepted benefits under the Employee
Retirement Income Security Act of 1974, the Internal Revenue
Code, and the Public Health Service Act related to limited
wraparound coverage. Excepted benefits are generally exempt
from the requirements that were added to those laws by the
Health Insurance Portability and Accountability Act and the
Patient Protection and Affordable Care Act.

### REG-145878-14, page 290.

This document contains proposed rules that would amend the
regulations regarding the summary of benefits and coverage
(SBC) and the uniform glossary for group health plans and
health insurance coverage in the group and individual markets
under the Patient Protection and Affordable Care Act. It pro-
poses changes concerning the disclosure requirements under
section 2715 of the Public Health Service Act and to docu-
ments required for compliance with section 2715 of the Public
Health Service Act, including to: a template for the SBC;
instructions; sample language; a guide for coverage example
calculations, and the uniform glossary.

(Continued on the next page)

Finding Lists begin on page ii.

MIRS

## EXEMPT ORGANIZATIONS

### Rev. Proc. 2015-9, page 249.

This document sets forth procedures for issuing determination
letters on the exempt status of organizations under sections
501 and 521 of the Code. The procedures also apply to the
revocation and modification of determination letters, and pro-
vide guidance on the exhaustion of administrative remedies for
purposes of declaratory judgment under section 7428 of the
Code. Rev. Proc. 2014-9 is superseded.

### Rev. Proc. 2015-10, page 262.

This document sets forth procedures for issuing determination
letters and rulings on private foundation status under section
509(a) of the Code, operating foundation status under section
4942(j)(3), and exempt operating foundation status under sec-
tion 4940(d)(2), of organizations exempt from Federal income
tax under section 501(c)(3). This revenue procedure also ap-
plies to the issuance of determination letters on the foundation
status under section 509(a)(3) of nonexempt charitable trusts
described in section 4947(a)(1). Rev. Proc. 2014-10 is super-
seded.

## EXCISE TAX

### REG-132751-14, page 279.

### REG-145878-14, page 290.

## ADMINISTRATIVE

### Notice 2015-1, page 249.

## 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 351 .- Transfer to Corporation Controlled by Transferor

Proposed regulations will amend § 1.351-1(a)(1)
to include a cross-reference to § 1.453B-1(c) for
rules requiring a transferor to recognize gain or loss
upon the satisfaction of an installment obligation of
a corporation when the obligation is exchanged for
stock in that corporation. See REG-109187-11,
page 277.

## Section 361 .- Nonrecognition of Gain or Loss to Corporations; Treatment of Distributions

Proposed regulations will amend § 1.361-1 to
include a cross-reference to § 1.453B-1(c) for rules
requiring a corporation transferring an installment
obligation to the acquiring corporation to recognize
gain or loss upon receipt of stock of the acquiring
corporation or another party to the reorganization in
satisfaction of that installment obligation. See REG-
109187-11, page 277.

## Section 721 .- Nonrecognition of Gain or Loss on Contribution

Proposed regulations will amend § 1.721-1(a) to
include a cross-reference to § 1.453B-1(c) for rules
in determining a partner's gain or loss when an
installment obligation of a partnership is contributed
to the partnership. See REG-109187-11, page 277.

## Section 6038A .- Information with respect to certain foreign-owned corporations

26 CFR 1.6038A-2: Requirement of return.

TD 9707
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1

### Filing of Form 5472

AGENCY: Internal Revenue Service (IRS),
Treasury.

ACTION: Final regulations.

SUMMARY: This document contains fi-
nal regulations concerning the manner of
filing Form 5472, "Information Return of
a 25% Foreign-Owned U.S. Corporation
or a Foreign Corporation Engaged in a
U.S. Trade or Business." The final regu-
lations affect certain 25-percent foreign-
owned domestic corporations and certain
foreign corporations that are engaged in a
trade or business in the United States that
are required to file Form 5472.

DATES: Effective date: These regulations
are effective on December 24, 2014.

Applicability date: For dates of applica-
bility, see §§ 1.6038A-1(n)(2) and (n)(3)
and 1.6038A-2(g).

FOR FURTHER INFORMATION
CONTACT: Anand Desai at (202) 317-
6939 (not a toll-free number).

## SUPPLEMENTARY INFORMATION:

### Background

On June 6, 2014, the Department of the
Treasury (Treasury Department) and the
IRS published a notice of proposed rule-
making (REG-114942-14) in the Federal
Register (79 FR 32687, 2014-26 IRB
1117) under sections 6038A and 6038C of
the Internal Revenue Code (Code) (pro-
posed regulations). The proposed regula-
tions proposed removing a provision for
timely filing Form 5472 separately from
an income tax return that is untimely filed
("untimely filed return provision"). As a
result, Form 5472 would be required to be
filed in all cases only with the filer's income
tax return for the taxable year by the due

date (including extensions) of that return.
No public hearing was requested or held.
The Treasury Department and the IRS re-
ceived two written comments on the pro-
posed regulations, which are available at
www.regulations.gov. After consideration
of the comments, this Treasury decision
adopts the proposed regulations, without
substantive change, as final regulations.

### Summary of Comments

One comment recommended that the
"untimely filed return provision" be re-
tained because the IRS may not timely
receive the information required by Form
5472 if the untimely filed return provision is
removed. The comment also recommended
conforming changes to permit the filing of
Form 5471, "Information Return of U.S.
Persons With Respect to Certain Foreign
Corporations," and Form 8865, "Return of
U.S. Persons With Respect to Certain For-
eign Partnerships," separately from an in-
come tax return that is untimely filed.

The Treasury Department and the IRS
decline to adopt this comment. The Trea-
sury Department and the IRS have deter-
mined that tax administration generally is
more efficient when forms (for example,
Form 5471, Form 5472, and Form 8865)
are filed with the filer's timely filed in-
come tax return.

The second comment addressed issues
unrelated to the proposed regulatory
change. The final regulations do not incor-
porate the suggestions contained in this
comment, which are outside the scope of
the proposed regulations.

### Special Analyses

It has been determined that these reg-
ulations are not a significant regulatory
action as defined in Executive Order
12866, as supplemented by Executive Or-
der 13563. Therefore, a regulatory assess-
ment is not required. It has also been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and because the regulations do not
impose a collection of information, the
Regulatory Flexibility Act (5 U.S.C.

chapter 6) does not apply. Pursuant to
section 7805(f) of the Code, the notice of
proposed rulemaking preceding this regu-
lation was submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact on
small business.

### Drafting information

The principal author of these regula-
tions is Anand Desai, Office of Associate
Chief Counsel (International). However,
other personnel from the Treasury Depart-
ment and the IRS participated in their
development.

* * * * *

### Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended
as follows:

### Part 1-INCOME TAXES

Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.6038A-1 is amended
by revising the third sentence of, and add-
ing a new fourth sentence to, paragraph
(n)(2), and adding a third sentence to para-
graph (n)(3), to read as follows:

§ 1.6038A-1 General requirements and
definitions.

* * * * *

(n) * * *

(2) Section 1.6038A-2. * * * Section
1.6038A-2(d) applies for taxable years
ending on or after June 10, 2011. For
taxable years ending on or after June 10,
2011, but before December 24, 2014, see
§ 1.6038A-2(e) as contained in 26 CFR
part 1 revised as of April 1, 2014. * * *

(3) Section 1.60384-4. * * * For tax-
able years ending before December 24,
2014, see § 1.6038A-4(a)(1) as contained
in 26 CFR part 1 revised as of April 1,
2014.

* * * * *

#### § 1.6038A-2 [Amended]

Par. 3. Section 1.6038A-2 is amended
by:

1\. Removing paragraph (e).

2\. Redesignating paragraphs (f), (g),
and (h) as paragraphs (e), (f), and (g),
respectively.

Par. 4. Section 1.6038A-4 is amended
by revising paragraph (a)(1) to read as
follows:

§ 1.6038A-4 Monetary penalty.

(a) * * *

(1) In general. If a reporting corpora-
tion fails to furnish the information de-

scribed in § 1.6038A-2 within the time
and manner prescribed in § 1.6038A-2(d),
fails to maintain or cause another to main-
tain records as required by § 1.6038A-3,
or (in the case of records maintained out-
side the United States) fails to meet the
non-U.S. record maintenance require-
ments within the applicable time pre-
scribed in § 1.6038A-3(f), a penalty of
$10,000 shall be assessed for each taxable
year with respect to which such failure
occurs. The filing of a substantially in-
complete Form 5472 constitutes a failure
to file Form 5472. Where, however, the
information described in § 1.6038A-
2(b)(3) through (5) is not required to be
reported, a Form 5472 filed without such
information is not a substantially incom-
plete Form 5472.

* * * * *

John Dalrymple,
Deputy Commissioner for
Services and Enforcement.

Approved: December 8, 2014

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

(Filed by the Office of the Federal Register on December 23,
2014, 8:45 a.m., and published in the issue of the Federal
Register for December 24, 2014, 79 F.R. 77388)

## Part III. Administrative, Procedural, and Miscellaneous

Maximum Vehicle Values
for 2015 for Use With
Vehicle Cents-Per-Mile and
Fleet-Average Valuation
Rules

### Notice 2015-1

#### PURPOSE

This notice provides the maximum ve-
hicle values for 2015 that taxpayers need
to determine the value of personal use of
employer-provided vehicles under the
special valuation rules provided under
section 1.61-21 (d) and (e) of the Income
Tax Regulations.

### MAXIMUM VEHICLE VALUES

The maximum value of employer-
provided vehicles first made available to
employees for personal use in calendar
year 2015 for which the vehicle cents-per-
mile valuation rule provided under Regu-
lation section 1.61-21(e) may be applica-
ble is $16,000 for a passenger automobile
and $17,500 for a truck or van.

The maximum value of employer-
provided vehicles first made available to
employees for personal use in calendar
year 2015 for which the fleet-average val-
uation rule provided under Regulation
section 1.61-21(d) may be applicable is
$21,300 for a passenger automobile and
$22,900 for a truck or van.

EFFECTIVE DATE

This notice applies to employer pro-
vided passenger automobiles first made
available to employees for personal use in
calendar year 2015.

## DRAFTING INFORMATION

The principal author of this notice is
Don M. Parkinson of the Office of the
Division Counsel/Associate Chief Coun-
sel) (Tax Exempt & Government Enti-
ties). For further information on this no-
tice contact Don Parkinson on (202)
317-4766 (not a toll-free number).

26 CFR 601.201: Rulings and determination letters.

### Rev. Proc. 2015-9

## TABLE OF CONTENTS

SECTION 1. WHAT IS THE PURPOSE OF THIS REVENUE PROCEDURE?

250

.01 Description of terms used in this revenue procedure

251

.02 Updated annually

251

SECTION 2. NATURE OF CHANGES AND RELATED REVENUE PROCEDURES.

251

.01 Rev. Proc. 2014-9 is superseded.

251

.02 Related revenue procedures

251

.03 What changes have been made to Rev. Proc. 2014-9?

252

SECTION 3. WHAT ARE THE PROCEDURES FOR REQUESTING RECOGNITION OF EXEMPT STATUS?

252

.01 In general

252

.02 User fee

252

.03 Form 1023 application

252

.04 Form 1024 application

253

.05 Letter application

253

.06 Form 1028 application

253

.07 Form 8871 notice for political organizations

253

.08 Requirements for a substantially completed application

253

.09 Terrorist organizations not eligible to apply for recognition of exemption

254

SECTION 4. WHAT ARE THE STANDARDS FOR ISSUING A DETERMINATION LETTER ON EXEMPT STATUS?

254

.01 Exempt status must be established in application and supporting documents.

254

.02 Determination letter based solely on administrative record

254

.03 Exempt status may be recognized in advance of actual operations

254

.04 No letter if exempt status issue in litigation or under consideration within the Service

254

.05 Incomplete application

254

.06 Even if application is complete, additional information may be required

255

.07 Expedited handling

255

.08 May decline to issue group exemption

255

SECTION 5. WHAT OFFICES ISSUE AN EXEMPT STATUS DETERMINATION LETTER?

255

.01 EO Determinations issues a determination letter in most cases

255

.02 Transition Rule for applications processed in EO Technical (or its successor)

255

.03 Technical advice may be requested in certain cases.

256

.04 Technical advice must be requested in certain cases

256

SECTION 6. WITHDRAWAL OF AN APPLICATION

256

.01 Application may be withdrawn prior to issuance of a determination letter.

256

.02 § 7428 implications of withdrawal of application under § 501(c)(3)

256

SECTION 7. WHAT ARE THE PROCEDURES WHEN EXEMPT STATUS IS DENIED?

256

.01 Proposed adverse determination letter

256

.02 Appeal of a proposed adverse determination letter issued by EO Rulings and Agreements

256

.03 Final adverse determination letter where no appeal is submitted

257

.04 How EO Rulings and Agreements handles an appeal of a proposed adverse determination letter

257

.05 Consideration by the Appeals Office

257

.06 An appeal or protest may be withdrawn

257

.07 Appeal and conference rights not applicable in certain situations

257

SECTION 8. DISCLOSURE OF APPLICATIONS AND DETERMINATION LETTERS

257

.01 Disclosure of applications, supporting documents, and favorable determination letters

257

.02 Disclosure of adverse determination letters.

258

.03 Disclosure to State officials when the Service refuses to recognize exemption under § 501(c)(3)

258

.04 Disclosure to State officials of information about § 501(c)(3) applicants

258

SECTION 9. REVIEW OF DETERMINATION LETTERS BY EO

258

.01 Determination letters may be reviewed by EO to assure uniformity

258

.02 Procedures for cases where EO takes exception to a determination letter

XXX

SECTION 10. DECLARATORY JUDGMENT PROVISIONS OF § 7428.

258

.01 Actual controversy involving certain issues

258

.02 Exhaustion of administrative remedies

258

.03 Not earlier than 270 days after seeking determination

259

.04 Service must have reasonable time to act on an appeal or protest

259

.05 Final determination to which § 7428 applies

259

SECTION 11. EFFECT OF DETERMINATION LETTER RECOGNIZING EXEMPTION

259

.01 Effective date of exemption

259

.02 Reliance on determination letter

260

SECTION 12. REVOCATION OR MODIFICATION OF DETERMINATION LETTER RECOGNIZING EXEMPTION

260

.01 Revocation or modification of a determination letter may be retroactive.

260

.02 Appeal and conference procedures in the case of revocation or modification of exempt status letter

260

SECTION 13. EFFECT ON OTHER REVENUE PROCEDURES

261

SECTION 14. EFFECTIVE DATE

261

SECTION 15. PAPERWORK REDUCTION ACT

261

DRAFTING INFORMATION

261

SECTION 1. WHAT IS
THE PURPOSE OF THIS
REVENUE
PROCEDURE?

This revenue procedure sets forth procedures for issuing determination letters on the exempt
status of organizations under § 501 and 521 of the Internal Revenue Code other than those subject
to Rev. Proc. 2015-6, last bulletin (relating to pension, profit-sharing, stock bonus, annuity, and
employee stock ownership plans) or Rev. Proc. 2015-5, last bulletin (relating to applications for
recognition of exemption made on Form 1023-EZ, Streamlined Application for Recognition of
Exemption Under Section 501(c)(3) of the Internal Revenue Code). Generally, the Service issues
these determination letters in response to applications for recognition of exemption from Federal

income tax. These procedures also apply to revocation or modification of determination letters.
This revenue procedure also provides guidance on the exhaustion of administrative remedies for
purposes of declaratory judgment under § 7428.

Although the Service released separate procedures for issuing determination letters on exempt
status for organizations applying on Form 1023-EZ with Rev. Proc. 2015-5, the Service is
considering whether to merge these procedures into this revenue procedure in a future update.

Description of terms used
in this revenue procedure

.01 For purposes of this revenue procedure-

(1) The term "Service" means the Internal Revenue Service.

(2) The term "application" means the appropriate form or letter that an organization must file
or submit to the Service for recognition of exemption from Federal income tax under the
applicable section of the Internal Revenue Code. See section 3 for information on specific forms.

(3) The term "EO Determinations" means the office in EO Rulings and Agreements of the
Service that is primarily responsible for processing initial applications for tax-exempt status. It
includes the main EO Determinations office located in Cincinnati, Ohio, and other field offices.
Applications are generally processed in the centralized EO Determinations office in Cincinnati,
Ohio.

(4) The term "EO Rulings and Agreements" means the office in EO that is primarily
responsible for up-front, customer-initiated activities such as determination applications, taxpayer
assistance, and assistance to other EO offices. The EO Rulings and Agreements office includes
EO Technical (or its successor office).

(5) The term "Appeals Office" means any office under the direction and control of the Chief,
Appeals. The purpose of the Appeals Office is to resolve tax controversies, without litigation, on
a fair and impartial basis. The Appeals Office is independent of EO Determinations and EO
Rulings and Agreements.

(6) The term "determination letter" means a written statement issued by EO Rulings and
Agreements or an Appeals Office in response to an application for recognition of exemption from
Federal income tax under § 501 and 521. This includes a written statement issued by EO
Determinations or an Appeals Office on the basis of advice secured from the Office of the
Associate Chief Counsel (Tax Exempt and Government Entities) pursuant to the procedures
prescribed in Rev. Proc. 2015-2, last bulletin.

(7) The term "Code" means the Internal Revenue Code.

Updated annually

.02 This revenue procedure is updated annually, but may be modified or amplified during the
year.

### SECTION 2. NATURE OF CHANGES AND RELATED REVENUE PROCEDURES

Rev. Proc. 2014-9 is superseded

.01 This revenue procedure is a general update of Rev. Proc. 2014-9, 2013-2 I.R.B. 255, which is hereby superseded.

Related revenue

.02 The following revenue procedures are related to Rev. Proc. 2015-9

procedures

(1) This revenue procedure supplements Rev. Proc. 2015-5, last bulletin, which provides alternative application and processing procedures for applications made on Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal

Revenue Code. This revenue procedure does not apply to applications made and determination
letters issued under Rev. Proc. 2015-5 except to the extent specifically noted therein.

(2) This revenue procedure supplements Rev. Proc. 2015-10, this bulletin, with respect to the
effects of § 7428 on the classification of organizations under §§ 509(a) and 4942(j)(3). Rev. Proc.
80-27, 1980-1 C.B. 677, sets forth procedures under which exemption may be recognized on a
group basis for subordinate organizations affiliated with and under the general supervision and
control of a central organization. Rev. Proc. 72-5, 1972-1 C.B. 709, provides information for
religious and apostolic organizations seeking recognition of exemption under § 501(d). General
procedures for requests for a determination letter are provided in Rev. Proc. 2015-8, last bulletin.
User fees for requests for determination letters are set forth in Rev. Proc. 2014-8, last bulletin.
Information regarding procedures for organizations described in § 501(c)(29) can be found in
Rev. Proc. 2012-11, 2012-7 I.R.B. 368.

What changes have been
made to Rev. Proc. 2014-9?

.03 Notable changes to Rev. Proc. 2014-9 that appear in this year's update include -

(1) Changes in the assignment of applications and provision of advice on the applications. EO
Rulings and Agreements no longer issues letter rulings or technical advice memoranda. Rev. Proc.
2015-1, last bulletin, sets forth procedures for obtaining letter rulings. Rev. Proc. 2015-2, last
bulletin, sets forth procedures for requesting technical advice.

(2) Provides a Transition Rule for applications processed in EO Technical (or its successor)

(3) Cross-references to Rev. Proc. 2015-5, last bulletin. As of July 1, 2014, eligible organi-
zations may request recognition of exemption under § 501(c)(3) by filing Form 1023-EZ. The
procedures for Form 1023-EZ are found in Rev. Proc. 2015-5. Cross-references to Rev. Proc.
2015-5 have been added to this revenue procedure where appropriate.

(4) Dates, cross references, and names have been changed to reflect the appropriate annual
Revenue Procedures.

SECTION 3. WHAT ARE
THE PROCEDURES FOR
REQUESTING
RECOGNITION OF
EXEMPT STATUS?

In general

.01 An organization seeking recognition of exempt status under § 501 or § 521 is required to
submit the appropriate application. In the case of a numbered application form, the current version
of the form must be submitted. A central organization that has previously received recognition of
its own exemption can request a group exemption letter by submitting a letter application along
with Form 8718, User Fee for Exempt Organization Determination Letter Request. See Rev. Proc.
80-27. Form 8718 is not a determination letter application. Attach this form to the determination
letter application.

User fee

.02 An application must be submitted with the correct user fee, as set forth in Rev. Proc.
2015-8, last bulletin.

Form 1023 application

.03 An organization seeking recognition of exemption under § 501(c)(3) and § 501(e), (f), (k),
(n), (q), or (r) must submit a completed Form 1023, Application for Recognition of Exemption
Under Section 501(c)(3) of the Internal Revenue Code. In the case of an organization that
provides credit counseling services, see § 501(q). In the case of an organization that is a hospital
and is seeking exemption under § 501(c)(3), see § 501(r). Notwithstanding the foregoing, eligible
organizations may seek recognition of exemption under § 501(c)(3) by submitting a completed
Form 1023-EZ, Streamlined Application for Recognition of Exemption under Section 501(c)(3)

of the Internal Revenue Code. See Rev. Proc. 2015-5, last bulletin, for the procedures that apply
to the Form 1023-EZ application.

Form 1024 application

.04 An organization seeking recognition of exemption under § 501(c)(9), § 501(c)(17), or
§ 501(c)(20), must submit a completed Form 1024, Application for Recognition of Exemption
Under Section 501 (a), along with Form 8718. An organization seeking a determination letter from
the Service recognizing exemption under § 501(c)(2), (4), (5), (6), (7), (8), (10), (12), (13), (15),
(19), or (25) must submit a completed Form 1024, Application for Recognition of Exemption
Under Section 501(a), along with Form 8718. In the case of an organization that provides credit
counseling services and seeks recognition of exemption under § 501(c)(4), see § 501(q).

#### Letter application

.05 An organization seeking recognition of exemption under § 501(c)(11), (14), (16), (18), (21), (22),
(23), (26), (27), (28), or (29), or under § 501(d), must submit a letter application along with Form 8718.

Form 1028 application

.06 An organization seeking recognition of exemption under § 521 must submit a completed
Form 1028, Application for Recognition of Exemption Under Section 521 of the Internal Revenue
Code, along with Form 8718.

Form 8871 notice for
political organizations

.07 A political party, a campaign committee for a candidate for federal, state or local office, and
a political action committee are all political organizations subject to tax under § 527. To be
tax-exempt, a political organization may be required to notify the Service that it is to be treated
as a § 527 organization by electronically filing Form 8871, Political Organization Notice of
Section 527 Status. For details, go to the IRS website at www.irs.gov/polorgs.

Requirements for a
substantially completed
application

.08 A substantially completed application, including a letter application, is one that:

(1) is signed by an authorized individual;

(2) includes an Employer Identification Number (EIN);

(3) for organizations other than those described in § 501(c)(3), includes a statement of receipts
and expenditures and a balance sheet for the current year and the three preceding years (or the
years the organization was in existence, if less than four years), and if the organization has not
yet commenced operations or has not completed one accounting period, a proposed budget for
two full accounting periods and a current statement of assets and liabilities; for organizations
described in § 501(c)(3), see Form 1023 and Notice 1382;

(4) includes a detailed narrative statement of proposed activities, including each of the
fundraising activities of a § 501(c)(3) organization, and a narrative description of anticipated
receipts and contemplated expenditures;

(5) includes a copy of the organizing or enabling document that is signed by a principal officer
or is accompanied by a written declaration signed by an authorized individual certifying that the
document is a complete and accurate copy of the original or otherwise meets the requirements of
a "conformed copy" as outlined in Rev. Proc. 68-14, 1968-1 C.B. 768;

(6) if the organizing or enabling document is in the form of articles of incorporation, includes
evidence that it was filed with and approved by an appropriate state official (e.g., stamped "Filed" and
dated by the Secretary of State); alternatively, a copy of the articles of incorporation may be submitted
if accompanied by a written declaration signed by an authorized individual that the copy is a complete
and accurate copy of the original copy that was filed with and approved by the state; if a copy is
submitted, the written declaration must include the date the articles were filed with the state;

(7) if the organization has adopted by-laws or similar governing rules, includes a current copy;
the by-laws need not be signed if submitted as an attachment to the application for recognition of
exemption; otherwise, the by-laws must be verified as current by an authorized individual; and

(8) is accompanied by the correct user fee and Form 8718, when applicable.

Terrorist organizations not
eligible to apply for
recognition of exemption
SECTION 4. WHAT ARE
THE STANDARDS FOR
ISSUING A
DETERMINATION
LETTER ON EXEMPT
STATUS?

#### Exempt status must be established in application and supporting documents

Determination letter based
solely on administrative
record

.09 An organization that is identified or designated as a terrorist organization within the
meaning of § 501(p)(2) is not eligible to apply for recognition of exemption.

.01 A favorable determination letter will be issued to an organization only if its application and
supporting documents establish that it meets the particular requirements of the section under
which exemption from Federal income tax is claimed.

.02 A determination letter on exempt status is issued based solely upon the facts and
representations contained in the administrative record.

(1) The applicant is responsible for the accuracy of any factual representations contained in the
application.

(2) Any oral representation of additional facts or modification of facts as represented or alleged
in the application must be reduced to writing over the signature of an officer or director of the
taxpayer under a penalties of perjury statement.

(3) The failure to disclose a material fact or misrepresentation of a material fact on the
application may adversely affect the reliance that would otherwise be obtained through issuance
by the Service of a favorable determination letter.

Exempt status may be
recognized in advance of
actual operations

.03 Exempt status may be recognized in advance of the organization's operations if the
proposed activities are described in sufficient detail to permit a conclusion that the organization
will clearly meet the particular requirements for exemption pursuant to the section of the Code
under which exemption is claimed.

(1) A mere restatement of exempt purposes or a statement that proposed activities will be in
furtherance of such purposes will not satisfy this requirement.

(2) The organization must fully describe all of the activities in which it expects to engage,
including the standards, criteria, procedures, or other means adopted or planned for carrying out
the activities, the anticipated sources of receipts, and the nature of contemplated expenditures.

(3) Where the organization cannot demonstrate to the satisfaction of the Service that it qualifies
for exemption pursuant to the section of the Code under which exemption is claimed, the Service
will generally issue a proposed adverse determination letter. See also section 7 of this revenue
procedure.

No letter if exempt status
issue in litigation or under
consideration within the
Service

.04 A determination letter on exempt status ordinarily will not be issued if an issue involving
the organization's exempt status under § 501 or § 521 is pending in litigation, is under
consideration within the Service, or if issuance of a determination letter is not in the interest of
sound tax administration. If the Service declines to issue a determination to an organization
seeking exempt status under § 501(c)(3), the organization may be able to pursue a declaratory
judgment under § 7428, provided that it has exhausted its administrative remedies.

#### Incomplete application

.05 If an application does not contain all of the items set out in section 3.08 of this revenue
procedure, the Service may return it to the applicant for completion.

(1) In lieu of returning an incomplete application, the Service may retain the application and
request additional information needed for a substantially completed application.

(2) In the case of an application under § 501(c)(3) that is returned incomplete, the 270-day
period referred to in § 7428(b)(2) will not be considered as starting until the date a substantially
completed Form 1023 is refiled with or remailed to the Service. If the application is mailed to the
Service and a postmark is not evident, the 270-day period will start to run on the date the Service
actually receives the substantially completed Form 1023. The same rules apply for purposes of the
notice requirement of § 508.

(3) Generally, the user fee will not be refunded if an incomplete application is filed. See Rev.
Proc. 2015-8, section 10, last bulletin.

Even if application is
complete, additional
information may be
required

.06 Even though an application is substantially complete, the Service may request additional
information before issuing a determination letter.

(1) If the application involves an issue where contrary authorities exist, an applicant's failure
to disclose and distinguish contrary authorities may result in requests for additional information,
which could delay final action on the application.

(2) In the case of an application under § 501(c)(3), the period of time beginning on the date the
Service requests additional information until the date the information is submitted to the Service
will not be counted for purposes of the 270-day period referred to in § 7428(b)(2).

Expedited handling

.07 Applications are normally processed in the order of receipt by the Service. However,
expedited handling of an application may be approved where a request is made in writing and
contains a compelling reason for processing the application ahead of others. Upon approval of a
request for expedited handling, an application will be considered out of its normal order. This
does not mean the application will be immediately approved or denied. Circumstances generally
warranting expedited processing include:

(1) a grant to the applicant is pending and the failure to secure the grant may have an adverse
impact on the organization's ability to continue to operate;

(2) the purpose of the newly created organization is to provide disaster relief to victims of
emergencies such as flood and hurricane; and

(3) there have been undue delays in issuing a determination letter caused by a Service error.

May decline to issue group
exemption

.08 The Service may decline to issue a group exemption letter when appropriate in the interest
of sound tax administration.

##### SECTION 5. WHAT OFFICES ISSUE AN EXEMPT STATUS DETERMINATION LETTER?

###### EO Determinations issues a determination letter

.01 Under the general procedures outlined in Rev. Proc. 2015-4, last bulletin, EO Determi-
nations is authorized to issue determination letters on applications for exempt status under § 501
and § 521.

###### Transition Rule for applications processed in EO Technical (or its successor)

.02 In limited circumstances, applications for exempt status are transferred to EO Technical (or
its successor office) for processing.

(1) All the procedures herein apply to applications for exempt status transferred to EO
Technical (or its successor), including the opportunity for the applicant to request consideration
by Appeals of a proposed adverse determination as set forth in Section 7.

(2) An applicant receiving a proposed adverse determination with regard to an application that has been transferred to EO Technical (or its successor) may also request a conference with EO Technical (or its successor) in addition to requesting appeals office consideration as described in Section 7.

Technical advice may be requested in certain cases

.03 At any time during the course of consideration of an exemption application by EO Determinations, if either EO Determinations or the organization believes that its case involves an issue on which there is no published precedent, or there has been non-uniformity in the Service's handling of similar cases, EO Determinations may decide to, or the organization may request that EO Determinations seek technical advice from the Office of Associate Chief Counsel (Tax Exempt and Government Entities). See Rev. Proc. 2014-2, last bulletin.

Technical advice must be requested in certain cases

.04 If EO Determinations proposes to recognize the exemption of an organization to which a contrary ruling or technical advice was previously issued, EO Determinations must seek technical advice from the Office of Associate Chief Counsel (Tax Exempt and Government Entities) before issuing a determination letter. This does not apply where an adverse ruling was issued and the organization subsequently made changes to its purposes, activities, or operations to remove the basis for which exempt status was denied.

SECTION 6. WITHDRAWAL OF AN APPLICATION

Application may be withdrawn prior to issuance of a determination letter

.01 An application may only be withdrawn upon the written request of an authorized individual prior to the issuance of a determination letter. The issuance of a determination letter includes the issuance of a proposed adverse determination letter.

(1) When an application is withdrawn, the Service will retain the application and all supporting documents. The Service may consider the information submitted in connection with the with- drawn request in a subsequent examination of the organization. (2) Generally, the user fee will not be refunded if an application is withdrawn. See Rev. Proc. 2015-8, section 10, last bulletin.

§ 7428 implications of withdrawal of application under § 501(c)(3)

.02 The withdrawal of an application under § 501(c)(3) is not a failure to make a determination within the meaning of § 7428(a)(2) or an exhaustion of administrative remedies within the meaning of § 7428(b)(2).

SECTION 7. WHAT ARE THE PROCEDURES WHEN EXEMPT STATUS IS DENIED?

Proposed adverse determination letter

.01 If EO Rulings and Agreements reaches the conclusion that the organization does not satisfy the requirements for exempt status pursuant to the section of the Code under which exemption is claimed, the Service generally will issue a proposed adverse determination letter, which will: (1) include a detailed discussion of the Service's rationale for the denial of tax-exempt status; and

(2) advise the organization of its opportunity to appeal the decision and request a conference.

Appeal of a proposed adverse determination letter issued by EO Rulings and Agreements

.02 A proposed adverse determination letter issued by EO Rulings and Agreements will advise the organization of its opportunity to appeal the determination by requesting Appeals Office consideration. To do this, the organization must submit a statement of the facts, law and arguments in support of its position within 30 days from the date of the adverse determination letter. The organization must also state whether it wishes an Appeals Office conference.

.03 If an organization does not submit a timely appeal of a proposed adverse determination
letter issued by EO Rulings and Agreements, a final adverse determination letter will be issued
to the organization. The final adverse letter will provide information about the filing of tax returns
and the disclosure of the proposed and final adverse letters.

.04 If an organization submits a protest of the proposed adverse determination letter, EO
Rulings and Agreements will first review the protest, and, if it determines that the organization
qualifies for tax-exempt status, issue a favorable exempt status determination letter. If EO Rulings
and Agreements maintains its adverse position after reviewing the protest, it will forward the
protest and the exemption application case file to the Appeals Office. As described in Section 5,
for protests of proposed adverse determinations issued by EO Technical (or its successor),
organizations may request a conference with EO Technical (or its successor) in addition to having
its protest and exemption application file forwarded to the Appeals Office.

.05 The Appeals Office will consider the organization's appeal. If the Appeals Office agrees
with the proposed adverse determination, it will either issue a final adverse determination or, if
a conference was requested, contact the organization to schedule a conference. At the end of the
conference process, which may involve the submission of additional information, the Appeals
Office will either issue a final adverse determination letter or a favorable determination letter. If
the Appeals Office believes that an exemption or private foundation status issue is not covered by
published precedent or that there is non-uniformity, the Appeals Office must request technical
advice from the Office of Associate Chief Counsel (Tax Exempt and Government Entities). See
Rev. Proc. 2015-2, last bulletin.

.06 An organization may withdraw its appeal or protest before the Service issues a final adverse
determination letter. Upon receipt of the withdrawal request, the Service will complete the
processing of the case in the same manner as if no appeal or protest was received.

###### Appeal and conference rights not applicable in certain situations

.07 The opportunity to appeal a proposed adverse determination letter and the conference rights
described above are not applicable to matters where delay would be prejudicial to the interests of
the Service (such as in cases involving fraud, jeopardy, the imminence of the expiration of the
statute of limitations, or where immediate action is necessary to protect the interests of the
Government).

Sections 6104 and 6110 provide rules for the disclosure of applications, including supporting
documents, and determination letters.

###### SECTION 8. DISCLOSURE OF APPLICATIONS AND DETERMINATION LETTERS

Disclosure of applications,
supporting documents, and
favorable determination
letters or rulings

.01 The applications, any supporting documents, and the favorable determination letter issued,
are available for public inspection under § 6104(a)(1). However, there are certain limited
disclosure exceptions for a trade secret, patent, process, style of work, or apparatus, if the Service
determines that the disclosure of the information would adversely affect the organization.

(1) The Service is required to make the applications, supporting documents, and favorable
determination letters available upon request. The public can request this information by submit-
ting Form 4506-A, Request for Public Inspection or Copy of Exempt or Political Organization
IRS Form. Organizations should ensure that applications and supporting documents do not
include unnecessary personal identifying information (such as bank account numbers or social
security numbers) that could result in identity theft or other adverse consequences if publicly
disclosed.

(2) The exempt organization is required to make its exemption application, supporting docu-
ments, and determination letter available for public inspection without charge. For more infor-
mation about the exempt organization's disclosure obligations, see Publication 557, Tax-Exempt
Status for Your Organization.

#### Final adverse determination letter or ruling where no appeal or protest is submitted

How EO Rulings and
Agreements handles an
appeal of a proposed
adverse determination
letter

Consideration by the
Appeals Office

#### An appeal may be withdrawn

Disclosure of adverse determination letters

.02 The Service is required to make adverse determination letters available for public inspec- tion under § 6110. Upon issuance of the final adverse determination letter to an organization, both the proposed adverse determination letter and the final adverse determination letter will be released pursuant to § 6110. (1) These documents are made available to the public after the deletion of names, addresses, and any other information that might identify the taxpayer. See § 6110(c) for other specific disclosure exemptions.

(2) The final adverse determination letter will enclose Notice 437, Notice of Intention to Disclose, and redacted copies of the final and proposed adverse determination letters. Notice 437 provides instructions if the organization disagrees with the deletions proposed by the Service.

Disclosure to State officials when the Service refuses to recognize exemption under § 501(c)(3)

.03 The Service may notify the appropriate State officials of a refusal to recognize an organization as tax-exempt under § 501(c)(3). See § 6104(c). The notice to the State officials may include a copy of a proposed or final adverse determination letter the Service issued to the organization. In addition, upon request by the appropriate State official, the Service may make available for inspection and copying the exemption application and other information relating to the Service's determination on exempt status.

Disclosure to State officials of information about § 501(c)(3) applicants SECTION 9. REVIEW OF DETERMINATION LETTERS

.04 The Service may disclose to State officials the name, address, and identification number of any organization that has applied for recognition of exemption under § 501(c)(3).

Determination letters may be reviewed by the Office of Associate Chief Counsel (Tax Exempt and Government Entities) or EO Rulings and Agreements to assure uniformity

.01 Determination letters issued by EO Determinations may be reviewed by EO Rulings and Agreements, the Office of Associate Chief Counsel (Tax Exempt and Government Entities), or the Office of the Associate Chief Counsel (Passthroughs and Special Industries) (for cases under § 521), to assure uniform application of the statutes or regulations, or rulings, court opinions, or decisions published in the Internal Revenue Bulletin.

SECTION 10. DECLARATORY JUDGMENT PROVISIONS OF § 7428

Actual controversy involving certain issues

.01 Generally, a declaratory judgment proceeding under § 7428 can be filed in the United States Tax Court, the United States Court of Federal Claims, or the district court of the United States for the District of Columbia with respect to an actual controversy involving a determination by the Service or a failure of the Service to make a determination with respect to the initial or continuing qualification or classification of an organization under § 501(c)(3) (charitable, educational, etc.); § 170(c)(2) (deductibility of contributions); § 509(a) (private foundation status); § 4942(j)(3) (operating foundation status); or § 521 (farmers cooperatives).

Exhaustion of administrative remedies

.02 Before filing a declaratory judgment action, an organization must exhaust its administrative remedies by taking, in a timely manner, all reasonable steps to secure a determination from the Service. These include: (1) the filing of a substantially completed application Form 1023 under § 501(c)(3) pursuant to section 3.08 of this revenue procedure, or the request for a determination of foundation status pursuant to Rev. Proc. 2015-10, this bulletin, or its successor;

(2) in appropriate cases, requesting relief pursuant to Treas. Reg. § 301.9100-1 of the

Procedure and Administration Regulations regarding the extension of time for making an election
or application for relief from tax;

(3) the timely submission of all additional information requested by the Service to perfect an
exemption application or request for determination of private foundation status; and

(4) exhaustion of all administrative appeals available within the Service pursuant to section 7
of this revenue procedure.

#### Not earlier than 270 days after seeking determination

.03 An organization will in no event be deemed to have exhausted its administrative remedies
prior to the earlier of:

(1) the completion of the steps in section 10.02, and the sending by the Service by certified or
registered mail of a final determination letter; or

(2) the expiration of the 270-day period described in § 7428(b)(2) in a case where the Service
has not issued a final determination letter, and the organization has taken, in a timely manner, all
reasonable steps to secure a determination letter.

Service must have
reasonable time to act on
an appeal

.04 The steps described in section 10.02 will not be considered completed until the Service has
had a reasonable time to act upon an appeal.

#### Final determination to which § 7428 applies

.05 A final determination to which § 7428 applies is a determination letter, sent by certified or
registered mail, which holds that the organization is not described in § 501(c)(3) or § 170(c)(2),
is a public charity described in a part of § 509 or § 170(b)(1)(A) other than the part under which
the organization requested classification, is not a private foundation as defined in § 4942(j)(3), or
is a private foundation and not a public charity described in a part of § 509 or § 170(b)(1)(A).

## SECTION 11. EFFECT OF DETERMINATION LETTER RECOGNIZING EXEMPTION

Effective date of exemption

.01 A determination letter recognizing exemption of an organization described in § 501(c),
other than § 501(c)(29), is usually effective as of the date of formation of an organization if: (1)
its purposes and activities prior to the date of the determination letter have been consistent with
the requirements for exemption; (2) it has not failed to file required Form 990 series returns or
notices for three consecutive years; and (3) it has filed an application for recognition of exemption
within 27 months from the end of the month in which it was organized. Special rules may apply
to an organization applying for exemption under § 501(c)(3), (9), (17) or (20). See §§ 505 and
508, and Treas. Reg. §§ 1.508-1(a)(2), 1.508-1(b)(7) and 301.9100-2(a)(2)(iii) and (iv). In
addition, special rules apply with respect to organizations described in § 501(c)(29). See Rev.
Proc. 2012-11, 2012-7 IRB 368.

