Internal Revenue Bulletin 2011-42 (PDF rendition): IRS Revenue Procedures

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Bulletin No. 201
1-42
October 17, 2011
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
T.D. 9546, page 505.
Final regulations under section 142 of the Code provide the
definition of solid waste disposal facilities for purposes of the
rules applicable to tax-exempt bonds issued by state and local
governments to finance solidwaste disposal facilities.
REG–111283–11, page 573.
Proposed regulations describe swaps and similar agreements
that fall within the meaning of section 1256(b)(2)(B) of the
Code. The proposed regulations also revise the definition of a
notional principal contract under regulations section 1.446–3.
A public hearing is scheduled for January 19, 2012.
REG–128224–06, page 533.
Proposed regulations under section 67 of the Code provide
guidance on which costs incurred by estates or trusts other
than grantor trusts (non-grantor trusts)aresubjecttothe2-per-
cent floor for miscellaneous itemized deductions under section
67(a). A public hearing is scheduled for December 19, 2011.
EMPLOYEE PLANS
REG–140038–10, page 537.
Proposed regulations under section 9815 of the Code imple-
ment the disclosure requirements to help plans and individuals
better understand their health coverage, as well as other cover-
age options, regarding the summary of benefits and coverage
and the uniform glossary for group health plans and health in-
surance coverage in the group and individual markets under
theAffordableCareAct.
ESTATE TAX
Notice 2011–82, page 516.
This notice provides guidance under section 2010 of the Code
on electing portability of a deceased spousal unused exclusion
amount on a Form 706(United States Estate (and Generation-
Skipping Transfer) Tax Return). This notice also announces
that the Treasury Department and the Service intend to issue
regulations to implement the provisions of section 2010(c) and
invites public comments.
Rev. Proc. 2011–48, page 527.
This procedure instructs taxpayers how to file a protective
claim for refund when the estate has a claim or expense not
yet deductible under section 2053 of the Code and the cor-
responding regulations. In addition, this procedure details the
procedures the Service will follow in processing these protec-
tive claims for refund. Finally, this procedure instructs taxpay-
ers how to notify the Service that a section 2053 protective
claim for refund is ready for consideration.
EXCISE TAX
REG–140038–10, page 537.
Proposed regulations under section 9815 of the Code imple-
ment the disclosure requirements to help plans and individuals
better understand their health coverage, as well as other cover-
age options, regarding the summary of benefits and coverage
and the uniform glossary for group health plans and health in-
surance coverage in the group and individual markets under
theAffordableCareAct.
(Continued on the next page)
Finding Lists begin on page ii.

ADMINISTRATIVE
Notice 2011–81, page 513.
Optional special per diem rates.This notice provides the
2011–2012 specialper diemrates for taxpayers to use in
substantiating the amount of ordinary and necessary business
expenses incurred while traveling away from home, specifically
(1) the special transportation industry rates, (2) the rate for the
incidental expenses only deduction, and (3) the rates and list
of high-cost localities for the high-low substantiation method.
Notice 2011–82, page 516.
This notice provides guidance under section 2010 of the Code
on electing portability of a deceased spousal unused exclusion
amount on a Form 706(United States Estate (and Generation-
Skipping Transfer) Tax Return). This notice also announces
that the Treasury Department and the Service intend to issue
regulations to implement the provisions of section 2010(c) and
invites public comments.
Rev. Proc. 2011–46, page 518.
Nonaccrual-experience method book safe harbor.This
procedure provides a safe harbor method of accounting for tax-
payers using the nonaccrual-experience method of accounting
under section 448(d)(5) of the Code and regulations section
1.448–2. This procedure also provides procedures for obtain-
ing automatic consent to change to this safe harbor method
and to make certain changes within this method. Rev. Proc.
2006–56 modified and amplified.
Rev. Proc. 2011–47, page 520.
Per diem allowances.This procedure provides optional rules
for deeming substantiated the amount of certain business ex-
penses of traveling away from home reimbursed to an em-
ployee, partner, or volunteer, or deductible by an employee
or self-employed individual. Rev. Proc. 2010–39 amplified,
modified, and superseded.
Rev. Proc. 2011–48, page 527.
This procedure instructs taxpayers how to file a protective
claimforrefundwhentheestatehasaclaimorexpensenot
yet deductible under section 2053 of the Code and the cor-
responding regulations. In addition, this procedure details the
procedures the Service will follow in processing these protec-
tive claims for refund. Finally, this procedure instructs taxpay-
ers how to notify the Service that a section 2053 protective
claim for refund is ready for consideration.
October 17, 20112011–42 I.R.B.

The IRS Mission
Provide Americ
a’s taxpayers top-quality service by helping
them understa
nd and meet their tax responsibilities and en-
force the law wi
th integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d 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 c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
2011–42 I.R.B.October 17, 2011

October 17, 20112011–42 I.R.B.