(1) If the Service requires the organization to alter its activities or make substantive amend-
ments to its enabling instrument, the exemption will be effective as of the date specified in a
determination letter.

(2) If the Service requires the organization to make a nonsubstantive amendment, exemption
will ordinarily be recognized as of the date of formation. Examples of nonsubstantive amend-
ments include correction of a clerical error in the enabling instrument or the addition of a
dissolution clause where the activities of the organization prior to the determination letter are
consistent with the requirements for exemption.

(3) An organization that otherwise meets the requirements for tax-exempt status and the
issuance of a determination letter that does not meet the requirements for recognition from date
of formation will generally be recognized from the postmark date of its application.

(4) Organizations that claim exempt status under § 501(c) generally must file annual Form 990 series returns or notices, even if they have not yet received their determination letter recognizing exemption. If an organization fails to file required Form 990 series returns or notices for three consecutive years, its exemption will be automatically revoked by operation of § 6033(j). Such an organization may apply for reinstatement of its exempt status, and such recognition may be granted retroactively, only in accordance with the procedure described in Rev. Proc. 2014-11, 2014-3 I.R.B. 411.

Reliance on determination letter

.02 A determination letter recognizing exemption may not be relied upon by the organization submitting the application if there is a material change, inconsistent with exemption, in the character, the purpose, or the method of operation of the organization, or a change in the applicable law. Also, a determination letter issued to an organization that submitted a Form 1023 in accordance with this revenue procedure may not be relied upon by the organization submitting the application if it was based on any inaccurate material information submitted by the organi- zation See section 12.01.

While the procedures for obtaining a determination letter by submitting Form 1023 differ from those for obtaining a determination letter by submitting Form 1023-EZ, grantors and contributors may rely on a determination letter issued pursuant to Rev. Proc. 2015-5, last bulletin, to the same extent as a determination letter issued pursuant to this Revenue Procedure. See, Rev. Proc. 2011-33, 2011-25 I.R.B. 887.

SECTION 12. REVOCATION OR MODIFICATION OF DETERMINATION LETTER RECOGNIZING EXEMPTION

A determination letter recognizing exemption may be revoked or modified: (1) by a notice to the taxpayer to whom the determination letter was issued; (2) by enactment of legislation or ratification of a tax treaty; (3) by a decision of the Supreme Court of the United States; (4) by the issuance of temporary or final regulations; (5) by the issuance of a revenue ruling, revenue procedure, or other statement published in the Internal Revenue Bulletin; or (6) automatically, pursuant to § 6033(j), for failure to file a required annual return or notice for three consecutive years.

Revocation or modification of a determination letter may be retroactive

.01 The revocation or modification of a determination letter recognizing exemption may be retroactive if there has been a change in the applicable law, the organization omitted or misstated a material fact, operated in a manner materially different from that originally represented, or, in the case of organizations to which § 503 applies, engaged in a prohibited transaction with the purpose of diverting corpus or income of the organization from its exempt purpose and such transaction involved a substantial part of the corpus or income of such organization. In certain cases an organization may seek relief from retroactive revocation or modification of a determi- nation letter under § 7805(b). Requests for § 7805(b) relief are subject to the procedures set forth in Rev. Proc. 2015-1, last bulletin.

(1) Where there is a material change, inconsistent with exemption, in the character, the purpose, or the method of operation of an organization, revocation or modification will ordinarily take effect as of the date of such material change.

(2) In the case where a determination letter is issued in error or is no longer in accord with the Service's position and § 7805(b) relief is granted (see sections 13 and 14 of Rev. Proc. 2015-4, last bulletin), ordinarily, the revocation or modification will be effective not earlier than the date when the Service modifies or revokes the original determination letter.

Appeal and conference procedures in the case of revocation or modification of exempt status letter

.02 In the case of a revocation or modification of a determination letter, the appeal and conference procedures are generally the same as set out in section 7 of this revenue procedure. However, appeal and conference rights are not applicable to matters where delay would be prejudicial to the interests of the Service (such as in cases involving fraud, jeopardy, the imminence of the expiration of the statute of limitations, or where immediate action is necessary to protect the interests of the Government). Organizations revoked under § 6033(j) will not have an opportunity for Appeal consideration. (1) If the case involves an exempt status issue on which EO Rulings and Agreements or the Office of Chief Counsel had issued a previous contrary ruling or technical advice, EO Determi-

nations generally must seek technical advice from the Office of Associate Chief Counsel (Tax
Exempt and Government Entities).

(2) EO Determinations does not have to seek technical advice if the prior ruling or technical
advice has been revoked by subsequent contrary published precedent, if the proposed revocation
involves a subordinate unit of an organization that holds a group exemption letter issued by EO
Technical, or if the EO Technical ruling or technical advice was issued under the Internal
Revenue Code of 1939 or prior revenue acts.

SECTION 13. EFFECT ON OTHER REVENUE PROCEDURES

Rev. Proc. 2014-9 is superseded.

SECTION 14. EFECTIVE DATE

This revenue procedure is effective January 2, 2015.

SECTION 15. PAPERWORK REDUCTION ACT

The collection of information for a letter application under section 3.05 of this revenue procedure has been reviewed and approved by the Office of Management and Budget (OMB) in accordance with the Paperwork Reduction Act (44 U.S.C. § 3507) under control number 1545-2080. All other collections of information under this revenue procedure have been approved under separate OMB control numbers.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid OMB control number. The collection of this information is required if an organization wants to be recognized as tax-exempt by the Service. We need the information to determine whether the organization meets the legal requirements for tax-exempt status. In addition, this information will be used to help the Service delete certain information from the text of an adverse determination letter before it is made available for public inspection, as required by § 6110. The time needed to complete and file a letter application will vary depending on individual circumstances. The estimated average time is 10 hours.

Books and records relating to the collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. The rules governing the confidentiality of letter applications are covered in § 6104.

DRAFTING INFORMATION

The principal author of this revenue procedure is Mr. Jonathan Carter of the Exempt Organi- zations, Tax Exempt and Government Entities Division. For further information regarding this revenue procedure, please contact the TE/GE Customer Service office at (877) 829-5500 (a toll-free call), or send an e-mail to Darla Trilli or Tracy Dornette at tege.eo@irs.gov and include "Question about Rev. Proc. 2015-9" in the subject line.

Rev. Proc. 2015-10

TABLE OF CONTENTS

SECTION 1. PURPOSE AND SCOPE

262

SECTION 2. WHAT CHANGES HAVE BEEN MADE TO REV. PROC. 2015-10?

262

SECTION 3. BACKGROUND.

262

SECTION 4. DETERMINATIONS OF FOUNDATION STATUS

263

SECTION 5. APPLICABILITY OF ANNUAL REVENUE PROCEDURES

264

SECTION 6. GENERALLY NO NEW DETERMINATION LETTER IF SAME STATUS IS SOUGHT

264

SECTION 7. FORMAT OF REQUEST

264

SECTION 8. REQUESTS BY NONEXEMPT CHARITABLE TRUSTS

264

SECTION 9. DETERMINATIONS OPEN TO PUBLIC INSPECTION

265

SECTION 10. NOT APPLICABLE TO PRIVATE FOUNDATION TERMINATIONS UNDER § 507 OR CHANGES OF STATUS PURSUANT TO EXAMINATION.

265

SECTION 11. EFFECT ON OTHER REVENUE PROCEDURES

265

SECTION 12. EFFECTIVE DATE.

265

SECTION 13. PAPERWORK REDUCTION ACT

265

SECTION 1. PURPOSE AND SCOPE

The purpose of this revenue procedure is to set forth updated procedures of the Internal Revenue Service (the "Service") with respect to issuing determination letters on private founda- tion status under § 509(a) of the Internal Revenue Code, operating foundation status under § 4942(j)(3), and exempt operating foundation status under § 4940(d)(2) of organizations exempt from Federal income tax under § 501(c)(3). This revenue procedure also applies to the issuance of determination letters on the foundation status under § 509(a)(3) of nonexempt charitable trusts described in § 4947(a)(1).

SECTION 2. WHAT CHANGES HAVE BEEN

.01 This revenue procedure is a general update of Rev. Proc. 2014-10, 2014-2 I.R.B. 293.

MADE TO REV. PROC. 2015-10?

.02 Changes in the assignment of applications and provision of advice on the applications. EO Rulings and Agreements no longer issues private letter rulings or technical advice memoranda. Rev. Proc. 2015-1, last bulletin, sets forth procedures for obtaining private letter rulings. Rev. Proc. 2015-2, last bulletin, sets forth procedures for requesting technical advice. .03 Dates and cross references have been changed to reflect the appropriate annual Revenue Procedures.

SECTION 3. BACKGROUND

.01 All § 501(c)(3) organizations are classified as private foundations under § 509(a) unless they qualify as a public charity under § 509(a)(1) (which cross-references § 170(b)(1)(A)(i)-(vi)), (2), (3), or (4). See Treas. Reg. §§ 1.170A-9, 1.509(a)-1 through 1.509(a)-7. The Service determines an organization's private foundation or public charity status when the organization files its Form 1023 or, when eligible, Form 1023-EZ. This status will be included in the organization's determination letter. .02 In its Form 990, Return of Organization Exempt From Income Tax Under section 501(c), 527, or 4947(a)(1) of the Internal Revenue Code (except black lung benefit trust or private foundation), a public charity indicates the paragraph of § 509(a), and subparagraph of § 170(b)(1)(A), if applicable, under which it qualifies as a public charity. Because of changes in its activities or operations, this may differ from the public charity status listed in its original determination letter. Although an organization is not required to obtain a determination letter to

qualify for the new public charity status, in order for Service records to recognize any change in
public charity status, an organization must obtain a new determination of foundation status
pursuant to this revenue procedure.

.03 If a public charity no longer qualifies as a public charity under § 509(a)(1)-(4), then it
becomes a private foundation, and as such, it must file Form 990-PF, Return of Private
Foundation or Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation.
It is not necessary for the organization to obtain a determination letter on its new private
foundation status (although it is permitted to do so pursuant to this revenue procedure). The
organization indicates this change in foundation status by filing its Form 990-PF return and
following any procedures specified in the form, instructions, or other published guidance.
Thereafter, the organization may terminate its private foundation status, such as by giving notice
and qualifying as a public charity again under § 509(a)(1)-(3) during a 60-month termination
period in accordance with the procedures under § 507(b)(1)(B) and Treas. Reg. § 1.507-2(b).

.04 This revenue procedure applies to organizations that may have erroneously determined that
the organization was a private foundation and wish to correct the error. For example, an
organization may have erroneously classified an item or items in its calculation of public support,
causing the organization to classify itself as a private foundation and to file Forms 990-PF.
Pursuant to this revenue procedure, the organization can request to be classified as a public charity
by showing that it continuously met the public support tests during the relevant periods. See
section 7 below.

.05 A private foundation may qualify as an operating foundation under § 4942(j)(3) without a
determination letter from the Service, but the Service will not recognize such status in its records
without a determination letter from the Service. An organization claiming to be an exempt
operating foundation under § 4940(d)(2) must obtain a determination letter from the Service
recognizing such status to be exempt from the § 4940 tax on net investment income.

# SECTION 4. DETERMINATIONS OF FOUNDATION STATUS

.01 EO Determinations will issue determination letters on foundation status, including whether
an organization is:

(1) a private foundation;

(2) a public charity described in §§ 509(a)(1) and 170(b)(1)(A) (other than clauses (v), (vii),
and (viii));

(3) a public charity described in § 509(a)(2) or (4);

(4) a public charity described in § 509(a)(3), whether such organization is described in
§ 509(a)(3)(B)(i), (ii), or (iii) ("supporting organization type"), and whether or not a Type III
supporting organization is functionally integrated;

(5) a private operating foundation described in § 4942(j)(3); or

(6) an exempt operating foundation described in § 4940(d)(2).

.02 EO Determinations will also issue determination letters on whether a nonexempt charitable
trust described in § 4947(a)(1) is described in § 509(a)(3).

.03 EO Determinations will issue such determinations in response to applications for recog-
nition of exempt status under § 501(c)(3) (Form 1023 or, when eligible, Form 1023-EZ),
submitted by organizations pursuant to § 508(b). EO Determinations will also issue such
determinations in response to separate requests for determination of foundation status submitted
on Form 8940, Request for Miscellaneous Determination, pursuant to this revenue procedure or
its successor revenue procedures.

## SECTION 5. APPLICABILITY OF ANNUAL REVENUE PROCEDURES

.01 Rev. Proc. 2015-9 (updated annually), this bulletin provides procedures of the Service in
processing applications for recognition of exemption from Federal income tax under § 501(c)(3),
other than those made on Form 1023-EZ. Rev. Proc. 2015-5 (updated annually), last bulletin
provides procedures of the Service in processing applications for recognition of exemption from
Federal income tax under § 501(c)(3) made on Form 1023-EZ. Rev. Proc. 2015-1 (updated
annually), last bulletin governs requests for ruling letters. Rev. Proc. 2015-4 (updated annually),
last bulletin governs requests for rulings and determination letters. Rev. Proc. 2015-8 (updated
annually), this bulletin prescribes user fees for applications, rulings, and other determinations.
Except as specifically noted herein, those revenue procedures and their annual successors also
apply to requests for determinations of foundation status.

.02 The provisions of Rev. Proc. 2015-9, this bulletin and any successor revenue procedure
regarding § 7428, protest, conference, and appeal rights also apply to all determinations of
foundation status described in section 4.01 (except section 4.01(6) relating to exempt operating
foundation status) and section 4.02, whether or not the request for determination is made in
connection with an application for recognition of tax-exempt status. Notwithstanding the fore-
going, the § 7428, protest, and appeal rights provisions of Rev. Proc. 2015-5, last bulletin and any
successor revenue procedure apply in the case of the determinations described in the preceding
sentence if such a determination is made in connection with a Form 1023-EZ.

# SECTION 6. GENERALLY NO NEW DETERMINATION LETTER IF SAME STATUS IS SOUGHT

The Service generally will not issue a new determination letter to a taxpayer that seeks a
determination of private foundation status that is identical to its current foundation status as
determined by the Service. For example, an organization that is already recognized as described
in §§ 509(a)(1) and 170(b)(1)(A)(ii) as a school generally will not receive a new determination
letter that it is still described in §§ 509(a)(1) and 170(b)(1)(A)(ii) under the currently extant facts.
However, the organization in such case could request a letter ruling pursuant to Rev. Proc.
2015-1, last bulletin that a given change of facts and circumstances will not adversely affect its
status under §§ 509(a)(1) and 170(b)(1)(A)(ii).

SECTION 7. FORMAT
OF REQUEST

.01 Organizations that are seeking to change their foundation status (including requests from
public charities for private foundation status and requests from public charities to change from
one public charity classification to another public charity classification) or seeking a determina-
tion or a change as to supporting organization type or functionally integrated status, or seeking
operating foundation or exempt operating foundation status, or subordinate organizations in-
cluded in a group exemption letter seeking a change in public charity status, must submit Form
8940, Request Miscellaneous Determination Under Section 507, 509(a), 4940, 4942, 4945, and
6033 of the Internal Revenue Code, along with all information, documentation, and other
materials required by Form 8940 and the instructions thereto, as well as the appropriate user fee
pursuant to Rev. Proc. 2015-8 or its successor revenue procedures.

.02 For complete information about filing requirements and the submission process, refer to
Form 8940 and the Instructions for Form 8940.

## SECTION 8. REQUESTS BY NONEXEMPT CHARITABLE TRUSTS

.01 A nonexempt charitable trust described in § 4947(a)(1) seeking a determination that it is
described in § 509(a)(3) should submit a written request for a determination pursuant to Rev.
Proc. 2015-4, last bulletin or its successor revenue procedure.

.02 The request for determination must include the following information items, from the date that
the organization became described in § 4947(a)(1) (but not before October 9, 1969) to the present:

(1) A subject line or other indicator on the first page of the request in bold, underlined, or all
capitals font indicating "NONEXEMPT CHARITABLE TRUST REQUEST FOR DETERMI-
NATION THAT IT IS DESCRIBED IN § 509(a)(3)";

(2) The name, address, and Employer Identification Number of the beneficiary organizations,
together with a statement whether each such beneficiary organization is described in § 509(a)(1) or (2);

(3) A list of all of the trustees that have served, together with a statement stating whether such
trustees were disqualified persons within the meaning of § 4946(a) (other than as foundation
managers);

(4) A copy of the original trust instrument and all subsequently adopted amendments to that
instrument;

(5) Sufficient information to otherwise establish that the trust has met the requirements of
§ 509(a)(3) as provided for in Treas. Reg. § 1.509(a)-4 (other than § 1.509(a)-4(i)(4)); If the trust
did not qualify under § 509(a)(3) in one or more prior years (after October 9, 1969) in which it
was described in § 4947(a)(1), then it cannot be issued a § 509(a)(3) determination letter except
in accordance with the procedures for termination of private foundation status under
§ 507(b)(1)(B); and

(6) Such other information as is required for a determination under Rev. Proc. 2015-4, last
bulletin or any successor revenue procedure.

Determinations as to foundation status are open to public inspection pursuant to § 6104(a).

These procedures do not apply to a private foundation seeking to terminate its status under
§ 507. These procedures also do not apply to the examination of an organization which results in
changes to its foundation status.

Rev. Proc. 2014-10 is superseded.

This revenue procedure is effective January 2, 2015.

### SECTION 13. PAPERWORK REDUCTION ACT

The collections of information contained in this revenue procedure have been reviewed and
approved by the Office of Management and Budget in accordance with the Paperwork Reduction
Act (44 U.S.C. § 3507) under control number 1545-1520.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection
of information unless the collection of information displays a valid OMB control number.

The collections of information in this revenue procedure are in sections 7.02 and 8.02. This
information is required to evaluate and process the request for a letter ruling or determination
letter. The collections of information are required to obtain a letter ruling or determination letter.
The likely respondents are tax-exempt organizations.

### DRAFTING INFORMATION

The principal author of this revenue procedure is Mr. Dave Rifkin of the Exempt Organiza-
tions, Tax Exempt and Government Entities Division. For further information regarding this
revenue procedure, please contact the TE/GE Customer Service office at (877) 829-5500 (a
toll-free call), or send an e-mail to Darla Trilli or Tracy Dornette at at tege.eo@irs.gov. and
include "Question about Rev. Proc. 2015-10" in the subject line.

## SECTION 9. DETERMINATIONS OPEN TO PUBLIC INSPECTION

### SECTION 10. NOT APPLICABLE TO PRIVATE FOUNDATION TERMINATIONS UNDER § 507 OR CHANGES OF STATUS PURSUANT TO EXAMINATION

### SECTION 11. EFFECT ON OTHER REVENUE PROCEDURES

SECTION 12.
EFFECTIVE DATE

## Section 162 .- Trade or business expenses.

For purposes of determining whether the cost of
replacement property may be deducted under § 162
of the Internal Revenue Code, what safe harbor
approaches may be used by a cable system operator
that has a depreciable interest in cable network assets
used in a cable system that provides video, high-
speed internet, and voice-over-internet-protocol
phone services. See Rev. Proc. 2015-12, page 266.

## Section 167 .- Depreciation.

Is there a safe harbor method that may be used to
determine whether cable distribution network assets
are primarily used for providing one-way or two-
way communication services? May a fiber optic
transfer node and trunk line consisting of fiber optic
cable used in a cable distribution system be treated
as a single asset for depreciation purposes? See Rev.
Proc. 2015-12, page 266.

## Section 168 .- Accelerated cost recovery system.

## Section 446 .- General rule for methods of accounting.

What are the procedural requirements for obtain-
ing automatic consent to change to one or more of
the safe-harbor methods of accounting provided in
Rev. Proc. 2015-12, which applies to a cable system
operator that has a depreciable interest in cable net-
work assets used in a cable system that provides
video, high-speed internet, and voice-over-internet-
protocol phone services. See Rev. Proc. 2015-12,
page 266.

26 CFR 1.263(a)-1: Capital expenditures; in general.
(Also: Part I, §§ 162, 167, 168, 446, 481; 1.167(a)-11,
1.168(i)-4, 1.446-1)

## Rev. Proc. 2015-12 SECTION 1. PURPOSE

This revenue procedure provides sev-
eral safe harbor methods of accounting for
certain property costs paid or incurred by
cable system operators. Specifically, this
revenue procedure provides two alterna-
tive safe harbor approaches for determin-
ing whether expenditures to maintain, re-
place, or improve cable network assets
must be capitalized under § 263(a) of the
Internal Revenue Code (Code): (1) a "net-
work asset maintenance allowance" meth-
od; and (2) a "units of property" method.
In addition, this revenue procedure pro-
vides two alternative methods for deter-
mining whether costs for installations and
customer drops may be deducted as re-
pairs under § 162 or must be capitalized as
improvements under § 263(a): (1) a "spe-
cific identification" method; and (2) a safe
harbor method. This revenue procedure
also permits a taxpayer to treat a fiber
optic transfer node and trunk line consist-
ing of fiber optic cable used in a cable
distribution system as the asset for depre-
ciation purposes. This revenue procedure
also provides a safe harbor method for
determining whether all cable distribution
network assets are primarily used for pro-
viding one-way or two-way communica-
tion services. Finally, this revenue proce-
dure provides procedures for a qualifying
taxpayer to obtain automatic consent from
the Commissioner of Internal Revenue to
change to the safe harbor methods of ac-
counting provided in this revenue proce-
dure.

## SECTION 2. BACKGROUND

.01 Cable system operators and their
affiliates that provide video, high-speed
internet, and voice-over-internet-protocol
(VOIP) phone services incur significant
costs to maintain, replace, and improve
the real and personal property used to
provide these services. Whether these
costs may be deducted as repairs under
§ 162 or must be capitalized as improve-
ments under § 263(a) depends on whether
the costs are for a betterment to the unit of
property, restore the unit of property, or

adapt the unit of property to a new or
different use. See §§ 1.162-4 and
1.263(a)-3(d). Applying capitalization
principles to assets used in a cable system
can be particularly difficult, largely be-
cause the property consists of a network
of interconnected items. Taxpayers and
the Internal Revenue Service (IRS) often
have difficulty identifying the units of
property that comprise these networks and
therefore disagree over whether the cost to
replace a particular item (or the cost of a
customer drop) is an improvement that
must be capitalized.

.02 To reduce disputes regarding the
deductibility or capitalization of expendi-
tures to maintain, replace, or improve ca-
ble network assets, this revenue procedure
provides two alternative safe harbor ap-
proaches for determining the amount of
expenditures that can be deducted as re-
pairs under § 162 or must be capitalized as
improvements under § 263(a). Section 5
of this revenue procedure provides a "net-
work asset maintenance allowance"
method for cable network assets, which
provides a simplified method for a tax-
payer to determine the portion of costs
capitalized for financial statement pur-
poses that, for Federal tax purposes, may
be deducted as repairs under § 162 or
must be capitalized as improvements un-
der § 263(a). As an alternative, section 6
of this revenue procedure defines "units of
property" that, if properly applied under
the principles of § 263(a), will not be
challenged by the IRS.

.03 To reduce disputes regarding the
deductibility and capitalization of costs
for installations and customer drops (as
defined in section 4.13 of this revenue
procedure), section 7 of this revenue pro-
cedure provides two alternative methods
for determining whether these costs may
be deducted as repairs under § 162 or
must be capitalized as improvements un-
der § 263(a): (1) a "specific identification"
method; and (2) a safe harbor method. The
specific identification method clarifies that
the costs of internal drops, drop replace-
ments, and installing customer premises
equipment may be deducted, while the
costs of installing initial external drops (as
defined in section 4.14 of this revenue
procedure) must be capitalized. The safe
harbor method provides a simplified allo-
cation methodology for determining

which customer drop costs are for external
drops and which are for internal drops (as
defined in section 4.15 of this revenue
procedure) or drop replacements.

.04 Revenue Procedure 2003-63,
2003-2 C.B. 304, provides a safe harbor
method under which the IRS will treat a
fiber optic transfer node and trunk line con-
sisting of fiber optic cable used in a cable
distribution system providing one-way and
two-way communication services as the as-
set for computing depreciation under §§ 167
and 168. Section 8 of this revenue procedure
incorporates this safe harbor, clarifies that
the definitions in section 8 of this revenue
procedure apply only for purposes of §§ 167
and 168, and supersedes Rev. Proc. 2003-
63.

.05 Revenue Procedure 2003-63 also
provides guidance on acceptable ways for
determining whether the asset described
in section 2.04 of Rev. Proc. 2003-63
primarily is used, within the meaning of
§ 1.167(a)-11(b)(4)(iii)(b), for providing
one-way or two-way communication ser-
vices. In particular, Rev. Proc. 2003-63
provides that taxpayers may use any rea-
sonable manner that is consistently ap-
plied to determine how the asset primarily
is used. To reduce disputes regarding
whether a taxpayer's manner of determin-
ing primary use for cable distribution net-
work assets is reasonable, taxpayers re-
quested more specific guidance on
acceptable manners for determining
whether cable distribution network assets
primarily are used for providing one-way
or two-way communication services. Sec-
tion 9 of this revenue procedure restates
the guidance originally provided in Rev.
Proc. 2003-63, extends application of the
guidance to all cable distribution network
assets described in asset class 48.42
(CATV-Subscriber Connection and Dis-
tribution Systems) of Rev. Proc. 87-56,
1987-2 C.B. 674, and provides a new safe
harbor manner for determining primary
use for cable distribution network assets.
While the safe harbor for determining pri-
mary use provided in this revenue proce-
dure only applies to cable system opera-
tors, disputes have also arisen regarding
the primary use of similar assets held by
wireline telecommunication service pro-
viders that are used to provide video,
high-speed internet, and voice communi-
cation services. It is anticipated that future

guidance will provide a safe harbor man-
ner similar to the manner provided in this
revenue procedure for determining the
primary use of assets held by a wireline
telecommunications service provider used
to provide video, high-speed internet, and
voice communication services.

.06 A change to use any of the safe
harbor methods provided in sections 5
through 7 of this revenue procedure for
determining whether a cost of tangible
property is deductible or is required to be
capitalized is a change in method of ac-
counting under § 446(e) and § 1.446-
1(e)(2)(ii)(a). In addition, a change to the
depreciation safe harbor method of ac-
counting provided in section 8 of this rev-
enue procedure is a change in method of
accounting under § 446(e) and § 1.446-
1(e)(2)(ii)(d). Except as otherwise ex-
pressly provided in the Code and the reg-
ulations thereunder, § 446(e) and
§ 1.446-1(e)(2) require a taxpayer to se-
cure the consent of the Commissioner be-
fore changing a method of accounting for
Federal tax purposes. Section 1.446-
1(e)(3)(ii) authorizes the Commissioner to
prescribe administrative procedures set-
ting forth the limitations, terms, and con-
ditions necessary to permit a taxpayer to
obtain consent to change a method of ac-
counting. Section 10 of this revenue pro-
cedure provides the procedures by which
a taxpayer may obtain automatic consent
for a change in method of accounting to
use the methods of accounting provided
by this revenue procedure.

## SECTION 3. SCOPE

This revenue procedure applies to a
cable system operator, including a subsid-
iary or other downstream affiliate, that has
a depreciable interest in cable network
assets used in a cable system, as defined in
sections 4.01 and 4.02 of this revenue
procedure, that provides video, high-
speed internet, and VOIP phone services.
This revenue procedure does not apply to
a taxpayer that is primarily a wireline or
wireless telecommunications service pro-
vider. See Rev. Proc. 2011-27, 2011-18
I.R.B. 740, and Rev. Proc. 2011-28,
2011-18 I.R.B. 743, for guidance applica-
ble to wireline or wireless telecommuni-
cations service providers.

SECTION 4. DEFINITIONS

The following definitions apply solely
for purposes of this revenue procedure:

.01 Cable network assets. (1) Cable
network assets mean personal or real prop-
erty used in a cable system that provides
video, high-speed internet, and VOIP phone
services ("cable services") to customer
premises in the United States. Cable net-
work assets consist of operating plant and
equipment that receive signals and transmit
programming from the headend, as defined
in section 4.05 of this revenue procedure, to
the customer, including signal receiving
equipment, encoding and decoding devices,
cables, connectors, switches, amplifiers, and
distribution equipment at or near customer
locations. Cable network assets do not in-
clude intangible property, other than com-
puter software used in operating plant and
equipment that provides cable services.

(2) Cable network assets do not include
personal or real property (whether owned or
leased) not directly used to provide cable
services to customers, such as the following:

(a) Land. Any land;

(b) Land improvements. Any land
improvements not directly used to pro-
vide cable services, such as a road;

(c) Non-cable network buildings and
improvements. Non-cable network build-
ings and improvements consisting of real
property, such as a corporate office
building, call center, or service center;

(d) Furniture and fixtures. Furniture
and fixtures;

(e) Equipment and machinery. Gen-
eral purpose office equipment (for ex-
ample, printers and copiers);

(f) Vehicles. Transport motor vehi-
cles; and

(g) Customer premises equipment.
Customer premises equipment ("CPE"),
which includes set-top boxes, modems,
routers, and remotes used by customers
to receive and select programming ser-
vices. CPE also includes a customer con-
nection box treated by a taxpayer as CPE
and not treated as part of a customer drop.
.02 Cable system means a facility con-
sisting of a set of closed transmission
paths and associated signal generation, re-
ception, and control equipment that pro-
vides cable services to multiple subscribers
within a community, as defined in section
4.03 of this revenue procedure. In general, a

cable system is the lowest reporting unit of
a cable system operator and its affiliates at
which they maintain their management re-
porting records. A single cable system can
be owned by multiple taxpayers, who may
each have different ownership interests in
different individual assets that are part of the
cable system.

.03 Community means one or more
geographically contiguous or proximate
customer populations receiving cable ser-
vices under one or more nonexclusive
franchises granted by one or more state or
local franchising authorities.

.04 Cable distribution network means
the network of property that conveys sig-
nals between the headend, as defined in
section 4.05 of this revenue procedure,
and customer premises, as defined in sec-
tion 4.12 of this revenue procedure. The
cable distribution network generally con-
sists of optic transmission and receiver
devices, fiber optic cable, hubs, fiber optic
transfer nodes, coaxial cable, amplifiers,
taps, and customer drops.

.05 Headend means the primary loca-
tion in a cable system that receives televi-
sion programming signals (through satellite
antennae or fiber optic cables) for distribu-
tion to the customer premises through a ca-
ble distribution network. Headend equip-
ment includes computer-based electronic
equipment that receives programming sig-
nals and uses prescribed processes to com-
bine, amplify, and convert the programming
signals and transmit them through the cable
distribution network. The headend may in-
clude a headend building that houses head-
end equipment. The headend processes and
combines signals for distribution to hubs, as
defined in section 4.06 of this revenue pro-
cedure, or directly to customer premises. In
most cases, the headend also serves as a
distribution hub for the fiber optic transfer
nodes closest to the headend. Headend also
includes a "super headend," which pro-
cesses all incoming programming signals
and transmits them to regional headends or
directly to hubs.

.06 Hub means the secondary location
in a cable system that is connected to the
headend by fiber optic cable. A hub may
contain electronic equipment that pro-
cesses, converts, and transmits signals
through the cable distribution network. A
hub can serve a large number of business
and residential communities.

.07 Fiber optic cable means a cable
with flexible, transparent fiber made of
very pure glass (silica) that transmits light
between the two ends of the cable.

.08 Coaxial cable means an electric
cable with an inner conductor surrounded
by a flexible, tubular insulating layer that
is further surrounded by a tubular con-
ducting shield (typically an inner conduc-
tor of copper, an insulating layer of nylon
foam, and a conducting shield of an ex-
ternal aluminum wrap overlaid with cop-
per or aluminum braid, all enclosed within
a protective plastic cover).

.09 Node means any point within a
cable distribution network where commu-
nication channels are interconnected.
Generally, a fiber optic node contains a
device that converts optical signals into
radio frequency signals for distribution in
coaxial cable portions of the cable distri-
bution network.

.10 Amplifier means an electric compo-
nent used to increase the strength of a
transmitted signal within a cable distribu-
tion network.

.11 Tap means the equipment that is
the final interconnection point within a
cable distribution network and directs the
signal to be delivered to a customer. A tap
may be on a pole or in a pedestal on the
ground. From the tap, the external drop
runs to the customer premises.

.12 Customer premises means the final
point of service and does not refer to any
specific customer.

.13 Customer drop means the property
that connects the tap with the customer
premises. A customer drop may run aer-
ially or underground. Multiple drops
may connect to one tap. Customer drops
include external drops and internal
drops. A customer drop also includes a
connection box or similar equipment
that is not treated as CPE. A customer
drop refers to the point of service, not to
any specific customer.

.14 External drop means the cable and
any associated connectors that run (aerial
or underground) from the tap to the exte-
rior of the customer premises.

.15 Internal drop means the cable and
any associated connectors within the inte-
rior of the customer premises.

SECTION 5. NETWORK ASSET
MAINTENANCE ALLOWANCE
METHOD FOR CABLE NETWORK
ASSETS

.01 In general. Taxpayers generally
must determine the amount of their cable
network asset expenditures that may be de-
ducted under § 162 and the amount of cable
network asset expenditures that are required
to be capitalized under § 263(a). Section
5.02 of this revenue procedure provides a
method for determining the "network asset
maintenance allowance" that may be de-
ducted under § 162. Section 5.03 of this
revenue procedure provides a method for
determining the basis of cable network as-
sets that are required to be capitalized under
§ 263(a). A taxpayer that uses the network
asset maintenance allowance method de-
scribed in this section 5 must use that
method for all of its cable network asset
costs, including subsequent costs relating to
cable network assets acquired in an applica-
ble asset acquisition as defined in § 1060 or
in a transaction subject to a § 338(g) or
§ 338(h)(10) election, even though the ini-
tial cost of such property is removed from
the total cost of capital additions for the
taxable year, as provided in paragraphs
5.02(2)(b)(iii) and (iv) of this section. If
used by a taxpayer, the network asset main-
tenance allowance method described in this
section 5 provides the exclusive means for
determining for Federal tax purposes
whether cable network asset costs that are
capitalized for financial statement purposes
are deductible or must be capitalized, except
for costs for customer drops (section 7 of
this revenue procedure provides methods
for determining whether costs for customer
drops are deductible or must be capitalized)
and costs deductible under section 174. For
instance, a taxpayer using the network asset
maintenance allowance method described in
this section 5 may not determine whether
cable network asset costs that are capitalized
for financial statement purposes are deduct-
ible by applying the safe harbor for routine
maintenance on property provided in
§ 1.263(a)-3(i).

.02 Network asset maintenance allow-
ance. (1) The amount of the network
asset maintenance allowance for a tax-
able year is determined using the meth-
odology provided in paragraph 5.02(2).
The methodology is a reclassification of

cable network asset costs that are capi-
talized for a taxpayer's financial state-
ments. Therefore, the network asset
maintenance allowance is a deduction in
addition to operation and maintenance
costs that generally are deductible for
both financial statement and Federal tax
purposes. References in this revenue
procedure to financial statements en-
compass financial information that sup-
ports the amount shown on a taxpayer's
financial statement, including support-
ing schedules or statements.

(2) The amount of the network asset
maintenance allowance for a taxable year
is determined as follows:

(a) Start with the cost of cable net-
work asset capital additions for financial
statement purposes that are placed in ser-
vice, within the meaning of § 1.46-
3(d)(1)(ii), during the taxable year.

(b) Decrease the amount deter-
mined in paragraph 5.02(a) of this sec-
tion by the following amounts:

(i) Customer drop costs capital-
ized for financial statement purposes;

(ii) Costs capitalized for finan-
cial statement purposes that are de-
ducted or deferred for Federal tax
purposes, other than under this net-
work asset maintenance allowance
safe harbor, such as research and ex-
perimental expenditures under § 174;

(iii) The cost of cable network
assets acquired during the taxable
year in an applicable asset acquisi-
tion as defined in § 1060; and

(iv) The cost of cable network
assets acquired during the taxable
year in a transaction subject to a
§ 338(g) or § 338(h)(10) election.

(c) To determine the adjusted basis of
the cable network assets under § 1011,
make the adjustments required under
§ 1016 to the amount determined under
paragraphs 5.02(2)(a) and (b) of this sec-
tion to applicable 5-year property, 7-year
property, 15-year property, and nonresi-

dential real property, except do not make
adjustments for the following:

(i) Basis adjustments attributable
to changes in the taxpayer's defini-
tion of units of property made
through a prior change in account-
ing method implemented before
changing to the network asset main-
tenance allowance method provided
in this revenue procedure;

(ii) Adjustments described in
§ 1016(a)(2) or § 1016(a)(3); or

(iii) Adjustments that require tax
basis to be reduced before depreci-
ation is computed (for example,
§§ 179 and 179D; §§ 44 and 46).

(d) Multiply the adjusted basis of the
cable network assets resulting from
paragraph 5.02(2)(c) of this section by
12%. The result is the taxpayer's total
network asset maintenance allowance
amount for the taxable year, which
may be deducted by the taxpayer under
§ 162.

.03 Allocation of basis to individual
assets. The adjusted basis of the cable
network assets determined by applying
paragraphs 5.02(2)(a), (b), and (c) of
this section must be allocated to each
cable network asset placed in service
during the taxable year as described in
this section. The allocation methodol-
ogy provided in this paragraph 5.03 in-
cludes a reduction in the adjusted basis
of the cable network assets to account
for the total network asset maintenance
allowance determined by applying para-
graph 5.02(2)(d) of this section

(1) Start with the adjusted basis of
5-year property, 7-year property, 15-year
property, and nonresidential real property
determined by applying paragraphs
5.02(2)(a), (b), and (c) of this section.

(2) For each class of property, multi-
ply the adjusted basis attributable to that
class by 88%. The result is the adjusted
basis for each class of property for the
taxable year, which takes into account

the network asset maintenance allow-
ance amount determined by applying
paragraph 5.02(2)(d) of this section.

(3) Next, based on the cost of the
individual assets in each class of prop-
erty, proportionally allocate the adjusted
basis for each class of property deter-
mined by applying paragraph 5.03(2) of
this section among each cable network
asset in the class of property that is
placed in service, within the meaning of
§ 1.46-3(d)(1)(ii), during the taxable
year. Any cable network assets acquired
during the taxable year in an applicable
asset acquisition as defined in § 1060 or
in a transaction subject to a § 338(g) or
§ 338(h)(10) election must be excluded
from this calculation. See paragraph
5.03(5) of this section.

(4) The amount determined in para-
graph 5.03(3) for each cable network asset
is the basis of such asset to be used to
determine the deductions allowable or in-
come tax credits available that require tax
basis to be reduced before any deprecia-
tion is computed (for example, §§ 179 and
179D; §§ 44 and 46). The net amount for
each cable network asset after the reduc-
tion in basis for such deductions and cred-
its is the unadjusted depreciable basis of
each asset for purposes of § 1.168(b)-
1(a)(3).

(5) Expenditures for cable network as-
sets acquired during the taxable year in an
applicable asset acquisition as defined in
§ 1060 or in a transaction subject to a
§ 338(g) or § 338(h)(10) election are cap-
ital expenditures under § 263(a) to which
ordinary basis and holding period rules
apply.

.04 Example. B is a cable system operator that
owns cable network assets. B changes its method of
accounting to use the cable network asset mainte-
nance allowance method provided in this revenue
procedure. To determine the cable network asset
maintenance allowance for the taxable year, B makes
the following calculation:

Total cost of cable network asset capital additions for financial statement purposes that are placed in service, within the meaning of § 1.46-3(d)(1)(ii), during the taxable year (see paragraph 5.02(2)(a)).

$900,000,000

Less: Customer drop costs capitalized for financial statement purposes (see paragraph 5.02(2)(b)(i)).

($100,000,000)

Less: Costs capitalized for financial statement purposes that are deducted or deferred for Federal tax purposes, other than under this network asset maintenance allowance safe harbor, such as research and experimental expenditures under § 174 (see paragraph 5.02(2)(b)(ii)).

($100,000,000)

Less: Cost of assets acquired during the taxable year in a § 1060 or a § 338(g) or § 338(h)(10) transaction (see para- graphs 5.02(2)(b)(iii) and (iv).

($25,000,000)

Less/Plus: Other basis adjustments (excluding adjustments described in paragraphs 5.02(2)(c)(i), (ii), and (iii) of this section) (see paragraph 5.02(2)(c)).

($5,000,000)

Adjusted basis of the cable network assets (see paragraph 5.02(2)(c)).

$670,000,000

Multiply by: Network asset maintenance allowance percentage (12%) (see paragraph (5.02(2)(d).

X 12%

Total network asset maintenance allowance amount (deductible under § 162) (see paragraph (5.02(2)(d)).

$80,400,000

## SECTION 6. UNITS OF PROPERTY FOR CABLE NETWORK ASSETS

.01 In general. For cable network assets,
each of the following groupings constitutes a
separate unit of property within an individual
cable system for purposes of § 263(a):

(1) All programming reception equip-
ment, including antenna and satellite dishes;

(2) All towers, antenna support struc-
tures, and satellite dish support structures
affixed to foundations;

(3) All concrete foundations upon
which a tower, antenna support structure,
or satellite support structure is installed,
including the bolts embedded therein and
other depreciable assets associated with
the platform or other forms of anchoring
to affix a tower, an antenna support struc-
ture, or a satellite support structure to a
foundation;

(4) Each headend building and each
hub building (including its structural com-
ponents);

(5) The headend equipment, including
computer-based electronic equipment that
receives programming signals and uses
prescribed processes to combine, amplify,
and convert the programming signals and
transmit them through the cable distribu-
tion network;

(6) All depreciable land improvements,
including (a) landscaping that is replaced
when a related depreciable asset is re-
placed, (b) fences, and (c) sidewalks, but
excluding (d) enclosures, (e) buildings,
and (f) any improvements properly capi-
talized to land;

(7) All equipment at the nodes;

(8) The fiber optic distribution system,
including fiber optic cable, related PVC
conduit and protective sheathing, and as-
sociated devices (including taps and
drops), whether overhead or underground,
but excluding permanent conduits and
ducts; and

(9) The coaxial distribution system,
including coaxial cable, related PVC

conduit or protective sheathing, and as-
sociated devices (including taps and
drops), whether overhead or under-
ground, but excluding permanent con-
duits and ducts.

.02 Universal adoption not required. A
taxpayer within the scope of this revenue
procedure is not required to use all of the
unit of property determinations provided in
section 6.01 of this revenue procedure and,
therefore, may use one or more of the unit of
property determinations provided. Once
used, however, a unit of property determi-
nation applies to all assets in that grouping,
including assets subsequently acquired in an
applicable asset acquisition as defined in
§ 1060 or in a transaction subject to a
§ 338(g) or § 338(h)(10) election.

.03 Limitation. The unit of property
determinations provided in this revenue
procedure shall not apply for any other pur-
pose of the Code or regulations, including
for determining the unit of property under
other Code sections (for example, § 263A),
or determining the asset for depreciation
purposes (for example, placed-in-service
date, dispositions, classification under
§ 168(e) or Rev. Proc. 87-56, 1987-2 C.B.
674, or for purposes of § 168(j)), for the
same or similar-type assets.

## SECTION 7. CUSTOMER DROP AND CPE INSTALLATION COSTS

.01 Taxpayers may use either the
method described in paragraph (1) of this
section or the method described in para-
graph (2) of this section for determining
whether customer drops costs (including in-
stallation costs) may be deducted under
§ 162 or must be capitalized under § 263(a).

(1) Specific identification method.
Taxpayers may specifically identify their
costs for customer drops and CPE instal-
lations and treat them as follows:

(a) Initial external drops. The di-
rect and indirect costs associated with
installing an initial external drop must

be capitalized, unless the costs are oth-
erwise deductible under another pro-
vision of the Code or regulations.

(b) Replacement external drops.
The direct and indirect costs associ-
ated with replacing an external drop
that do not result in a betterment
(§ 1.263(a)-3(j)) or an adaption to a
new or different use (§ 1.263(a)-
3(l)) may be deducted.

(c) Improved external drops. The
direct and indirect costs associated
with replacing an external drop that
result in a betterment (§ 1.263(a)-
3(j)) or an adaption to a new or dif-
ferent use (§ 1.263(a)-3(1)) must be
capitalized, unless the costs are oth-
erwise deductible under another pro-
vision of the Code or regulations.

(d) Internal drops. The direct and
indirect costs associated with install-
ing or replacing any internal drop
may be deducted.

(2) Safe-harbor allocation method. As
an alternative to the specific identification
method described in paragraph 7.01(1) of
this section, taxpayers may treat customer
drop costs as follows:

(a) Methodology. Allocate an
amount equal to 12% of total cus-
tomer drop costs for the taxable
year to initial external drops and
treat those costs as expenditures to
be capitalized under § 263(a). Al-
locate the remaining 88% of total
customer drop costs for the taxable
year to internal drop costs and drop
replacement costs, and treat those
costs as deductible expenditures,
except for the expenditures de-
scribed in paragraph 7.01(2)(b) of
this section.

(b) Cable system improvements.
Notwithstanding paragraph 7.01(2)(a)
of this section, the direct and indirect
costs associated with replacing an ex-
ternal drop that result in a betterment
(§ 1.263(a)-3(j)) or an adaption to a new

or different use (§ 1.263(a)-3(1)) must
be capitalized, unless the costs are oth-
erwise deductible under another provi-
sion of the Code or regulations.

.02 CPE costs. In general, whether the
costs of acquiring CPE must be capital-
ized is determined under the general rules
of the Code and regulations, such as
§ 263(a) and the corresponding regula-
tions. The labor costs associated with in-
stalling CPE may be treated as expendi-
tures deductible under § 162.

SECTION 8. DEPRECIATION OF
FIBER OPTIC NODE AND CABLE

.01 In general. This section 8 provides
a safe harbor method of accounting under
which the IRS will treat a fiber optic trans-
fer node and trunk line consisting of fiber
optic cable used in a cable distribution
network providing both one-way and two-
way communication services as the asset
for computing depreciation under §§ 167
and 168.

.02 Definitions. The following defini-
tions apply solely for purposes of section
8 of this revenue procedure:

(1) Node means a fiber optic
transfer node of the cable distribu-
tion network.

(2) Fiber optic cable means fiber
optic cable that is used as a trunk
line.

.03 Safe harbor method. (1) Asset. The
asset for calculating depreciation under
§§ 167 and 168 and the regulations there-
under is a node and the fiber optic cable to
that node, excluding any fiber optic cable
previously considered placed in service
under section 8.03(2) of this revenue pro-
cedure or under section 4.03 of Rev. Proc.
2003-63, 2003-2 C.B. 304, and any optic
fibers sold by the taxpayer.

(2) Placed in service. The asset de-
scribed in paragraph 8.03(1) of this sec-
tion is considered placed in service for
depreciation purposes when placed in a
condition or state of readiness and avail-
ability for its specifically assigned func-
tion. The specifically assigned function
of a cable operator's cable system is to
provide services to subscribers. Thus,
when a node is connected to the equip-
ment necessary for providing one-way
or two-way communication services to
subscribers, or potential subscribers, the
property is considered placed in service

for depreciation purposes. Although a
fiber optic cable may contain more optic
fibers than are necessary to serve a sin-
gle node, all optic fibers in the asset are
considered placed in service when the
node is ready and available as described
above and connected to at least one op-
tic fiber in the fiber optic cable.

(3) Consistent treatment. A taxpayer
using the asset described in paragraph
8.03(1) of this section must use it for all of
the nodes and fiber optic cable connected
to an individual headend. Taxpayers also
are required to treat the asset consistently
for all purposes under §§ 167 and 168 and
the regulations thereunder.

(4) Example. Taxpayer has a fiber optic cable
containing 20 bundles of 6 optic fibers each (120
total optic fibers) and initially connects 2 optic
fibers to the node in taxable year X. Assume that
the node is connected to the equipment necessary
for providing one-way or two-way communication
services to subscribers or potential subscribers.
The fiber optic cable (including all 120 optic fi-
bers) and the node are the asset for depreciation
purposes. The fiber optic node and cable is con-
sidered placed in service in taxable year X, even
though only 2 of the 120 optic fibers are con-
nected.

## SECTION 9. PRIMARY USE

.01 In general. This section 9 provides
guidance for determining whether a cable
network asset, other than a headend, used
in a cable system and described in asset
class 48.42 (CATV-Subscriber Connec-
tion and Distribution Systems) of Rev.
Proc. 87-56, 1987-2 C.B. 674, ("tested
asset") is primarily used, within the mean-
ing of § 1.167(a)-11(b)(4)(iii)(b), for pro-
viding one-way or two-way communica-
tion services to subscribers, including a
safe harbor manner for determining pri-
mary use.

.02 Definitions. The following defini-
tions apply solely for purposes of section
9 of this revenue procedure:

(1) Video service means video ser-
vice that is not provided via internet
broadband service, including multi-
channel, on-demand, and other video
service.

(2) Telephony service means bi-
directional voice communication.

(3) Broadband service means in-
ternet or high-speed data telecommu-
nications provided via multiple chan-
nels of data over a single
communications medium.

(4) Signal traffic or internet deliv-
ery protocols means internet or high-
speed-data signal traffic that can be
either one-way or two-way communi-
cation.

(5) One-way signal traffic means
signal traffic associated with streaming
protocols (video and audio) and file
transfer protocols (bulk file down-
loads).

(6) Two-way signal traffic means
signal traffic associated with protocols
other than one-way signal traffic.

(7) One-way communication ser-
vices means communication services
that are primarily transmitted down-
stream, including the following inter-
net or high-speed data-signal traffic:

(a) Video streaming;

(b) Cable television;

(d) Web-video streaming;

(e) Over-the-top video;

(f) Real-time entertainment
video;

(g) Bulk entertainment;

(h) Audio streaming; and

(i) Other video signals sent
only downstream regardless of de-
livery protocols.

(8) Two-way communication ser-
vices means all communication services
other than one-way communication ser-
vices. Two way communication services
transmit internet or high-speed data-
signal traffic both upstream and down-
stream. Two-way communication ser-
vices include the following internet or
high-speed data-signal traffic:

(a) File exchange protocol;

(b) Email;

(d) Peer-to-peer communica-
tions, such as video conferencing;

(e) Instant messaging;

(f) Gaming; and

(g) Other similar communica-
tion services equivalent to telephone
communications.

.03 Determining primary use.

(1) General rule. In determining
whether a tested asset is primarily
used, within the meaning of
§ 1.167(a)-11(b)(4)(iii)(b), for provid-
ing one-way or two-way communica-
tion services to subscribers, a taxpayer

must determine primary use by using
any reasonable manner that is consis-
tently applied within a taxable year to
the taxpayer's tested asset. If a tested
asset is primarily used for providing
one-way communication services, the
asset is included in asset class 48.42
and classified as 7-year property under
§ 168(e)(1), with a recovery period of 7
years under § 168(c) and a recovery
period of 10 years under § 168(g). If a
tested asset is primarily used for pro-
viding two-way communication ser-
vices, the asset is classified as 15-year
property pursuant to § 168(e)(3)(E)(ii),
with a recovery period of 15 years un-
der § 168(c) and a recovery period of
24 years under § 168(g).

(2) Reasonable manner. A reason-
able manner includes, but is not limited
to, determining primary use by gross
receipts or by subscriber count for each
service within the applicable cable sys-
tem, as well as the safe harbor manner
provided by paragraph 9.03(3) of this
section. Determining primary use
solely by bandwidth is not reasonable.
A taxpayer may use different reason-
able manners to determine primary use
from taxable year to taxable year.

(3) Safe harbor manner for deter-
mining primary use. The following
safe harbor manner is reasonable for
determining primary use under para-
graph 9.03(1) of this section for a tax-
able year. This manner for making the
factual primary use determination ap-
plies solely for depreciation purposes
and is applied at the cable system level.
Thus, for the taxable year for which the
safe harbor is applied to one or more
cable systems, the safe harbor must be
used for all of the taxpayer's tested
assets in each cable system to which
the safe harbor is applied.

(a) Identification of total revenue.
Total revenue of the cable system gen-
erated by the use of tested assets must
be identified.

(i) Revenue generated by the use
of tested assets includes the follow-
ing:

(A) Video service revenue;

(B) Telephony service reve-
nue;

(D) Broadband service reve-
nue;

(E) Revenue derived from
leasing or otherwise providing
the right to use optical fibers or
one or more fiber optic cables in
the cable system; and

(F) Any other revenue gener-
ated by the use of tested assets
identified in guidance published
in the Internal Revenue Bulletin.

(ii) The revenue identified in
paragraphs 9.03(3)(a)(i) of this sec-
tion includes all of the following
sub-categories of revenue:

(A) Service revenue;

(B) Advertising revenue;

(D) Installation fees; and

(E) Early service termination
fees.

(iii) Total revenue generated by
the use of tested assets excludes
franchise fee revenue.

(b) Substantiation of total revenue.
For purposes of paragraph 9.03(3)(a)
of this section, revenue generated by
the use of a tested asset may be sub-
stantiated by either of the following:

(i) Revenue reported on a tax-
payer's financial statements, includ-
ing the financial statements them-
selves and information contained on
schedules or statements supporting
the financial statements; or

(ii) Company reports (and sup-
porting data) used for regulatory re-
porting of revenue for the following
services:

(A) Video service;

(B) Telephony service;

(D) Other similar services
provided by the taxpayer.

(c) Determination of one-way or
two-way communication services reve-
nue. The revenue identified in para-
graph 9.03(3)(a) of this section must be
treated as revenue from one-way com-
munication services or two-way com-
munication services, using the method-
ology described in paragraphs
9.03(3)(c)(i)-(iv) of this section.

(i) One-way communication ser-
vices revenue. The following reve-
nue must be treated as revenue from
one-way communication services:

(A) Video service revenue;
and

(B) Any additional revenue
treated as revenue from one-way
communication services in guid-
ance published in the Internal
Revenue Bulletin.

(ii) Two-way communication ser-
vices revenue. The following reve-
nue must be treated as revenue from
two-way communication services:

(A) Telephony service reve-
nue;

(B) Home monitoring reve-
nue; and

(C) Any additional revenue
treated as revenue from two-way
communication services in guid-
ance published in the Internal
Revenue Bulletin.

(iii) Presumptive two-way com-
munication services revenue. Reve-
nue derived from leasing or other-
wise providing the right to use
optical fibers or one or more fiber
optic cables in the cable system is
presumptively treated as revenue
from two-way communication ser-
vices, unless the taxpayer can sub-
stantiate through reasonable means
that the revenue is from one-way
communication services.

(iv) Allocated revenue. (A) Rev-
enue to be allocated between one-
way and two-way. The following
types of revenue must be allocated
between revenue from one-way
communication services and reve-
nue from two-way communication
services:

a. Broadband service revenue;
and

b. Any additional revenue
treated as revenue that must be
allocated between revenue from
one-way communication ser-
vices and revenue from two-way
communication services in guid-
ance published in the Internal
Revenue Bulletin.

(B) Allocation between one-way
and two-way communication ser-
vices revenue. The allocation be-
tween revenue from one-way com-
munication services and revenue
from two-way communication ser-
vices required by this paragraph

9.03(c)(iv) is determined pro rata,
based on the ratio of one-way signal
traffic to two-way signal traffic, de-
termined from either of the follow-
ing data sources:

a. Average signal traffic data
determined from the taxpayer's
records for the taxable year; or

b. Industry average signal
traffic data published by com-
mercially available third-party
sources (not including news me-
dia outlets) for the taxable year
or the most recent period avail-
able.

(d) Primary use determination. Pri-
mary use is determined based on total
revenue under paragraph 9.03(3)(a) of
this section and the one-way and two-
way communication services revenue
determinations under paragraph
9.03(3)(c) of this section. If total cable
system revenue from one-way commu-
nication services is greater than total
cable system revenue from two-way
communication services for a taxable
year, then the primary use of the tested
assets in the cable system is for pro-
viding one-way communication ser-
vices for that taxable year. If total cable
system revenue from two-way commu-

nication services is greater than total
cable system revenue from one-way
communication services for a taxable
year, then the primary use of tested
assets in the cable system is for pro-
viding two-way communication ser-
vices for that taxable year.

.04 Example. Z is a cable system operator
that owns cable network assets. Z uses the safe
harbor manner provided by paragraph 9.03(3) of
this section to determine whether the primary use
of Z's tested assets used in cable system S is for
one-way or two-way communications for the
taxable year.

During the taxable year, Z has the following
total revenue generated by the use of tested as-
sets in cable system S:

Video service

Service revenue

$10,000,000

Advertising revenue

$4,000,000

Equipment rental

$650,000

Video installation fees

$250,000

Early termination fees

$100,000

$15,000,000

Telephony service

Service revenue

$2,500,000

Advertising revenue

Equipment rental

$325,000

Installation fees

$125,000

Early termination fees

$50,000

$3,000,000

Home monitoring

Service revenue

$1,000,000

Advertising Revenue

Equipment rental

$750,000

Installation fees

$150,000

Early termination fees

$100,000

$2,000,000

Broadband service

Service revenue

$8,000,000

Advertising revenue

$1,000,000

Equipment rental

$500,000

Installation fees

$400,000

Early termination fees

$100,000

$10,000,000

Optical fiber leasing

$500,000

Total revenue

$30,500,000

Under the safe harbor manner for determining
primary use, the video service revenue ($15,000,000) is
treated as revenue from one-way communication
services, and the telephony service revenue
($3,000,000) and the home monitoring revenue
($2,000,000) are treated as revenue from two-way
communication services. The revenue derived from
leasing certain optical fibers ($500,000) is treated as
revenue from two-way communication services un-
less Z can substantiate through reasonable means

that the revenue is from one-way communication
services. In this instance, Z does not know how the
lessor is using the leased optical fiber, so the
$500,000 is treated as revenue from two-way com-
munication services.

Under the safe harbor manner for determining
primary use, Z must allocate its broadband service
revenue pro rata between revenue from one-way
communication services and revenue from two-way
communication services based on a comparison of

one-way signal traffic to two-way signal traffic. Pub-
lished industry data establish that during the taxable
year 58% of signal traffic is one-way signal traffic
and 42% of signal traffic is two-way signal traffic.
Therefore, $5,800,000 ($10,000,000 x 58%) of Z's
broadband service revenue must be treated as reve-
nue from one-way communication services, and
$4,200,000 ($10,000,000 x 42%) of Z's broadband
service revenue must be treated as revenue from
two-way communication services.

To determine whether the primary use for the
taxable year of all of Z's tested assets used in
cable system S is for one-way or two-way com-
munication services, Z compares total cable sys-
tem S revenue from one-way communication ser-
vices for the taxable year to total cable system
revenue from two-way communication services
for the taxable year. Cable system S revenue from
one-way communication services totals
$20,800,000 ($15,000,000 + $5,800,000). Cable
system S revenue from two-way communication
services totals $9,700,000 ($3,000,000 +
$2,000,000 + $500,000 + $4,200,000), which is
less than the total cable system revenue from
one-way communication services. Therefore, un-
der the safe harbor manner for primary use pro-
vided by section 9.03(3) of this revenue proce-
dure, for the taxable year all of Z's tested assets
used in cable system S are primarily used for
one-way communication services.

.05 Change in use. Section 168(i)(5)
and § 1.168(i)-4 apply for determining
depreciation of an asset beginning in the
year of the change (as defined in
§ 1.168(i)-4(a)) if the primary use (deter-
mined under section 9.03(1) or section
9.03(2)) of tested asset changes-

(1) From providing one-way commu-
nication services to providing two-way
communication services; or

(2) From providing two-way commu-
nication services to providing one-way
communication services.

## SECTION 10. CHANGE IN METHOD OF ACCOUNTING

.01 In general. Each of the following is
a change in method of accounting to
which the provisions of §§ 446 and 481,
and the regulations thereunder, apply:

(1) A change to use the network
asset maintenance allowance method
for cable network assets provided in
section 5 of this revenue procedure;

(2) A change to use any of the unit
of property definitions provided in sec-
tion 6 of this revenue procedure;

(3) A change to use the specific
identification method for customer
drops provided in section 7.01(1) of
this revenue procedure;

(4) A change to use the safe harbor
allocation method for external drops
provided in section 7.01(2) of this rev-
enue procedure;

(5) A change to deduct the labor
costs associated with installing CPE
provided in section 7.02 of this revenue
procedure; and

(6) A change to the safe harbor
method provided in section 8.03 of this
revenue procedure for determining the
asset and placed-in-service date under
§§ 167 and 168 for a fiber optic transfer
node and trunk line that consists of
fiber optic cable used in a cable distri-
bution network providing one-way and
two-way communication services and
that is placed in service in taxable years
ending on or after December 30, 2003.
A taxpayer also may treat a change to
the safe harbor method for determining
the asset provided in section 8.03 of
this revenue procedure for a fiber optic
transfer node and trunk line that con-
sists of fiber optic cable used in a cable
distribution network providing one-
way and two-way communication ser-
vices and that is placed in service in
taxable years ending before December
30, 2003, as a change in method of
accounting to which the provisions of
§§ 446 and 481, and the regulations
thereunder, apply.

.02 Automatic changes.

(1) A taxpayer that wants to change
to a method of accounting described in
this revenue procedure must use the
automatic change in method of ac-
counting provisions in Rev. Proc.
2011-14, 2011-4 I.R.B. 330, as mod-
ified by this revenue procedure, or its
successor.

(2) Rev. Proc. 2011-14 is modified
to add new section 3.21 to the APPEN-
DIX, to read as follows:

3.21 Cable network asset capitaliza-
tion methods of accounting under Rev.
Proc. 2015-12.

(1) Description of change. This
change applies to a cable system oper-
ator that is within the scope of Rev.
Proc. 2015-12, 2015-2 I.R.B. 265, and
wants to make one or more of the fol-
lowing changes in method of account-
ing:

(a) Change its treatment of cable
network asset expenditures to the
cable network asset maintenance al-
lowance method of accounting pro-
vided in section 5 of Rev. Proc.
2015-12;

(b) Change to use any of the unit
of property definitions provided in
section 6 of Rev. Proc. 2015-12;

(c) Change to use the specific
identification method for installa-
tions and customer drop costs de-
scribed in section 7.01(1) of Rev.
Proc. 2015-12;

(d) Change to use the safe harbor
allocation method for installations
and customer drop costs described
in section 7.01(2) of Rev. Proc.
2015-12; or

(e) Change to deduct the labor
costs associated with installing cus-
tomer premises equipment under
section 7.02 of Rev. Proc. 2015-12.

(2) Scope limitations inapplicable.
The scope limitations in section 4.02 of
this revenue procedure do not apply to
a cable system operator that changes to
a method of accounting provided in
section 5, section 6, or section 7 of
Rev. Proc. 2015-12 for its first or sec-
ond taxable year ending after Decem-
ber 31, 2013.

(3) Audit protection limited. A tax-
payer does not receive audit protection
under section 7 of this revenue proce-
dure in connection with this change, or
a concurrent automatic change permit-
ted under section (4) of this change, if
the method of accounting to be
changed is (a) an issue pending for any
taxable year under examination, (b) an
issue under consideration by an ap-
peals office, or (c) an issue under con-
sideration by a federal court. See sec-
tions 6.03(6), 6.04, and 6.05 of this
revenue procedure.

(4) Concurrent automatic change.
A taxpayer that wants to make both one
or more changes in method of ac-
counting pursuant to this section 3.21
of the APPENDIX and a change to a
UNICAP method pursuant to the AP-
PENDIX for the same year of change
should file a single Form 3115 that
includes all of these changes and
must enter the designated automatic
accounting method change numbers
for all of these changes on the appro-
priate line on the Form 3115. For
guidance on filing a single applica-
tion for two or more changes, see
section 6.02(1)(b)(ii) of this revenue
procedure.

(5) Section 481(a) adjustment.

(a) In general, a change to one or
more of the changes in method of

accounting described in paragraph
(1) of this section requires an adjust-
ment under § 481(a). The § 481(a)
adjustment shall not include any
amount attributable to property for
which the taxpayer elected to apply
the repair allowance under
§ 1.167(a)-11(d)(2).

(b) Itemized listing on Form
3115. The taxpayer must include on
Form 3115, Part IV, line 25, the
total § 481(a) adjustment for all
changes in methods of accounting
being made. If the taxpayer is mak-
ing more than one change in method
of accounting under Rev. Proc.
2015-12, the taxpayer must include
on an attachment to Form 3115 -

(i) the information required by
Part IV, line 25 for each change
in method of accounting (includ-
ing the amount of the § 481(a)
adjustment for each change in
method of accounting, which in-
cludes the portion of the § 481(a)
adjustment attributable to UNI-
CAP);

(ii) the information required
by Part II, line 12 of Form 3115
that is associated with each
change; and

(iii) the citation to the para-
graph of Rev. Proc. 2015-12 that
provides for each proposed
method of accounting.

(6) Ogden copy of Form 3115 required
in lieu of national office copy. A taxpayer
changing its method of accounting under
this section 3.21 of the APPENDIX must
file a signed copy of its completed Form
3115 with the IRS in Ogden, UT (Ogden
copy) in lieu of filing the national office
copy no earlier than the first day of the
year of change and no later than the date
the taxpayer files the original Form 3115
with its Federal income tax return for the
year of change. See section 6.02(3)(a)(ii)(B)
(providing the general rules) and section
6.02(7)(b) (providing the mailing address)
of this revenue procedure.

(7) Designated automatic accounting
method change number. The designated
automatic accounting method change
number for a change to a method of ac-
counting provided in section 5 or 6 of
Rev. Proc. 2015-12 is "208." The desig-
nated automatic accounting method

change number for a change to a method
of accounting provided in section 7 of
Rev. Proc. 2015-12 is "209."

(8) Contact information. For further in-
formation regarding a change under this
section, contact Merrill Feldstein at (202)
317-5100 (not a toll-free number).

(3) Rev. Proc. 2011-14 is modified to
add new section 6.41 to the APPENDIX
to read as follows:

6.41 Depreciation of fiber optic trans-
fer node and fiber optic cable used by a
cable system operator (§§ 167 and 168)

(1) Description of change.

(a) Applicability. This change applies
to a cable system operator that is within
the scope of Rev. Proc. 2015-12, 2015-2
I.R.B. 265, and wants to change to the
safe harbor method of accounting pro-
vided in section 8.03 of Rev. Proc.
2015-12 for determining depreciation un-
der §§ 167 and 168 of a fiber optic transfer
node and trunk line consisting of fiber
optic cable used in a cable distribution
network providing one-way and two-way
communication services. The safe harbor
method provided by section 8.03 of Rev.
Proc. 2015-12 determines the asset for
purposes of §§ 167 and 168.

(b) Inapplicability. This change does
not apply to the following:

(i) any property that is not depreci-
ated under § 168 under the taxpayer's
present and proposed methods of ac-
counting; or

(ii) any property that is not owned by
the taxpayer at the beginning of the year
of change.

(2) Scope limitations inapplicable.

(a) The scope limitations in section
4.02(1), (2), (3), (4), (6), and (7) of this
revenue procedure do not apply to a tax-
payer that makes this change for its first or
second taxable year ending after Decem-
ber 31, 2013.

(b) The scope limitation in section
4.02(5) of this revenue procedure does not
apply to a taxpayer that makes this
change.

(3) Audit protection limited. A tax-
payer does not receive audit protection
under section 7 of this revenue procedure
in connection with this change, or a con-
current automatic change permitted under
section (4)(b) of this change, if the method
of accounting to be changed is (a) an issue
pending for any taxable year under exam-

ination, (b) an issue under consideration
by an appeals office, or (c) an issue under
consideration by a federal court. See sec-
tions 6.03(6), 6.04, and 6.05 of this reve-
nue procedure.

(4) Concurrent automatic change.

(a) A taxpayer that wants to make this
change for more than one asset for the
same year of change should file a single
Form 3115 for all such assets and pro-
vide a single net § 481(a) adjustment for
all the changes included in that Form
3115. If one or more of the changes in
that single Form 3115 generate a nega-
tive § 481(a) adjustment and other
changes in that same Form 3115 gener-
ate a positive § 481(a) adjustment, the
taxpayer may provide a single negative
§ 481(a) adjustment for all the changes
that are included in that Form 3115 gen-
erating such adjustment and a single
positive § 481(a) adjustment for all the
changes that are included in that Form
3115 generating such adjustment.

(b) A taxpayer that wants to make both
this change and a change to a UNICAP
method under section 11.01, 11.02, or
11.09 of this APPENDIX, as applicable,
for the same year of change should file a
single Form 3115 for all such changes and
must enter the designated automatic ac-
counting method change numbers for the
changes on the appropriate line on the
Form 3115. For guidance on filing a single
application for two or more changes, see
section 6.02(1)(b)(ii) of this revenue pro-
cedure.

(5) Ogden copy of Form 3115 required
in lieu of national office copy. A taxpayer
changing its method of accounting under
section 6.41 of the APPENDIX must file a
signed copy of its completed Form 3115
with the IRS in Ogden, UT (Ogden copy)
in lieu of filing the national office copy no
earlier than the first day of the year of
change and no later than the date the tax-
payer files the original Form 3115 with its
Federal income tax return for the year of
change. If a taxpayer makes both this
change and a change to a UNICAP
method under section 11.01, 11.02, or
11.09 of this APPENDIX, as applicable,
on a single Form 3115 for the same year
of change in accordance with section
6.41(3)(b) of this APPENDIX, the tax-
payer must file a signed copy of that com-
pleted Form 3115 with the IRS in Ogden,

UT (Ogden copy) in lieu of filing the
national office copy no earlier than the
first day of the year of change and no later
than the date the taxpayer files the original
Form 3115 with its Federal income tax
return for the year of change. See section
6.02(3)(a)(ii)(B) (providing the general
rules) and section 6.02(7)(b) (providing
the mailing address) of this revenue pro-
cedure.

(6) Designated automatic accounting
method change number. The designated
automatic accounting method change
number for a change to the method of
accounting under section 6.41 of this AP-
PENDIX is "210." See section 6.02(4) of
this revenue procedure.

(7) Contact information. For further in-
formation regarding a change under this
section, contact Charles Magee at (202)
317-7005 (not a toll-free number).

(4) Section 6.08 of the APPENDIX of
Rev. Proc. 2011-14 is modified by add-
ing a new sentence at the end of section
6.08(1) of the APPENDIX, to read as

follows: This change applies only to
taxable years ending on or before De-
cember 31, 2013. For taxable years end-
ing after December 31, 2013, see section
6.41 of this APPENDIX for making a
change to the safe harbor method of
accounting provided in section 8.03 of
Rev. Proc. 2015-12, 2015-2 I.R.B. 265,
for depreciation of fiber optic transfer
node and trunk line consisting of fiber
optic cable used in a cable distribution
network. The safe harbor method of ac-
counting provided in section 8.03 of
Rev. Proc. 2015-12 determines the asset
for purposes of §§ 167 and 168. See
section 9 of Rev. Proc. 2015-12 for the
safe harbor manner of determining the
primary use of that asset for taxable
years ending after December 31, 2013.

## SECTION 11. EFFECT ON OTHER DOCUMENTS

.01 Rev. Proc. 2003-63 is superseded.
.02 Rev. Proc. 2011-14 is modified.

## SECTION 12. EFFECTIVE DATE

This revenue procedure is effective for
taxable years ending after December 31,
2013.

## SECTION 13. DRAFTING INFORMATION

The principal author of this revenue
procedure is Alan S. Williams of the Of-
fice of Associate Chief Counsel (Income
Tax & Accounting). For further informa-
tion regarding sections 5, 6, 7, 10.01, or
10.02(2) of this revenue procedure contact
Merrill Feldstein at 202-317-5100 (not a
toll free number). For further information
regarding sections 8, 9, 10.02(3), or
10.02(4) of this revenue procedure contact
Charles Magee of the Office of Associate
Chief Counsel (Income Tax & Account-
ing) at 202-317-7005 (not a toll free
number).

## Part IV. Items of General Interest

### Notice of Proposed Rulemaking Nonrecognition of Gain or Loss on Certain Dispositions of Installment Obligations

#### REG-109187-11

AGENCY: Internal Revenue Service
(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains
proposed regulations relating to the non-
recognition of gain or loss on certain dis-
positions of an installment obligation. In
general, under the proposed regulations a
transferor does not recognize gain or loss
on certain dispositions of an installment
obligation if gain or loss is not recognized
on the disposition under another provision
of the Internal Revenue Code. The pro-
posed regulations also provide that this
general rule does not apply to the satisfac-
tion of an installment obligation. For ex-
ample, an installment obligation of an is-
suer, such as a corporation or partnership,
is satisfied when the holder transfers the
obligation to the issuer for an equity in-
terest in the issuer.

DATES: Comments or a request for a
public hearing must be received by March
23, 2015.

ADDRESSES: Send submissions to CC:
PA:LPD:PR (REG-109187-11), room
5203, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand de-
livered Monday through Friday between
the hours of 8 a.m. and 4 p.m. to CC:PA:
LPD:PR (REG-109187-11), Courier's
Desk, Internal Revenue Service, 1111
Constitution Avenue, NW., Washington,
DC, or sent electronically via the Federal
eRulemaking Portal at www.regulations.
gov (IRS REG-109187-11).

#### FOR FURTHER INFORMATION

CONTACT: Concerning the proposed
regulations, Arvind Ravichandran, (202)
317-4718; concerning the submission of

comments and/or requests for a public
hearing, Olawafunmilayo (Funmi) Taylor
at (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:
Background

This document contains proposed
amendments to the regulations in 26 CFR
part 1 under section 453B of the Internal
Revenue Code (Code) relating to gain or
loss on the disposition of installment ob-
ligations. Section 453B was added to the
Code by the Installment Sales Revision
Act of 1980, Public Law 96-471 (94 Stat.
2252 (1980)).

Section 453B replaces and provides
generally the same rules as former section
453(d). In general, under section 453B(a)
gain or loss is recognized upon the satis-
faction of an installment obligation at
other than its face value, or upon the dis-
tribution, transmission, sale, or other dis-
position of the installment obligation.
Section 1.453-9(c)(2) of the Income Tax
Regulations, issued under former section
453(d), provides an exception to the gen-
eral rule. Under § 1.453-9(c)(2), if the
Code provides an exception to the recog-
nition of gain or loss for certain disposi-
tions, then gain or loss is not recognized
under former section 453(d) on the dispo-
sition of an installment obligation within
that exception. The exceptions identified
in § 1.453-9(c)(2) include certain trans-
fers to corporations under sections 351
and 361, contributions to partnerships un-
der section 721, and distributions by part-
nerships to partners under section 731 (ex-
cept as provided by section 736 and
section 751).

Under Rev. Rul. 73-423, 1973-2 CB
161, the exceptions in § 1.453-9(c)(2) to
recognition of gain or loss under the in-
stallment sale rules do not apply to the
transfer of an installment obligation that
results in a satisfaction of the obligation.
Thus, the revenue ruling holds that the
transfer of a corporation's installment ob-
ligation to the issuing corporation in ex-
change for stock of the issuing corpora-
tion results in a satisfaction of the
obligation. In that case, the transferor
must recognize gain or loss on the satis-
faction of the obligation to the extent of

the difference between the transferor's ba-
sis in the obligation and the fair market
value of the stock received, even though
gain or loss generally is not recognized on
section 351 transfers.

### Explanation of Provisions

These proposed regulations republish
in § 1.453B-1(c) the general rule in
§ 1.453-9(c)(2) under which gain or loss
is not recognized upon certain disposi-
tions. In addition, the proposed regula-
tions incorporate and expand the holding
of Rev. Rul. 73-423 to provide that a
transferor recognizes gain or loss under
section 453B(a) when the transferor dis-
poses of an installment obligation in a
transaction that results in the satisfaction
of the installment obligation, including,
for example, when an installment obliga-
tion of a corporation or partnership is con-
tributed to the corporation or partnership
in exchange for an equity interest in the
corporation or partnership. Finally, the
proposed regulations amend the regula-
tions under sections 351, 361, and 721 to
include a cross-reference to the regula-
tions under section 453B regarding recog-
nition of any gain or loss upon the satis-
faction of an installment obligation. The
IRS and the Treasury Department antici-
pate publishing regulations addressing the
general rule under section 453B(a) and the
basis of an obligation under section
453B(b) in the future. Therefore, regula-
tions under § 1.453B-1(a) and (b) are
reserved.

### Proposed Effective/Applicability Date

These regulations are proposed to ap-
ply to satisfactions, distributions, trans-
missions, sales, or other dispositions of
installment obligations after the date these
regulations are published as final regula-
tions in the Federal Register.

### Special Analyses

This notice of proposed rulemaking is
not a significant regulatory action as de-
fined in Executive Order 12866, as sup-
plemented by Executive Order 13563.
Therefore, a regulatory assessment is not
required. It also has been determined that

section 553(b) of the Administrative Pro-
cedure Act (5 U.S.C. chapter 5) does not
apply to these regulations, and because the
regulation does not impose a collection of
information on small entities, the Regula-
tory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section
7805(f) of the Code, this notice of pro-
posed rulemaking has been submitted to
the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.

### Comments and Requests for a Public Hearing

Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
that are submitted timely to the IRS as
prescribed in this preamble under the
"Addresses" heading. The Treasury De-
partment and the IRS invite comments on
all aspects of the proposed rules. In par-
ticular, the Treasury Department and the
IRS request comments on how a partner-
ship's distribution of a partner's install-
ment obligation to the obligor partner
should be treated under section 453B, and
whether there are circumstances in which
such a distribution should not result in
gain or loss recognition by the partner-
ship. All comments will be available for
public inspection and copying at www-
.regulations.gov or upon request. A public
hearing will be scheduled if requested in
writing by any person who timely submits
written comments. If a public hearing is
scheduled, notice of the date, time and
place for the hearing will be published in
the Federal Register.

### Drafting Information

The principal author of these regula-
tions is Arvind Ravichandran, Office of
the Associate Chief Counsel (Income Tax
and Accounting). However, other person-
nel from the IRS and the Treasury Depart-
ment participated in their development.
* * * * *

### 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 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.351-1(a)(1) is
amended by adding a heading and new
second and third sentences to read as fol-
lows:

§ 1.351-1 Transfer to corporation
controlled by transferor.

(a)(1) In general. * * * See § 1.453B-
1(c) for rules requiring a transferor to rec-
ognize gain or loss upon the satisfaction
of an installment obligation of a corpora-
tion when the obligation is exchanged for
stock in that corporation. The preceding
sentence applies to satisfactions of install-
ment obligations after the date these reg-
ulations are published as final regulations
in the Federal Register .* * *

* * * * *

Par. 3. Section 1.361-1 is amended by
adding new second and third sentences to
read as follows:

§ 1.361-1 Nonrecognition of gain or
loss to corporations.

\* \* \* See § 1.453B-1(c) for rules re-
quiring a corporation transferring an in-
stallment obligation to the acquiring
corporation (as that term is used in
§ 1.368-1) to recognize gain or loss
upon the receipt of stock of the acquir-
ing corporation or another party to the
reorganization (as defined in § 1.368-
2(f)) in satisfaction of that installment
obligation. The preceding sentence ap-
plies to satisfactions of installment ob-
ligations after the date these regulations
are published as final regulations in the
Federal Register .* * *

Par. 4. Section 1.453B-1 is added to
read as follows:

§ 1.453B-1 Gain or loss on disposition
of installment obligations.

(a) General rule. [Reserved].

(b) Basis of obligation. [Reserved].

(1) Certain nonrecognition transac-
tions-(i) In general. If the Internal Rev-
enue Code provides an exception to the

recognition of gain or loss for certain
dispositions, no gain or loss shall be
recognized under section 453B on the
disposition of an installment obligation
within that exception. These exceptions
include-

(A) Certain transfers to corporations
under sections 351 and 361;

(B) Contributions to a partnership un-
der section 721; and

(C) Distributions by a partnership to a
partner under section 731 (except as pro-
vided by sections 704(c)(1)(B), 736, 737,
and 751(b)).

(ii) Transactions resulting in a satis-
faction of installment obligations. Para-
graph (c)(1)(i) of this section does not
apply to a disposition that results in a
satisfaction of an installment obligation,
regardless of whether the disposition oc-
curs as part of a transaction for which the
Internal Revenue Code provides an excep-
tion to the recognition of gain or loss.
These dispositions include, but are not
limited to-

(A) The receipt of stock of a corpora-
tion from the corporation in satisfaction of
an installment obligation of the corpora-
tion; and

(B) The receipt of an interest in a part-
nership from the partnership in satisfac-
tion of an installment obligation of the
partnership.

(2) Effective/applicability date. This
paragraph (c) applies to satisfactions,
distributions, transmissions, sales, or
other dispositions of installment obliga-
tions after the date these regulations are
published as final regulations in the
Federal Register.

Par. 5. Section 1.721-1(a) is amended
by adding new ninth and tenth sentences
to read as follows:

### § 1.721-1 Nonrecognition of gain or loss on contribution.

(a) * * * For rules in determining a
partner's gain or loss when an installment
obligation of a partnership is contributed
to the partnership, see section 453B and
§ 1.453B-1(c). The preceding sentence
applies to satisfactions of installment ob-
ligations after the date these regulations
are published as final regulations in the
Federal Register.