.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 62.—Adjusted
Gross I
ncome Defined
26 CFR 1.62–2: Reimbursements and other expense
allowance arrangements.
Rules are provided under which a reimbursement
or other expense allowance arrangement for the cost
of lodging, meal, and incidental expenses, or of
meal and incidental expenses only, incurred by an
employee, partner, or volunteer while traveling away
from home, satisfies the requirements of section
62(c) of the Code for substantiation of the amount of
the expenses. See Rev. Proc. 2011-47, page 520.
Section 142.—Exempt
Facility Bond
26 CFR 1.142(a)(6)–1: Exempt facility bonds: solid
waste disposal facilities.
T.D. 9546
Definition of Solid Waste
Disposal Facilities for
Tax-Exempt Bond Purposes
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations on the definition of solid waste
disposal facilities for purposes of the rules
applicable to tax-exempt bonds issued by
State and local governments. These regu-
lations provide guidance to State and local
governments that issue tax-exempt bonds
to finance solid waste disposal facilities
and to taxpayers that use those facilities.
DATES:Effective Date:These regulations
are effective August 19, 2011.
Applicability Date:For dates of appli-
cability, see §1.142(a)(6)–1(i).
FOR FURTHER INFORMATION
CONTACT: Timothy Jones, (202)
622–3980 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document amends the Income
Tax Regulations (26 CFR part 1) un-
der section 142 of the Internal Rev-
enue Code (Code) to provide final rules
for determining whether a facility is a
solid waste disposal facility under sec-
tion 142(a)(6). This document also re-
moves certain existing regulations on
this subject. On September 16, 2009,
the IRS published a Notice of Proposed
Rulemaking (REG–140492–02, 2009–42
I.R.B. 559) in theFederal Register
(74 FR 47500) (the Proposed Regulations).
The Proposed Regulations under proposed
§1.142(a)(6)–1 would modify existing
regulations under §1.103–8(f)(2) of the
Income Tax Regulations and §17.1 of
the temporary Income Tax Regulations
(together, the Existing Regulations) on this
subject. Public comments on the Proposed
Regulations were received and a public
hearing was held on January 5, 2010.
After consideration of the public com-
ments, the IRS and the Treasury Depart-
ment adopt the Proposed Regulations, with
revisions, as final regulations by this Trea-
sury decision (the Final Regulations). Sig-
nificant aspects of the public comments
and the revisions made in the Final Reg-
ulations are discussed in this preamble.
Explanation of Provisions
1.Introduction.
In general, interest on State or local
bonds is excludable from gross income un-
der section 103(a). Under section 103(b),
however, interest on private activity bonds
is excludable from gross income under
section 103 only if the bond meets the
requirements for a qualified bond under
section 141(e) and other applicable re-
quirements under section 103. Section
141(e) defines a qualified bond to include
anexempt facility bondthat meets certain
requirements. Section 142(a) defines an
exempt facility bond to mean any bond
that is issued as part of an issue 95 percent
or more of the net proceeds of which are
to be used to provide an exempt facil-
ity specified in section 142(a). Section
142(a)(6) includes a solid waste disposal
facility as one specified type of qualified
exempt facility.
In general, the Proposed Regulations
addressed the requirements for solid waste
disposal facilities under section 142(a)(6)
for purposes of eligibility for tax-exempt
private activity bond financing. The Pro-
posed Regulations provided that a facility
qualifies as a solid waste disposal facility if
it processes solid waste in a qualified solid
waste disposal process, performs prelimi-
nary functions, or is a functionally related
or subordinate facility. The Proposed Reg-
ulations focused on eligible processes to
dispose of solid waste, including a final
disposal process, an energy conversion
process, and a recycling process. The Pro-
posed Regulations also provided a more
developed definition of solid waste which
focused on used materials and residual
materials, with certain specific exclusions.
The Proposed Regulations eliminated a
“no-value” test from the solid waste def-
inition under §1.103–8(f)(2)(ii)(b) of the
Existing Regulations, which provides that
material does not qualify as solid waste
unless, on the issue date of the tax-exempt
bonds used to provide the solid waste
disposal facility, the property is useless,
unused, unwanted, or discarded solid ma-
terial that has no market or other value
at the place where theproperty is located
(No-Value Test). The Proposed Regu-
lations also proposed various allocation
and accounting rules based on existing
principles for mixed-input facilities and
mixed-use facilities. Overall, the Pro-
posed Regulations implement a policy in
favor of recycling through the use of solid
waste disposal facilities.
Commentators generally supported the
approach taken towards solid waste dis-
posal facilities under the Proposed Regu-
lations. The Final Regulations retain the
overall approach of the Proposed Regula-
tions and make certain technical changes
in response to public comments, as dis-
cussed further in this preamble.
2.Solid Waste Disposal Facility.