* * * * *

John Dalrymple,
Deputy Commissioner for
Services and Enforcement.

(Filed by the Office of the Federal Register on December 22,
2014, 8:45 a.m., and published in the issue of the Federal
Register or December 23, 2014, 79 F.R. 76928)

## Notice of Proposed Rulemaking Amendments to Excepted Benefits

### REG-132751-14

AGENCIES:

Internal Revenue Service, Department
of the Treasury; Employee Benefits Secu-
rity Administration, Department of Labor;
Centers for Medicare & Medicaid Ser-
vices, Department of Health and Human
Services.

ACTION: Proposed rules.

### SUMMARY:

This document contains proposed rules
that would amend the regulations regard-
ing excepted benefits under the Employee
Retirement Income Security Act of 1974,
the Internal Revenue Code (the Code),
and the Public Health Service Act related
to limited wraparound coverage. Excepted
benefits are generally exempt from the
requirements that were added to those
laws by the Health Insurance Portability
and Accountability Act and the Patient
Protection and Affordable Care Act.

### DATES:

Comments are due on or before Janu-
ary 22, 2015.

ADDRESSES:

Written comments may be submitted to
the Department of Labor as specified be-
low. Any comment that is submitted will
be shared with the other Departments and
will also be made available to the public.
Warning: Do not include any personally
identifiable information (such as name,
address, or other contact information) or
confidential business information that you
do not want publicly disclosed. All com-
ments may be posted on the Internet and
can be retrieved by most Internet search
engines. No deletions, modifications, or
redactions will be made to the comments
received, as they are public records. Com-
ments may be submitted anonymously.

Comments, identified by "Excepted
Benefits," may be submitted by one of the
following methods:

Federal eRulemaking Portal: http://
www.regulations.gov. Follow the instruc-
tions for submitting comments.

Mail or Hand Delivery: Office of
Health Plan Standards and Compliance
Assistance, Employee Benefits Security
Administration, Room N-5653, U.S. De-
partment of Labor, 200 Constitution Av-
enue NW., Washington, DC 20210, At-
tention: Excepted Benefits.

Comments received will be posted
without change to www.regulations.gov
and available for public inspection at the
Public Disclosure Room, N-1513, Em-
ployee Benefits Security Administration,
200 Constitution Avenue NW., Washing-
ton, DC 20210, including any personal
information provided.

FOR FURTHER INFORMATION
CONTACT: Amy Turner or Beth Baum,
Employee Benefits Security Administra-
tion, Department of Labor, at (202) 693-
8335; Karen Levin, Internal Revenue Ser-
vice, Department of the Treasury, at (202)
317-5500; Jacob Ackerman, Centers for

Medicare & Medicaid Services, Depart-
ment 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 website (http://www-
.dol.gov/ebsa). In addition, information
from HHS on private health insurance for
consumers can be found on the Centers
for Medicare & Medicaid Services (CMS)
website (www.cms.gov/cciio) and infor-
mation on health reform can be found at
www.HealthCare.gov.

### SUPPLEMENTARY INFORMATION:

#### I. Background

The Health Insurance Portability and
Accountability Act of 1996 (HIPAA),
Public Law 104-191, 110 Stat. 1936
added title XXVII of the Public Health
Service Act (PHS Act), part 7 of the Em-
ployee Retirement Income Security Act of
1974 (ERISA), and chapter 100 of the
Internal Revenue Code (the Code), pro-
viding portability and nondiscrimination
provisions with respect to health cover-
age. These provisions of the PHS Act,
ERISA, and the Code were later aug-
mented by other consumer protection
laws, including the Mental Health Parity
Act of 1996,1 the Mental Health Parity
and Addiction Equity Act of 2008,2 the
Newborns' and Mothers' Health Protec-
tion Act,3 the Women's Health and Can-
cer Rights Act,4 the Genetic Information
Nondiscrimination Act of 2008,5 the Chil-
dren's Health Insurance Program Reau-
thorization Act of 2009,6 Michelle's
Law,7 and the Affordable Care Act.8

The Affordable Care Act reorganizes,
amends, and adds to the provisions of part

1Pub. L. 104-204, 110 Stat. 2944 (September 26, 1996).

2Pub. L. 110-343, 122 Stat. 3881 (October 3, 2008).

3Pub. L. 104-204, 110 Stat. 2935 (September 26, 1996).
4Pub. L. 105-277, 112 Stat. 2681-436 (October 21, 1998).
5Pub. L. 110-233, 122 Stat. 881 (May 21, 2008).

6Pub. L. 111-3, 123 Stat. 65 (February 4, 2009).

7Pub. L. 110-381, 122 Stat. 4081 (October 9, 2008).

8The Patient Protection and Affordable Care Act, Public Law 111-148, was enacted on March 23, 2010, and the Health Care and Education Reconciliation Act, Public Law 111-152, was
enacted on March 30, 2010. (These statutes are collectively known as the "Affordable Care Act".)

A of title XXVII of the 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.9 Section 715(a)(1) of ERISA
and section 9815(a)(1) of the Code, as
added by the Affordable Care Act, incor-
porate the provisions of part A of title
XXVII of the PHS Act into ERISA and
the Code to make them applicable to
group health plans and health insurance
issuers providing health insurance cover-
age in connection with group health plans.
The PHS Act sections incorporated by
these references are sections 2701 through
2728.

Sections 2722 and 2763 of the PHS
Act, section 732 of ERISA, and section
9831 of the Code provide that the require-
ments of title XXVII of the PHS Act, part
7 of ERISA, and chapter 100 of the Code,
respectively, generally do not apply to
excepted benefits. Excepted benefits are
described in section 2791 of the PHS Act,
section 733 of ERISA, and section 9832
of the Code.

The parallel statutory provisions estab-
lish four categories of excepted benefits.
The first category includes benefits that
are generally not health coverage1º (such
as automobile insurance, liability insur-
ance, workers compensation, and acciden-
tal death and dismemberment coverage).
The benefits in this category are excepted
in all circumstances. In contrast, the ben-
efits in the second, third, and fourth cate-
gories are types of health coverage but are
excepted only if certain conditions are
met.

The second category of excepted ben-
efits is limited excepted benefits, which
may include limited scope vision or dental
benefits, and benefits for long-term care,

nursing home care, home health care, or
community based care. Section 2791(c)(2)(C)
of the PHS Act, section 733(c)(2)(C) of
ERISA, and section 9832(c)(2)(C) of the
Code authorize the Secretaries of Health
and Human Services (HHS), Labor, and
the Treasury (collectively, the Secretaries)
to issue regulations establishing other,
similar limited benefits as excepted bene-
fits. The Secretaries exercised this author-
ity previously with respect to certain
health flexible spending arrangements
(health FSAs).11 To be excepted under
this second category, the statute (specifi-
cally, ERISA section 732(c)(1), PHS Act
section 2722(c)(1), and section 9831(c)(1)
of the Code) provides that limited benefits
must either: (1) be provided under a sep-
arate policy, certificate, or contract of in-
surance; or (2) otherwise not be an inte-
gral part of a group health plan, whether
insured or self-insured.12

The third category of excepted bene-
fits, referred to as “noncoordinated ex-
cepted benefits," includes both coverage
for only a specified disease or illness
(such as cancer-only policies), and hospi-
tal indemnity or other fixed indemnity in-
surance. In the group market, these bene-
fits are excepted only if all of the
following conditions are met: (1) the ben-
efits are provided under a separate policy,
certificate, or contract of insurance; (2)
there is no coordination between the pro-
vision of such benefits and any exclusion
of benefits under any group health plan
maintained by the same plan sponsor; and
(3) the benefits are paid with respect to
any event without regard to whether ben-
efits are provided under any group health
plan maintained by the same plan spon-
sor.13

The fourth category of excepted bene-
fits is supplemental excepted benefits.

Such benefits must be: (1) coverage sup-
plemental to Medicare, coverage supple-
mental to the Civilian Health and Medical
Program of the Department of Veterans
Affairs (CHAMPVA) or to Tricare, or
similar coverage that is supplemental to
coverage provided under a group health
plan; and (2) provided under a separate
policy, certificate, or contract of insur-
ance.14

In 2004, the Departments of the Trea-
sury, Labor, and HHS published final reg-
ulations with respect to excepted benefits
(the HIPAA regulations).15 (Subsequent
references to the "Departments" include
all three Departments, unless the headings
or context indicate otherwise.)

On December 24, 2013, the Depart-
ments issued additional proposed regula-
tions with respect to the second category
of excepted benefits, limited excepted
benefits (2013 proposed regulations).16
These regulations proposed to: (1) elimi-
nate the requirement that participants in
self-insured plans pay an additional pre-

mium or contribution for limited-scope
vision or dental benefits to qualify as ben-
efits that are not an integral part of the
plan; (2) set forth the criteria under which
employee assistance programs (EAPs)
that do not provide significant benefits in
the nature of medical care constitute ex-
cepted benefits; and (3) allow plan spon-
sors in limited circumstances to offer, as
excepted benefits, coverage that wraps
around certain individual health insurance
coverage in certain circumstances.

After consideration of comments re-
ceived on the 2013 proposed regulations,
the Departments published final regula-
tions regarding dental and vision benefits
and EAP benefits on October 1, 2014

9The 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.

10See 62 FR 16894, 16903 (Apr. 8, 1997), which states that these benefits are generally not health insurance coverage).

1126 CFR 54.9831-1(c)(3)(v); 29 CFR 2590.732(c)(3)(v); 45 CFR 146.145(b)(3)(v).

12See the discussion in the 2014 final regulations concerning the application of these requirements to benefits such as limited-scope dental and vision benefits and employee assistance
programs at 79 FR 59131 (Oct. 1, 2014).

1326 CFR 54.9831-1(c)(4); 29 CFR 2590.732(c)(4); 45 CFR 146.145(b)(4). See also Q7 in Affordable Care Act Implementation FAQs Part XI, available at http://www.dol.gov/ebsa/faqs/
faq-aca11.html.

1426 CFR 54.9831-1(c)(5); 29 CFR 2590.732(c)(5); 45 CFR 146.145(b)(5). The Departments issued additional guidance regarding supplemental health insurance coverage as excepted
benefits. See EBSA Field Assistance Bulletin No. 2007-04 (available at http://www.dol.gov/ebsa/pdf/fab2007-4.pdf); CMS Insurance Standards Bulletin 08-01 (available at http://
www.cms.gov/CCIIO/Resources/Files/Downloads/hipaa_08_01_508.pdf); and IRS Notice 2008-23 (available at http://www.irs.gov/irb/2008-07_IRB/ar09.html).

1569 FR 78720 (Dec. 30, 2004).

1678 FR 77632.

(2014 final regulations).17 Consistent with
the 2013 proposed regulations, the 2014
final regulations eliminated the require-
ment under the HIPAA regulations that
participants pay an additional premium or
contribution for limited-scope vision or
dental benefits to qualify as excepted ben-
efits. With respect to EAPs, the Depart-
ments finalized the proposal with one mod-
ification related to financing.18 In the 2014
final regulations, the Departments also
stated their intent to publish regulations that
addressed limited wraparound coverage in
the future, taking into account the extensive
comments received on this issue.19

As explained in the preamble to the
2013 proposed regulations, some group
health plan sponsors have asked whether
certain limited benefits that "wrap around"
employer-sponsored group health plan
coverage20 could be considered an ex-
cepted benefit if such benefits are pro-
vided to employees for whom the employ-
er's group health plan coverage that is
otherwise offered to them ("primary" cov-
erage) is unaffordable, and who instead
obtain major medical coverage through
the individual market, including through
the Affordable Insurance Exchange, or
"Exchange" (also called a Health Insur-
ance Marketplace, or Marketplace). Spe-
cifically, the preamble to the 2013 pro-
posed regulations noted that experts
suggest that most workers who are offered
minimum value coverage under their em-
ployer's primary group health plan will
not meet the criteria for that coverage to
be considered "unaffordable" within the
meaning of the statute and thus will not
qualify for the premium tax credit for en-
rolling in individual health coverage
through an Exchange.21 However, the pre-
amble went on to note that coverage under
such a primary group health plan may be
unaffordable for some employees, who
might instead purchase individual health
coverage through an Exchange with a pre-
mium tax credit. While such individuals

might pay lower premiums for such indi-
vidual health coverage through an Exchange
than they would pay for major medical cov-
erage offered through their employer's
group health plan, the individual coverage
in the Exchange might also provide less
generous coverage in terms of benefits or a
different provider network than the cover-
age provided under their employer's group
health plan. The 2013 proposed regulations
intended to permit employers to provide
such employees with overall coverage that
is comparable to the employer's group
health plan by providing them with limited
employer-sponsored coverage that would
add to and wrap around the individual mar-
ket coverage that the employee purchases
through the Exchange. If the employer
chose to provide such limited employer-
sponsored wraparound coverage, that cov-
erage would qualify as an excepted benefit
and therefore would not preclude the em-
ployee from obtaining a premium tax credit
to assist in purchasing the individual cover-
age through the Exchange if the employee
was otherwise eligible for a premium tax
credit.

The 2013 proposed regulations outlined
requirements under which certain employer-
sponsored wraparound coverage provided
under a group health plan would be treated
as excepted benefits when offered to indi-
viduals who could have received the bene-
fits provided in the wraparound coverage
through their employer's primary group
health plan, however the primary plan is
unaffordable and they do not enroll in that
primary plan. The 2013 proposed regula-
tions were intended to allow a plan sponsor
to pursue equity in coverage by maintaining
a comparable level of benefits for all poten-
tial enrollees, including not only higher-
income workers enrolled in the employer's
primary group health plan but also lower-
income workers, enrolled in non-
grandfathered individual market coverage.
Under the 2013 proposed regulations,
employer-provided wraparound coverage

would constitute excepted benefits (limited
wraparound coverage) and therefore would
not disqualify an employee from eligibility
for the premium tax credit and cost-sharing
reductions, if five conditions were met.

First, under the 2013 proposed regula-
tions, the coverage could wrap around
only certain coverage provided through
the individual market. Specifically, the in-
dividual health insurance coverage would
have to be non-grandfathered and could
not consist solely of excepted benefits. In
States that elect to establish a Basic
Health Program (BHP), certain low-
income individuals (for example, those
with household income between 133%
and 200% of the Federal poverty level)
who would otherwise qualify for a tax
credit to obtain a qualified health plan
through an Exchange would instead be
enrolled in coverage through the BHP.
The Departments invited comments on
how an employer might make wraparound
coverage available to BHP enrollees.

Second, the 2013 proposed regulations
would have required that limited wrap-
around coverage be specifically designed
to provide benefits beyond those offered
by the individual health insurance cover-
age. Specifically, the limited wraparound
coverage would have been required to
provide either benefits that are in addition
to essential health benefits (EHBs), or re-
imburse the costs of items and services
provided by health care providers consid-
ered out-of-network under the individual
health insurance coverage, or both. Addi-
tionally, the 2013 proposed regulations
stated that the limited wraparound cover-
age could, but would not be required to,
provide benefits to reimburse for partici-
pants' otherwise applicable cost sharing
under the individual health insurance pol-
icy. Reimbursement for participants' oth-
erwise applicable cost sharing could not be
its primary purpose since Affordable Care
Act-compliant individual health insurance
policies already offer lower cost sharing at

1779 FR 59131 (Oct. 1, 2014).

18The 2014 final regulations do not include the requirement set forth in the 2013 proposed regulations that EAP benefits cannot be financed by another group health plan in order to qualify
as excepted benefits. See 79 FR 59134.

1979 FR 59131.

20 A group health plan may be sponsored by an employer, an employee organization, or both. For simplicity, this preamble generally refers to employer-sponsored coverage. However, these
proposed regulations would be equally applicable to group health plans sponsored by employee organizations, or jointly by employers and employee organizations.

21 See Congressional Budget Office, CBO and JCT Estimates of the Effects of the Affordable Care Act on the Number of People Obtaining Employer-Based Insurance, March 2012, at Table
2, available at http://www.cbo.gov/sites/default/files/cbofiles/attachments/03-15-ACA_and_Insurance_2.pdf. See also Carter C. Price & Evan Saltzman, Delaying the Employer Mandate, July
2013, available at http://www.rand.org/pubs/research_reports/RR411.html.

higher metal tiers (gold and platinum). For
the benefits to be considered specifically
designed to wrap around the individual
health insurance coverage, they would have
to provide additional benefits; the coverage
could not, under the proposed regulations,
provide benefits solely pursuant to a
coordination-of-benefits provision that sim-
ply pays benefits whenever the individual
health insurance policy does not cover all or
part of a medical expense.

The third condition of the 2013 pro-
posed regulations would have required the
plan sponsor offering the limited wrap-
around coverage to sponsor another group
health plan providing minimum value (as
defined under section 36B(c)(2)(C)(ii) of
the Code) for the plan year, referred to as
the "primary plan." This primary plan
would have to be affordable for a majority
of the employees eligible for the primary
plan, and only individuals eligible for this
primary plan could be eligible for the lim-
ited wraparound coverage.

Under the fourth condition set forth in
the 2013 proposed regulations, the total
cost of the employer's limited wraparound
coverage would have to be limited, so as
not to exceed 15 percent of the cost of
coverage under the employer's primary
plan offered to employees eligible for the
wraparound coverage.22 For this purpose,
the cost of coverage would include both
employer and employee contributions to-
wards coverage and would be determined
in the same manner as that in which the
applicable premium is calculated under a
Consolidated Omnibus Reconciliation Act
of 1985 (COBRA) continuation provi-
sion.23 This is similar to the standard in
the 2007 enforcement safe harbor for

treating supplemental health insurance
coverage as excepted benefits, under
which the cost of coverage under the sup-
plemental policy, certificate, or contract of
insurance must not exceed 15 percent of
the cost of primary coverage.24

The fifth and final condition for the
limited wraparound coverage to qualify as
excepted benefits under the 2013 pro-
posed regulations relates to nondiscrimi-
nation. The limited wraparound coverage
could not discriminate against individuals
in eligibility, benefits, or premiums based
on any health factor of an individual (or
any dependent of the individual), consis-
tent with the requirements of section 2705
of the PHS Act (incorporated by reference
into ERISA section 715 and Code section
9815) and its implementing regulations.
As explained in the preamble to the 2013
proposed regulations, this condition is
similar to the standard in the 2007 en-
forcement safe harbor treating supplemen-
tal health insurance coverage as excepted
benefits and rules for Medicare supple-
mental coverage.25

To satisfy the fifth condition under the
2013 proposed regulations, the limited
wraparound coverage also could not im-
pose any preexisting condition exclusion,
consistent with the requirements of sec-
tion 2704 of the PHS Act (as incorporated
into ERISA section 715 and Code section
9815) and its implementing regulations.
Finally, both the primary coverage and the
limited wraparound coverage could not
discriminate in favor of highly compen-
sated individuals, consistent with the pro-
visions of section 2716 of the PHS Act
(also incorporated by reference into
ERISA section 715 and Code section

9815\) and section 105(h) of the Code, and
its implementing regulations at 26 CFR
1.105-11, as applicable.26 The preamble
to the 2013 proposed regulations clarified
that these limitations were intended to en-
sure the coverage is available regardless
of health status and to prevent employers
from shifting employees with high medi-
cal costs to an Exchange.27 Conditioning
excepted benefit status on meeting stan-
dards consistent with the compensation-
based nondiscrimination rules, in combi-
nation with the requirement that the
primary plan be affordable for a majority
of the employees who are eligible for it,
was intended to help ensure that employ-
ers would not be able to use wraparound
coverage to send excessive numbers of
low wage workers to the Exchanges.28

After consideration of comments on
the 2013 proposed regulations, the De-
partments are publishing these proposed
regulations to address limited wraparound
coverage and solicit comment before
promulgation of final regulations on lim-
ited wraparound benefits.

#### II. Overview of these Proposed Regulations

The Departments received general
comments on the 2013 proposed regula-
tions, as well as on the five conditions for
wraparound coverage to qualify as ex-
cepted benefits. Many commenters sug-
gested that limited wraparound coverage
should be considered supplemental ex-
cepted benefits instead of limited excepted
benefits, which would eliminate the need
for the wraparound coverage to not be an
integral part of a group health plan.29
Some commenters suggested a more sim-

22If an employer provides more than one primary plan option (for example, a health maintenance organization option and a preferred provider organization option), and one primary plan
does not satisfy the 15 percent standard but another plan does, the Departments stated in the preamble to the 2013 proposed regulations that they would consider the 15 percent standard
to be met if the average value of the primary plan options meets the 15 percent standard.

23Under the COBRA rules, plans are generally permitted to charge up to 102 percent of the applicable premium. See § 4980B(f)(2)(C)(i) of the Code. The cost of coverage for purposes
of these proposed regulations is 100 percent of the applicable premium, not 102 percent of the applicable premium that the plan is generally permitted to charge under the COBRA rules.
"Applicable premium" is defined at § 4980B(f)(4) of the Code.

24The Departments issued parallel guidance regarding supplemental health insurance coverage as excepted benefits under HIPAA and related legislation. See EBSA Field Assistance Bulletin
No. 2007-04 (available at http://www.dol.gov/ebsa/pdf/fab2007-4.pdf); CMS Insurance Standards Bulletin 08-01 (available at http://www.cms.gov/CCIIO/Resources/Files/Downloads/
hipaa_08_01_508.pdf); and IRS Notice 2008-23 (available at http://www.irs.gov/irb/2008-07_IRB/ar09.html).

2575 FR 77636.

26Section 2716 of the PHS Act (as incorporated into ERISA and the Code) generally applies to insured coverage and section 105(h) of the Code and its implementing regulations generally
apply to self-insured coverage.

2778 FR at 77636.

28Id.

29The Departments note that the exception for supplemental excepted benefits is for coverage that is supplemental to coverage provided under Medicare or Tricare, or similar supplemental
coverage provided to coverage under a group health plan. None of these circumstances apply here. That is, the limited wraparound coverage that is the subject of these proposed regulations
is supplemental to individual insurance.

plified approach to wraparound coverage
rather than the five conditions outlined in
the proposed regulations, such as adopting
a more subjective test so that reasonable
efforts to comply with the conditions to be
excepted benefits will not cause a plan to
fail to qualify as such. Others requested
that the standards for limited wraparound
coverage to qualify as excepted benefits
track the same standards and safe harbors
for applicable large employers under sec-
tion 4980H of the Code and its imple-
menting regulations, for ease of adminis-
tration and consistency.

Many commenters suggested modifi-
cations to the second condition of the
2013 proposed regulations, requiring that
limited wraparound coverage be specifi-
cally designed to provide benefits beyond
those offered by the individual health in-
surance coverage. Some suggested that
the goal of limited wraparound coverage
should be to fill gaps in cost sharing, as
the individual health insurance policy
would provide coverage of EHB. Others
disagreed, requesting that this condition
be changed so that cost sharing would not
be the primary purpose of the wraparound
coverage, because individuals who wish
to reduce their cost sharing can do so by
purchasing a higher "metal level" of cov-
erage. Additionally, commenters ques-
tioned how to choose which benefits to
offer in addition to what is covered under
the individual health insurance policy
without knowing what benefits each em-
ployee will receive under their individual
health insurance coverage. Some com-
menters suggested that benefits provided
under the wraparound coverage mirror the
benefits offered under the employer's pri-
mary plan.

Commenters also recommended changes
to the third condition, that the plan spon-
sor offer another, primary group health
plan that provides minimum value and is
affordable for a majority of the employees
eligible for the primary plan. Some asked
that this requirement be deleted alto-
gether. Others stated that the "majority"
test conflicts with the 95% test under sec-

tion 4980H(a) of the Code, and that this
difference would introduce complexity
and confusion, and suggested that Form
W-2 employee wages and other safe har-
bor rules under section 4980H of the Code
and the accompanying regulations be used
to compute affordability. Some comment-
ers requested that the eligibility test ex-
clude part-time employees, Medicaid-
eligible employees, and retirees. Other
commenters asked that wraparound cov-
erage be considered to meet this standard
if the primary plan is affordable to the
majority of employees enrolled in the pri-
mary plan (as opposed to the majority
eligible for the primary plan).

Additionally, commenters addressed
the limit that the total cost of coverage
under the wraparound coverage not ex-
ceed 15 percent of the cost of coverage
under the primary plan. Some commenters
suggested increasing this percentage, stat-
ing that the 15 percent benchmark was
based on rough Medicare estimates for
supplemental coverage and is too low to
wrap around a bronze or silver plan. Oth-
ers asked that the limit be a simple dollar
amount, similar to limits on health savings
accounts or health FSAs. Additional com-
menters pointed out that as minimum
value increases, so does the total cost of
the wraparound coverage (and vice versa),
and that wrapping around individual cov-
erage makes these calculations confusing
and uncertain.

After consideration of comments on
the 2013 proposed regulations, the De-
partments are publishing these new pro-
posed regulations with respect to limited
wraparound coverage. These proposed
regulations seek comment on two options
for limited wraparound coverage to be
considered an excepted benefit. The De-
partments intend that, after notice and
comment, one or both options could be
finalized. (That is, they are not necessarily
alternatives and, therefore, could be im-
plemented side by side).

The regulations include a sunset date
and, therefore, would operate as a pilot
program. While some elements of this

proposal are the same as those in the pre-
vious proposal, this new proposal contains
changes in response to suggestions and
adds new elements for reporting and data
collection to gather information to inform
future rulemaking.

A. Requirements of these New Pro-
posed Regulations

These proposed regulations set forth
five requirements under which limited
benefits provided through a group health
plan that wrap around either eligible indi-
vidual insurance or coverage under a
Multi-State Plan (limited wraparound
coverage) constitute excepted benefits.
For this purpose, "eligible individual
health insurance" is individual health in-
surance coverage that is not a grandfa-
thered health plan,3º not a transitional in-
dividual health insurance market plan,31
and does not consist solely of excepted
benefits.

##### 1. Covers additional benefits

The limited wraparound coverage
would have to be specifically designed to
wrap around eligible individual health in-
surance.32 That is, the limited wraparound
coverage would have to provide meaning-
ful benefits beyond coverage of cost shar-
ing under the eligible individual health
insurance. For example, the limited wrap-
around coverage could provide coverage
for expanded in-network medical clinics
or providers, or provide benefits that are
not EHB and that are not covered under
the eligible individual health insurance.
The limited wraparound coverage would
not be permitted to provide benefits solely
under a coordination-of-benefits provision
and could not be solely an account-based
reimbursement arrangement. Limited wrap-
around coverage that covers solely cost
sharing is not permissible because re-
duced cost sharing can be obtained by
choosing an individual health insurance
policy with a higher actuarial value (for
example, a platinum plan with a 90 per-
cent actuarial value). Because the pro-
posed regulations would permit certain el-
igible individuals to select any eligible
individual health insurance (that is, indi-

30See section 1251 of the Affordable Care Act, 29 CFR 2590.715-1251, and 45 CFR 147.140.

31 As described in CMS Insurance Standards Bulletin (March 5, 2014) available at: http://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/transition-to-compliant-
policies-03-06-2015.pdf.

32In States that elect to establish a Basic Health Program (BHP), certain low-income individuals (for example, those with household income between 133% and 200% of the Federal poverty
level) who would otherwise qualify for a tax credit to obtain a qualified health plan through an Exchange will instead be enrolled in coverage through the BHP. Therefore, the Departments
invite comments on how an employer might make wraparound coverage available to BHP enrollees.

vidual health insurance coverage that is
not a grandfathered health plan, not a tran-
sitional individual health insurance mar-
ket plan, and does not consist solely of
excepted benefits), and recognizing the
complications some plan sponsors might
encounter in determining what benefits or
providers are not covered under that indi-
vidual policy, the Departments invite
comment on safe harbors standardizing
the benefits in the limited wraparound
coverage that could be established under
this second proposed requirement.

##### 2. Limited in amount

The second requirement is that the lim-
ited wraparound coverage be limited in
amount. For this purpose, the annual cost
of coverage per employee (and any cov-
ered dependents) under the limited
wraparound coverage could not exceed
the maximum annual contribution for
health FSAs which is $2,500 in 2014,
indexed in the manner prescribed under
section 125(i)(2) of the Code, and the
cost of coverage would include both em-
ployer and employee contributions to-
wards coverage and be determined in
the same manner as the applicable pre-
mium is calculated under a COBRA
continuation provision. The bright-line
$2,500 limitation is intended to be sim-
pler to administer than the 15 percent
cap set forth in the 2013 proposed reg-
ulations.

##### 3. Nondiscrimination

The limited wraparound coverage must
meet three requirements relating to non-
discrimination in order to qualify as ex-
cepted benefits. First, the wraparound
coverage could not impose any preexist-
ing condition exclusion, consistent with
the requirements of section 2704 of the
PHS Act (as incorporated into section 715
of ERISA and section 9815 of the Code)
and implementing regulations.33 Second,
the wraparound coverage could not dis-
criminate against individuals in eligibility,
benefits, or premiums based on any health
factor of an individual (or any dependent
of the individual), consistent with the re-
quirements of section 702 of ERISA, sec-
tion 9802 of the Code, and section 2705 of
the PHS Act (as incorporated into section

715 of ERISA and section 9815 of the
Code) and implementing regulations.34
Finally, neither the primary group health
plan coverage nor the limited wraparound
coverage could fail to comply with section
2716 of the PHS Act (as incorporated into
section 715 of ERISA and section 9815 of
the Code) or fail to be excludible from
income with respect to any individual due
to the application of section 105(h) of the
Code (as applicable).

##### 4. Plan eligibility requirements

The fourth requirement to qualify as
excepted benefits would be that individu-
als eligible for the limited wraparound
coverage cannot be enrolled in excepted
benefit coverage that is a health FSA. In
addition, plans must comply with one of
two alternative sets of standards relating
to eligibility and benefits. One set of plan
eligibility requirements applies to wrap-
around benefits offered in conjunction
with eligible individual health insurance
for persons who are not full-time employ-
ees. A separate set of standards applies to
coverage that wraps around certain Multi-
State Plan coverage.

###### a. Eligible individual health insurance for individuals who are not full-time em- ployees

Limited coverage that wraps around
eligible individual health insurance for an
individual who is not a full-time employee
must satisfy three standards relating to
plan eligibility. First, for each year that
wraparound coverage is offered, the em-
ployer that is the sponsor of the plan of-
fering wraparound coverage, or the em-
ployer participating in a plan offering
wraparound coverage, must offer to its
full-time employees coverage that: (1) is
substantially similar to coverage that the
employer would need to offer to its full-
time employees in order not to be subject
to a potential assessable payment under
the employer shared responsibility provi-
sions of section 4980H(a) of the Code, if
such provisions were applicable (that is,
substantially similar to an offer of mini-
mum essential coverage (as defined in
section 5000A(f) to at least 95 percent of
its full-time employees (or to all but five
of its full-time employees, if five is greater

than five percent of its full-time employ-
ees)); (2) provides minimum value (as de-
fined in section 36B(c)(2)(C)(ii) of the
Code); and (3) is reasonably expected to
be affordable (applying the safe harbor
rules for determining affordability set
forth in 26 CFR 54.4980H-5(e)(2)). If a
plan or issuer providing limited wrap-
around coverage takes reasonable steps to
ensure that employers disclose necessary
information regarding their coverage of-
fered and affordability information to the
plan or issuer, the plan or issuer may rely
on reasonable representations by employ-
ers regarding this information, unless the
plan or issuer has specific knowledge to
the contrary. Second, eligibility for the
limited wraparound coverage must be lim-
ited to employees who are not full-time
employees (and their dependents), or who
are retirees (and their dependents). For
this purpose, the Departments propose
that "full-time employees" would be em-
ployees who are reasonably expected to
work at least an average of 30 hours per
week. The Departments proposal would
not require plans and issuers to define
"full-time employees" strictly in accor-
dance with the rules of section 4980H of
the Code. Because this proposal is for
part-time employees, some employers
who wish to take advantage of this ex-
cepted benefits option may be exempt
from Code 4980H and may not already
be operating under that detailed set of
rules. The Departments intend that em-
ployers could rely on the 4980H defini-
tion, or any reasonable interpretation of
who is reasonably expected to work an
average of 30 hours a week, for pur-
poses of this provision affecting part-
time employees and invite comment on
this approach.

Third, other group health plan cover-
age, not limited to excepted benefits, must
be offered to the individuals eligible for
the wraparound coverage. Only individu-
als eligible for other group health plan
coverage may be eligible for the wrap-
around coverage. This third requirement is
consistent with the requirement for a
health FSA to qualify as excepted benefits

3329 CFR 2590.715-2704 and 45 CFR 147.108. See also Q2 in Affordable Care Act Implementation FAQs Part XXII, available at http://www.dol.gov/ebsa/faqs/faq-aca22.html regarding
the prohibition against offering employees with high claims risk a choice between enrollment in its standard group health plan or cash.

3426 CFR 54.9802-1, 29 CFR 2590.702, and 45 CFR 146.121.

under the Departments' excepted benefits
regulations.35

###### b. Multi-State Plan coverage

For Multi-State Plan coverage limited
wraparound coverage, four requirements
must be satisfied. The first of the four
standards requires that the limited wrap-
around coverage be specifically designed
and approved by the Office of Personnel
Management (OPM) to provide benefits in
conjunction with coverage under a Multi-
State Plan authorized under section 1334
of the Affordable Care Act. The Depart-
ments anticipate that health insurance is-
suers with whom OPM contracts to offer
Multi-State Plans will be in the best posi-
tion to offer this type of limited wrap-
around coverage. OPM may revoke ap-
proval if it determines that continued
approval is inconsistent with the reporting
and evaluation criteria in the proposed
regulations. Second, the employer must
have offered coverage in the plan year that
begins in 2014 that is substantially similar
to coverage that the employer would need
to have offered to its full-time employees
in order to not be subject to an assessable
payment under the employer shared respon-
sibility provisions of section 4980H(a) of
the Code, if such provisions had been
applicable (that is, substantially similar to
an offer of minimum essential coverage
(as defined in section 5000A(f) of the
Code) to at least 95 percent of its full-time
employees (or to all but five of its full-time
employees, if five is greater than five per-
cent of its full-time employees). Third, in
the plan year that begins in 2014, the em-
ployer must have offered coverage to a sub-
stantial portion of full-time employees that
provided minimum value (as defined in sec-
tion 36B(c)(2)(C)(ii) of the Code) and was
affordable (applying the safe harbor rules
for determining affordability set forth in
26 CFR 54.4980H-5(e)(2)). Fourth, for
the duration of the pilot program, the em-
ployer's annual aggregate contributions
for both primary and limited wraparound
coverage must be substantially the same
as the employer's aggregate contributions
for coverage offered to full-time employ-
ees in 2014. The Departments are consid-
ering interpreting this "substantially the
same" condition as a percentage (e.g., 80
or 90 percent) and potentially applying it

on a per-worker basis to allow for fluctu-
ations in an employer's workforce. The
Departments seek comment on such an
interpretation, as well as on all aspects of
this maintenance of effort condition.

For purposes of administering this pro-
vision, with respect to limited wraparound
coverage offered in conjunction with
Multi-State Plan coverage, the Depart-
ments propose that the term "full-time
employee" means a "full-time employee"
as defined in 26 CFR 54.4980H-1(a)(21)
who is not in a limited non-assessment
period for certain employees (as defined
in 26 CFR 54.4980H-1(a)(26)). More-
over, if a plan or issuer providing limited
wraparound coverage takes reasonable
steps to ensure that employers disclose
necessary information regarding their
coverage offered and contribution levels
for 2014 to the plan or issuer, the plan or
issuer may rely on reasonable representa-
tions by employers regarding this infor-
mation, unless the plan or issuer has spe-
cific knowledge to the contrary. Consistent
with the reporting and evaluation criteria
described later in this preamble, OPM
may verify that plans and issuers have
reasonable mechanisms in place to ensure
that contributing employers meet these
standards.

###### 5. Reporting

The fifth and final requirement for lim-
ited wraparound coverage to qualify as
excepted benefits is a reporting require-
ment, for group health plans and group
health insurance issuers, as well as group
health plan sponsors.

A self-insured group health plan, or a
health insurance issuer offering or propos-
ing to offer Multi-State Plan wraparound
coverage, reports to OPM, in a form and
manner specified in OPM guidance, infor-
mation OPM reasonably requires to deter-
mine whether the plan or issuer qualifies
to offer such coverage or complies with
the applicable requirements of this sec-
tion.

In addition, the plan sponsor of any
group health plan offering either limited
wraparound coverage that wraps around
eligible individual health insurance or
Multi-State Plan coverage must report to
HHS, in a form and manner specified in
guidance, information HHS reasonably

requires to determine whether the excep-
tion for limited wraparound coverage un-
der these proposed regulations is allowing
plan sponsors to provide workers with
comparable benefits whether enrolled in
minimum essential coverage under a
group health plan offered by the plan
sponsor, or a qualified health plan with
additional limited wraparound coverage
offered by the plan sponsor, without caus-
ing an erosion of coverage.

B. Pilot program with sunset date

Under these proposed regulations, lim-
ited wraparound coverage would be per-
mitted under a pilot program for a limited
time. Specifically, this type of wraparound
coverage could be offered as excepted
benefits to coverage that is first offered no
later than December 31, 2017 and that
ends on the later of: (1) the date that is
three years after the date wraparound cov-
erage is first offered; or (2) the date on
which the last collective bargaining agree-
ment relating to the plan terminates after
the date wraparound coverage is first of-
fered (determined without regard to any
extension agreed to after the date the
wraparound coverage is first offered). The
Departments invite comments on this time
frame for applicability, including whether
the Departments should have the option to
provide for an earlier termination date.

##### C. Comment Solicitation

The Departments invite comments on
these proposed regulations generally, and
on the specific issues identified earlier in
this preamble. The Departments also seek
comments on the special circumstances of
small businesses that are not subject to
section 4980H of the Code. Small em-
ployers may qualify to purchase coverage
through the Small-Business Health Op-
tions Program (SHOP) in their State, or
they may elect to buy coverage in their
state's small group market outside of the
SHOP. Small businesses, like other em-
ployers, can also contribute towards a
health savings account (HSA) under sec-
tion 223 of the Code, which may be used
in combination with a high deductible
health plan (HDHP). In addition, the De-
partments invite comments on whether
modifications to health FSAs or other ex-
isting policies tailored to the needs of

35 See 26 CFR 54.9831-1(c)(3)(v); 29 CFR 2590.732(c)(3)(v); 45 CFR 146.145(b)(3)(v).

small businesses may also be beneficial to
employers and employees.

#### III. Economic Impact and Paperwork Burden

##### A. Summary

As discussed in detail above, these pro-
posed regulations would amend the defi-
nition of "limited excepted benefits" to
provide plan sponsors with two mutually
exclusive options to offer limited wrap-
around coverage to certain individuals.
Under the first option, plan sponsors could
offer limited benefits provided through a
group health plan that wraps around eligi-
ble individual health insurance to employ-
ees who are not full-time employees (and
their dependents), or who are retirees (and
their dependents). For this purpose, full-
time employees are employees who are
reasonably expected to work at least an
average of 30 hours per week. Under the
second option, the limited wraparound
coverage that satisfies the requirements
outlined in the regulations must be ap-
proved by OPM and be offered in con-
junction with Multi-State Plan coverage
authorized under section 1334 of the Af-
fordable Care Act.

B. Executive Orders 12866 and 13563
\- Departments of Labor and HHS

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, and public health and
safety effects; distributive impacts; and
equity). Executive Order 13563 empha-
sizes the importance of quantifying both
costs and benefits, reducing costs, harmo-
nizing rules, and promoting flexibility.

Section 3(f) of Executive Order 12866
defines a "significant regulatory action" as
an action that is likely to result in a reg-
ulation: (1) having an annual effect on the
economy of $100 million or more in any
one year, or adversely and materially af-
fecting a sector of the economy, produc-

tivity, competition, jobs, the environment,
public health or safety, or state, local, or
tribal governments or communities (also
referred to as "economically significant");
(2) creating a serious inconsistency or oth-
erwise interfering with an action taken or
planned by another agency; (3) materially
altering the budgetary impacts of entitle-
ment grants, user fees, or loan programs
or the rights and obligations of recipients
thereof; or (4) raising novel legal or policy
issues arising out of legal mandates, the
President's priorities, or the principles set
forth in the Executive Order. OMB has
determined that the action is significant
within the meaning of section 3(f)(4) of
Executive Order 12866, and the Depart-
ments accordingly provide the following
assessment of its potential benefits and
costs.

The Departments recognize that many
plan sponsors provide comprehensive
health benefits to their workers. One ob-
jective of the Affordable Care Act is to
allow individuals with comprehensive
health insurance plans to maintain their
current level of benefits. Some employers
are interested in offering wraparound cov-
erage to employees who are enrolled in a
Multi-State Plan authorized under section
1334 of the Affordable Care Act or to
part-time, seasonal, or part-year employ-
ees. These proposed regulations provide
two options to employers that clarify the
circumstances under which plan sponsors
can provide such limited wraparound cov-
erage to their employees.

The cost (and Federal budget impact36)
of this proposal is difficult to quantify,
because it is unclear how many plan spon-
sors will be eligible to offer and how
many employees will be covered by lim-
ited wraparound benefits. It is important to
note that the cost of the proposed limited
wraparound coverage is limited by the
proposed conditions on its availability.

For example, in order to qualify as
limited excepted benefits under the indi-
vidual coverage option, limited wrap-
around coverage can be offered only to

individuals who are not full-time employ-
ees (and their dependents) or who are re-
tirees (and their dependents), and can only
wrap around eligible individual health in-
surance.37 The limited wraparound cover-
age must provide meaningful benefits be-
yond coverage of cost sharing under the
individual health insurance coverage.

Plan designs will be limited by nondis-
crimination rules aimed at preventing plan
sponsors from discriminating in favor of
highly compensated employees or offer-
ing different benefits for workers along
certain other dimensions such as health
status. The total cost of the wraparound
coverage per employee (and any covered
dependents) under both options is limited
to $2,500 indexed in the manner pre-
scribed under section 125(i)(2) of the
Code.

Under the Multi-State Plan wrap-
around option, the limited wraparound
coverage that satisfies the requirements
outlined in the regulations must be ap-
proved by OPM and be offered in con-
junction with Multi-State Plan coverage
authorized under section 1334 of the Af-
fordable Care Act. As part of the approval
process, OPM will require the wraparound
coverage to provide meaningful benefits
other than coverage of cost sharing under
the Multi-State Plan.38

Coverage under both options applies to
limited wraparound coverage that is first
offered no later than December 31, 2017,
and that ends on the later of: (1) the date
that is three years after the date wrap-
around coverage is first offered, or (2) the
date on which the last collective bargain-
ing agreement relating to the plan termi-
nates after the date the wraparound cov-
erage is first offered.

Both options are designed so that
wraparound coverage could not replace
employer-sponsored primary group cover-
age. Under the individual coverage op-
tion, the employer also must offer other
group health coverage that is not limited
to excepted benefits and provides mini-
mum value to the class of participants

36 As with other group health coverage, employer contributions to the limited wraparound coverage would be excluded from employee income for tax purposes. Similar to the cost of the
proposal, the budget implications of adding limited wraparound coverage as a form of excepted benefits depends on the number of employers that elect either option and the number of
employees that in turn receive it.

37 As described earlier in this preamble, "eligible individual health insurance" is individual health insurance coverage is not a grandfathered health plan, not a transitional individual health
insurance market plan, and does not consist solely of excepted benefits.

38For example, the wraparound coverage may provide coverage for expanded in-network medical clinics or providers, or provide benefits that are not essential health benefits that are not
covered under the Multi-State Plan.

offered the wraparound coverage by rea-
son of their employment. Only individu-
als who are not full-time workers and
who are eligible for other group health
plan coverage may be eligible for the
wraparound coverage. Also, the em-
ployer coverage must substantially sat-
isfy the employer responsibility provi-
sions of section 4980H(a) of the Code
(whether applicable or not), and the cov-
erage would have to be affordable for at
least 95% of full-time employees.

Under the Multi-State Plan option, the
employer would have to offer coverage in
the plan year beginning in 2014 that
would have substantially satisfied the em-
ployer responsibility provisions of section
4980H(a) of the Code if the provision had
been applicable, provided minimum value,
and been affordable for a substantial por-
tion of its full-time employees.39 The em-
ployer's annual contributions for both its
primary and wraparound coverage must
be substantial (e.g., at least 80% or 90% of
the employer's total contributions for cov-
erage offered to full-time employees in
2014).

Another factor in assessing the propos-
al's cost is that the decision to offer the
limited wraparound coverage is optional.
There is greater administrative complexity
associated with the wraparound coverage
than primary coverage alone or primary
coverage plus a health FSA which offers
similar benefits. Given a choice, some
plan sponsors may choose to increase the
affordability of their primary coverage
rather than offer limited wraparound cov-
erage. Some plan sponsors may not have
that choice: the employers may not be in a
financial position to make their primary
health plans affordable to more workers,
let alone contribute to wraparound cover-
age. Employers may also continue to sim-
ply not provide employees with afford-
able, minimum value coverage, allowing
their workers to purchase coverage and
potentially qualify for premium tax credits
in the Marketplace with no additional
wraparound benefit, and these employers
would continue to pay any shared respon-
sibility payments as applicable, resulting
in no additional cost to the employer or
the Federal government.

This proposed regulation would not en-
cumber any currently existing means by
which employers can provide comprehen-
sive health insurance coverage to their
employees in compliance with the Afford-
able Care Act. Rather, it would clarify two
additional, alternative means of doing so.
In light of this, the Departments invite
comment on to what degree, if any, might
this regulation increase employers' pro-
pensity to provide health insurance. Exist-
ing rules against discrimination in favor of
highly compensated employees would
limit employer's decisions. The Depart-
ments invite comment on to what extent,
if any, this proposed regulation could af-
fect plan sponsors' decision making. Em-
ployers' (and their employees') economic
incentive, if any, to pursue a program of
wrap coverage will depend importantly on
the demographics of each employer's
work force - that is, the distribution of
their employees by part-time, seasonal,
and temporary employment status, and by
pay and income. In light of this, the De-
partments invite comment on whether
there are particular sectors of the economy
in which employers will be more or less
inclined to pursue wraparound coverage
programs.

The Departments seek comment on the
other effects of the proposal. Specifically,
the Departments request detailed data that
would inform the following questions:
What will be the impact of limiting the
cost of the wraparound coverage to $2,500
per employee (and any covered depen-
dents)? How many employers offer cov-
erage that provides minimum value and is
affordable for a substantial portion (under
the first option) or 95 percent (under the
second option) of employees who are el-
igible for coverage? To what extent would
premiums for comprehensive health cov-
erage change in the presence and absence
of this rule?

C. Paperwork Reduction Act - Depart-
ment of Labor and Department of the
Treasury

The proposed rule is not subject to the
requirements of the Paperwork Reduction
Act of 1995 (PRA 95) (44 U.S.C. section
3501 et seq.), because it does not contain

a collection of information as defined in
44 U.S.C. section 3502(3).

D. Paperwork Reduction Act - Depart-
ment of HHS

The proposed rule is not subject to the
requirements of the Paperwork Reduction
Act of 1995 (PRA 95) (44 U.S.C. section
3501 et seq.), because it does not contain
a collection of information as defined in
44 U.S.C. section 3502(3). An analysis
under the PRA will be conducted for any
guidance establishing a collection of in-
formation related to the rule.

E. Regulatory Flexibility Act - Depart-
ments of Labor and HHS

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 that are likely to have a sig-
nificant economic impact on a substantial
number of small entities. Unless an
agency certifies that a proposed rule is not
likely to have a significant economic im-
pact on a substantial number of small en-
tities, section 603 of RFA requires that the
agency present an initial regulatory flexi-
bility analysis at the time of the publica-
tion of the notice of proposed rulemaking
describing the impact of the rule on small
entities and seeking public comment on
such impact. Small entities include small
businesses, organizations and governmen-
tal jurisdictions.

For purposes of the RFA, the Depart-
ments continue to consider a "small en-
tity" to be an employee benefit plan with
fewer than 100 participants. The basis for
this definition is found in section
104(a)(2) of the act, which permits the
Secretary of Labor to prescribe simplified
annual reports for pension plans that cover
fewer than 100 participants. Pursuant to
the authority of section 104(a)(3), the De-
partment has previously issued at 29 CFR
2520.104-20, 2520.104-21, 2520.104-
41, 2520.104-46 and 2520.104b-10 cer-
tain simplified reporting provisions and
limited exemptions from reporting and
disclosure requirements for small plans,
including unfunded or insured welfare

39The substantial level was proposed to help minimize the implications for the primary plan's risk pool by preventing a large number of low-wage workers from leaving the primary plan
for Marketplace coverage.

plans covering fewer than 100 participants
and satisfying certain other requirements.

Further, while some large employers
may have small plans, in general small
employers maintain most small plans.
Thus, the Departments believe that assess-
ing the impact of this proposed rule on
small plans is an appropriate substitute for
evaluating the effect on small entities. The
definition of small entity considered ap-
propriate for this purpose differs, how-
ever, from a definition of small business
that is based on size standards promul-
gated by the Small Business Administra-
tion (13 CFR 121.201) pursuant to the
Small Business Act (15 U.S.C. 631 et
seq.). The Departments therefore request
comments on the appropriateness of the
size standard used in evaluating the im-
pact of this proposed rule on small enti-
ties.

Because the proposed rule would im-
pose no additional costs on employers or
plans, the Departments believe that it
would not have a significant economic
impact on a substantial number of small
entities. Accordingly, pursuant to section
605(b) of the RFA, the Departments
hereby certify that the proposed rule, if
promulgated, would not have a significant
economic impact on a substantial number
of small entities.

F. Special Analyses - Department of
the Treasury

For purposes of the Department of the
Treasury it has been determined that this
notice of proposed rulemaking is not a
significant regulatory action as defined in
Executive Order 12866, as supplemented
by Executive Order 13563. Therefore, a
regulatory assessment is not required. It
has also been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply to
these proposed regulations, and, because
these proposed regulations do not impose
a collection of information on small enti-
ties, an analysis under the RFA is not
required. Pursuant to section 7805(f) of
the Code, this notice of proposed rulemak-
ing has been submitted to the Small Busi-
ness Administration for comment on its
impact on small business.

###### G. Unfunded Mandates Reform Act

For purposes of the Unfunded Man-
dates Reform Act of 1995 (2 U.S.C. 1501
et seq.), as well as Executive Order 12875,

these proposed rules do not include any
federal mandate that may result in expen-
ditures by State, local, or tribal govern-
ments, or the private sector, which may
impose an annual burden of $100 million
adjusted for inflation since 1995.

###### H. Federalism

Executive Order 13132 outlines funda-
mental principles of federalism. It requires
adherence to specific criteria by federal
agencies in formulating and implementing
policies that have "substantial direct ef-
fects" on the states, the relationship be-
tween the national government and states,
or on the distribution of power and re-
sponsibilities among the various levels of
government. Federal agencies promulgat-
ing regulations that have these federalism
implications must consult with state and
local officials, and describe the extent of
their consultation and the nature of the
concerns of state and local officials in the
preamble to the final regulation.

In the Departments' view, the proposed
regulations, by clarifying policy regarding
certain expected benefits options that can
be designed by employers to support their
employees, would provide more certainty
to employers and others in the regulated
community as well as states and political
subdivisions regarding the treatment of
such arrangements under ERISA. Accord-
ingly, the Departments will affirmatively
engage in outreach with officials of state
and political subdivisions regarding the
proposed rule and seek their input on the
proposed rules and any federalism impli-
cations that they believe may be presented
by it.

###### I. Congressional Review Act

This proposed rule is subject to the
Congressional Review Act provisions of
the Small Business Regulatory Enforce-
ment Fairness Act of 1996 (5 U.S.C. 801
et seq.), which specifies that, before a rule
can take effect, the Federal agency pro-
mulgating 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.

#### IV. Statutory Authority

The Department of the Treasury regu-
lations are proposed to be adopted pursu-

ant to the authority contained in sections
7805 and 9833 of the Code.

The Department of Labor regulations
are proposed to be adopted pursuant to the
authority contained in 29 U.S.C. 1027,
1059, 1135, 1161-1168, 1169, 1181-
1183, 1181 note, 1185, 1185a, 1185b,
1191, 1191a, 1191b, and 1191c; sec.
101(g), Public Law 104-191, 110 Stat.
1936; sec. 401(b), Public Law 105-200,
112 Stat. 645 (42 U.S.C. 651 note); sec.
512(d), Public Law 110-343, 122 Stat.
3765; Public Law 110-460, 122 Stat.
5123; Secretary of Labor's Order 1-2011,
77 FR 1088 (January 9, 2012).

The Department of Health and Human
Services regulations are proposed to be
adopted pursuant to the authority con-
tained in sections 2701 through 2763,
2791, and 2792 of the PHS Act (42 U.S.C.
300gg through 300gg-63, 300gg-91, and
300gg-92), as amended.

* * * * *

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

Signed this 17th day of December,
2014.

Signed this 18th day of December,
2014.

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

Dated: December 17, 2014

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

DEPARTMENT OF THE
TREASURY

Internal Revenue Service
26 CFR Chapter I

Accordingly, 26 CFR part 54 is pro-
posed to be amended as follows:

Paragraph 1. The authority citation for
part 54 continues to read in part as fol-
lows:

Authority: Authority: 26 U.S.C. 7805.
* * *

Section 54.9831-1 also issued under
26 U.S.C. 9833.

Paragraph 2. Section 54.9831-1 is
amended by adding paragraph (c)(3)(vii)
to read as follows:

§ 54.9831-1 Special rules relating to
group health plans.

* * * * *

(3) * * *

(vii) Limited wraparound coverage.
Limited benefits provided through a group
health plan that wrap around either "eligi-
ble individual health insurance" or cover-
age under a Multi-State Plan (limited
wraparound coverage) are excepted bene-
fits if all of the following conditions are
satisfied. For this purpose, "eligible indi-
vidual health insurance" is individual
health insurance coverage that is not a
grandfathered health plan (as described in
section 1251 of the Patient Protection and
Affordable Care Act and § 54.9815-
1251), not a transitional individual health
insurance market plan (as described in the
March 5, 2014 Insurance Standards Bul-
letin Series - Extension of Transitional
Policy through October 1, 2016), and does
not consist solely of excepted benefits (as
defined in paragraph (c) of this section).

(A) Covers additional benefits. The
limited wraparound coverage provides
meaningful benefits beyond coverage of
cost sharing under either the eligible indi-
vidual health insurance or Multi-State
Plan coverage. The wraparound coverage
must not provide benefits only under a
coordination-of-benefits provision and must
not merely be an account-based reim-
bursement arrangement.

(B) Limited in amount. The annual cost
of coverage per employee (and any cov-
ered dependents) under the limited wrap-
around coverage does not exceed the max-
imum annual salary reduction contributions
toward health flexible spending arrange-
ments, which is $2,500 for 2014, indexed
in the manner prescribed under section
125(i)(2). For this purpose, the cost of
coverage includes both employer and em-
ployee contributions towards coverage

and is determined in the same manner as
the applicable premium is calculated un-
der a COBRA continuation provision.

(1) No preexisting condition exclusion.
The limited wraparound coverage does
not impose any preexisting condition ex-
clusion, consistent with the requirements
of section 2704 of the PHS Act (incorpo-
rated by reference into section 9815) and
29 CFR 2590.715-2704.

(2) No discrimination based on health
status. The limited wraparound coverage
does not discriminate against individuals
in eligibility, benefits, or premiums based
on any health factor of an individual (or
any dependent of the individual), consis-
tent with the requirements of section 9802
and § 54.9802-1, and section 2705 of the
PHS Act (incorporated by reference into
section 9815) and § 54.9815-2705.

(3) No discrimination in favor of highly
compensated individuals. Neither the lim-
ited wraparound coverage, nor any other
group health plan coverage offered by the
plan sponsor, fails to comply with section
2716 of the PHS Act (incorporated by
reference into section 9815) or fails to be
excludible from income for any individual
due to the application of section 105(h)
(as applicable).

(D) Plan eligibility requirements. Indi-
viduals eligible for the wraparound cover-
age are not enrolled in excepted benefit
coverage under paragraph (c)(3)(v) of this
section (relating to health FSAs). In addi-
tion, the conditions set forth in either para-
graph (c)(3)(vii)(D)(1) or (2) of this sec-
tion are met.

(1) Limited wraparound coverage of-
fered in conjunction with individual insur-
ance for persons who are not full-time
employees. Wraparound benefits offered
in conjunction with eligible individual
health insurance satisfies all of the follow-
ing requirements-

(i) For each year for which wraparound
coverage is offered, the employer that is
the sponsor of the plan offering wrap-
around coverage, or the employer partici-
pating in a plan offering wraparound cov-
erage, offers to its full-time employees
coverage that is substantially similar to
coverage that the employer would need to
offer to its full-time employees in order

not to be subject to a potential assessable
payment under the employer shared re-
sponsibility provisions of section 4980H(a),
if such provisions were applicable; pro-
vides minimum value (as defined in sec-
tion 36B(c)(2)(C)(ii)); and is reasonably
expected to be affordable (applying the
safe harbor rules for determining afford-
ability set forth in 54.4980H-5(e)(2)). If a
plan or issuer providing limited wrap-
around coverage takes reasonable steps to
ensure that employers disclose to the plan
or issuer necessary information regarding
their coverage offered and affordability
information, the plan or issuer is permitted
to rely on reasonable representations by
employers regarding this information, un-
less the plan or issuer has specific knowl-
edge to the contrary.

(ii) Eligibility for the wraparound cov-
erage is limited to employees who are not
full-time employees (and their depen-
dents), or who are retirees (and their de-
pendents). For this purpose, full-time em-
ployees are employees who are
reasonably expected to work at least an
average of 30 hours per week.

(iii) Other group health plan coverage,
not limited to excepted benefits, is offered
to the individuals eligible for the wrap-
around coverage. Only individuals eligi-
ble for the other group health plan cover-
age are eligible for the wraparound
coverage.

(2) Limited wraparound coverage of-
fered in conjunction with Multi-State Plan
coverage. Limited wraparound coverage
offered in conjunction with Multi-State
Plan coverage satisfies all of the condi-
tions of this paragraph (c)(3)(vii)(D)(2).
For this purpose, the term "full-time em-
ployee" means a "full-time employee"
as defined in § 54.4980H-1(a)(21) who
is not in a limited non-assessment pe-
riod for certain employees (as defined in
§ 54.4980H-1(a)(26)). Moreover, if a
plan or issuer providing limited wrap-
around coverage takes reasonable steps to
ensure that employers disclose to the plan
or issuer necessary information regarding
their coverage offered and contribution
levels for 2014 and for any year in which
limited wraparound coverage is offered,
the plan or issuer is permitted to rely on
reasonable representations by employers
regarding this information, unless the plan
or issuer has specific knowledge to the

contrary. Consistent with the reporting
and evaluation criteria of paragraph
(c)(3)(vii)(E) of this section, the Office of
Personnel Management may verify that
plans and issuers have reasonable mecha-
nisms in place to ensure that contributing
employers meet these standards.

(i) The limited wraparound coverage is
specifically designed, and approved by the
Office of Personnel Management, consis-
tent with the reporting and evaluation cri-
teria of paragraph (c)(3)(vii)(E) of this
section, to provide benefits in conjunction
with coverage under a Multi-State Plan
authorized under section 1334 of the Pa-
tient Protection and Affordable Care Act.
The Office of Personnel Management may
revoke approval if it determines that con-
tinued approval is inconsistent with the
reporting and evaluation criteria of para-
graph (c)(3)(vii)(E) of this section.

(ii) The employer has offered coverage
in the plan year that begins in 2014 that is
substantially similar to coverage that the
employer would need to have offered to
its full-time employees in order to not be
subject to an assessable payment under
the employer shared responsibility provi-
sions of section 4980H(a), if such provi-
sions had been applicable.

(iii) In the plan year that begins in
2014, the employer has offered coverage
to a substantial portion of full-time em-
ployees that provided minimum value (as
defined in section 36B(c)(2)(C)(ii)) and
was affordable (applying the safe harbor
rules for determining affordability set
forth in § 54.4980H-5(e)(2)).

(iv) For the duration of the pilot pro-
gram, as described in paragraph
(c)(3)(vii)(F) of this section, the employ-
er's annual aggregate contributions for
both primary and wraparound coverage
are substantially the same as the employ-
er's total contributions for coverage of-
fered to full-time employees in 2014.

(E) Reporting - (1) Reporting by group
health plans and group health insurance
issuers. A self-insured plan, or a health
insurance issuer, offering or proposing to
offer Multi-State Plan wraparound coverage
pursuant to paragraph (c)(3)(vii)(D)(2) of
this section reports to the Office of Person-
nel Management (OPM), in a form and
manner specified in guidance, information
OPM reasonably requires to determine
whether the plan or issuer qualifies to offer

such coverage or complies with the applica-
ble requirements of this section.

(2) Reporting by group health plan
sponsors. The plan sponsor of a group
health plan offering wraparound coverage
under paragraph (c)(3)(vii) of this section,
must report to the Department of Health
and Human Services (HHS), in a form and
manner specified in guidance, information
HHS reasonably requires.

(F) Pilot program with sunset-The
provisions of paragraph (c)(3)(vii) of this
section apply to limited wraparound cov-
erage that is first offered no later than
December 31, 2017 and that ends on the
later of:

(1) The date that is three years after
the date wraparound coverage is first
offered; or

(2) The date on which the last collec-
tive bargaining agreement relating to the
plan terminates after the date wraparound
coverage is first offered (determined with-
out regard to any extension agreed to after
the date wraparound coverage is first of-
fered).

* * * * *

Dated: December 17, 2014

Marilyn Tavenner,
Administrator, Centers for
Medicare & Medicaid Services.

(Filed by the Office of the Federal Register on December 19,
2014, 11:15 a.m., and published in the issue of the Federal
Register on December 23, 2014, 79 F.R. 76931)

Notice of Proposed
Rulemaking
Summary of Benefits and
Coverage and Uniform
Glossary

REG-145878-14

AGENCIES:

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains
proposed regulations regarding the sum-
mary of benefits and coverage (SBC) and
the uniform glossary for group health
plans and health insurance coverage in the
group and individual markets under the
Patient Protection and Affordable Care
Act. It proposes changes to the regulations
that implement the disclosure require-
ments under section 2715 of the Public
Health Service Act to help plans and in-
dividuals better understand their health
coverage, as well as to gain a better un-
derstanding of other coverage options for
comparison. It proposes changes to docu-
ments required for compliance with sec-
tion 2715 of the Public Health Service
Act, including a template for the SBC,
instructions, sample language, a guide for
coverage example calculations, and the
uniform glossary.

DATES:

Comment date. Comments are due on
or before March 2, 2015.

ADDRESSES: Written comments on
these proposed regulations and documents
required for compliance (including the
template, instructions, sample language,
guide for coverage example calculations,
and the uniform glossary) may be submit-
ted to the Department of Labor as speci-
fied below. Any comment that is submit-
ted will be shared with the Department of
Health and Human Services and the De-
partment of the Treasury, and will also be
made available to the public. WARNING:
Do not include any personally identifiable
information (such as name, address, or
other contact information) or confidential
business information that you do not want
publicly disclosed. All comments are
posted on the Internet exactly as received,
and can be retrieved by most Internet
search engines. No deletions, modifica-
tions, or redactions will be made to the
comments received, as they are public re-
cords. Comments may be submitted
anonymously.

Comments, identified by "Summary of
Benefits and Coverage," may be submit-
ted by one of the following methods:

· Federal eRulemaking Portal: http://
www.regulations.gov. Follow the in-
structions for submitting comments.

. Mail or Hand Delivery: Office of
Health Plan Standards and Compli-
ance Assistance, Employee Benefits
Security Administration, Room N-5653,
U.S. Department of Labor, 200 Con-
stitution Avenue NW, Washington,
DC 20210, Attention: Summary of
Benefits and Coverage.

Comments received will be posted
without change to http://www.regula-
tions.gov, and available for public inspec-
tion at the Public Disclosure Room,
N-1513, Employee Benefits Security Ad-
ministration, 200 Constitution Avenue,
NW, Washington, DC 20210, including
any personal information provided.

### FOR FURTHER INFORMATION

CONTACT: Amy Turner or Beth Baum,
Employee Benefits Security Administra-
tion, Department of Labor, at (202) 693-
8335; Karen Levin, Internal Revenue Ser-
vice, Department of the Treasury, at (202)
622-6080; Heather Raeburn or Tricia
Beckmann, Centers for Medicare & Med-
icaid Services, Department of Health and
Human Services, at (301) 492-4224 or
(301) 492-4328.

### CUSTOMER SERVICE INFORMATION:

Individuals interested in obtaining in-
formation from the Department of Labor
concerning employment-based health
coverage laws may call the EBSA Toll-
Free Hotline at 1-866-444-EBSA (3272)
or visit the Department of Labor's website
(http://www.dol.gov/ebsa). In addition, in-
formation from HHS on private health
insurance for consumers can be found on
CMS's website (www.cms.gov/cciio) and
information on health reform can be found
at http://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, Pub. L.
111-152, was enacted on March 30, 2010
(these are collectively known as the “Af-
fordable Care Act"). The Affordable Care
Act reorganizes, amends, and adds to the
provisions of part A of title XXVII of the
Public Health Service Act (PHS Act) re-
lating to group health plans and health
insurance issuers in the group and individ-
ual markets. The term "group health plan"
includes both insured and self-insured
group health plans.40 The Affordable Care
Act adds section 715(a)(1) to the Em-
ployee Retirement Income Security Act
(ERISA) and section 9815(a)(1) to the
Internal Revenue Code (the Code) to in-
corporate 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
issuers providing health insurance cover-
age in connection with group health plans.
The PHS Act sections incorporated by this
reference are sections 2701 through 2728.

Section 2715 of the PHS Act, added by
the Affordable Care Act, directs the De-
partments of Labor, Health and Human
Services (HHS), and the Treasury (the
Departments) to develop standards for use
by a group health plan and a health insur-
ance issuer offering group or individual
health insurance coverage in compiling
and providing a summary of benefits and
coverage (SBC) that "accurately describes
the benefits and coverage under the appli-
cable plan or coverage." PHS Act section
2715 also calls for the "development of
standards for the definitions of terms used
in health insurance coverage."

In accordance with the statute, the De-
partments, in developing such standards,

consulted with the National Association
of Insurance Commissioners (referred to
in this document as the "NAIC") through
a "working group composed of represen-
tatives of health insurance-related con-
sumer advocacy organizations, health in-
surance issuers, health care professionals,
patient advocates including those repre-
senting individuals with limited English
proficiency, and other qualified individu-
als."41 On July 29, 2011, the NAIC pro-
vided its final recommendations to the De-
partments regarding the SBC. On August
22, 2011, the Departments published in
the Federal Register proposed regula-
tions (2011 proposed regulations) and
an accompanying document with tem-
plates, instructions, and related materi-
als for implementing the disclosure pro-
visions under PHS Act section 2715.42
After consideration of all the comments
received on the 2011 proposed regula-
tions and accompanying documents, the
Departments published joint final regu-
lations to implement the disclosure re-
quirements under PHS Act section 2715
on February 14, 2012 (2012 final regu-
lations) and an accompanying document
soliciting comments on templates, in-
structions, and related materials.43 The
2012 final regulations implemented
standards for use by a group health plan
and a health insurance issuer offering
group or individual health insurance
coverage in compiling and providing an
SBC that "accurately describes the ben-
efits and coverage under the applicable
plan or coverage" pursuant to PHS Act
section 2715.

After the 2012 final regulations were
published, the Departments released Fre-
quently Asked Question (FAQs) regard-
ing implementation of the SBC provisions
as part of six issuances. The Departments
released Affordable Care Act Implemen-
tation FAQs Parts VII, VIII, IX, X, XIV,
and XIX to answer outstanding questions,

40The 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.

41 The NAIC convened a working group (NAIC working group) comprised of a diverse group of stakeholders. This working group met frequently for over one year while developing its
recommendations. In developing its recommendations, the NAIC considered the results of various consumer testing sponsored by both insurance industry and consumer associations.
Throughout the process, NAIC working group draft documents and meeting notes were displayed on the NAIC's website for public review, and several interested parties filed formal
comments. In addition to participation from the NAIC working group members, conference calls and in-person meetings were open to other interested parties and individuals and provided
an opportunity for non-member feedback. See www.naic.org/committees_b_consumer_information.htm.

42See proposed regulations, published at 76 FR 52442 (August 22, 2011) and guidance document published at 76 FR 52475 (August 22, 2011).

43See final regulations, published at 77 FR 8668 (February 14, 2012) and guidance document published at 77 FR 8706 (February 14, 2012).

including questions related to the SBC.44
These FAQs addressed questions related
to compliance with the requirements of
the 2012 final regulations, implemented
additional safe harbors,45 and released up-
dated SBC materials.

The Departments are issuing these pro-
posed regulations, as well as a new set of
proposed SBC templates, instructions, an
updated uniform glossary, and other ma-
terials to incorporate some of the feedback
the Departments have received and to
make some improvements to the template.
This will provide guidance necessary to
plans and issuers as they continue to issue
SBCs, and will improve the SBC for em-
ployers, participants and beneficiaries,
and individuals and dependents for use as
a tool in making important decisions re-
garding their health coverage. These mod-
ifications clarify when and how a plan or
issuer must provide an SBC, and stream-
line and shorten the SBC template while
also adding certain additional elements
that the Departments believe will be use-
ful to consumers. The draft updated tem-
plate, instructions, and supplementary ma-
terials are available at http://cciio.cms.gov
and http://www.dol.gov/ebsa/healthreform/
regulations/summaryofbenefits.html. The
Departments invite comments on all of the
documents. Comments should be submitted
as described above.

### II. Overview of the Proposed Regulations

A. Requirement to Provide a Summary
of Benefits and Coverage

1\. Providing the SBC

Paragraph (a) of the 2012 final regula-
tions implements the general disclosure
requirement and sets forth the standards
for who is required to provide an SBC, to
whom, and when. PHS Act section 2715

generally requires that an SBC be pro-
vided to applicants, enrollees, and policy-
holders or certificate holders, at specified
times. PHS Act section 2715(d)(3) places
the responsibility to provide an SBC on
"(A) a health insurance issuer (including a
group health plan that is not a self-insured
plan) offering health insurance coverage
within the United States; or (B) in the case
of a self-insured group health plan, the
plan sponsor or designated administrator
of the plan (as such terms are defined in
section 3(16) of ERISA)."46 Accordingly,
the 2012 final regulations interpret PHS
Act section 2715 to apply to both group
health plans and health insurance issuers
offering group or individual health insur-
ance coverage. In addition, consistent
with the statute, the 2012 final regulations
hold the plan administrator of a group
health plan responsible for providing an
SBC. Under the 2012 final regulations, the
SBC must be provided in writing and free
of charge.

There are three general scenarios under
which an SBC will be provided. An SBC
will be provided: (1) by a group health
insurance issuer to a group health plan; (2)
by a group health insurance issuer or a
group health plan to participants and ben-
eficiaries; and (3) by a health insurance
issuer to individuals and dependents in the
individual market.

The 2012 final regulations specify
timeframes according to which the SBC
must be provided. After the 2012 regula-
tions were published, the Departments
were asked to clarify the meaning of the
term "provided." As the Departments
stated in Affordable Care Act Implemen-
tation FAQs Part VIII, question 7, for
purposes of providing an SBC in the con-
text of these regulations, the term "pro-
vided" means sent. Accordingly, the SBC
is timely if it is sent within seven business

days, even if is not received until after that
period.47

a. Provision of the SBC by an Issuer to
a Plan

Paragraph (a)(1)(i) of the 2012 final
regulations requires a health insurance is-
suer offering group health insurance cov-
erage to provide an SBC to a group health
plan (or its sponsor) upon an application
by the plan for health coverage. The issuer
must provide the SBC as soon as practi-
cable following receipt of the application,
but in no event later than seven business
days following receipt of the application.
These proposed regulations would clarify
when the health insurance issuer offering
group health insurance coverage (or plan,
if applicable, under paragraph (a)(1)(ii))
must provide the SBC again if the issuer
already provided the SBC before applica-
tion to any entity or individual. If the
issuer provides the SBC before applica-
tion for coverage pursuant to paragraph
(a)(1)(i)(D) of the regulations (relating to
SBCs upon request), the requirement to
provide an SBC upon application is
deemed satisfied and such issuer is not
required to automatically provide another
SBC upon application to the same entity
or individual, provided there is no change
to the information required to be in the
SBC. However, if there has been a change
in the information required, a new SBC
that includes the correct information must
be provided upon application (that is, as
soon as practicable following receipt of
the application, but in no event later than
seven business days following receipt of
the application).

Under the 2012 final regulations and
these proposed regulations, if there is any
change in the information required to be
in the SBC that was provided upon appli-
cation and before the first day of coverage,
the issuer must update and provide a cur-

44See Affordable Care Act Implementation FAQs Part VII (available at www.dol.gov/ebsa/faqs/faq-aca7.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs7.html); Part VIII (available at www.dol.gov/ebsa/faqs/faq-aca8.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs8.html); Part IX (available at www.dol.gov/ebsa/faqs/faq-aca9.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs9.html); Part X (available at www.dol.gov/ebsa/faqs/faq-aca10.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs10.html); Part XIV (available at www.dol.gov/ebsa/faqs/faq-aca14.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs14.html); and Part XIX (available at www.dol.gov/ebsa/faqs/faq-aca19.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs19.html).

45Some of the enforcement safe harbors and transitions are proposed to be made permanent (several with modifications) by these proposed regulations. The Departments intend to use this
rulemaking to develop a permanent approach to those issues and, thereby, discontinue all temporary enforcement policies that were used as a bridge to a permanent rule.

46ERISA section 3(16) defines an administrator as: (i) the person specifically designated by the terms of the instrument under which the plan is operated; (ii) if an administrator is not so
designated, the plan sponsor; or (iii) in the case of a plan for which an administrator is not designated and plan sponsor cannot be identified, such other person as the Secretary of Labor
may by regulation prescribe.

47See Affordable Care Act Implementation FAQs Part VIII, question 7, available at www.dol.gov/ebsa/faqs/faq-aca8.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs8.html.

rent SBC to the plan (or its sponsor) no
later than the first day of coverage. If the
information is unchanged, the issuer does
not need to provide the SBC again in
connection with coverage for that plan
year, except upon request. These proposed
rules would provide clarification with re-
spect to how to satisfy the requirement to
provide an SBC when the terms of cover-
age are not finalized. If the plan sponsor is
negotiating coverage terms after an appli-
cation has been filed and the information
required to be in the SBC changes, an
updated SBC is not required to be pro-
vided to the plan (or its sponsor) (unless
an updated SBC is requested) until the
first day of coverage. The updated SBC
should reflect the final coverage terms un-
der the contract, certificate, or policy of
insurance that was purchased.

b. Provision of the SBC by a Plan or
Issuer to Participants and Beneficiaries

Under paragraph (a)(1)(ii) of the 2012
final regulations, a group health plan (in-
cluding the plan administrator), and a
health insurance issuer offering group
health insurance coverage, must provide
an SBC to a participant or beneficiary48
with respect to each benefit package of-
fered by the plan or issuer for which the
participant or beneficiary is eligible.49
This includes individuals who are quali-
fied beneficiaries under the Consolidated
Omnibus Reconciliation Act of 1985
(COBRA).50 In Affordable Care Act Im-
plementation FAQs Part VIII, question 8,
the Departments clarified that while a
qualifying event does not, itself, trigger a
requirement to provide an SBC, during an
open enrollment period, any COBRA
qualified beneficiary who is receiving CO-
BRA coverage must be given the same
rights to elect different coverage as are
provided to similarly situated non-
COBRA beneficiaries.51 In this situation,

a COBRA qualified beneficiary who has
elected coverage must be provided an
SBC just as a similarly situated non-
COBRA beneficiary must be provided
with one. There are also limited situations
in which a COBRA qualified beneficiary
may need to be offered different coverage
at the time of the qualifying event than the
coverage he or she was receiving before
the qualifying event and this may trigger a
requirement to provide an SBC.52

If a plan or issuer distributes any writ-
ten application materials for enrollment,
including any forms or requests for infor-
mation (in paper form or through a web-
site or email) that must be completed for
enrollment, the plan or issuer must pro-
vide the SBC as part of those materials. If
the plan or issuer does not distribute writ-
ten application materials for enrollment
(in either paper or electronic form), the
SBC must be provided no later than the
first date on which the participant is eligi-
ble to enroll in coverage for the partici-
pant or any beneficiaries. If there is any
change to the information required to be
in the SBC that was provided upon appli-
cation for coverage and before the first
day of coverage, the plan or issuer must
update and provide a current SBC to a
participant or beneficiary no later than the
first day of coverage.

These proposed rules would clarify
when a plan or issuer must provide the
SBC again if the plan or issuer already
provided the SBC prior to application. If
the plan or issuer provides the SBC prior
to application for coverage, the plan or
issuer is not required to automatically pro-
vide another SBC upon application, if
there is no change to the information re-
quired to be in the SBC. If there is any
change to the information required to be
in the SBC by the time the application is
filed, the plan or issuer must update and

provide a current SBC as soon as practi-
cable following receipt of the application,
but in no event later than seven business
days following receipt of the application.

These proposed rules also would pro-
vide clarification with respect to how to
satisfy the requirement to provide an SBC
when the terms of coverage are not final-
ized. If the plan sponsor is negotiating
coverage terms after an application has
been filed and the information required to
be in the SBC changes, the plan or issuer
is not required to provide an updated SBC
(unless an updated SBC is requested) until
the first day of coverage. The updated
SBC should reflect the final coverage
terms under the contract, certificate, or
policy of insurance that was purchased.

Under the 2012 final regulations, the
plan or issuer must also provide the SBC
to individuals enrolling through a special
enrollment period, also called special en-
rollees.53 Special enrollees must be pro-
vided the SBC no later than when a sum-
mary plan description is required to be
provided under the timeframe set forth in
ERISA section 104(b)(1)(A) and its im-
plementing regulations, which is 90 days
from enrollment. To the extent individuals
who are eligible for special enrollment
and are contemplating their coverage op-
tions would like to receive SBCs earlier,
they may always request an SBC with
respect to any particular plan, policy, or
benefit package and the SBC is required to
be provided as soon as practicable, but in
no event later than seven business days
following receipt of the request (as dis-
cussed more fully below).

c. Provision of the SBC Upon Request
in Group Health Coverage

A health insurance issuer offering
group health insurance coverage must
provide the SBC to a group health plan or
its sponsor (and a plan or issuer must

48ERISA section 3(7) defines a participant as: any employee or former employee of an employer, or any member or former member of an employee organization, who is or may become
eligible to receive a benefit of any type from an employee benefit plan which covers employees of such employers or members of such organization, or whose beneficiaries may be eligible
to receive any such benefit. ERISA section 3(8) defines a beneficiary as: a person designated by a participant, or by the terms of an employee benefit plan, who is or may become entitled
to a benefit thereunder.

49 With respect to insured group health plan coverage, PHS Act section 2715 generally places the obligation to provide an SBC on both a plan and issuer. As discussed below, under section
III.A.1.d., "Special Rules to Prevent Unnecessary Duplication with Respect to Group Health Coverage", if either the issuer or the plan provides the SBC, both will have satisfied their
obligations. As they do with other notices required of both plans and issuers under Part 7 of ERISA, Title XXVII of the PHS Act, and Chapter 100 of the Code, the Departments expect
plans and issuers to make contractual arrangements for sending SBCs. Accordingly, the remainder of this preamble generally refers to requirements for plans or issuers.

50See Affordable Care Act Implementation FAQs Part VIII, question 7, available at www.dol.gov/ebsa/faqs/faq-aca8.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs8.html.

51See 26 CFR 54.4980B-5, Q&A-4(c) (requirement to provide election) and 54.4980B-3, Q&A-3 (definition of similarly situated non-COBRA beneficiary).

52See 26 CFR 54.4980B-5, Q&A-4(b).

53Regulations regarding special enrollment are available at 26 CFR 54.9801-6, 29 CFR 2590.701-6, and 45 CFR 146.117.

provide the SBC to a participant or bene-
ficiary) upon request for an SBC or sum-
mary information about the health cover-
age, as soon as practicable, but in no event
later than seven business days following
receipt of the request. The SBC must be
provided upon request to participants,
beneficiaries, and plans (or plan spon-
sors), including prior to submitting an ap-
plication for coverage, because the SBC
provides information that not only helps
consumers and employers understand
their coverage, but also helps consumers
and employers compare coverage options
prior to selecting coverage. Health insur-
ance issuers offering individual market
coverage must also provide the SBC to
individuals upon request, according to the
same timeframe, to allow consumers the
same ability to compare coverage options
in the individual market as the group mar-
ket.