The Proposed Regulations defined the
termsolid waste disposal facilityto mean
a facility that processes solid waste in a
qualified solid waste disposal process, per-
forms a preliminary function, or is a func-
tionally related and subordinate facility.
2011–42 I.R.B.505October 17, 2011

The Final Regulations retain this definition
of a solid waste disposal facility.
3.Definition of Solid Waste.
The Proposed Regulations defined the
termsolid wasteto mean garbage, refuse,
and other solid material derived from any
agricultural, commercial, consumer, or in-
dustrial operation or activity, based largely
on an existing definition under the Exist-
ing Regulations. The Proposed Regula-
tions refined the existing definition to re-
quire that solid waste be eitherused ma-
terialorresidual material. The Proposed
Regulations also eliminated the No-Value
Test. Additionally, the Proposed Regula-
tions required that the person who acquires
the material must reasonably expect to in-
troduce it into a qualified solid waste dis-
posal process within a reasonable period of
time after acquisition.
The Proposed Regulations definedused
materialto mean any material that has
been used previouslyas an agricultural,
commercial, consumer, or industrial prod-
uct or as a component of any such product.
The Proposed Regulations definedresid-
ual materialto mean any residual byprod-
uct or excess unused raw material that re-
mains from the production of any agricul-
tural, commercial, consumer, or industrial
product, provided that material qualified
as residual material only to the extent that
it constituted less than five percent (5%)
of the total material introduced into the
production process and it had a fair mar-
ket value that is reasonably expected to be
lower than that of any product made in that
production process.
The Final Regulations generally retain
the core definition of solid waste from the
Proposed Regulations but modify that def-
inition in certain technical respects. The
Final Regulations clarify that material is
“solid” only if it is solid at ambient temper-
ature and pressure. The Final Regulations
also clarify that solid waste can result from
governmental operations or activities. The
Final Regulations expand the definition of
solid waste to include animal waste.
With respect to the definition ofresid-
ual material, commentators generally
supported the analytic standard under the
Proposed Regulations, but recommended
removing the five percent (5%) size limi-
tation on residual material. Commentators
recommended removing this size limit
because it unduly restricts the scope of
residual material in many circumstances
and it arbitrarily treats various industries
and activities differently because residual
amounts vary widely by industry and ac-
tivity. The Final Regulations adopt this
comment to eliminate the five percent
(5%) size limitation on residual material
and otherwise generally retain the analytic
standard for residual material. The Final
Regulations also expand the definition of
residual material to include material de-
rived from providing a service in which
no product is produced.
Further, for purposes of determining
residual material when multiple produc-
tion processes are operated on the same
site, commentators recommended a sep-
arate evaluation of each process. Based
on reasons associated with scope and ad-
ministrability, the IRS and the Treasury
Department intended to cover only resid-
ual material that remains at the end of
integrated processes that are functionally
interconnected or interdependent, based
on all the facts and circumstances. Ac-
cordingly, the Final Regulations do not
adopt this comment. Instead, the Final
Regulations adopt an integrated process
standard to limit residual material.
4.Specific Exclusions from the Definition
of Solid Waste.
In general, the Proposed Regulations
excluded from the definition of solid waste
the following items: (1) virgin material;
(2) solids within liquids and liquid waste;
(3) precious metals; (4) hazardous mate-
rial; and (5) radioactive material. The
Final Regulations retain these exclusions
with certain technical modifications.
The exclusion for virgin material aimed
to distinguish solid waste disposal from
manufacturing. The exclusion for certain
precious metals aimed to recognize that
recovery of these metals generally would
take place without regard to a recycling
industry. With respect to the exclusions
for hazardous and radioactive waste, the
statute and legislative history indicate that
Congress intended to exclude hazardous
waste and radioactive waste from solid
waste. The statute treats qualified haz-
ardous waste facilities as eligible exempt
facilities under section 142(a)(10) sepa-
rate and apart from solid waste disposal
facilities under section 142(a)(6). In ad-
dition, the legislative history provides, in
relevant part, that “the conferees wish to
clarify that solid waste does not include
most hazardous waste (including radioac-
tive waste).” H.Rep. No. 99–841, at
II–704 (1986), 1986–3 (Vol. 4) C.B. 704.
Some commentators expressed concern
that the introduction of virgin material
or precious metals into a final disposal
process, such as a landfill (as contrasted
with a recycling process), could disqualify
a facility from treatment as a qualified
solid waste disposal facility. The Final
Regulations address this comment favor-
ably and modify the definition of solid
waste to allow the introduction of virgin
materials and precious metals into a final
disposal process. The Final Regulations
also add a provision that allows the IRS to
identify other excluded precious metals in
future public administrative guidance.
Commentators also recommended
treating hazardous waste and radioactive
waste as solid waste. The Final Regula-
tions generally do not adopt this comment.