Since the issuance of the 2012 final
regulations, the Departments have contin-
ued to receive questions about providing
SBCs upon request, including whether is-
suers are required to provide SBCs to
plans or their sponsors who are "shop-
ping" for coverage from different issuers
but have not yet submitted an application
for coverage. In Affordable Care Act Im-
plementation FAQs Part IX, question 4,
the Departments reiterated that an SBC
must be provided upon request for an SBC
or "summary information about a health
insurance product." The latter phrase is
intended to ensure that persons who do
not ask exactly for a "summary of benefits
and coverage" still receive one when they
explicitly ask for a summary document
with respect to a specific health coverage
product.54 The FAQ also referred to other
guidance outlining the circumstances in
which an SBC may be provided electron-
ically, to assist in reducing the burden of
providing multiple SBCs in paper form
when requested. Additional information
on electronic disclosure of SBCs is dis-
cussed later in this preamble.

d. Special Rules to Prevent Unneces-
sary Duplication with Respect to Group
Health Coverage

Paragraph (a)(1)(iii) of the 2012 final
regulations includes three special rules to
streamline provision of the SBC and avoid
unnecessary duplication with respect to
group health coverage. The first provides
that the requirement to provide an SBC
generally will be considered satisfied for
all applicable entities if it is provided by
any entity, so long as all timing and con-
tent requirements are satisfied. The second
provides that a single SBC may be pro-
vided to a participant and any beneficia-
ries at the participant's last known ad-
dress. However, if a beneficiary's last
known address is different than the partic-
ipant's last known address, a separate
SBC is required to be provided to the
beneficiary at the beneficiary's last known
address. Third, the 2012 final regulations
provide that SBCs are not required to be
provided automatically upon renewal for
each benefit package option in group
health plans that offer multiple benefit
packages. Rather, a plan or issuer is re-
quired to provide an SBC automatically
upon renewal or reissuance only with re-
spect to the benefit package in which a
participant or beneficiary is enrolled. In
cases in which an issuer will automati-
cally re-enroll participants and beneficia-
ries, these proposed rules propose to add
that a new SBC is required to be provided
with respect to the plan or product in
which a participant or beneficiary will be
automatically enrolled in accordance with
the same timing requirements that apply
to a renewal or reissuance. Consistent
with the 2012 final regulations, if a par-
ticipant or beneficiary requests an SBC
with respect to one or more other benefit
packages for which he or she is eligible,
that requested SBC or SBCs must be pro-
vided as soon as practicable, but in no
event later than seven business days fol-
lowing the receipt of the request.

In addition to retaining these three ex-
isting special rules, these proposed regu-
lations would add an additional provision

to ensure participants receive information
while preventing unnecessary duplication.
This would address circumstances where
an entity required to provide an SBC with
respect to an individual has entered into a
binding contract with another party to pro-
vide the SBC to the individual. In such a
case, the proposed regulations state that
the entity would be considered to satisfy
the requirement to provide the SBC with
respect to the individual if specified con-
ditions are met:

(1) The entity monitors performance
under the contract;55

(2) If the entity has knowledge that the
SBC is not being provided in a manner
that satisfies the requirements of this sec-
tion and the entity has all information
necessary to correct the noncompliance,
the entity corrects the noncompliance as
soon as practicable; and

(3) If the entity has knowledge the SBC
is not being provided in a manner that
satisfies the requirements of this section
and the entity does not have all informa-
tion necessary to correct the noncompli-
ance, the entity communicates with par-
ticipants and beneficiaries who are
affected by the noncompliance regarding
the noncompliance, and begins taking sig-
nificant steps as soon as practicable to
avoid future violations.

The proposed regulations would also
add a provision to prevent unnecessary
duplication with respect to a group health
plan that uses two or more insurance prod-
ucts provided by separate issuers to insure
benefits under the plan. The proposed reg-
ulations would place responsibility for
providing complete SBCs with respect to
the plan in such a case on the group health
plan administrator. This provision of the
proposed regulations states that the group
health plan administrator may contract
with one of its issuers (or other service
providers) to provide the SBC; however,
absent a contract to perform the function,
an issuer has no obligation to provide an
SBC containing information for benefits
that it does not insure.

54The FAQ stated that other general questions about coverage options or discussions about health products do not trigger the requirement to provide an SBC.

55The selection and monitoring of service providers for a group health plan, including parties assuming responsibility to complete, provide information for, or deliver SBCs, is a fiduciary
act subject to prudence and loyalty duties and prohibited transaction provisions of ERISA. No single fiduciary procedure will be appropriate in all cases; the procedure for selecting and
monitoring service providers may vary in accordance with the nature of the plan and other facts and circumstances relevant to the choice of the service provider. More general information
on hiring and monitoring service providers is contained in the Department of Labor publication "Understanding Your Fiduciary Responsibilities Under a Group Health Plan," which is
available on the Department's website at: www.dol.gov/ebsa/publications/ghpfiduciaryresponsibilities.html.

The Departments recognize that a plan
sponsor may purchase an insurance prod-
uct for certain coverage from a particular
issuer and purchase a separate insurance
product or self-insure with respect to other
coverage (such as outpatient prescription
drug coverage). In these circumstances,
the first issuer may or may not know of
the existence of other coverage, or
whether the plan sponsor has arranged the
two benefit packages as a single plan or
two separate plans. To address these ar-
rangements, these proposed rules propose
that, with respect to a group health plan
that uses two or more insurance products
provided by separate issuers, the group
health plan administrator is responsible
for providing complete SBCs with respect
to the plan. The group health plan admin-
istrator may contract with one of its issu-
ers (or other service providers) to perform
that function. Absent a contract to perform
the function, an issuer has no obligation to
provide coverage information for benefits
that it does not insure.

The Departments published an FAQ on
May 11, 201256 regarding the responsibil-
ity to provide an SBC in situations where
plans may have benefits provided by more
than one issuer. This FAQ provides an
enforcement safe harbor for a group
health plan that uses two or more insur-
ance products provided by separate issu-
ers with respect to a single group health
plan. Under this enforcement safe harbor,
the group health plan administrator may
synthesize the information into a single
SBC or provide multiple partial SBCs
that, together, provide all the relevant in-
formation to meet the SBC content re-
quirements. In such circumstances, the
plan administrator should take steps (such
as a cover letter or a notation on the SBCs
themselves) to indicate that the plan pro-
vides coverage using multiple insurance
products and that individuals may contact
the plan administrator for more informa-
tion (and provide the contact information).
The Departments extended this enforce-
ment safe harbor for one year on April 23,
2013,57 and indefinitely on May 2, 2014,58

and reiterate that the safe harbor continues
to apply. The Departments seek comment
on whether to codify this policy in the
regulation.

e. Provision of the SBC by an Issuer
Offering Individual Market Coverage

Paragraph (a)(1)(iv) of the HHS 2012
final regulations sets forth standards ap-
plicable to individual health insurance
coverage, under which the provision of
the SBC by an issuer offering individual
market coverage largely parallels the
group market requirements described
above, with only those changes necessary
to reflect the differences between the two
markets. The SBC must be provided upon
application. That is, a health insurance
issuer offering individual health insurance
coverage must provide an SBC to an in-
dividual or dependent upon receiving an
application for any health insurance pol-
icy, as soon as practicable following re-
ceipt of the application, but in no event
later than seven business days following
receipt of the application. If there is any
change in the information required to be
in the SBC that was provided upon appli-
cation and before the first day of coverage,
the issuer must update and provide a cur-
rent SBC to an individual or dependent no
later than the first day of coverage. These
proposed rules would clarify when the
issuer must provide the SBC again if the
issuer already provided the SBC prior to
application. If the issuer provides the SBC
prior to application for coverage, the is-
suer is not required to automatically pro-
vide another SBC upon application, if
there is no change to the information re-
quired to be in the SBC. If there is any
change to the information required to be
in the SBC that was provided prior to
application for coverage by the time the
application is filed, the issuer must update
and provide a current SBC to the same
individual or dependent as soon as practi-
cable following receipt of the application,
but in no event later than seven business
days following receipt of the application.
Under the 2012 final regulations, a health
insurance issuer offering individual health

insurance coverage must provide the SBC
to an individual or dependent upon re-
quest for the SBC or summary informa-
tion about the health insurance product, as
soon as practicable, but in no event later
than seven business days following re-
ceipt of the request.

These proposed rules would also ad-
dress situations where an issuer offering
individual market insurance coverage,
consistent with applicable Federal and
State law, automatically re-enrolls an in-
dividual and any dependents into a differ-
ent plan or product than the plan in which
these individuals were previously en-
rolled. If the issuer automatically re-
enrolls an individual covered under a pol-
icy, certificate, or contract of insurance
(including every dependent) into a policy,
certificate, or contract of insurance under
a different plan or product, HHS proposes
that the issuer would be required to pro-
vide an SBC with respect to the coverage
in which the individual (including every
dependent) will be enrolled, consistent
with the timing requirements that apply
when the policy is renewed or reissued.

f. Special Rules to Prevent Unneces-
sary Duplication With Respect to Individ-
ual Health Insurance Coverage

In paragraph (a)(1)(v) of the 2012 final
regulations, the Secretary of HHS states
that, if a single SBC is provided to an
individual and any dependents at the indi-
vidual's last known address, then the re-
quirement to provide the SBC to the indi-
vidual and any dependents is generally
satisfied. However, if a dependent's last
known address is different than the indi-
vidual's last known address, a separate
SBC is required to be provided to the
dependent at the dependent's last known
address.

Student health insurance coverage is a
type of individual health insurance cover-
age provided pursuant to a written agree-
ment between an institution of higher ed-
ucation and a health insurance issuer to
students enrolled in that institution of
higher education, and their dependents,

56See Affordable Care Act Implementation FAQs Part IX, question 10, available at http://www.dol.gov/ebsa/faqs/faq-aca9.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-
FAQs/aca_implementation_faqs9.html.

57 Affordable Care Act Implementation FAQs Set XIV, question 5, available at www.dol.gov/ebsa/faqs/faq-aca14.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs14.html.

58 Affordable Care Act FAQ Set XIX, question 8, available at www.dol.gov/ebsa/faqs/faq-aca19.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs19.html.

that meet certain specified conditions.59
These proposed rules propose to extend an
anti-duplication rule similar to that pro-
vided with respect to group health cover-
age to student health insurance coverage,
as defined in in 45 CFR 147.145(a). Spe-
cifically, HHS proposes that the require-
ment to provide an SBC with respect to an
individual will be considered satisfied for
an entity (such as an institution of higher
education) if another party (such as a
health insurance issuer) provides a timely
and complete SBC to the individual. The
Departments are also soliciting comments
on whether or not a requirement to mon-
itor the provisioning of the SBC in this
circumstance should be added.

2\. Content

PHS Act section 2715(b)(3) gener-
ally provides that the SBC must in-
clude:

a. Uniform definitions of standard in-
surance terms and medical terms so
that consumers may compare health
coverage and understand the terms
of (or exceptions to) their coverage;

b. A description of the coverage, in-
cluding cost sharing, for each cate-
gory of essential health benefits,
and other benefits as identified by
the Departments;

c. The exceptions, reductions, and lim-
itations on coverage;

d. The cost-sharing provisions of the
coverage, including deductible, co-
insurance, and copayment obliga-
tions;

e. The renewability and continuation
of coverage provisions;

f. A coverage facts label that includes
examples to illustrate common ben-
efits scenarios (including pregnancy
and serious or chronic medical con-
ditions) and related cost sharing
based on recognized clinical prac-
tice guidelines;

g. A statement of whether the plan or
coverage provides minimum essen-

tial coverage (MEC) as defined un-
der section 5000A(f) of the Code,
and whether the plan's or cover-
age's share of the total allowed
costs of benefits provided under the
plan or coverage is not less than
60% of such costs;

h. A statement that the SBC is only a
summary and that the plan docu-
ment, policy, or certificate of insur-
ance should be consulted to deter-
mine the governing contractual
provisions of the coverage; and

i. A contact number to call with ques-
tions and an Internet web address
where a copy of the actual individual
coverage policy or group certificate
of coverage can be reviewed and
obtained.

Consistent with the Departments' au-
thority to develop standards with respect
to the SBC and with the statutory require-
ment to consult with the NAIC and other
stakeholders, after considering recom-
mendations by the NAIC and comments
received on the 2011 proposed regula-
tions, the 2012 final regulations added
three content elements: (1) for plans and
issuers that maintain one or more net-
works of providers, an Internet address (or
similar contact information) for obtaining
a list of the network providers; (2) for
plans and issuers that use a formulary in
providing prescription drug coverage, an
Internet address (or similar contact infor-
mation) for obtaining information on pre-
scription drug coverage under the plan or
coverage; and (3) an Internet address for
obtaining the uniform glossary, as well as
a contact phone number to obtain a paper
copy of the uniform glossary, and a dis-
closure that paper copies of the uniform
glossary are available.

The Departments have received several
questions related to content requirements
under the 2012 final regulations. One such
question relates to the statements about
whether a plan or coverage provides

MEC, as defined under section 5000A(f)
of the Code, and whether the plan's or
coverage's share of the total allowed costs
of benefits provided under the plan or
coverage meets applicable minimum
value (MV) requirements. The preamble
to the 2012 final regulations stated that
future guidance would address these state-
ments. In April 2013, the Departments
issued an updated SBC template (and
sample completed SBC) with the addition
of statements of whether the plan or cov-
erage provides MEC (as defined under
section 5000A(f) of the Code) and
whether the plan or coverage meets the
MV requirements.60 In Affordable Care
Act Implementation FAQs Part XIV, is-
sued contemporaneously with the updated
SBC template, the Departments stated this
language is required to be included in
SBCs provided with respect to coverage
beginning on or after January 1, 2014.61

An FAQ issued at that time stated that
if a plan or issuer was unable to modify
the SBC template for these disclosures,
the Departments will not take any en-
forcement action against a plan or issuer
for using the original template authorized
at the time the 2012 final regulations were
issued, provided that the SBC was fur-
nished with a cover letter or similar dis-
closure stating whether the plan or cover-
age does or does not provide MEC and
whether the plan's or coverage's share of
the total allowed costs of benefits pro-
vided under the plan or coverage does or
does not meet the MV standard under the
Affordable Care Act.62 The Departments
decline to extend this temporary enforce-
ment safe harbor. Accordingly, effective
for SBCs provided in accordance with the
applicability date described below for
these proposed rules, the statements re-
garding MEC and MV are required to be
included in the SBC. These statements
have been modified for added clarity and
relevance for consumers, including con-
sumers in the individual market. As of the

59See 45 CFR 147.145, published at 77 FR 16453 (March 21, 2012).

60See Affordable Care Act Implementation FAQs Part XIV, question 1, available at www.dol.gov/ebsa/faqs/faq-aca14.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-
FAQs/aca_implementation_faqs14.html.

61 The guidance with respect to statements regarding MEC and MV was originally issued for SBCs provided with respect to coverage beginning on or after January 1, 2014, and before January
1, 2015 (referred to as the "second year of applicability"). See Affordable Care Act Implementation FAQs Part XIV, question 1, available at at www.dol.gov/ebsa/faqs/faq-aca14.html and
http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs14.html. This guidance was extended to be applicable until further guidance was issued. See
Affordable Care Act Implementation FAQs Part XIX, question 7, available at www.dol.gov/ebsa/faqs/faq-aca19.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs19.html

62See Affordable Care Act Implementation FAQs Part XIV, question 2, available at at www.dol.gov/ebsa/faqs/faq-aca14.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-
FAQs/aca_implementation_faqs14.html.

applicability date described below, the op-
tion previously available to include this
information in a cover letter or similar
disclosure furnished with the SBC is no
longer available.

Under section 1303(b)(3)(A) of the Af-
fordable Care Act and implementing reg-
ulations at 45 CFR 156.280(f), a QHP
issuer that elects to offer a QHP that pro-
vides coverage of abortion services for
which public funding is prohibited (non-
excepted abortion services) must provide
a notice to enrollees, as part of the SBC
provided at the time of enrollment, of
coverage of such services.

In the interest of increasing transpar-
ency for consumers shopping for cover-
age, and to assist issuers with meeting
applicable disclosure requirements under
section 1303(b)(3)(A) of the Affordable
Care Act and its implementing regula-
tions, we are updating the SBC template
published contemporaneously with these
proposed rules. These proposed rules
would require a QHP issuer to disclose on
the SBC whether abortion services are
covered or excluded and whether cover-
age is limited to services for which federal
funding is allowed (excepted abortion ser-
vices). The draft instruction guide for indi-
vidual health insurance, released concur-
rently with these proposed rules, indicates
that coverage of abortion services must be
described in the "services your plan does not
cover" or "other covered services" section.
We seek comments on this guidance, in-
cluding whether coverage of abortion ser-
vices should be included in another section
of the template, such as the table occurring
immediately prior.

Neither the 2012 final regulations nor
these proposed regulations require the
SBC to include premium information. The
Departments previously stated their un-
derstanding that it is administratively and
logistically complex to convey premium
information in an SBC due to a number of

variables, including, for example, when
premiums differ based on family size;
when, in the group market, employer con-
tributions impact cost of coverage paid by
participants and beneficiaries; and when,
for coverage sold through an individual
market Exchange, advance payments of
the premium tax credit impact the cost of
coverage paid by individuals and depen-
dents. In Affordable Care Act Implemen-
tation FAQs Part VIII, question 16, the
Departments clarified that a plan or issuer
may choose to add premium information
to the SBC.63 If a plan or issuer wishes to
include this information, it should be
added at the end of the SBC template.64

As mentioned above, the statute pro-
vides that the SBC must include "a con-
tact number for the consumer to call with
additional questions and an Internet web
address where a copy of the actual indi-
vidual coverage policy or group certificate
of coverage can be reviewed and ob-
tained." The 2012 final regulations state the
SBC must include "contact information for
questions and obtaining a copy of the plan
document or the insurance policy, certifi-
cate, or contract of insurance (such as a
telephone number for customer service and
an Internet address for obtaining a copy of
the plan document or the insurance policy,
certificate, or contact of insurance)." Ques-
tions have arisen as to whether this provi-
sion of the statute and regulations requires
that all plans and issuers must post underly-
ing plan documents automatically on an In-
ternet website.

These proposed rules would clarify
that all plans and issuers must include on
the SBC contact information for ques-
tions. However, because the statutory lan-
guage regarding Internet posting uses the
terms "individual coverage policy" and
"group certificate of coverage," which we
interpret to refer only to insurance, these
proposed regulations propose that only is-
suers must also include an Internet web

address where a copy of the actual indi-
vidual coverage policy or group certificate
of coverage can be reviewed and obtained.
The Departments note that this proposal
would require these documents to be eas-
ily available to individuals, plan sponsors,
and participants and beneficiaries shop-
ping for coverage prior to submitting an
application for coverage. For the group
market only, because the actual "certifi-
cate of coverage" is not available until
after the plan sponsor has negotiated the
terms of coverage with the issuer, an is-
suer is permitted to satisfy this require-
ment with respect to plan sponsors that are
shopping for coverage by posting a sam-
ple group certificate of coverage for each
applicable product. After the actual certif-
icate of coverage is executed, it must be
easily available to plan sponsors and par-
ticipants and beneficiaries via an Internet
web address. The Departments invite
comments on this approach, including the
costs and benefits of also requiring self-
insured plans to post underlying plan doc-
uments on the Internet.

The Departments also note that, sepa-
rate from the SBC requirement, provisions
of other applicable law require disclosure
of plan documents and other instruments
governing the plan. For example, ERISA
section 104 and the Department of La-
bor's implementing regulations65 provide
that, for plans subject to ERISA, the plan
documents and other instruments under
which the plan is established or operated
must generally be furnished by the plan
administrator to plan participants66 upon
request. In addition, the Department of
Labor's claims procedure regulations (ap-
plicable to ERISA plans), as well as the
Departments' claims and appeals regula-
tions under the Affordable Care Act (ap-
plicable to all non-grandfathered group
health plans and health insurance issuers
in the group and individual markets),67 set
forth rules regarding claims and appeals,

63See Affordable Care Act Implementation FAQs Part VIII, question 16, available at at www.dol.gov/ebsa/faqs/faq-aca8.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-
FAQs/aca_implementation_faqs8.html.

64In accordance with section 1303 (b)(3)(B) of the Affordable Care Act and 45 CFR 156.280(f)(2), if the SBC provided at the time of enrollment notice includes the QHP premium amount,
it must display only the total premium for the plan, inclusive of all covered benefits and services.

6529 CFR 2520.104b-1.

66ERISA section 3(7) defines a "participant" to include any employee or former employee who is or may become eligible to receive a benefit of any type from an employee benefit plan
or whose beneficiaries may be eligible to receive any such benefit. Accordingly, employees who are not enrolled but are, for example, in a waiting period for coverage, or who are otherwise
shopping amongst benefit package options at open season, generally are considered plan participants for this purpose.

6729 CFR 2560.503-1. See also 29 CFR 2590.715-2719(b)(2)(i) and 45 CFR 147.136(b)(2)(i), requiring nongrandfathered plans and issuers to incorporate the internal claims and appeals
processes set forth in 29 CFR 2560.503-1.

including the right of claimants (or their
authorized representatives) upon appeal of
an adverse benefit determination (or a fi-
nal internal adverse benefit determination)
to be provided by the plan or issuer, upon
request and free of charge, reasonable ac-
cess to and copies of all documents, re-
cords, and other information relevant to
the claimant's claim for benefits. Plans
and issuers must continue to comply with
these provisions and any other applicable
laws.

Section 2715(b)(3)(F) of the PHS Act
also requires that an SBC contain a "cov-
erage facts label." For ease of reference,
the 2012 final regulations used the term
"coverage examples" in place of the stat-
utory term. Consumer testing performed
on behalf of the NAIC68 demonstrated
that the coverage examples facilitated in-
dividuals' understanding of the benefits
and limitations of a plan or policy and
helped them make more informed choices
about their options. That testing also
showed that individuals were able to com-
prehend that the examples were only il-
lustrative. Additionally, while some plans
provide useful coverage calculators to
their enrollees to help them make health
coverage decisions, they are not uniform
across all plans and most are not available
to individuals prior to enrollment, making
it difficult for individuals and employers
to make coverage comparisons.

The Departments have taken a phased
approach to implementing the coverage
examples. The 2012 final regulations re-
quire the SBC to include two coverage
examples: having a baby (normal deliv-
ery) and routine maintenance of well-
controlled type 2 diabetes. Each benefit
scenario represents a hypothetical situa-
tion consisting of a sample treatment plan
and medical costs, based on national av-
erage allowed charges, for each of the
conditions stated above. Each example de-

scribes the sample care costs and how
much the hypothetical patient will be re-
sponsible for paying, including deduct-
ibles, copayments and coinsurance.

In addition to the two existing cover-
age examples, these proposed regulations
would require a third coverage example -
a simple foot fracture (with emergency
room visit). This example is proposed as a
health problem that most individuals
could experience (whereas having a baby
and type 2 diabetes affect a subset of the
population). Comments are welcome on
the choice of this coverage example.

In documents published contempora-
neously with these proposed rules, the De-
partments are publishing draft updated
claims and pricing data underlying the
two existing coverage examples as well as
a narrative description and claims and
pricing data associated with the third pro-
posed coverage example.69 These materi-
als would provide plans and issuers with
the specific information necessary to sim-
ulate benefits covered under the plan or
policy for the coverage example portion
of the SBC (including relevant medical
items and services, dates of service, bill-
ing codes, and allowed charges). The De-
partments invite comment on all aspects
of the benefits scenario proposed as a third
coverage example and on all aspects of
the coverage example materials made
available on the HHS website contempo-
raneously with the publication of these
proposed regulations.

In May 2012, the Departments an-
nounced the development of a calculator
that plans and issuers could use as a safe
harbor for the first year of applicability to
complete the coverage examples in a
streamlined fashion.7º The calculator al-
lows plans and issuers to input a discrete
number of informational elements about
the benefit package, taken from data fields
used to populate the "Important Ques-

tions" and "Common Medical Events"
chart sections of the SBC template." The
output of the calculator is a coverage ex-
ample that can be added to the SBC. On
its website, HHS provided the coverage
examples calculator, instructions for using
the calculator, the algorithm that was used
to create the calculator, and a checklist
providing information on the inputs
needed to use the coverage calculator.

The original FAQ regarding the cover-
age example calculator stated that because
using a limited number of inputs in the
calculator will be less accurate than the
results that a plan or issuer could obtain
by processing the full list of claims asso-
ciated with each coverage example
through the plan's or issuer's system, the
calculator would be allowed as a transi-
tional tool for the first year of applicability
of the SBC requirements. Use of the cov-
erage example calculator was subse-
quently extended for the second year of
applicability, and later extended until su-
perseded by further guidance.71 Given the
complexity of the existing coverage ex-
amples, the addition of a proposed new,
third coverage example to the SBC re-
quirements, and the fact that all coverage
examples are merely illustrative and will
not be an accurate predictor of a specific
individual's actual costs, the Departments
are proposing that the coverage example
calculator be authorized for continued use.
The Departments invite comments on this
proposal.

#### 3. Appearance

PHS Act section 2715 sets forth stan-
dards related to the appearance and lan-
guage of the SBC. Specifically, the statute
provides that the SBC is to be presented in
a uniform format, in a culturally and lin-
guistically appropriate manner utilizing
terminology understandable by the aver-
age plan enrollee, that does not exceed
four double-sided pages in length, and

68A summary of the focus group testing done by America's Health Insurance Plans is available at: http://www.naic.org/documents/committees_b_consumer_information
101012_ahip_focus group_summary.pdf, a summary of the focus group testing done by Consumers Union on the coverage examples is available at: http:/prescriptionforchange.org/
wordpress/wp-content/uploads/2011/08/A_New_Way_of_Comparing_Health_Insurance.pdf.

69For further discussion of changes to the claims and pricing data underlying the two existing coverage examples, as well as the claims and pricing data with respect to the new coverage
example, see section III later in this preamble.

70See ACA Implementation FAQ Set IX, question 9, available at www.dol.gov/ebsa/faqs/faq-aca9.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs9.html.

71The FAQ with respect to the coverage example calculator was originally issued for SBCs provided for coverage beginning before January 1, 2014 (referred to as the "first year of
applicability). See Affordable Care Act Implementation FAQs Part IX, question 9, available at www.dol.gov/ebsa/faqs/faq-aca9.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-
and-FAQs/aca_implementation_faqs9.html. It was extended for SBCs provided for coverage beginning on or after January 1, 2014, and before January 1, 2015 (referred to as the "second
year of applicability"), in Affordable Care Act Implementation FAQs Part XIV, question 5 (available at www.dol.gov/ebsa/faqs/faq-acal4.html and http://www.cms.gov/CCIIO/Resources/
Fact-Sheets-and-FAQs/aca_implementation_faqs14.html) and later extended until superseded by further guidance is issued in Affordable Care Act Implementation FAQs Part XIX, question
7 (available at www.dol.gov/ebsa/faqs/faq-aca19.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs19.html).

does not include print smaller than 12-
point font. Since the issuance of the 2011
proposed regulations, plans and issuers
have informed the Departments that they
are concerned about including all of the
required information in the SBC while
also satisfying the limitation on the length
of the document of four double-sided
pages.

The instruction guides for completing
the SBC template (issued contemporane-
ously with the 2012 final regulations) in-
cluded a special rule stating that, to the
extent a plan's terms that are required to
be in the SBC template cannot reasonably
be described in a manner consistent with
the template format and instructions, the
plan or issuer must accurately describe the
relevant plan terms while using its best
efforts to do so in a manner that is still as
consistent with the instructions and tem-
plate format as reasonably possible. Such
situations may occur, for example, if a
plan provides a different structure for pro-
vider network tiers or drug tiers than is
contemplated by the template and associ-
ated instructions, if a plan provides differ-
ent benefits based on facility type (such as
hospital inpatient versus non-hospital in-
patient), in a case where the effects of a
health flexible spending arrangement
(health FSA) or a health reimbursement
arrangement (HRA) are being described,
or if a plan provides different cost sharing
based on participation in a wellness pro-
gram. The new SBC template that is being
published contemporaneously with these
proposed regulations eliminates some in-
formation from the SBC that is not re-
quired by statute based on comments from
stakeholders, which is intended to make it
easier for plans to include all of the re-
quired information in the SBC while also
satisfying the statutory page limit. These
reductions are significant; the sample
completed template has been reduced
from four double-sided pages to two and a
half double-sided pages. The Departments
invite comments on whether the modifi-
cations maintain critical information

while shortening it enough to ensure that
SBCs do not extend beyond the statutory
page limit and, if not, what other changes
should be made to ensure the minimum
content, appearance, and language re-
quirements are met while also providing
consistency in formatting to allow com-
parisons for individuals. Comments are
invited on potential ways to reconcile the
statutory page limit with the statutory con-
tents, appearance, and format require-
ments, particularly the need for the sum-
mary to present information in an
understandable, accurate, and meaningful
way that facilitates comparisons of health
options, including those that have dispa-
rate and comparatively complex features.
Specifically, comments are invited on the
sorts of plans that have difficulty meeting
the statutory limit, and what other sorts of
accommodations may be appropriate for
those plans.

Paragraph (a)(3) of the 2012 final reg-
ulations requires plans and issuers to pro-
vide the SBC in the form, and in accor-
dance with the instructions for completing
the SBC, that are specified by the Secre-
taries in guidance. A guidance document
published contemporaneously with the
2012 final regulations served as such
guidance specified by the Secretaries, and
stated that SBCs provided in connection
with group health plan coverage may be
provided either as a stand-alone document
or in combination with other summary
materials (for example, a summary plan
description (SPD)), if the SBC informa-
tion is intact and prominently displayed at
the beginning of the materials (such as
immediately after the Table of Contents in
an SPD) and in accordance with the tim-
ing requirements for providing an SBC.72
For health insurance coverage offered in
the individual market, the SBC must be
provided as a stand-alone document, but
HHS notes that it can be included in the
same mailing as other plan materials.
These proposed rules do not make any
changes to these requirements.

In Affordable Care Act Implementa-
tion FAQs Part VIII, question 8, the De-
partments stated that an SBC provided in
connection with a group health plan may
include a reference to the SPD (although
not as a substitute for any required content
element of the SBC).73 Another FAQ pro-
vided that for SBCs provided in connec-
tion with coverage in the individual mar-
ket, while it is not permitted to substitute
a reference to any other document for any
content element of the SBC, an SBC may
include a reference to another document
in the SBC footer.74 In addition, wherever
an SBC provides information that fully
satisfies a particular content element of
the SBC, it may add to that information a
reference to specified pages or portions of
other documents in order to supplement or
elaborate on that information. As stated in
the previous FAQs, SBCs provided in
connection with a group health plan may
include a reference to the SPD or other
documents and SBCs provided in connec-
tion with individual market coverage may
reference other documents to supplement
or elaborate on information in the SBC.

Affordable Care Act Implementation
FAQs Part IX, question 7, addressed com-
bining SBCs or SBC elements to provide
a side-by-side comparison.75 Some plans
or issuers provide web-based or print ma-
terials to illustrate the differences between
benefit package options (including com-
parison charts and broker comparison
websites). Issuers and plans (and agents
and brokers working with such plans) may
display SBCs, or parts of SBCs, in a way
that facilitates comparisons of different
benefit package options by individuals
and employers shopping for coverage. For
example, on a website, viewers could be
allowed to select a comparison of only the
deductibles, out-of-pocket limits, or other
cost sharing information relating to sev-
eral benefit package options. This could
be achieved by providing the information
from the Answers column in the "What is
the overall deductible?" row of the SBC
for several benefit packages, but without

72Summary of Benefits and Coverage and Uniform Glossary - Templates, Instructions, and Related Materials; and Guidance for Compliance, 77 FR 8706, 8707 (February 14, 2012).

73See Affordable Care Act Implementation FAQs Part VIII, question 8, available at www.dol.gov/ebsa/faqs/faq-aca8.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
aca_implementation_faqs8.html.

74 See Affordable Care Act Implementation FAQs Part IX, question 5, available at http://www.dol.gov/ebsa/faqs/faq-aca9.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-
FAQs/aca_implementation_faqs9.html.

75 See Affordable Care Act Implementation FAQs Part IX, question 7, available at http://www.dol.gov/ebsa/faqs/faq-aca9.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-
FAQs/aca_implementation_faqs9.html.

having to repeat the first "Important Ques-
tions" and "Why this Matters" columns,
or the other content rows, of the SBC for
each of the benefit packages. However,
such a chart, website, or other comparison
would not, itself, satisfy the requirements
under PHS Act section 2715 and the 2012
final regulations to provide the SBC. The
full SBC for each of the benefit packages
included in the comparison view or tool
must be made available in accordance
with the statute and regulations.

#### 4. Form

a. Group health plan coverage

To facilitate faster and less burden-
some disclosure of the SBC, and to be
consistent with PHS Act section
2715(d)(2), which permits disclosure in
either paper or electronic form, the 2012
final regulations set forth rules to permit
greater use of electronic transmittal of the
SBC. For SBCs provided electronically
by a plan or issuer to participants and
beneficiaries, the 2012 final regulations
make a distinction between a participant
or beneficiary who is already covered un-
der the group health plan, and a partici-
pant or beneficiary who is eligible for
coverage but not enrolled in a group
health plan. This distinction should pro-
vide new flexibility in some circum-
stances, while also ensuring adequate con-
sumer protections. For participants and
beneficiaries who are already covered un-
der the group health plan, the 2012 final
regulations permit provision of the SBC
electronically if the requirements of the
Department of Labor's regulations at 29
CFR 2520.104b-1 are met. (Paragraph (c)
of those regulations includes an electronic
disclosure safe harbor.76) For participants
and beneficiaries who are eligible for but
not enrolled in coverage, the 2012 final
regulations permit the SBC to be provided
electronically if the format is readily ac-
cessible and a paper copy is provided free
of charge upon request. Additionally, to
reduce paper copies that may be unneces-
sary, if the electronic form is an Internet
posting, the plan or issuer must timely

advise the individual in paper form (such
as a postcard) or email that the documents
are available on the Internet, provide the
Internet address, and notify the individual
that the documents are available in paper
form upon request. The Departments note
that the rules for participants and benefi-
ciaries who are eligible for but not en-
rolled in coverage are substantially similar
to the requirements for an issuer providing
an electronic SBC to a group health plan
(or its sponsor) under paragraph (a)(4)(i)
of the regulations. Finally, plans, and par-
ticipants and beneficiaries (both those
covered and those eligible but not en-
rolled) have the right to receive an SBC in
paper format, free of charge, upon request.

In Affordable Care Act Implementa-
tion FAQs Part IX, question 1, the Depart-
ments adopted an additional safe harbor
related to electronic delivery of SBCs.77
That FAQ stated that SBCs may be pro-
vided electronically to participants and
beneficiaries in connection with their on-
line enrollment or online renewal of cov-
erage under the plan. The FAQ also stated
SBCs also may be provided electronically
to participants and beneficiaries who re-
quest an SBC online. In either case, the
individual must have the option to receive
a paper copy upon request. These pro-
posed regulations would include this ad-
ditional safe harbor into the applicable
regulations.

After the publication of the 2012 final
regulations, the Departments were asked
to provide model language to meet the
requirement to advise participants and
beneficiaries that the SBC is available on
the Internet. In Affordable Care Act FAQs
Part VIII, question 12, the Departments
provided the following model language:7

Availability of Summary Health In-
formation

As an employee, the health benefits
available to you represent a significant
component of your compensation
package. They also provide important
protection for you and your family in
the case of illness or injury.

Your plan offers a series of health cov-
erage options. Choosing a health cov-
erage option is an important decision.
To help you make an informed choice,
your plan makes available a Summary
of Benefits and Coverage (SBC),
which summarizes important informa-
tion about any health coverage option
in a standard format, to help you com-
pare across options.

The SBC is available on the web at:
www.website.com/SBC. A paper copy
is also available, free of charge, by
calling 1-XXX-XXX-XXXX (a toll-
free number).

The FAQ also stated that plans and
issuers have flexibility with respect to
the postcard and may choose to tailor it
in many ways.

b. Individual health insurance cover-
age and self-insured non-Federal govern-
mental plans

The HHS 2012 final regulations estab-
lished a provision under paragraph
(a)(4)(iii)(C) that deems health insurance is-
suers in the individual market to be in com-
pliance with the requirement to provide the
SBC to an individual requesting summary
information about a health insurance prod-
uct prior to submitting an application for
coverage if the issuer provides the content
required under paragraph (a)(2) of the reg-
ulations to the federal health reform Web
portal described in 45 CFR 159.120. Issuers
must submit all of the content required un-
der paragraph (a)(2), as specified in guid-
ance by the Secretary, to be deemed com-
pliant with the requirement to provide an
SBC to an individual requesting summary
information prior to submitting an appli-
cation for coverage. HHS intends to con-
tinue to facilitate the operation of this
deemed compliance option for individual
market issuers. An issuer must provide all
SBCs other than the "shopper" SBC con-
templated in the deemed compliance pro-
vision as required under the 2012 final
regulations (and any future final regula-
tions), including providing the SBC at the
time of application and renewal.

76On April 7, 2011, the Department of Labor published a Request for Information regarding electronic disclosure at 76 FR 19285. In it, the Department of Labor stated that it is reviewing
the use of electronic media by employee benefit plans to furnish information to participants and beneficiaries covered by employee benefit plans subject to ERISA. Because these proposed
regulations propose to adopt the ERISA electronic disclosure rules by cross-reference, any changes that may be made to 29 CFR 2520.104b-1 in the future would also apply to the SBC.

77 See Affordable Care Act Implementation FAQs Part IX, question 4, available at http://www.dol.gov/ebsa/faqs/faq-aca9.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-
FAQs/aca_implementation_faqs9.html.

78See Affordable Care Act Implementation FAQs Part VIII, question 12, available at http://www.dol.gov/ebsa/faqs/faq-aca8.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-
and-FAQs/aca_implementation_faqs8.html.

The Departments note that consistent
with the 2012 final regulations, an issuer
in the individual market must provide the
SBC in a manner that can reasonably be
expected to provide actual notice regard-
less of the format. An issuer in the indi-
vidual market satisfies the form require-
ments set forth in the 2012 final
regulations if it does at least one of the
following: (1) hand-delivers a printed
copy of the SBC to the individual or de-
pendent; (2) mails a printed copy of the
SBC to the mailing address provided to
the issuer by the individual or dependent;
(3) provides the SBC by email after ob-
taining the individual's or dependent's
agreement to receive the SBC or other
electronic disclosures by email; (4) posts
the SBC on the Internet and advises the
individual or dependent in paper or elec-
tronic form, in a manner compliant with
45 CFR 147.200(a)(4)(iii)(A)(1) through
(3), that the SBC is available on the Inter-
net and includes the applicable Internet
address; or (5) provides the SBC by any
other method that can reasonably be ex-
pected to provide actual notice.

The 2012 final regulations also pro-
vide that the obligation to provide an
SBC cannot be satisfied electronically in
the individual market unless: the format
is readily accessible; the SBC is dis-
played in a location that is prominent
and readily accessible; the SBC is pro-
vided in an electronic form that can be
electronically retained and printed; the
SBC is consistent with the appearance,
content and language requirements; and
the issuer notifies the individual that a
paper SBC is available upon request
without charge.

These proposed rules would clarify the
form and manner for SBCs provided by a
self-insured non-Federal governmental
plan. Such SBCs may be provided in pa-
per form. Alternatively, such SBCs may
be provided electronically if the plan con-
forms to either the substance of the pro-
visions applicable to ERISA plans (in
paragraph (a)(4)(ii) of the regulations) or
to individual health insurance coverage

(in paragraph (a)(4)(iii) of the regula-
tions).

#### 5. Language

PHS Act section 2715(b)(2) provides
that standards shall ensure that the SBC
"is presented in a culturally and linguisti-
cally appropriate manner." The 2012 final
regulations provide that a plan or issuer
for this purpose is considered to provide
the SBC in a culturally and linguistically
appropriate manner if the thresholds and
standards of 45 CFR 147.136(e), imple-
menting standards for the form and man-
ner of notices related to internal claims
appeals and external review, are met as
applied to the SBC.79 At the time of pub-
lication of these proposed regulations, 268
U.S. counties (78 of which are in Puerto
Rico) meet this threshold. The over-
whelming majority of these are Spanish;
however, Chinese, Navajo, and Tagalog
are present in a few counties, affecting
five states (specifically, Alaska, Arizona,
California, New Mexico, and Utah).80

To help plans and issuers meet the lan-
guage requirements of paragraph (a)(5) of
the 2012 final regulations, as requested by
commenters, HHS has provided written
translations of the SBC template, sample
language, and the uniform glossary in
Chinese, Navajo, Spanish, and Tagalog.8
HHS may also make these materials
available in other languages to facilitate
voluntary distribution of SBCs to other
individuals with limited English profi-
ciency. We seek comment on this stan-
dard, and on other potential standards
that could facilitate consistency across
the Departments' programs. The Depart-
ments anticipate that translations of the
updated SBC template, sample lan-
guage, and uniform glossary will be
available when these proposed regula-
tions are finalized.

Nothing in these proposed regulations
should be construed as limiting an indi-
vidual's rights under Federal or State civil
rights statutes, such as Title VI of the
Civil Rights Act of 1964 (Title VI) which
prohibits recipients of Federal financial
assistance, including issuers participating
in Medicare Advantage, from discriminat-

ing on the basis of race, color, or national
origin. To ensure non-discrimination on
the basis of national origin, recipients are
required to take reasonable steps to ensure
meaningful access to their programs and
activities by limited English proficient
persons. For more information, see,
"Guidance to Federal Financial Assis-
tance Recipients Regarding Title VI Pro-
hibition Against National Origin Discrim-
ination Affecting Limited English
Proficient Persons," available at http://
www.hhs.gov/ocr/civilrights/resources/
specialtopics/lep/policyguidancedocu-
ment.html.

#### B. Notice of Modification

PHS Act section 2715(d)(4) directs
that a group health plan or health insur-
ance issuer offering group or individual
health insurance coverage must provide
notice of any material modification (as
defined under ERISA section 102) in any
of the terms of the plan or coverage in-
volved that is not reflected in the most
recently provided SBC. For purposes of
PHS Act section 2715, the 2012 final reg-
ulations interpret the statutory reference to
the SBC to mean that only a material
modification in the terms of the plan or
coverage that would affect the content of
the SBC, that is not reflected in the most
recently provided SBC, and that occurs
other than in connection with a renewal or
reissuance of coverage would trigger the
notice. In these circumstances, the notice
would be required to be provided to en-
rollees (or, in the individual market, cov-
ered individuals) no later than 60 days
prior to the date on which such change
will become effective. A material modifi-
cation, within the meaning of section 102
of ERISA, includes any modification to
the coverage offered under a plan or pol-
icy that, independently, or in conjunction
with other contemporaneous modifica-
tions or changes, would be considered by
an average plan participant (or in the case
of individual market coverage, an average
individual covered under a policy) to be
an important change in covered benefits or
other terms of coverage under the plan or

79 See 75 FR 43330 (July 23, 2010), as amended by 76 FR 37208 (June 24, 2011).

80 Guidance on the HHS website contains a list of the counties that meet this threshold. This information is available at http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/
Downloads/2009-13-CLAS-County-Data_12-05-14_clean_508.pdf.

81Translations are available at http://cciio.cms.gov/programs/consumer/summaryandglossary/index.html.

policy.82 A material modification could be
an enhancement of covered benefits or
services or other more generous plan or
policy terms. It includes, for example,
coverage of previously excluded benefits
or reduced cost-sharing. A material mod-
ification could also be a material reduction
in covered services or benefits, as defined
in 29 CFR 2520.104b-3(d)(3) of the De-
partment of Labor's regulations, or more
stringent requirements for receipt of ben-
efits. As a result, it also includes changes
or modifications that reduce or eliminate
benefits, increase cost-sharing, or impose
a new referral requirement.83 (However,
changes to the information in the SBC
resulting from changes in the regulatory
requirements for an SBC are not changes
to the plan or policy requiring the mid-
year provision of a notice of modification,
unless specified in such new require-
ments.)

The 2012 final regulations require that
this notice be provided only for changes
other than in connection with a renewal or
reissuance of coverage. At renewal, plans
and issuers must provide an updated SBC
in accordance with the requirements oth-
erwise applicable to SBCs. PHS Act sec-
tion 2715 and paragraph (b) of the 2012
final regulations specify the timing for
providing a notice of modification in sit-
uations other than in connection with a
renewal or reissuance of coverage. To the
extent a plan or policy implements a mid-
year change that is a material modification
that affects the content of the SBC, and
that occurs other than in connection with a
renewal or reissuance of coverage, the
2012 final regulations require a notice of
modification to be provided 60 days in
advance of the effective date of the
change.84 Plans and issuers are permitted
to either provide an updated SBC reflect-

ing the modifications or provide a separate
notice describing the material modifica-
tions. These proposed regulations do not
make any changes to these requirements.

For ERISA-covered group health plans
subject to PHS Act section 2715, this no-
tice is required in advance of the timing
requirements under the Department of La-
bor's regulations at 29 CFR 2520.104b-3
for providing a summary of material mod-
ification (SMM) (generally not later than
210 days after the close of the plan year in
which the modification or change was ad-
opted, or, in the case of a material reduc-
tion in covered services or benefits, not
later than 60 days after the date of adop-
tion of the modification or change). In
situations where a complete notice is pro-
vided in a timely manner under PHS Act
section 2715(d)(4), an ERISA-covered
plan will also satisfy the requirement to
provide an SMM under Part 1 of ERISA.

C. Requirement to Provide the Uniform
Glossary

Sections 2715(g)(2) and (g)(3) of the
PHS Act direct the Departments to de-
velop standards for definitions, at a mini-
mum, for certain insurance-related and
medical terms (and also directs the De-
partments to develop standards for such
other insurance-related and medical terms
as will help consumers compare the terms
of their coverage and the extent of medi-
cal benefits (or exceptions to those bene-
fits)).85 The 2012 final regulations in-
cluded several additional terms in the
uniform glossary.86 As discussed later in
this preamble, the Departments propose to
revise definitions for several of these
terms and also add several new terms to
the Glossary.87

A plan or issuer must make the uniform
glossary available upon request within
seven business days. To satisfy this re-

quirement, a plan or issuer must provide
the content described in paragraph
(a)(2)(i)(L) of the 2012 final regulations,
discussed earlier in this preamble, which
requires that the SBC include an Internet
address for obtaining the uniform glos-
sary, a contact phone number to obtain a
paper copy of the uniform glossary, and a
disclosure that paper copies are available
upon request. The Internet address may be
a place where the document can be found
on the plan's or issuer's website, or the
website of either the Department of Labor
or HHS. However, a plan or issuer must
make the glossary available upon request,
in either paper or electronic form (as re-
quested), within seven business days after
receipt of the request. Group health plans
and health insurance issuers must provide
the uniform glossary in the appearance
specified by the Departments and without
modification, so that the glossary is pre-
sented in a uniform format and uses ter-
minology understandable by the average
plan enrollee or individual covered under
an individual policy.

##### D. Preemption

Section 2715 of the PHS Act is incor-
porated into ERISA section 715, and Code
section 9815, and is subject to the preemp-
tion provisions of ERISA section 731 and
PHS Act section 2724 (implemented in 29
CFR 2590.731(a) and 45 CFR 146.143(a)).
Under these provisions, the requirements
of part 7 of ERISA and part A of title
XXVII of the PHS Act, as amended by the
Affordable Care Act, are not to be "con-
strued 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 group or
individual health insurance coverage ex-
cept to the extent that such standard or

82 See DOL Information Letter, Washington Star/Washington-Baltimore Newspaper Guild to Munford Page Hall, II, Baker & Mckenzie (February 8, 1985).

83 See, e.g., Ward v. Maloney, 386 F.Supp.2d 607, 612 (M.D.N.C. 2005), which discusses judicial interpretations of when an amendment is and is not a material modification.

84In Affordable Care Act Implementation FAQs Part XX, the Departments addressed notice requirements triggered by a closely-held for-profit corporation's health plan ceasing to provide
coverage for some or all contraceptive services mid-plan year. The FAQ clarified that, for plans subject to ERISA that reduce or eliminate coverage of contraceptive services after having
provided such coverage, expedited disclosure requirements for material reductions in covered services or benefits apply. See http://www.dol.gov/ebsa/pdf/faq-aca20.pdf and http://
www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs20.html.

85The insurance-related terms identified in the statute are: co-insurance, co-payment, deductible, excluded services, grievance and appeals, non-preferred provider, out-of-network
co-payments, out-of-pocket limit, preferred provider, premium, and UCR (usual, customary and reasonable) fees. The medical terms identified in the statute are: durable medical equipment,
emergency medical transportation, emergency room care, home health care, hospice services, hospital outpatient care, hospitalization, physician services, prescription drug coverage,
rehabilitation services, and skilled nursing care.

86The additional terms in the uniform glossary issued with the 2012 final regulations are: allowed amount, balance billing, complications of pregnancy, emergency medical condition,
emergency services, habilitation services, health insurance, in-network co-insurance, in-network co-payment, medically necessary, network, out-of-network co-insurance, plan, preautho-
rization, prescription drugs, primary care physician, primary care provider, provider, reconstructive surgery, specialist, and urgent care.

87For further discussion of proposed changes to the Uniform Glossary, see section III later in this preamble.

requirement prevents the application of a
requirement" of part A of title XXVII of
the PHS Act. Accordingly, State laws that
impose requirements on health insurance
issuers that are stricter than those imposed
by the Affordable Care Act will not be
superseded by the Affordable Care Act. In
addition, PHS Act section 2715(e) pro-
vides that the standards developed under
PHS Act section 2715(a), "shall preempt
any related State standards that require [an
SBC] that provides less information to
consumers than that required to be pro-
vided under this section, as determined by
the [Departments]." Reading these two
preemption provisions together, the 2012
final regulations do not, and these pro-
posed regulations would not, prevent
States from imposing separate, additional
disclosure requirements on health insur-
ance issuers.

E. Failure to Provide

PHS Act section 2715(f), incorporated
into ERISA section 715 and Code section
9815, provides that a group health plan
(including its administrator), and a health
insurance issuer offering group or individ-
ual health insurance coverage, that "will-
fully fails to provide the information re-
quired under this section shall be subject
to a fine of not more than $1,000 for each
such failure." In addition, under PHS Act
section 2715(f), a separate fine may be
imposed for each individual or entity for
whom there is a failure to provide an SBC.
The 2012 final regulations addressed the
different underlying enforcement struc-
tures and penalty mechanisms for the De-
partments.

HHS clarified in the 2012 final regula-
tions that HHS will enforce these provi-
sions in a manner consistent with 45 CFR
150.101 through 150.465. In these pro-
posed regulations, the Department of La-
bor proposes to clarify that it will use the
same process and procedures for assess-
ment of the civil fine as used for failure to
file an annual report under 29 CFR
2560.502c-2 and 29 CFR Part 2570, Sub-
part C. In accordance with ERISA section
502(b)(3), 29 U.S.C. 1132(b)(3), the Sec-
retary of Labor is not authorized to assess
this fine against a health insurance issuer.
Moreover, in these proposed regulations,
the IRS proposes to clarify that the IRS

will enforce this section using a process
and procedure consistent with section
4980D of the Code.

III. Proposed Documents authorized for
plan years beginning on or after
September 23, 2015

Contemporaneously with the issuance
of these proposed regulations, the Depart-
ments are making available on their web-
sites a proposed revised SBC template and
attendant materials (including a proposed
revised uniform glossary) to comply with
the disclosure requirements of PHS Act
section 2715. These materials are pro-
posed to be authorized by the Depart-
ments for disclosure provided in accor-
dance with the applicability date proposed
later in this preamble.88 This section of
the preamble describes the changes pro-
posed to each document.

The following documents, available at
http://cciio.cms.gov and www.dol.gov/
ebsa/healthreform, are available for re-
view and the Departments solicit comment
on them:

1\. SBC template. The document is
available in accessible format (PDF) and
modifiable format (MS Word).

2\. Sample completed SBC. This docu-
ment was completed using information for
sample health coverage and provides a
general illustration of a completed SBC
for coverage under a group health plan.

3\. Instructions. For assistance in com-
pleting the SBC template, separate in-
structions are available for group health
coverage and for individual health insur-
ance coverage. Additionally, with respect
to the individual market instructions, the
Office of Personnel Management (OPM)
may provide additional instructions for
Multi-State Plan issuers.

4\. Why This Matters language. The
SBC instructions include language that
must be used when completing the "Why
This Matters" column on the first page of
the SBC template. Two language options
are provided depending on whether the
answer in the applicable row is "yes" or
"no", according to the terms of the plan or
coverage.

5\. Coverage examples. Information
provided by HHS at http://cciio.cms.gov

(and accessible via hyperlink from www-
.dol.gov/ebsa/healthreform) the informa-
tion necessary to perform the coverage
example calculations.

6\. Uniform glossary. The uniform glos-
sary of health coverage and medical terms
may not be modified by plans or issuers.

Many of the changes proposed in the
updated versions of these documents
streamline the SBC. As discussed earlier
in this preamble, these changes were made
after feedback the Departments received
from stakeholders, and the revised pro-
posed template and other documents are
intended to make it easier for plans to
satisfy the statutory page limit. The re-
vised documents also incorporate infor-
mation from several sets of FAQs that
addressed implementation of the SBC
provisions.

Additionally, the revised documents
include changes made to conform with
new requirements that have become appli-
cable since the issuance of the 2012 final
regulations. These changes include the ad-
dition of information regarding minimum
value and minimum essential coverage
and changes to be consistent with the Af-
fordable Care Act's requirement to elim-
inate all annual limits on essential health
benefits.

Finally, the revised documents reflect
changes to the coverage examples. The
coding and pricing data for the existing
coverage examples (having a baby
through normal delivery and managing
well controlled type 2 diabetes) have been
updated to account for changes in the data
since the issuance of the final regulations
in 2012. Additionally the Departments
proposed to change the data source for the
claims and pricing information from a
data source that used multiple commercial
payor databases, to one based on a single
database, the Truven Health Analytics
MarketScan® Commercial Claims and
Encounters database, adjusted to estimate
2014 pricing to account for health care
inflation since 2010. The Departments
seek comment on whether to update this
data using more recent 2013 Marketscan®
database claims data that will be available
for the final rule, and on appropriate ways
to inform consumers of the resulting in-
creases in sample care costs when the

88See section IV of this preamble for a full discussion of the proposed applicability date.

pricing data is updated, for example,
through a cover letter or other disclosure
provided along with the SBC. The Depart-
ments also seek specific comment on two
diagnosis codes in the having a baby (nor-
mal delivery) scenario. The pricing data
associated with these two codes, DRG 775
and DRG 795 (inpatient hospital charges
for the mother, and inpatient hospital
charges for the baby, respectively), ap-
pears higher than expected. These diagno-
sis codes represent bundled services and
may include charges that are duplicated
by other codes currently included in the
scenario. The Departments seek comment
on the accuracy of this pricing data.

Additionally, the SBC template, sam-
ple completed template, and coverage ex-
ample documents have been updated to
reflect that these proposed regulations
would require a third coverage example -
a simple foot fracture (with emergency
room visit), as described earlier in this
preamble. The same Marketscan® data-
base has been used to produce the claim
and pricing data for this scenario.

The Departments invite comment on all
aspects of the proposed changes to the SBC
template and other materials, and the uni-
form glossary. The Departments also re-
quest specific comments regarding the In-
struction Guides about whether plans and
issuers should be permitted to add additional
benefits that are either covered or excluded
in the "other covered services" and "ex-
cluded services" section that are not already
required to be disclosed by the instructions.

### IV. Applicability

After publication of the 2012 final reg-
ulations, the Departments received ques-
tions about the applicability of the SBC re-
quirements to certain types of group health
plans, including expatriate health plans,
Medicare Advantage plans, and insurance
products that are no longer being offered for

purchase (closed blocks of business). The
Departments addressed the applicability of
the SBC requirements to each of these types
of coverage in FAQs issued after publica-
tion of the 2012 final regulations. The De-
partments also received questions regarding
the applicability of the SBC requirements to
benefits provided under certain account-
type arrangements such as health flexible
spending arrangements (health FSAs),89
health reimbursement arrangements
(HRAs),90 and health savings accounts
(HSAs),91 as well as benefits provided
through an employee assistance program
(EAP) and other excepted benefits.

In May 2012, the Departments issued
FAQs that discussed the special circum-
stances and considerations faced by expa-
triate plans in complying with the SBC
requirements.92 The FAQs provided tem-
porary relief from enforcement. Under re-
cently enacted legislation,93 expatriate
health plans are not subject to the require-
ment to provide an SBC. The Departments
intend to issue guidance implementing
this legislation. The temporary relief from
enforcement for expatriate plans will re-
main in place until such guidance is is-
sued.

Moreover, in August 2012, the Depart-
ments issued FAQs that discussed group
health plans providing Medicare Advan-
tage benefits, which are Medicare benefits
financed by the Medicare Trust Funds, for
which the benefits are set by Congress and
regulated by the Centers for Medicare &
Medicaid Services. Again, the FAQs pro-
vided a temporary nonenforcement pol-
icy, because Medicare Advantage benefits
are not health insurance coverage and
Medicare Advantage organizations are not
required to provide an SBC with respect
to such benefits. Additionally, there are
separately required disclosures required to
be provided by Medicare Advantage or-
ganizations, to ensure that enrollees in
these plans receive the necessary informa-

tion about their coverage and benefits.
These rules propose to exempt from the
SBC requirements a group health plan
benefit package that provides Medicare
Advantage benefits.

The Departments also issued FAQs in
May 2012 addressing insurance products
that are no longer being offered for pur-
chase ("closed blocks of business"). Some
interested stakeholders had requested en-
forcement relief with respect to such prod-
ucts because the products are no longer
offered for purchase and the SBC is in-
tended to be a tool to help group health
plans and individuals as they shop for
coverage. The Departments had provided
temporary relief through an FAQ pro-
vided that certain conditions were met: (1)
the insurance product is no longer being
actively marketed; (2) the health insur-
ance issuer stopped actively marketing the
product prior to September 23, 2012,
when the requirement to provide an SBC
was first applicable to health insurance
issuers; and (3) the health insurance issuer
has never provided an SBC with respect to
such product.94 The Departments reiterate
that relief here, but note that if an insur-
ance product was actively marketed for
business on or after September 23, 2012,
and is no longer being actively marketed
for business, or if the plan or issuer ever
provided an SBC in connection with the
product, the plan and issuer must provide
the SBC with respect to such coverage, as
required by PHS Act section 2715 and the
regulations.

As under the 2012 final regulations, an
SBC need not be provided for plans, pol-
icies, or benefit packages that constitute
excepted benefits. Thus, for example, an
SBC need not be provided for stand-alone
dental or vision plans or health FSAs if
they constitute excepted benefits under the
Departments' regulations.95 If benefits un-
der a health FSA do not constitute ex-
cepted benefits, the health FSA is a group

89See Code section 106(c)(2).

90See IRS Notice 2002-45, 2002-2 C.B. 93.

91See Code section 223.

92 See Affordable Care Act Implementation FAQs Part IX, question 13, available at http://www.dol.gov/ebsa/faqs/faq-aca9.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-
FAQs/aca_implementation_faqs9.html.

93See Consolidated and Further Continuing Appropriations Act, 2015, Division M, Expatriate Health Coverage Clarification Act of 2014, Section 3(d).

94See Affordable Care Act Implementation FAQs Part IX, question 12, available at http://www.dol.gov/ebsa/faqs/faq-aca9.html and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-
FAQs/aca_implementation_faqs9.html.

95See 26 CFR 54.9831-1(c), 29 CFR 2590.732(c), 45 CFR 146.145(c).

health plan generally subject to the SBC
requirements. For a health FSA that does
not meet the criteria for excepted benefits
and that is integrated with other major
medical coverage, the SBC is prepared for
the other major medical coverage, and the
effects of the health FSA can be denoted
in the appropriate spaces on the SBC,
including those for deductibles, copay-
ments, coinsurance, and benefits other-
wise not covered by the major medical
coverage. A stand-alone health FSA,
which does not meet the criteria for ex-
cepted benefits, must satisfy the SBC re-
quirements independently.

On October 1, 2014, the Departments
published final rules on excepted bene-
fits.96 These regulations stated that an
EAP constitutes excepted benefits if it sat-
isfies certain requirements.97 If an EAP
qualifies as excepted benefits, the EAP
need not separately satisfy the SBC re-
quirements.

The Departments have issued guidance
regarding HRAs since the publication of
the 2012 final regulations.98 An HRA is a
group health plan. The Departments'
guidance on HRAs clarifies that such ar-
rangements are subject to the group mar-
ket reform provisions of the Affordable
Care Act, including the prohibition on an-
nual limits under PHS Act section 2711
and the requirement to provide certain
preventive services without cost sharing
under PHS Act section 2713. The Depart-
ments' guidance further clarifies that such
arrangements will not violate the market
reform provisions when integrated with a
group health plan that complies with those
provisions (and that such arrangements
cannot be integrated with individual mar-
ket policies to satisfy the market reforms).

Benefits under an HRA generally do
not constitute excepted benefits, and thus
HRAs are generally subject to the SBC

requirements. An HRA integrated with
other major medical coverage under a
group health plan need not separately sat-
isfy the SBC requirements; the SBC is
prepared for the other major medical cov-
erage, and the effects of employer alloca-
tions to an account under the HRA can be
denoted in the appropriate spaces on the
SBC, including those for deductibles, co-
payments, coinsurance, and benefits oth-
erwise not covered by the other major
medical coverage.

HSAs generally are not group health
plans and thus generally are not subject to
the SBC requirements. Nevertheless, an
SBC prepared for a high deductible health
plan associated with an HSA can (but is
not required to) mention the effects of
employer contributions to HSAs in the
appropriate spaces on the SBC, including
those for deductibles, copayments, coin-
surance, and benefits otherwise not cov-
ered by the high deductible health plan.

### IV. Applicability Date

Changes to the current requirements to
provide an SBC, notice of modification,
and uniform glossary under PHS Act sec-
tion 2715 and the 2012 final regulations
are proposed to apply for disclosures with
respect to participants and beneficiaries
who enroll or re-enroll in group health
coverage through an open enrollment pe-
riod (including re-enrollees and late en-
rollees) beginning on the first day of the
first open enrollment period that begins on
or after September 1, 2015. With respect
to disclosures to participants and benefi-
ciaries who enroll in group health cover-
age other than through an open enrollment
period (including individuals who are
newly eligible for coverage and special
enrollees), the requirements of these pro-
posed regulations are proposed to apply

beginning on the first day of the first plan
year that begins on or after September 1,
2015. For disclosures to plans, and to in-
dividuals and dependents in the individual
market, these requirements are proposed
to apply to health insurance issuers begin-
ning on September 1, 2015. We solicit
comments on these proposed applicability
dates.

### V. Economic Impact and Paperwork Burden

A. Executive Orders 12866 and
13563-Departments of Labor and HHS
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.
This rule has been designated a "signifi-
cant regulatory action" under section 3(f)
of Executive Order 12866. Accordingly,
the rule has been reviewed by the Office
of Management and Budget.

A regulatory impact analysis (RIA)
must be prepared for major rules with
economically significant effects ($100
million or more in any one year). As dis-
cussed below, the Departments have con-
cluded that these proposed regulations
would not have economic impacts of $100
million or more in any one year or other-
wise meet the definition of an "economi-
cally significant rule" under Executive Or-
der 12866. Nonetheless, consistent with
Executive Orders 12866 and 13563, the
Departments have provided an assessment

9679 FR 59130 (October 1, 2014).

97The first requirement is that the EAP does not provide significant benefits in the nature of medical care. For this purpose, the amount, scope, and duration of covered services are taken
into account. (See preamble discussion at 79 FR 59133 for examples). The second requirement is that the EAP's benefits cannot be coordinated with the benefits under another group health
plan. For this purpose, participants in the group health plan must not be required to use and exhaust benefits under the EAP (making the EAP a "gatekeeper") before an individual is eligible
for benefits under the other group health plan; and participant eligibility for benefits under the EAP must not be dependent on participation in another group health plan. The third requirement
is that no employee premiums or contributions may be required as a condition of participation in the EAP. The fourth requirement is that an EAP that constitutes excepted benefits may
not impose any cost-sharing requirements.

98On September 13, 2013, DOL and the Treasury published guidance on the application of the market reforms and other provisions of the Affordable Care Act to health reimbursement
arrangements (HRAs), certain health flexible spending arrangements (health FSAs) and certain other employer health care arrangements. See DOL Technical Release 2013-03, available at
http://www.dol.gov/ebsa/newsroom/tr13-03.html, and IRS Notice 2013-54, available at http://www.irs.gov/pub/irs-drop/n-13-54.pdf. HHS also issued guidance to reflect that HHS concurs
in the application of the laws under its jurisdiction as set forth in the DOL and Treasury Department guidance. See Insurance Standards Bulletin, Application of Affordable Care Act
Provisions to Certain Healthcare Arrangements, September 16, 2013, available at https://www.cms.gov/CCIIO/Resources/Regulations-and-Guidance/Downloads/cms-hra-notice-9-16-
2013.pdf. On May 13, 2013, two FAQs were made available on the IRS website addressing employer healthcare arrangements, available at: www.irs.gov/uac/Newsroom/Employer-Health-
Care-Arrangements. On November 6, 2014, the Departments issued three FAQs on the compliance of premium reimbursement arrangements. See ACA Implementation FAQs Part XXII,
available at http://www.dol.gov/ebsa/pdf/faq-aca22.pdf and http://www.cms.gov/CCIIO/Resources/Fact-Sheets-and-FAQs/aca_implementation_faqs22.html.

of the potential benefits and the costs as-
sociated with this proposed regulation.

The primary benefits of these proposed
regulations come from improved informa-
tion, which will enable consumers, both
individuals and employers, to better un-
derstand the health insurance coverage
they have and provide, and make better
coverage decisions based on their prefer-
ences with respect to benefit design, level
of financial protection, and cost. The De-
partments believe that such improvements
will result in a more efficient, competitive
market. These proposed regulations will
also benefit consumers by reducing the
time they spend searching for and compil-
ing health plan and coverage information.

The Departments have continued using
the cost methodology that was used to
estimate the costs presented in the 2012
final regulations. Since publication of the
2012 final regulations, the Departments
have refined assumptions and estimates to
incorporate better data. The estimates pre-
sented in these proposed regulations are a
result of those efforts and represent the
Departments' best estimates.

The primary cost of the proposed reg-
ulations is requiring issuers and plans to
create a third coverage example, a simple
foot fracture (with emergency room visit).
This third coverage example will fit on the

same page as the two existing coverage
examples in the SBC template, so no new
material costs are required by these pro-
posed regulations. The quantified costs of
these proposed regulations are for the ac-
tual production of the new coverage ex-
ample.

These proposed regulations allow issu-
ers and plans to continue to use the "Cov-
erage Example Calculator."99 This calcu-
lator benefits issuers and plan sponsors by
reducing the required time to produce the
coverage examples. The calculator allows
plans to either manually populate less than
20 data points on the plan's design for one
plan at a time, or to enter the data points
for multiple plans at once. Most of the
data fields needed for the new, proposed
coverage example are already required to
create the other two, already required cov-
erage examples. While plan sponsors and
issuers are not required to use the Cover-
age Example Calculator, the Departments
expect that many will. Those choosing to
perform the calculations without the cal-
culator will make their own determination
that it is more efficient and economically
advantageous, or otherwise more appro-
priate for them to do so.

Using assumptions similar to those
used in the regulatory impact analysis of
the 2012 final regulations, with respect to

plans and issuers that do not use the Cov-
erage Example Calculator, the Depart-
ments estimate that large issuers and
third-party administrators (TPAs), for all
their plans and products, would spend a
total of approximately 40 additional hours
creating the new coverage example (30
hours for medium firms, and 20 hours for
small firms). Once the new coverage ex-
ample is completed, the Departments es-
timate that large firms would spend an
estimated 25 hours in later years updating,
while medium firms would spend 19
hours and small firms would spend 13
hours.

This leads to an estimated cost in the
first year of $3.4 million and for each
subsequent year of $2.1 million to pro-
duce the coverage example. Actual cost
could be lower as firms organize their data
in a manner that will allow them to use the
automated functions of the Coverage Ex-
ample Calculator. Table 1 details the cal-
culations used to obtain the cost estimate
for creating the new, proposed coverage
example. The Paperwork Reduction Act
section below contains a discussion of ad-
ditional assumptions and data used to de-
velop this estimate.

Type of Labor

TABLE 1 .- Year 1, Creating New Coverage Example

Number of Firms

Hours Per Firm

Cost per Hour

Total Hour Burden

Equivalent Costs of Hours

Issuers

Large

22.0

$84

1,650

$138,584

Benefits

16.0

$62

1,200

$74,796

Legal

2.0

$130

150

$19,491

Sub-Total

3,000

$232,871

Medium

250

16.5

$84

4,125

$346,459

Benefits

250

12.0

$62

3,000

$186,990

Legal

250

1.5

$130

375

$48,728

Sub-Total

7,500

$582,176

Small

175

11.0

$84

1,925

$161,681

Benefits

175

8.0

$62

1,400

$87,262

Legal

175

1.0

$130

175

$22,740

Sub-Total

3,500

$271,682

TPAs

Large

158

22.0

$84

3,476

$291,949

Benefits

158

16.0

$62

2,528

$157,570

99 http://www.cms.gov/cciio/Resources/forms-reports-and-other-resources/index.html#sbcug. For more information on the calculator, see section II.A.3 earlier in this preamble.

TABLE 1 .- Year 1, Creating New Coverage Example Number of Hours Per Cost per Total Hour Equivalent Type of Labor Firms Firm Hour Burden Costs of Hours

Legal

158

2.0

$130

316

$41,061

Sub-Total

6,320

$490,581

Medium

526

16.5

$84

8,679

$728,949

Benefits

526

12.0

$62

6,312

$393,427

Legal

526

1.5

$130

789

$102,523

Sub-Total

15,780

$1,224,899

Small

368

11.0

$84

4,048

$339,992

Benefits

368

8.0

$62

2,944

$183,500

Legal

368

1.0

$130

368

$47,818

Sub-Total

7,360

$571,309

Total

43,460

$3,373,517

TABLE 2 .- Year 2, Creating New Coverage Example Number of Hours Per Cost per Total Hour Equivalent Type of Labor Firms Firm Hour Burden Costs of Hours

Issuers Large

13.8

$84

1,031

$86,615

Benefits

10.0

$62

750

$46,748

Legal

1.3

$130

$12,182

Sub-Total

1,875

$145,544

Medium

250

10.3

$84

2,578

$216,537

Benefits

250

7.5

$62

1,875

$116,869

Legal

250

0.9

$130

234

$30,455

Sub-Total

4,688

$363,860

Small

175

6.9

$84

1,203

$101,050

Benefits

175

5.0

$62

875

$54,539

Legal

175

0.6

$130

109

$14,212

Sub-Total

2,188

$169,801

TPAs

Large

158

13.8

$84

2,173

$182,468

Benefits

158

10.0

$62

1,580

$98,481

Legal

158

1.3

$130

198

$25,663

Sub-Total

3,950

$306,613

Medium

526

10.3

$84

5,424

$455,593

Benefits

526

7.5

$62

3,945

$245,892

Legal

526

0.9

$130

493

$64,077

Sub-Total

9,863

$765,562

Small

368

6.9

$84

2,530

$212,495

Benefits

368

5.0

$62

1,840

$114,687

Legal

368

0.6

$130

230

$29,886

Sub-Total

4,600

$357,068

Total

27,163

$2,108,448

B. Paperwork Reduction Act
1\. Department of Labor and Depart-
ment of the Treasury

To implement PHS Act section 2715
and these proposed regulations, collection

of information requirements relate to the
provision of the following:

· Summary of benefits and coverage.

· Coverage examples (as components of
each SBC).

· A uniform glossary of health coverage
and medical terms (uniform glossary).

· Notice of modifications.

A copy of the information collection
request (ICR) may be obtained by con-
tacting the PRA addressee: G. Christo-
pher Cosby, Office of Policy and Re-
search, U.S. Department of Labor,
Employee Benefits Security Administra-
tion, 200 Constitution Avenue, NW,
Room N-5718, Washington, DC 20210.
Telephone: (202) 693-8410; Fax: (202)
219-4745. These are not toll-free num-
bers. E-mail: ebsa.opr@dol.gov. ICRs
submitted to OMB also are available at
reginfo.gov (http://www.reginfo.gov/
public/do/PRAMain).

This analysis includes the coverage ex-
amples that are part of the SBC disclosure,
therefore, the Departments calculate a sin-
gle burden estimate for purposes of this
section, assuming the information collec-
tion request for the SBC (including cov-
erage examples) totals eight (8) sides of a
page in length.

The Departments assume fully-
insured ERISA plans will rely on health
insurance issuers and self-insured plans
will rely on TPAs to perform these func-
tions. While self-insured plans may pre-
pare SBCs internally, the Departments
make this simplifying assumption be-
cause most plans appear to rely on issu-
ers and TPAs for the purpose of admin-
istrative duties, such as enrollment and
claims processing. Thus, the Depart-
ments use health insurance issuers and
TPAs as the unit of analysis for the

purposes of estimating administrative
costs.

The Departments estimate there are a
total of 500 issuers and 1,050 TPAs
affected by this information collec-
tion.100 Because HHS shares the hour
and cost burden for fully-insured plans
with the Departments of Labor and the
Treasury, HHS assumes 50 percent of
the hour and cost burden estimates to
account for burden for issuers in the
individual market and 15 percent of the
burden for TPAs to account for those
TPAs serving self-insured non-Federal
governmental plans. The Departments
of Labor and the Treasury assume the
other 50 percent of the burden related to
issuers to account for burden servicing
fully insured ERISA plans, and 85 per-
cent of the burden related to TPAs to
account for the burden related to ERISA
self-insured plans.

To account for variation in costs due to
firm size and the number of plans and
individuals they service, the Departments
divide issuers into small, medium, and
large categories.101 Accordingly, the De-
partments estimate that there are approx-
imately 175 small, 250 medium, and 75
large issuers. The Departments lack infor-
mation to create a similar split for TPAs,
so they assume a similar distribution re-
sulting in an estimate of approximately
368 small, 526 medium, and 158 large
TPAs.

The estimated hour burden and
equivalent cost for the collections of
information are as follows: The Depart-
ments estimate an administrative burden
on issuers and TPAs to make appropri-
ate changes to IT systems and processes

and make updates to the SBCs and cov-
erage examples. The Departments esti-
mate that large firms would spend 190
hours (40 hours of which would be new
due to the proposed regulation) in the
first year, medium firms would spend 75
percent of large firm hour burden, and
small firms would spend 50 percent of
the large firm hour burden to perform
these tasks. The total burden would be
split among IT professionals (55 per-
cent), benefits professionals (40 per-
cent), and legal professionals (5 per-
cent), with hourly labor rates of $83.99,
$62.33, and $129.94 respectively.102
Clerical labor rates are $30.42 per hour.

Tables 3 (first year) and 4 (subse-
quent years) show the calculations used
to obtain the hours burden of 153,600
hours (first year) and 141,600 hours
(subsequent years) and the equivalent
cost burden of $11.9 million (first year)
and $11.0 million (subsequent years) for
issuers and TPAs to prepare the SBCs
and coverage examples. In addition,
clerical employees would spend 653,000
hours with an equivalent cost of $19.8
million in each year preparing and dis-
tributing the SBCs.

Based on the foregoing , the total hours
burden for this information collection
would be 806,000 hours for the first year
(794,000 hours for subsequent years) with
an equivalent cost of $31.7 million for the
first year ($30.8 million for subsequent
years). This burden is split evenly be-
tween the Departments of Labor and the
Treasury.

100The estimate for the number of issuers is based on the number of issuers for the group and individual market filing with HHS for the Medical Loss Ratio regulations. See 45 CFR Part
158. The number of TPAs is based on the U.S. Census's 2011 Statistics of U.S. Businesses that reports there are 3,157 TPA's. Previous discussions with industry experts led to assuming
about one-third of the TPA's (1,052) could be providing services to self-insured plans.

101The Departments define small issuers as those with total earned premiums less than $50 million; medium issuers as those with total earned premiums between $50 million and $999
million; and large issuers as those with total earned premiums of $1 billion or more. The premium revenue data come from the 2009 NAIC financial statements, also known as "Blanks,"
where insurers report information about their various lines of business.

102The Departments' 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). Computer Systems Analysts (15-1121):
$41.02(2013 BLS Wage rate) /0.69(ECEC ratio) *1.35(Overhead Load Factor) *1.023(Inflation rate) 2(Inflated 2 years from base year) = $83.99; Compensation, benefits, and job analysis
specialists (13-1141): $30.44(2013 BLS Wage rate) /0.69(ECEC ratio) *1.35(Overhead Load Factor) *1.023(Inflation rate) 2(Inflated 2 years from base year) = $62.33; Legal 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; 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.

TABLE 1 .- Update SBC including Coverage Examples, Year 1

Type of Labor

Number of Firms

Hours Per Firm

Cost per Hour

Total Hour Burden

Total Cost Burden

Issuers

Large

52.3

$84

3,919

$329,136

Benefits

38.0

$62

2,850

$177,641

Legal

4.8

$130

356

$46,291

Sub-Total

7,125

$553,067

Medium

250

39.9

$84

9,969

$837,275

Benefits

250

29.0

$62

7,250

$451,893

Legal

250

3.6

$130

906

$117,758

Sub-Total

18,125

$1,406,926

Small

175

26.1

$84

4,572

$383,992

Benefits

175

19.0

$62

3,325

$207,247

Legal

175

2.4

$130

416

$54,006

Sub-Total

8,313

$645,245

TPAs

Large

158

88.8

$84

14,034

$1,178,745

Benefits

158

64.6

$62

10,207

$636,190

Legal

158

8.1

$130

1,276

$165,784

Sub-Total

25,517

$1,980,719

Medium

526

67.8

$84

35,656

$2,994,766

Benefits

526

49.3

$62

25,932

$1,616,329

Legal

526

6.2

$130

3,241

$421,197

Sub-Total

64,830

$5,032,293

Small

368

44.4

$84

16,344

$1,372,716

Benefits

368

32.3

$62

11,886

$740,879

Legal

368

4.0

$130

1,486

$193,065

Sub-Total

29,716

$2,306,660

Total

153,625

$11,924,910

TABLE 1 .- Update SBC including Coverage Examples, Subsequent Years

Type of Labor

Number of Firms

Hours Per Firm

Cost per Hour

Total Hour Burden

Total Cost Burden

Issuers Large

48.1

$84

3,609

$303,151

Benefits

35.0

$62

2,625

$163,616

Legal

4.4

$130

328

$42,637

Sub-Total

6,563

$509,404

Medium

250

36.8

$84

9,195

$772,314

Benefits

250

26.8

$62

6,688

$416,832

Legal

250

3.3

$130

836

$108,622

Sub-Total

16,719

$1,297,768

Small

175

24.1

$84

4,211

$353,677

Benefits

175

17.5

$62

3,063

$190,886

Legal

175

2.2

$130

383

$49,743

Sub-Total

7,656

$594,305

TPAs

TABLE 1 .- Update SBC including Coverage Examples, Subsequent Years

Type of Labor

Number of Firms

Hours Per Firm

Cost per Hour

Total Hour Burden

Total Cost Burden

Large

158

81.8

$84

12,926

$1,085,686

Benefits

158

59.5

$62

9,401

$585,964

Legal

158

7.4

$130

1,175

$152,696

Sub-Total

23,503

$1,824,346

Medium

526

62.5

$84

32,890

$2,762,414

Benefits

526

45.5

$62

23,920

$1,490,924

Legal

526

5.7

$130

2,990

$388,518

Sub-Total

59,800

$4,641,856

Small

368

40.9

$84

15,054

$1,264,343

Benefits

368

29.8

$62

10,948

$682,389

Legal

368

3.7

$130

1,369

$177,823

Sub-Total

27,370

$2,124,555

Total

141,610

$10,992,235

The Departments also estimate the cost
burden associated with the SBC, Uniform
Glossary and Notice of Modification.
These costs are discussed below.

· SBC-The Departments estimate that
approximately 60.6 million SBCs will
be delivered with 527,000 going to
ERISA plans and 60.1 million going to
participants and beneficiaries annu-
ally.103 The Departments assume 50
percent of the SBCs going to plans
would be sent electronically while 38
percent of SBCs would be sent elec-
tronically to plan participants. Accord-
ingly, the Departments estimate that
about 23.4 million SBCs would be dis-
tributed electronically and about 37.2
million SBCs would be distributed on
paper. The Departments assume there
are costs only for paper disclosures,
with de minimis costs for electronic
disclosures. The SBC, with coverage

examples, is assumed to be four
double-sided pages (eight page sides)
in length. Paper SBCs sent to partici-
pants would have no postage costs as
they could be included in mailings
with other plan materials, however all
notices sent to beneficiaries living
apart from the participant would be
mailed and have a 49 cent postage
costs. Printing costs would be five
cents per page. Each document sent by
mail would have a one minute prepa-
ration burden, with the task performed
by a clerical worker. Based on the
foregoing, the total cost burden to pre-
pare and distribute the SBC would be
$16.4 million.