The IRS and the Treasury Department
believe that Congress generally intended
to exclude these materials from the def-
inition of solid waste. Recognizing that
only certain hazardous waste and radioac-
tive waste are required to be disposed of
at regulated facilities, however, the Final
Regulations limit the exclusions for these
two types of waste to the extent that they
are required to be disposed of or contained
at a regulated hazardous waste or radioac-
tive waste disposal facility.
5.Qualified Solid Waste Disposal
Process.
The Proposed Regulations provided for
three eligible types of solid waste disposal
processes: a final disposal process, an en-
ergy conversion process, and a recycling
process. To provide flexibility for future
innovation, the Proposed Regulations pro-
vided that, absent an express restriction in
the proposed regulations, a solid waste dis-
posal function may employ any biologi-
cal, engineering, industrial, or technolog-
ical method.
The Final Regulations generally retain
the eligible types of solid waste disposal
processes from the Proposed Regulations,
with technical clarifications. The Final
Regulations clarify that a final disposal
process includes the spreading of solid
October 17, 20115062011–42 I.R.B.

waste in an environmentally compliant
and safe manner. The Final Regulations
also clarify that an energy conversion
process ends at the point at which useful
energy is first created or incorporated into
the form of synthesis gas, heat, hot water,
or other useful energy.
6.First Useful Product Principle.
The Proposed Regulations provided
guidance on the standard for determining
the first useful product for purposes of
establishing the end point of a solid waste
disposal process. The first useful prod-
uct principle has particular application to
recycling. Under the Proposed Regula-
tions, a useful product generally included
a product useful for consumption, either
as an ultimate end-use product or as an
input to some stage of a manufacturing
or production process, and that could be
sold for such use (taking into account
operational constraints on such sales for
certain integrated processes), whether or
not actually sold.
The Final Regulations generally retain
the first useful product standard from the
Proposed Regulations. Some commen-
tators recommended that determinations
under the first useful product rule take into
account geographic location and trans-
portation costs in certain situations. The
Final Regulations adopt this comment.
7.Mixed-Input Facilities.
The Proposed Regulations provided
a mixed-input accounting rule, which
treated a facility as a qualified solid waste
disposal facility if at least 65 percent of all
of the material introduced into such facil-
ity in each year consisted of solid waste.
This proposed rule recognizes that recy-
cling processes may require supplemental
inputs besides solid waste to operate vi-
ably. This proposed rule is similar to an
existing rule under §1.103–8(f)(2)(ii)(c) of
the Existing Regulations. This proposed
rule requires annual testing for compliance
with the requisite 65 percent solid waste
threshold. Several commentators recom-
mended reformulating this 65 percent test
to require compliance based on an ag-
gregate testing period measured over the
life of the tax-exempt bonds instead of an
annual testing period. These commenta-
tors expressed concerns about compliance
with an annual test during start-up periods
and aberrational years for various reasons.
The Final Regulations retain the an-
nual 65 percent test for mixed-input facil-
ities with modifications. In response to
the public comments, the Final Regula-
tions provide a special rule that allows a
three-year curative period to address the
impact of extraordinary events outside the
control of the operator of the solid waste
disposal facility (such as natural disasters,
strikes, major utility disruptions, or gov-
ernmental interventions). In addition, the
Final Regulations provide that the annual
testing does not begin until the facility is
placed in service within the meaning of
the special placed-in-service definition in
§1.150–2(c), which focuses on the point at
which a facility is operational at substan-
tially its design level.
8.Certain Other Changes.
Several commentators recommended
removal of the proposed concept of facil-
ities that perform a preliminary function
for a qualified solid waste disposal process
and removal of the threshold limit on
preliminary functions that requires more
than 50 percent of the materials that result
from preliminary functions to constitute
solid waste. The Final Regulations retain
the concept of a preliminary function, but
remove the 50 percent threshold limit on
preliminary functions. The Final Regu-
lations also provide for application of a
mixed-use accounting rule to facilities that
perform preliminary functions.
One commentator expressed concern
thatExample 2in the Proposed Reg-
ulations was confusing, and the Final
Regulations remove that example with no
substantive inference intended by that re-
moval. The Final Regulations also expand
and clarify certain other examples.
Commentators recommended various
transition rules for applicability of the Fi-
nal Regulations to refunding bonds issued
prior to the date of publication of the final
regulations. The Final Regulations pro-
vide a transition rule for current refunding
bonds the weighted average maturity of
which is no longer than the remaining
weighted average maturity of the refunded
bonds.
Effective/Applicability Dates
The Final Regulations apply to bonds
to which section 142 applies that are sold
on or after October 18, 2011. Issuers may
apply the Final Regulations to outstanding
bonds sold before October 18, 2011. The
Final Regulations need not be applied to
bonds that are issued in a current refunding
to refund bonds to which the Final Regu-
lations do not apply if the weighted aver-
age maturity of the refunding bonds is no
longer than the remaining weighted aver-
age maturity of the refunded bonds.
Special Analyses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory action as defined in Executive Order
12866, as supplemented by Executive Or-
der 13563. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Admin-
istrative Procedure Act (5 U.S.C. chapter
5) does not apply to these regulations, and,
because the regulationsare interpretative
and do not impose a collection of infor-
mation on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does
not apply. Pursuant to section 7805(f) of
the Code, the proposed regulations preced-
ing these final regulations were submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on its impact on small business.
Drafting Information
The principal author of these final reg-
ulations is Timothy L. Jones, Office of
Associate Chief Counsel (Financial Insti-
tutions and Products). However, other
personnel from the IRS and the Treasury
Department participated in their develop-
ment.
*****
Adoption of Amendments to the
Regulations
Accordingly, under the authority of
26 U.S.C. 7805, 26 CFR parts 1 and 17 are
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 * * *
2011–42 I.R.B.507October 17, 2011

§1.103–8 [Amended]
Par. 2. Section 1.103–8 is amended by
removing paragraph (f)(2)(ii) and redesig-
nating paragraph (f)(2)(iii) as (f)(2)(ii).
Par. 3. Section 1.142(a)(6)–1 is added
to read as follows:
§1.142(a)(6)–1 Exempt facility bonds:
solid waste disposal facilities.
(a)In general. This section defines the
term solid waste disposal facility for pur-
poses of section 142(a)(6).
(b)Solid waste disposal facility.The
termsolid waste disposal facilitymeans a
facility to the extentthatthefacility—
(1) Processes solid waste (as defined in
paragraph (c) of this section) in a qualified
solid waste disposal process (as defined in
paragraph (d) of this section);
(2) Performs a preliminary function (as
defined in paragraph (f) of this section); or
(3) Is functionally related and
subordinate (within the meaning of
§1.103–8(a)(3)) to a facility described in
paragraph (b)(1) or (b)(2) of this section.
(c)Solid waste—(1)In general.Ex-
cept to the extent excluded under para-
graph (c)(2) of this section, for purposes
of section 142(a)(6), the termsolid waste
means garbage, refuse, and other solid ma-
terial derived from any agricultural, com-
mercial, consumer, governmental, or in-
dustrial operation or activity if the mate-
rial meets the requirements of both para-
graph (c)(1)(i) and paragraph (c)(1)(ii) of
this section. For purposes of this section,
material is solid if it is solid at ambient
temperature and pressure.
(i)Used material or residual material.
Material meets the requirements of this
paragraph (c)(1)(i) if it is either used ma-
terial (as defined in paragraph (c)(1)(i)(A))
of this section or residual material (as de-
fined in paragraph(c)(1)(i)(B) of this sec-
tion).
(A)Used material.Thetermused ma-
terialmeans any material that is a prod-
uct of any agricultural, commercial, con-
sumer, governmental, or industrial opera-
tion or activity, or a component of any such
product or activity, and that has been used
previously. Used material also includes
animal waste produced by animals from a
biological process.
(B)Residual material.Theterm
residual materialmeans material that
meets the requirements of this paragraph
(c)(1)(i)(B). The material must be a resid-
ual byproduct or excess raw material that
results from or remains after the com-
pletion of any agricultural, commercial,
consumer, governmental, or industrial
production process or activity or from the
provision of any service. In the case of
multiple processes constituting an inte-
grated manufacturing or industrial process,
the material must result from or remain
after the completion of such integrated
process. As of the issue date of the bonds
used to finance the solid waste disposal
facility, the material must be reasonably
expected to have a fair market value that is
lower than the value of all of the products
made in that production process or lower
than the value of the service that produces
such residual material.
(ii)Reasonably expected introduc-
tion into a qualified solid waste disposal
process. Material meets the requirements
of this paragraph (c)(1)(ii)ifitisreason-
ably expected by the person who gener-
ates, purchases, or otherwise acquires it
to be introduced within a reasonable time
after such generation, purchase or acqui-
sition into a qualified solid waste disposal
process described in paragraph (d) of this
section.
(2)Exclusions from solid waste.The
following materials do not constitute solid
waste:
(i)Virgin material. Except to the extent
that virgin material constitutes an input to a
final disposal process or residual material,
solid waste excludes any virgin material.
The termvirgin materialmeans material
that has not been processed into an agricul-
tural, commercial, consumer, governmen-
tal, or industrial product, or a component
of any such product. Further, for this pur-
pose, material continues to be virgin ma-
terial after it has been grown, harvested,
mined, or otherwise extracted from its nat-
urally occurring location and cleaned, di-
vided into component elements, modified,
or enhanced, as long as further processing
is required before it becomes an agricul-
tural, commercial, consumer, or industrial
product, or a component of any such prod-
uct.