· Uniform Glossary - The Depart-
ments assume that 2.5 percent of those
who receive paper SBCs will request
glossaries in paper form (that is, about
1.1 million glossary requests). The to-
tal cost burden to prepare and distrib-

ute paper copies of the Uniform Glos-
saries would be $760,000.

· Notice of Modifications - The De-
partments assume that issuers and
plans will send notices of modification
to covered participants and beneficia-
ries, and that 2 percent of covered par-
ticipants and beneficiaries will receive
such notices (1.2 million notices). As
with the SBC, 50 percent of plans and
38 percent of policy holders will re-
ceive electronic notices. Paper notices
are assumed to be of the same length
as an SBC, and will incur a postage
cost of 49 cents. The total cost burden
to prepare and distribute the notices of
modification would be $640,000.

Based on the foregoing, the total an-
nual cost burden is estimated to be $16.4
million. This burden is split evenly be-
tween the Departments of Labor and the
Treasury.

TABLE .- Preparation and Distribution Costs: Cost Burden

Number of Disclosures

Number of Disclosures Sent on Paper

Material and Printing Costs

Postage Costs

Total Cost Burden

SBC with Coverage Examples to Group Health Plan

Renewal or Application

527,328

263,664

$105,466

Sub-Total

527,328

263,664

$105,466

SBC with Coverage Examples To Participants and Beneficiaries

2\.
103Based on the 2012 Current Population Survey the Department estimates there are 58.0 million policy holders in ERISA plans http://www.dol.gov/ebsa/pdf/coveragebulletin2013.pdf table

TABLE .- Preparation and Distribution Costs: Cost Burden

Number of Disclosures

Number of Disclosures Sent on Paper

Material and Printing Costs

Postage Costs

Total Cost Burden

Upon Application or Eligi- bility

2,030,000

1,015,000

$406,000

Upon Renewal

58,000,000

35,960,000

$14,384,000

Beneficiaries Living Apart

90,000

$36,000

$44,100

$80,100

Sub-Total

60,120,000

36,975,000

$14,826,000

$44,100

$14,870,100

Uniform Glossary

1,102,000

$220,400

$539,980

$760,380

Notice of Modification

1,160,000

719,200

$287,680

$352,408

$640,088

Total

62,909,328

39,059,864

$15,439,546

$936,488

$16,376,034

TABLE .- Preparation and Distribution Costs: Hour Burden

Number of Disclosures

Number of Disclo- sures Sent on Pa- per

Clerical Hours

Clerical Costs

Total Hour Burden

Total Equivalent Cost

SBC with Coverage Examples to Group Health Plan

Renewal or Application

527,328

263,664

4,394

$130,074

4,394

$130,074

Sub-Total

527,328

263,664

4,394

$130,074

4,394

$130,074

SBC with Coverage Examples To Participants and Beneficiaries

bility Upon Application or Eligi-

2,030,000

1,015,000

16,917

$500,733

16,917

$500,733

Upon Renewal

58,000,000

35,960,000

599,333

$17,740,267

599,333

$17,740,267

Beneficiaries Living Apart

90,000

1,500

$44,400

1,500

$44,400

Sub-Total

60,120,000

36,975,000

617,750

$18,285,400

617,750

$18,285,400

Uniform Glossary

1,102,000

18,367

$543,653

18,367

$543,653

Notice of Modification

1,160,000

719,200

11,987

$354,805

11,987

$354,805

Total

62,909,328

39,059,864

652,498

$19,313,933

652,498

$19,313,933

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 2015-
2017 paperwork burden estimates are
summarized as follows:

Type of Review:

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

Title: Affordable Care Act Uniform
Explanation of Coverage Documents

OMB Number:
1210-0147;
1545-
2229.

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

Total Respondents: 2,389,000
Total Responses: 62,909,000
Frequency of Response: On-going.
Estimated Total Annual Burden Hours
(three year average): 399,000 hours (Em-
ployee Benefits Security Administration);
399,000 hours (Internal Revenue Service).

Estimated Total Annual Cost Burden
(three year average): $8,188,000 (Em-

ployee Benefits Security Administration);
$8,188,000 (Internal Revenue Service).

2\. Department of Health and Human
Services

The Paperwork Reduction Act (PRA)
section for the Departments of Labor and
the Treasury above contain the assump-
tions, data sources, and explanations of
the Departments' methodology for esti-
mating the PRA burden. The following
tables summarize the Department of
Health and Human Services' burden esti-
mates.

TABLE 1 .- Update SBC including Coverage Examples; Year 1

Type of Labor

Number of Firms

Hours Per Firm

Cost per Hour

Total Hour Burden

Equivalent Costs

Issuers

Large

52.3

$84

3,919

$329,136

Benefits

38.0

$62

2,850

$177,641

Legal

4.8

$130

356

$46,291

Sub-Total

7,125

$553,067

Medium

250

39.9

$84

9,969

$837,275

Benefits

250

29.0

$62

7,250

$451,893

Legal

250

3.6

$130

906

$117,758

Sub-Total

18,125

$1,406,926

Small

175

26.1

$84

4,572

$383,992

Benefits

175

19.0

$62

3,325

$207,247

Legal

175

2.4

$130

416

$54,006

Sub-Total

8,313

$645,245

TPAs

Large

158

15.7

$84

2,477

$208,014

Benefits

158

11.4

$62

1,801

$112,269

Legal

158

1.4

$130

225

$29,256

Sub-Total

4,503

$349,539

Medium

526

12.0

$84

6,292

$528,488

Benefits

526

8.7

$62

4,576

$285,235

Legal

526

1.1

$130

572

$74,329

Sub-Total

11,441

$888,052

Small

368

7.8

$84

2,884

$242,244

Benefits

368

5.7

$62

2,098

$130,743

Legal

368

0.7

$130

262

$34,070

Sub-Total

5,244

$407,058

Total

54,750

$4,249,887

TABLE 1 .- Update SBC including Coverage Examples, Subsequent Years

Type of Labor

Number of Firms

Hours Per Firm

Cost per Hour

Total Hour Burden

Equivalent Costs

Issuers

Large

48.1

$84

3,609

$303,151

Benefits

35.0

$62

2,625

$163,616

Legal

4.4

$130

328

$42,637

Sub-Total

6,563

$509,404

Medium

250

36.8

$84

9,195

$772,314

Benefits

250

26.8

$62

6,688

$416,832

Legal

250

3.3

$130

836

$108,622

Sub-Total

16,719

$1,297,768

Small

175

24.1

$84

4,211

$353,677

Benefits

175

17.5

$62

3,063

$190,886

Legal

175

2.2

$130

383

$49,743

Sub-Total

7,656

$594,305

TPAs

Large

158

14.4

$84

2,281

$191,592

TABLE 1 .- Update SBC including Coverage Examples, Subsequent Years

Type of Labor

Number of Firms

Hours Per Firm

Cost per Hour

Total Hour Burden

Equivalent Costs

Benefits

158

10.5

$62

1,659

$103,405

Legal

158

1.3

$130

207

$26,946

Sub-Total

4,148

$321,943

Medium

526

11.0

$84

5,804

$487,485

Benefits

526

8.0

$62

4,221

$263,104

Legal

526

1.0

$130

528

$68,562

Sub-Total

10,553

$819,151

Small

368

7.2

$84

2,657

$223,119

Benefits

368

5.3

$62

1,932

$120,422

Legal

368

0.7

$130

242

$31,381

Sub-Total

4,830

$374,922

Total

50,468

$3,917,493

TABLE 2 .- Preparation and Distribution Costs

Number of Disclosures

Number of Disclosures Sent on Paper

Clerical Hour Burden

Total Equivalent Cost

Group Health Plan

SBC with Coverage Examples

15,750

7,875

131.25

$3,885

SBC with Coverage Examples-Participants and Beneficiaries

Upon Application or Eligibility

222,680

111,340

1,855.67

$54,928

Upon Renewal

17,129,262

8,564,631

142,743.85

$4,225,218

Beneficiaries Living Apart

33,000

550.00

$16,280

Sub-Total

17,384,942

8,708,971

145,150

$4,296,426

Uniform Glossary

428,232

7,137

$211,261

Notice of Modification

342,585

171,293

2,855

$84,504

Individual Market

SBC with Coverage Examples

21,784,217

6,535,265

108,921

$3,224,064

Uniform Glossary

762,448

12,707

$376,141

Notice of Modification

435,684.34

130,705

2,178

$64,481

Total

41,153,858

16,744,788

279,080

$8,260,762

TABLE 3 .- Preparation and Distribution Costs

Number of Disclosures

Number of Disclosures Sent on Paper

Material and Printing Costs

Postage Costs

Total Cost Burden

Group Health Plan

SBC with Coverage Examples

15,750

7,875

$3,150

SBC with Coverage Examples-Participants and Beneficiaries

Upon Application or Eligibility

222,680

111,340

$44,536

Upon Renewal

17,129,262

8,564,631

$3,425,852

Beneficiaries Living Apart

33,000

$13,200

$16,170

$29,370

Sub-Total

17,384,942

8,708,971

$3,483,588

$16,170

$3,499,758

Uniform Glossary

428,232

$85,646

$209,833

$295,480

Notice of Modification

342,585

171,293

$68,517

$83,933

$152,450

TABLE 3 .- Preparation and Distribution Costs

Number of Disclosures

Number of Disclosures Sent on Paper

Material and Printing Costs

Postage Costs

Total Cost Burden

Individual Market

SBC with Coverage Examples

21,784,217

6,535,265

$2,614,106

Uniform Glossary

762,448

$152,490

$373,599

$526,089

Notice of Modification

435,684.34

130,705

$52,282

$64,046

$116,328

Total

41,153,858

16,744,788

$6,459,780

$747,582

$7,207,361

HHS is proposing that issuers be re-
quired to make available on an Internet
web address a copy of the actual individ-
ual coverage policy or group certificate of
coverage.104 HHS estimates that the bur-
den of this request will be de minimis
because the documents will have already
been created and issuers already have web
addresses on which the materials can be
made available.

The Department notes 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 2015-2017 paperwork burden es-
timates are summarized as follows:

Type of Review: Revision.

Agency: Department of Health and Hu-
man Services.

Title: Summary of benefits and Cover-
age Uniform Glossary

CMS Identifier (OMB Control Num-
ber): CMS-10407 (0938-1146).

Affected Public: State, Local, or Tribal
Governments.

Total Respondents: 126,500.

Total Responses: 41,154,000.

Frequency of Response: On-going.

Estimated Total Annual Burden Hours
(three year average): 331,000 hours.

Estimated Total Annual Cost Burden
(three year average): $7,207,000ICRs Re-
lated to Deemed Compliance Reporting
(45 CFR 147.200(a)(4)(iii)(C))

Under 45 CFR 147.200(a)(4)(iii)(C), if
individual health insurance issuers pro-
vide the content required for the SBC to
the federal health reform Web portal de-
scribed in 45 CFR 159.120 (HealthCar-
e.gov), then they will be deemed to have
satisfied the requirement to provide an
SBC to individuals who request informa-

tion about coverage prior to submitting an
application for coverage. Individual
health insurance issuers already provide
most SBC content elements to HealthCar-
e.gov, except for five data elements re-
lated to patient responsibility for each
coverage example: deductibles, co-
payments, co-insurance, coverage limits
or exclusions, and the total out-of-pocket
cost to the enrollee in view of these cost-
sharing amounts and coverage limits or
exclusions.

Accordingly, the additional burden as-
sociated with the requirements under
§ 147.200(a)(4)(iii)(C) is the time and ef-
fort it would take each of the 320 issuers
submitting this data in the individual mar-
ket to enter the five additional data ele-
ments into an Excel spreadsheet. We es-
timate that it will take these issuers about
160 hours, at a total estimated cost of
about $4,800, for each coverage example.
For three coverage examples, the burden
and cost would be about 480 hours at a
cost of about $14,400.

In deriving these figures, we used the
following hourly labor rates and estimated
the time to complete each task: $ 30.78/hr.
and 0.5 hr./issuer for clerical staff to enter
data into an Excel spreadsheet, or about
$15 per respondent per coverage example.

This information collection require-
ment reflects the requirement that issuers
must provide all content required in the
SBC, including the information necessary
for coverage examples, to HealthCare.gov
to be deemed compliant. The aforemen-
tioned burden estimates will be submitted
for OMB review and approval as a revi-
sion to the information collection request
currently approved under OMB control
number 0938-1086.

To obtain copies of the supporting
statement and any related forms for the
proposed paperwork collections refer-
enced above, access CMS' Web site at
http://www.cms.gov/PaperworkReduction
Actof1995/PRAL/list.asp#TopOfPage or
email your request, including your ad-
dress, phone number, OMB control num-
ber, and CMS document identifier, to
Paperwork@cms.hhs.gov, or call the Re-
ports Clearance Office at 410-786-1326.

#### C. 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. Unless the
head of an agency certifies that a proposed
rule is not likely to have a significant
economic impact on a substantial number
of small entities, section 603 of the RFA
requires that the agency present an initial
regulatory flexibility analysis (IRFA) de-
scribing the rule's impact on small entities
and explaining how the agency made its
decisions with respect to the application
of the rule to 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.")

104See proposed 45 CFR 147.200(a)(2)(i)(J).

There are several different types of
small entities affected by these proposed
regulations. For issuers and TPAs, the De-
partments use as their measure of signifi-
cant economic impact on a substantial
number of small entities a change in rev-
enues of more than 3 to 5 percent. For
plans, the Departments continue to con-
sider a small plan to be an employee ben-
efit plan with fewer than 100 partici-
pants.105 Further, while some large
employers may have small plans, in gen-
eral small employers maintain most small
plans. Thus, the Departments believe that
assessing the impact of this proposed rule
on small plans is an appropriate substitute
for evaluating the effect on small entities.
The definition of small entity considered
appropriate for this purpose differs, how-
ever, from a definition of small business
that is based on size standards promul-
gated by the Small Business Administra-
tion (SBA) (13 CFR 121.201) pursuant to
the Small Business Act (15 U.S.C. 631 et
seq.). The Departments therefore request
comments on the appropriateness of the
size standard used in evaluating the im-
pact of these proposed regulations on
small entities.

The Departments carefully considered
the likely impact of the rule on small
entities in connection with their assess-
ment under Executive Order 12866. The
Departments believe that the proposed
regulations include flexibility like allow-
ing use of the Coverage Example Calcu-
lator that would minimize the burden on
small entities. Also, the Departments be-
lieve that the burden imposed by the pro-
posed regulation on small insurers and
small TPAs will be 20 hours or less an-
nually.

The Departments hereby certify that
these proposed regulations will not have a
significant economic impact on a substan-
tial number of small entities, as described
above. Consistent with the policy of the
RFA, the Departments encourage the pub-
lic to submit comments that would allow
the Departments to assess the impacts spe-
cifically on small entities or suggest alter-
native rules that accomplish the stated
purpose of PHS Act section 2715 and
minimize the impact on small entities.

D. 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 proposed rule
that includes a Federal mandate that could
result 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 2014, that threshold
level is approximately $141 million.
These proposed regulations include no
mandates on State, local, or Tribal gov-
ernments. These proposed regulations
propose requirements regarding standard-
ized consumer disclosures that would af-
fect private sector firms (for example,
health insurance issuers offering coverage
in the individual and group markets, and
third-party administrators providing ad-
ministrative services to group health
plans), but we conclude that these costs
would not exceed the $141 million thresh-
old. Thus, the Departments of Labor and
HHS conclude that these proposed regu-
lations would not impose an unfunded
mandate on State, local or Tribal govern-
ments or the private sector. Regardless,
consistent with policy embodied in
UMRA, the proposed requirements de-
scribed in this notice of proposed rule-
making has been designed to be the least
burdensome alternative for State, local
and Tribal governments, and the private
sector while achieving the objectives of
the Affordable Care Act.

E. 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 proposed rules have
federalism implications because they
would have direct effects on the States,
the relationship between national govern-
ments and States, or on the distribution of
power and responsibilities among various
levels of government relating to the dis-
closure of health insurance coverage in-
formation to consumers. Under these pro-
posed rules, all group health plans and
health insurance issuers offering group or
individual health insurance coverage, in-
cluding self-funded non-federal govern-
mental plans as defined in section 2791 of
the PHS Act, would be required to follow
uniform standards for compiling and pro-
viding a summary of benefits and cover-
age to consumers. Such Federal standards
developed under PHS Act section 2715(a)
would preempt any related State standards
that require a summary of benefits and
coverage that provides less information to
consumers than that required to be pro-
vided under PHS Act section 2715(a).

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
2724 of the PHS Act (implemented in 29
CFR 2590.731(a) and 45 CFR 146.143(a))
apply so that the HIPAA requirements
(including those of the Affordable Care
Act) are not to be "construed to supersede
any provision of State law which estab-
lishes, implements, or continues in effect
any standard or requirement solely relat-
ing to health insurance issuers in connec-
tion with group health insurance coverage
except to the extent that such standard or
requirement prevents the application of a
requirement" of a Federal standard. The
conference report accompanying HIPAA
indicates that this is intended to be the

105The 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.

"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. However, under
these proposed rules, a State would not be
allowed to impose a requirement that
modifies the summary of benefits and cov-
erage required to be provided under PHS
Act section 2715(a), because it would pre-
vent the application of this proposed
rule's uniform disclosure requirement.

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, including the provisions of
section 2715 of the PHS Act. Throughout
the process of developing these proposed
regulations, to the extent feasible within
the specific preemption provisions of
HIPAA as it applies to the Affordable
Care Act, the Departments 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 pro-
posed rule, the Departments certify that
the Employee Benefits Security Adminis-
tration and the Centers for Medicare &
Medicaid Services have complied with the

requirements of Executive Order 13132
for the attached proposed rule in a mean-
ingful and timely manner.

F. Special Analyses - Department of
the Treasury

For purposes of the Department of the
Treasury it has been determined that this
notice of proposed rulemaking is not a
significant regulatory action as defined in
Executive Order 12866, as supplemented
by Executive Order 13563. Therefore, a
regulatory assessment is not required. It
has also been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply to
these proposed regulations. For a discus-
sion of the impact of this proposed rule on
small entities, please see section V.C. of
this preamble. Pursuant to section 7805(f)
of the Code, this notice of proposed rule-
making has been submitted to the Small
Business Administration for comment on
its impact on small business.

#### G. Congressional Review Act

This proposed rule is subject to the
Congressional Review Act provisions of
the Small Business Regulatory Enforce-
ment Fairness Act of 1996 (5 U.S.C. 801
et seq.), which specifies that before a rule
can take effect, the Federal agency pro-
mulgating 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.

### VI. Statutory Authority

The Department of the Treasury regu-
lations are proposed to be adopted pursu-
ant to the authority contained in sections
7805 and 9833 of the Code.

The Department of Labor regulations
are proposed to be adopted pursuant to the
authority contained in 29 U.S.C. 1027,
1059, 1135, 1161-1168, 1169, 1181-
1183, 1181 note, 1185, 1185a, 1185b,
1185d, 1191, 1191a, 1191b, and 1191c;
sec. 101(g), Pub. L.104-191, 110 Stat.
1936; sec. 401(b), Pub. L. 105-200, 112
Stat. 645 (42 U.S.C. 651 note); sec.
512(d), Pub. L. 110-343, 122 Stat. 3881;
sec. 1001, 1201, and 1562(e), Pub. L.
111-148, 124 Stat. 119, as amended by
Pub. L. 111-152, 124 Stat. 1029; Secre-

tary of Labor's Order 1-2011, 77 FR 1088
(January 9, 2012).

The Department of Health and Human
Services regulations are proposed to be
adopted pursuant to the authority con-
tained in sections 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.
Signed this 18th day of December,
2014.

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

CMS-9938-P

Dated: December 18, 2014

Marilyn Tavenner,
Administrator,
Centers for Medicare
& Medicaid Services.

Dated: December 19, 2014

Sylvia Burwell,
Secretary,
Department of Health
and Human Services

#### DEPARTMENT OF THE TREASURY

Internal Revenue Service
26 CFR Chapter 1

Accordingly, 26 CFR Part 54 is pro-
posed to be amended as follows:

##### PART 54 -PENSION EXCISE TAXES

Paragraph 1. The authority citation for
Part 54 continues to read as follows:

Authority: Authority: 26 U.S.C. 7805.
* * *

Section 54.9815-2715 also issued un-
der 26 U.S.C. 9833.

Paragraph 2. Section 54.9815-2715 is
revised to read as follows:

### § 54.9815-2715 Summary of benefits and coverage and uniform glossary.

(a) Summary of benefits and coverage-
(1) In general. A group health plan (and
its administrator as defined in section
3(16)(A) of the Employee Retirement In-
come Security Act of 1974 (ERISA)), and
a health insurance issuer offering group
health insurance coverage, is required to
provide a written summary of benefits and
coverage (SBC) for each benefit package
without charge to entities and individuals
described in this paragraph (a)(1) in ac-
cordance with the rules of this section.

(i) SBC provided by a group health
insurance issuer to a group health plan -
(A) Upon application. A health insurance
issuer offering group health insurance
coverage must provide the SBC to a group
health plan (or its sponsor) upon applica-
tion for health coverage, as soon as prac-
ticable following receipt of the applica-
tion, but in no event later than seven
business days following receipt of the ap-
plication. If an SBC was provided before
application pursuant to paragraph (a)(1)(i)(D)
of this section (relating to SBCs upon
request), this paragraph (a)(1)(i)(A) is
deemed satisfied, provided there is no
change to the information required to be
in the SBC. However, if there has been a
change in the information required, a new
SBC that includes the correct information
must be provided upon application pursu-
ant to this paragraph (a)(1)(i)(A).

(B) By first day of coverage (if there
are changes). If there is any change in the
information required to be in the SBC that
was provided upon application and before
the first day of coverage, the issuer must
update and provide a current SBC to the
plan (or its sponsor) no later than the first
day of coverage.

(C) Upon renewal, reissuance, or re-
enrollment. If the issuer renews or reis-
sues a policy, certificate, or contract of
insurance for a succeeding policy year, or
automatically re-enrolls the policyholder
or its participants and beneficiaries in cov-

erage, the issuer must provide a new SBC
as follows:

(1) If written application is required (in
either paper or electronic form) for re-
newal or reissuance, the SBC must be
provided no later than the date the written
application materials are distributed.

(2) If renewal, reissuance, or re-
enrollment is automatic, the SBC must be
provided no later than 30 days prior to the
first day of the new plan or policy year;
however, with respect to an insured plan,
if the policy, certificate, or contract of
insurance has not been issued or renewed
before such 30-day period, the SBC must
be provided as soon as practicable but in
no event later than seven business days
after issuance of the new policy, certifi-
cate, or contract of insurance, or the re-
ceipt of written confirmation of intent to
renew, whichever is earlier.

(D) Upon request. If a group health
plan (or its sponsor) requests an SBC or
summary information about a health in-
surance product from a health insurance
issuer offering group health insurance
coverage, an SBC must be provided as
soon as practicable, but in no event later
than seven business days following re-
ceipt of the request.

(ii) SBC provided by a group health
insurance issuer and a group health plan
to participants and beneficiaries - (A) In
general. A group health plan (including its
administrator, as defined under section
3(16) of ERISA), and a health insurance
issuer offering group health insurance
coverage, must provide an SBC to a par-
ticipant or beneficiary (as defined under
sections 3(7) and 3(8) of ERISA), and
consistent with the rules of paragraph
(a)(1)(iii) of this section, with respect to
each benefit package offered by the plan
or issuer for which the participant or ben-
eficiary is eligible.

(B) Upon application. The SBC must
be provided as part of any written appli-
cation materials that are distributed by the
plan or issuer for enrollment. If the plan or
issuer does not distribute written applica-
tion materials for enrollment, the SBC
must be provided no later than the first
date on which the participant is eligible to
enroll in coverage for the participant or
any beneficiaries. If an SBC was provided
before application pursuant to paragraph
(a)(1)(ii)(F) of this section (relating to

SBCs upon request), this paragraph
(a)(1)(ii)(B) is deemed satisfied, provided
there is no change to the information re-
quired to be in the SBC. However, if there
has been is a change in the information
content, a new SBC that includes the cor-
rect information must be provided upon
application pursuant to this paragraph
(a)(1)(ii)(B).

(C) By first day of coverage (if there
are changes). If there is any change to the
information required to be in the SBC that
was provided upon application and before
the first day of coverage, the plan or issuer
must update and provide a current SBC to
a participant or beneficiary no later than
the first day of coverage.

(D) Special enrollees. The plan or is-
suer must provide the SBC to special en-
rollees (as described in § 54.9801-6) no
later than the date by which a summary
plan description is required to be provided
under the timeframe set forth in ERISA
section 104(b)(1)(A) and its implementing
regulations, which is 90 days from enroll-
ment.

(E) Upon renewal, reissuance, or re-
enrollment. If the plan or issuer requires
participants or beneficiaries to renew in
order to maintain coverage (for example,
for a succeeding plan year), or automati-
cally re-enrolls participants and beneficia-
ries in coverage, the plan or issuer must
provide a new SBC, as follows:

(1) If written application is required for
renewal, reissuance, or re-enrollment (in
either paper or electronic form), the SBC
must be provided no later than the date on
which the written application materials
are distributed.

(F) Upon request. A plan or issuer
must provide the SBC to participants or
beneficiaries upon request for an SBC or

summary information about the health
coverage, as soon as practicable, but in no
event later than seven business days fol-
lowing receipt of the request.

(iii) Special rules to prevent unneces-
sary duplication with respect to group
health coverage - (A) An entity required
to provide an SBC under this paragraph
(a)(1) with respect to an individual satis-
fies that requirement if another party pro-
vides the SBC, but only to the extent that
the SBC is timely and complete in accor-
dance with the other rules of this section.
Therefore, for example, in the case of a
group health plan funded through an in-
surance policy, the plan satisfies the re-
quirement to provide an SBC with respect
to an individual if the issuer provides a
timely and complete SBC to the individ-
ual. An entity required to provide an SBC
under this paragraph (a)(1) with respect to
an individual that contracts with another
party to provide such SBC is considered
to satisfy the requirement to provide such
SBC if:

(1) The entity monitors performance
under the contract;

(3) If the entity has knowledge the SBC
is not being provided in a manner that
satisfies the requirements of this section
and the entity does not have all informa-
tion necessary to correct the noncompli-
ance, the entity communicates with par-
ticipants and beneficiaries who are
affected by the noncompliance regarding
the regarding the noncompliance, and be-
gins taking significant steps as soon as
practicable to avoid future violations.

(B) If a single SBC is provided to a
participant and any beneficiaries at the
participant's last known address, then the
requirement to provide the SBC to the
participant and any beneficiaries is gener-
ally satisfied. However, if a beneficiary's
last known address is different than the
participant's last known address, a sepa-
rate SBC is required to be provided to the
beneficiary at the beneficiary's last known
address.

(C) With respect to a group health plan
that offers multiple benefit packages, the
plan or issuer is required to provide a new
SBC automatically to participants and
beneficiaries upon renewal or re-
enrollment only with respect to the benefit
package in which a participant or benefi-
ciary is enrolled (or will be automatically
re-enrolled under the plan); SBCs are not
required to be provided automatically
upon renewal or re-enrollment with re-
spect to benefit packages in which the
participant or beneficiary is not enrolled
(or will not automatically be enrolled).
However, if a participant or beneficiary
requests an SBC with respect to another
benefit package (or more than one other
benefit package) for which the participant
or beneficiary is eligible, the SBC (or
SBCs, in the case of a request for SBCs
relating to more than one benefit package)
must be provided upon request as soon as
practicable, but in no event later than
seven business days following receipt of
the request.

(2) Content - (i) In general. Subject to
paragraph (a)(2)(iii) of this section, the
SBC must include the following:

(A) Uniform definitions of standard in-
surance terms and medical terms so that
consumers may compare health coverage
and understand the terms of (or exceptions
to) their coverage, in accordance with
guidance as specified by the Secretary;

(B) A description of the coverage, in-
cluding cost sharing, for each category of
benefits identified by the Secretary in
guidance;

(D) The cost-sharing provisions of the
coverage, including deductible, coinsur-
ance, and copayment obligations;

(E) The renewability and continuation
of coverage provisions;

(F) Coverage examples, in accordance
with the rules of paragraph (a)(2)(ii) of
this section;

(G) With respect to coverage begin-
ning on or after January 1, 2014, a state-
ment about whether the plan or coverage
provides minimum essential coverage as
defined under section 5000A(f) and
whether the plan's or coverage's share of
the total allowed costs of benefits pro-
vided under the plan or coverage meets
applicable requirements;

(H) A statement that the SBC is only a
summary and that the plan document, pol-
icy, certificate, or contract of insurance
should be consulted to determine the gov-
erning contractual provisions of the cov-
erage;

(I) Contact information for questions;

(J) For issuers, an Internet web address
where a copy of the actual individual cov-
erage policy or group certificate of cover-
age can be reviewed and obtained;

(K) For plans and issuers that maintain
one or more networks of providers, an
Internet address (or similar contact infor-
mation) for obtaining a list of network
providers;

(L) For plans and issuers that use a
formulary in providing prescription drug
coverage, an Internet address (or similar
contact information) for obtaining infor-
mation on prescription drug coverage; and

(M) An Internet address for obtaining
the uniform glossary, as described in para-
graph (c) of this section, as well as a
contact phone number to obtain a paper
copy of the uniform glossary, and a dis-
closure that paper copies are available.

(ii) Coverage examples. The SBC must
include coverage examples specified by
the Secretary in guidance that illustrate
benefits provided under the plan or cover-
age for common benefits scenarios (in-
cluding pregnancy and serious or chronic
medical conditions) in accordance with
this paragraph (a)(2)(ii).

(A) Number of examples. The Secre-
tary may identify up to six coverage ex-
amples that may be required in an SBC.

(B) Benefits scenarios. For purposes of
this paragraph (a)(2)(ii), a benefits sce-
nario is a hypothetical situation, consist-
ing of a sample treatment plan for a spec-
ified medical condition during a specific
period of time, based on recognized clin-
ical practice guidelines as defined by the
National Guideline Clearinghouse, Agency
for Healthcare Research and Quality. The
Secretary will specify, in guidance, the
assumptions, including the relevant items
and services and reimbursement informa-
tion, for each claim in the benefits sce-
nario.

(C) Illustration of benefit provided. For
purposes of this paragraph (a)(2)(ii), to
illustrate benefits provided under the plan
or coverage for a particular benefits sce-
nario, a plan or issuer simulates claims

processing in accordance with guidance
issued by the Secretary to generate an
estimate of what an individual might ex-
pect to pay under the plan, policy, or
benefit package. The illustration of bene-
fits provided will take into account any
cost sharing, excluded benefits, and other
limitations on coverage, as specified by
the Secretary in guidance.

(iii) Coverage provided outside the
United States. In lieu of summarizing cov-
erage for items and services provided out-
side the United States, a plan or issuer
may provide an Internet address (or sim-
ilar contact information) for obtaining in-
formation about benefits and coverage
provided outside the United States. In any
case, the plan or issuer must provide an
SBC in accordance with this section that
accurately summarizes benefits and cov-
erage available under the plan or coverage
within the United States.

(3) Appearance. (i) A group health
plan and a health insurance issuer must
provide an SBC in the form, and in accor-
dance with the instructions for completing
the SBC, that are specified by the Secre-
tary in guidance. The SBC must be pre-
sented in a uniform format, use terminol-
ogy understandable by the average plan
enrollee, not exceed four double-sided
pages in length, and not include print
smaller than 12-point font.

(ii) A group health plan that utilizes
two or more benefit packages (such as
major medical coverage and a health flex-
ible spending arrangement) may synthe-
size the information into a single SBC, or
provide multiple SBCs.

(4) Form - (i) An SBC provided by an
issuer offering group health insurance
coverage to a plan (or its sponsor), may be
provided in paper form. Alternatively, the
SBC may be provided electronically (such
as by email or an Internet posting) if the
following three conditions are satisfied -

(A) The format is readily accessible by
the plan (or its sponsor);

(B) The SBC is provided in paper form
free of charge upon request; and

(C) If the electronic form is an Internet
posting, the issuer timely advises the plan
(or its sponsor) in paper form or email that
the documents are available on the Inter-
net and provides the Internet address.

(ii) An SBC provided by a group health
plan or health insurance issuer to a partic-

ipant or beneficiary may be provided in
paper form. Alternatively, the SBC may
be provided electronically (such as by
email or an Internet posting) if the re-
quirements of this paragraph (a)(4)(ii) are
met.

(A) With respect to participants and
beneficiaries covered under the plan, the
SBC may be provided electronically as
described in this paragraph (a)(4)(ii)(A).
However, in all cases, the plan must pro-
vide the SBC in paper form if paper form
is requested.

(1) In accordance with the Department
of Labor's disclosure regulations at 29
CFR 2520.104b-1;

(2) In connection with online enroll-
ment or online renewal of coverage under
the plan; or

(3) In response to an online request
made by a participant or beneficiary for
the SBC.

(B) With respect to participants and
beneficiaries who are eligible but not en-
rolled for coverage, the SBC may be pro-
vided electronically if:

(1) The format is readily accessible;

(2) The SBC is provided in paper form
free of charge upon request; and

(3) In a case in which the electronic
form is an Internet posting, the plan or
issuer timely notifies the individual in pa-
per form (such as a postcard) or email that
the documents are available on the Inter-
net, provides the Internet address, and no-
tifies the individual that the documents are
available in paper form upon request.

(5) Language. A group health plan or
health insurance issuer must provide the
SBC in a culturally and linguistically ap-
propriate manner. For purposes of this
paragraph (a)(5), a plan or issuer is con-
sidered to provide the SBC in a culturally
and linguistically appropriate manner if
the thresholds and standards of 29 CFR
2590.715-2719(e) are met as applied to
the SBC.

(b) Notice of modification. If a group
health plan, or health insurance issuer of-
fering group health insurance coverage,
makes any material modification (as de-
fined under section 102 of ERISA) in any
of the terms of the plan or coverage that
would affect the content of the SBC, that
is not reflected in the most recently pro-
vided SBC, and that occurs other than in
connection with a renewal or reissuance

of coverage, the plan or issuer must pro-
vide notice of the modification to enroll-
ees not later than 60 days prior to the date
on which the modification will become
effective. The notice of modification must
be provided in a form that is consistent
with the rules of paragraph (a)(4) of this
section.

(c) Uniform glossary - (1) In general.
A group health plan, and a health insur-
ance issuer offering group health insur-
ance coverage, must make available to
participants and beneficiaries the uniform
glossary described in paragraph (c)(2) of
this section in accordance with the appear-
ance and form and manner requirements
of paragraphs (c)(3) and (c)(4) of this sec-
tion.

(2) Health-coverage-related terms and
medical terms. The uniform glossary must
provide uniform definitions, specified by
the Secretary in guidance, of the following
health-coverage-related terms and medi-
cal terms:

(i) Allowed amount, appeal, balance
billing, co-insurance, complications of
pregnancy, co-payment, deductible, dura-
ble medical equipment, emergency medi-
cal condition, emergency medical trans-
portation, emergency room care,
emergency services, excluded services,
grievance, habilitation services, health in-
surance, home health care, hospice ser-
vices, hospitalization, hospital outpatient
care, in-network co-insurance, in-network
co-payment, medically necessary, net-
work, non-preferred provider, out-of-
network co-insurance, out-of-network co-
payment, out-of-pocket limit, physician
services, plan, preauthorization, preferred
provider, premium, prescription drug cov-
erage, prescription drugs, primary care
physician, primary care provider, pro-
vider, reconstructive surgery, rehabilita-
tion services, skilled nursing care, special-
ist, usual customary and reasonable
(UCR), and urgent care; and

(ii) Such other terms as the Secretary
determines are important to define so that
individuals and employers may compare
and understand the terms of coverage and
medical benefits (including any excep-
tions to those benefits), as specified in
guidance.

(3) Appearance. A group health plan,
and a health insurance issuer, must pro-
vide the uniform glossary with the appear-

ance specified by the Secretary in guid-
ance to ensure the uniform glossary is
presented in a uniform format and uses
terminology understandable by the aver-
age plan enrollee.

(4) Form and manner. A plan or issuer
must make the uniform glossary described
in this paragraph (c) available upon re-
quest, in either paper or electronic form
(as requested), within seven business days
after receipt of the request.

(d) Preemption. State laws that require
a health insurance issuer to provide an

SBC that supplies less information than
required under paragraph (a) of this sec-
tion are preempted.

(e) Failure to provide. A group health
plan that willfully fails to provide infor-
mation required under this section to a
participant or beneficiary is subject to a
fine of not more than $1,000 for each such
failure. A failure with respect to each par-
ticipant or beneficiary constitutes a sepa-
rate offense for purposes of this paragraph
(e). The IRS will enforce this section us-

ing a process and procedure consistent
with section 4980D of the Code.

(f) Applicability. The requirements of
this section do not apply to a group
health plan benefit package that pro-
vides Medicare Advantage benefits pur-
suant to or 42 USC Chapter 7, Subchap-
ter XVIII, Part C.

(Filed by the Office of the Federal Register on December 22,
2014, 4:15 p.m., and published in the issue of the Federal
Register on December 30, 2014, 79 F.R. 78578)

## 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.

CFR-Code of Federal Regulations.

GP-General Partner.

TFR-Transferor.

CI-City.

GR-Grantor.

T.I.R .- Technical Information Release.

COOP-Cooperative.

IC-Insurance Company.

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.

U.S.C .- United States Code.

DC-Dummy Corporation.

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.

BK-Bank.

T-Target Corporation.

B.T.A .- Board of Tax Appeals.

T.C .- Tax Court.

C-Individual.

T.D .- Treasury Decision.

C.B .- Cumulative Bulletin.

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.

LR-Lessor.

M-Minor.

Y-Corporation.

Z-Corporation.

DISC-Domestic International Sales Corporation.

E-Estate.

EE-Employee.

E.O .- Executive Order.

ER-Employer.

### Numerical Finding List1

Bulletin 2015-1 through 2015-2

Proposed Regulations:

REG-109187-11, 2015-2 I.R.B. 277
REG-132751-14, 2015-2 I.R.B. 279
REG-145878-14, 2015-2 I.R.B. 290

Notices:

2015-1, 2015-2 I.R.B. 249

Revenue Procedures:

2015-1, 2015-1 I.R.B. 1

2015-2, 2015-1 I.R.B. 105

2015-3, 2015-1 I.R.B. 129

2015-4, 2015-1 I.R.B. 144

2015-5, 2015-1 I.R.B. 186
2015-6, 2015-1 I.R.B. 194
2015-7, 2015-1 I.R.B. 231

2015-8, 2015-1 I.R.B. 235

2015-9, 2015-2 I.R.B. 249

2015-10, 2015-2 I.R.B. 262
2015-12, 2015-2 I.R.B. 266

Treasury Decisions:

9707, 2015-2 I.R.B. 247

## Finding List of Current Actions on Previously Published Items1

Bulletin 2015-1 through 2015-2

### Revenue Procedures:

2014-01
Superseded by
Rev. Proc. 2015-01, 2015-01 I.R.B. 1

2014-02
Superseded by
Rev. Proc. 2015-02, 2015-01 I.R.B. 105

2014-03
Superseded by
Rev. Proc. 2015-03, 2015-01 I.R.B. 129

2014-04
Superseded by
Rev. Proc. 2015-04, 2015-01 I.R.B. 144

2014-05
Superseded by
Rev. Proc. 2015-05, 2015-01 I.R.B. 186

2014-06
Superseded by
Rev. Proc. 2015-06, 2015-01 I.R.B. 194
2014-07
Superseded by
Rev. Proc. 2015-07, 2015-01 I.R.B. 231

2014-08
Superseded by
Rev. Proc. 2015-08, 2015-01 I.R.B. 235

2014-10
Superseded by
Rev. Proc. 2015-10, 2015-2 I.R.B. 262

2003-63
Superseded by
Rev. Proc. 2015-12, 2015-2 I.R.B. 266

2011-14
Modified by
Rev. Proc. 2015-12, 2015-2 I.R.B. 266

# Internal Revenue Service Washington, DC 20224

Official Business
Penalty for Private Use, $300

# INTERNAL REVENUE BULLETIN

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Bulletins are available at www.irs.gov/irb/.

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would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page
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Internal Revenue Bulletin 2015-2 (PDF rendition): IRS Revenue Procedures

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