(ii)Solids within liquids and liquid
waste. Solid waste excludes any solid
or dissolved material in domestic sewage
or other significant pollutant in water
resources, such as silt, dissolved or sus-
pended solids in industrial waste water
effluents, dissolved materials in irrigation
return flows or other common water pol-
lutants, and liquid or gaseous waste.
(iii)Precious metals. Except to the ex-
tent that a precious metal constitutes an in-
put to a final disposal process and/or an un-
recoverable trace of the particular precious
metal, solid waste excludes gold, silver,
ruthenium, rhodium, palladium, osmium,
iridium, platinum, gallium, rhenium, and
any other precious metal material as may
be identified by the Internal Revenue Ser-
vice in future public administrative guid-
ance.
(iv)Hazardous material.Solidwaste
excludes any hazardous material that must
be disposed of at a facility that is subject to
final permit requirements under subtitle C
of title II of the Solid Waste Disposal Act
as in effect on the date of the enactment of
the Tax Reform Act of 1986 (which is Oc-
tober 22, 1986). See section 142(h)(1) of
the Internal Revenue Code for the defini-
tion of qualified hazardous waste facilities.
(v)Radioactive material. Solid waste
excludes any radioactive material subject
to regulation under the Nuclear Regulatory
Act (10 CFR §1.1et seq.), as in effect on
the issue date of the bonds.
(d)Qualified solid waste disposal
process.Thetermqualified solid waste
disposal processmeans the processing of
solid waste in a final disposal process (as
defined in paragraph (d)(1) of this section),
an energy conversion process (as defined
in paragraph (d)(2) of this section), or a
recycling process (as defined in paragraph
(d)(3) of this section). Absent an express
restriction to the contrary in this section,
a qualified solid waste disposal process
may employ any biological, engineering,
industrial, or technological method.
(1)Final disposal process.Thetermfi-
naldisposalprocessmeans the placement
of solid waste in a landfill (including, for
this purpose, the spreading of solid waste
over land in an environmentally compli-
antandsafemannerwithnointenttore-
move such solid waste), the incineration of
solid waste without capturing any useful
energy, or the containment of solid waste
with a reasonable expectation as of the date
of issue of the bonds that the containment
will continue indefinitely and that the solid
waste has no current or future beneficial
use.
October 17, 20115082011–42 I.R.B.

(2)Energy conversion process.The
termenergy conversion processmeans a
thermal, chemical, or other process that is
applied to solid waste to create and cap-
ture synthesis gas, heat, hot water, steam,
or other useful energy. The energy con-
version process begins at the point of the
first application of such process. The en-
ergy conversion process ends at the point
at which the useful energy is first created,
captured, or incorporated into the form of
synthesis gas, heat, hot water, or other use-
ful energy and before any transfer or dis-
tribution of such synthesis gas, heat, hot
water or other useful energy, regardless of
whether such synthesis gas, heat, hot wa-
ter, or other useful energy constitutes a first
useful product within the meaning of para-
graph (e) of this section.
(3)Recycling process—(i)In general.
The termrecycling processmeans recon-
stituting, transforming, or otherwise pro-
cessing solid waste into a useful product.
The recycling process begins at the point
of the first application of a process to re-
constitute or transform the solid waste into
a useful product, such as decontamination,
melting, re-pulping, shredding, or other
processing of the solid waste to accom-
plish this purpose. The recycling process
ends at the point of completion of produc-
tion of the first useful product from the
solid waste.
(ii)Refurbishment, repair, or similar
activities.Thetermrecycling process
does not include refurbishment, repair, or
similar activities. The termrefurbishment
means the breakdown and reassembly of a
product if such activity is done on a prod-
uct-by-product basis and if the finished
product contains more than 30 percent of
its original materials or components.
(e)First useful product.Thetermfirst
useful productmeans the first product pro-
duced from the processing of solid waste in
a solid waste disposal process that is useful
for consumption in agricultural, consumer,
commercial, governmental, or industrial
operation or activity and that could be sold
for such use, whether or not actually sold.
A useful product includes both a product
useful to an individual consumer as an ul-
timate end-use consumer product and a
product useful to an industrial user as a ma-
terial or input for processing in some stage
of a manufacturing or production process
to produce a different end-use consumer
product. The determination of whether a
useful product has been produced may take
into account operational constraints that
affect the point in production when a use-
ful product reasonably can be extracted or
isolated and sold independently. For this
purpose, the costs of extracting, isolating,
storing, and transporting the product to a
market may only be taken into account as
operational constraints if the product is not
to be used as part of an integrated manu-
facturing or industrial process in the same
location as that in which the product is pro-
duced.
(f)Preliminary function.Aprelimi-
nary functionis a function to collect, sep-
arate, sort, store, treat, process, disassem-
ble, or handle solid waste that is prelimi-
nary to and directly related to a qualified
solid waste disposal process.
(g)Mixed-use facilities—(1)In gen-
eral. If a facility is used for both a qualified
solid waste disposal function (including a
qualified solid waste disposal process or
a preliminary function) and a nonquali-
fied function (a mixed-use facility), then
the costs of the facility allocable to the
qualified solid waste disposal function are
determined using any reasonable method,
based on all the facts and circumstances.
See §1.103–8(a)(1) for allocation rules on
amounts properly allocable to an exempt
facility. Facilities qualify as functionally
related and subordinate to a qualified solid
waste disposal function only to the extent
that they are functionally related and sub-
ordinate to the portion of the mixed-use fa-
cility that is used for one or more qualified
solid waste disposal functions (including
a qualified solid waste disposal process or
a preliminary function).
(2)Mixed inputs—(i)In general.Ex-
cept as otherwise provided in paragraph
(g)(2)(ii) of this section, for each facility
(or a portion of a mixed-use facility) per-
forming a qualified solid waste disposal
process or a preliminary function, the per-
centage of the costs of the property used
for such process that are allocable to a
qualified solid waste disposal process or
a preliminary function cannot exceed the
average annual percentage of solid waste
processedinthatqualifiedsolidwastedis-
posal process or that preliminary function
while the issue is outstanding. The an-
nual percentage of solid waste processed in
that qualified solid waste disposal process
or preliminary function for any year is the
percentage, by weight or volume, of the
total materials processed in that qualified
solid waste disposal process or preliminary
function that constitute solid waste for that
year.
(ii)Special rule for mixed-input pro-
cesses if at least 65 percent of the materials
processed are solid waste—(A)In general.
Except as otherwise provided in paragraph
(g)(2)(ii)(B) of this section, for each facil-
ity (or a portion of a mixed-use facility)
performing a qualified solid waste disposal
process or preliminary function, if the an-
nual percentage of solid waste processed in
that qualified solid waste disposal process
or preliminary function for each year that
the issue is outstanding (beginning with
the date such facility is placed in service
within the meaning of §1.150–2(c)) equals
at least 65 percent of the materials pro-
cessed in that qualified solid waste dis-
posal process or preliminary function, then
all of the costs of the property used for such
process are treated as allocable to a quali-
fied solid waste disposal process. The an-
nual percentage of solid waste processed in
such qualified solid waste disposal process
or preliminary function for any year is the
percentage, by weight or volume, of the
total materials processed in that qualified
solid waste disposal process or preliminary
function that constitute solid waste for that
year.
(B)Special rule for extraordinary
events. In the case of an extraordinary
event that is beyond the control of the
operator of a solid waste disposal facility
(such as a natural disaster, strike, major
utility disruption, or governmental inter-
vention) and that causes a solid waste
disposal facility to be unable to meet the 65
percent test under paragraph (g)(2)(ii)(A)
of this section for a particular year, the
percentage of solid waste processed for
that year equals—
(1) The sum of the amount of solid
waste processed in the solid waste disposal
facility for the year affected by the extraor-
dinary event and the amount of solid waste
processed in the solid waste disposal facil-
ityduringthefollowingtwoyearsinex-
cess of the amount required to meet the
general 65 percent threshold for the facil-
ity during each of such two years; divided
by
(2) The total materials processed in the
solid waste disposal facility during the
year affected by the extraordinary event.
If the resulting measure of solid waste
2011–42 I.R.B.509October 17, 2011

processed for the year affected by the
extraordinary event equals at least 65 per-
cent, then the facility is treated as meeting
the requirements of the 65 percent test un-
der paragraph (g)(2)(ii)(A) of this section
for such year.
(iii)Facilities functionally related and
subordinate to mixed-input facilities.
Except to the extent that facilities are
functionally related and subordinate to a
mixed-input facility that meets the 65 per-
cent test under paragraph (g)(2)(ii) of this
section, facilities qualify as functionally
related and subordinate to a mixed-input
facility only to the extent that they are
functionally related and subordinate to the
qualified portion of the mixed-input facil-
ity that is used for one or more qualified
solid waste disposal functions (including
a qualified solid waste disposal process or
a preliminary function).
(h)Examples. The following examples
illustrate the application of this section:
Example 1.Nonqualified Unused Mate-
rial—Cloth. Company A takes wool and weaves it
into cloth and then sells the cloth to a manufacturer
to manufacture clothing. The cloth is material that
has not been used previously as a product of or other-
wise used in an agricultural, commercial, consumer,
governmental, or industrial operation or activity,
or as a component of any such product or activity.
Accordingly, the cloth is not solid waste.
Example 2.Residual Material—Waste Coal.
Company B mines coal. Some of the ore mined is
a low quality byproduct of coal mining commonly
known as waste coal, which cannot be converted to
energy under a normal energy-production process
because the BTU content is too low. Waste coal has
the lowest fair market value of any product produced
in Company B’s coal mining process. Waste coal
is solid waste because it is residual material within
the meaning of paragraph (c)(1)(i)(B) of this section
and Company B reasonably expects to introduce the
waste coal into a solid waste disposal process.
Example 3.Virgin Material—Logs. Company C
cuts down trees and sells the logs to another company,
which further processes the logs into lumber. In order
to facilitate shipping, Company C cuts the trees into
uniform logs. The trees are not solid waste because
they are virgin material within the meaning of para-
graph (c)(2)(i) of this section that are not being intro-
duced into a final disposal process within the mean-
ing of paragraph (d)(1) of this section. The division
of such trees into uniform logs does not change the
status of the trees as virgin material.
Example 4.Qualified Solid Waste Disposal
Process—Landfill. Company D plans to construct a
landfill. The landfill will not be subject to the final
permit requirements under subtitle C of title II of the
Solid Waste Disposal Act (as in effect on the date of
enactment of the Tax Reform Act of 1986). As of
the issue date, Company D expects that the landfill
will be filled entirely with material that will qualify
as solid waste within the meaning of paragraph (c)
of this section. Placing solid waste into a landfill is a
qualified solid waste disposal process. The landfill
is a qualified solid waste disposal facility.
Example 5.Qualified Solid Waste Disposal
Process—Recycling Tires. Company E owns a fa-
cility that converts used tires into roadbed material.
The used tires are used material within the meaning
of paragraph (c)(1)(i)(A) of this section that qualifies
as solid waste. Between the introduction of the old
tires into the roadbed manufacturing process and the
completion of the roadbed material, the facility does
not create any interim useful products. The process
for the manufacturing of the roadbed material from
the old tires is a qualified solid waste disposal process
as a recycling process and the facility that converts
the tires into roadbed material is a qualified solid
waste disposal facility. This conclusion would be the
same if the recycling process took place at more than
one plant.
Example 6.Qualified Solid Waste Disposal
Process—Energy Conversion Process. Company
F receives solid waste from a municipal garbage
collector. Company F burns that solid waste in an
incinerator to remove exhaust gas and to produce
heat. Company F further processes the heat in a heat
exchanger to produce steam. Company F further
processes the steam to generate electricity. The en-
ergy conversion process ends with the production of
steam. The facilities used to burn the solid waste and
to capture the steam as useful energy are qualified
solid waste disposal facilities because they process
solidwasteinanenergyconversionprocess. The
generating facilities used to process the steam further
to generate electricity are not engaged in the energy
conversion process and are not qualified solid waste
disposal facilities.
Example 7.Nonqualified Refurbishment.Com-
pany G purchases used cars and restores them. This
restoration process includes disassembly, cleaning,
and repairing of the cars. Parts that cannot be repaired
are replaced. The restored cars contain at least 30 per-
cent of the original parts. While the cars are used ma-
terial, the refurbishing process is not a qualified solid
waste disposal process. Accordingly, Company G’s
facility is not a qualified solid waste disposal facility.
Example 8.Qualified Solid Waste Disposal Facil-
ity—First Useful Product Rule—Paper Recycling.(i)
Company H employs an integrated process to re-pulp
discarded magazines, clean the pulp, and produce re-
tail paper towel products. Operational constraints on
Company H’s process do not allow for reasonable ex-
traction, isolation, and sale of the cleaned paper pulp
independently without degradation of the pulp. Com-
pany H further processes the paper pulp into large in-
dustrial-sized rolls of paper which are approximately
12 feet in diameter. At this point in the process,
Company H could either sell such industrial-sized
rolls of paper to another company for further pro-
cessing to produce retail paper products or it could
produce those retail products itself. In general, pa-
per pulp is a useful product that is bought and sold on
the market as a material for input into manufacturing
or production processes. The discarded magazines
are used material within the meaning of paragraph
(c)(1)(i)(A) of this section. Company H’s facility is
engagedinarecyclingprocess within the meaning
of paragraph (d)(3) of this section to the extent that
it repulps and cleans the discarded magazines gen-
erally and further to the extent that it produces in-
dustrial-sized rolls of paper under the particular cir-
cumstances here. Specifically, taking into account the
operational constraints on Company H’s facility that
limit its ability reasonably to extract, isolate, and sell
the paper pulp independently, the first useful products
within the meaning of paragraph (e) of this section
from Company H’s recycling process are the indus-
trial-sized rolls of paper. The portion of Company
H’s facility that processes the discarded magazines
and produces industrial-sized rolls of paper is a qual-
ified solid waste disposal facility, and the portion of
Company H’s facility that further processes the indus-
trial-sized rolls of paper into retail paper towels is not
a qualified solid waste facility.
(ii) The facts are the same as in paragraph (i) of
thisExample 8, except that Company H is able rea-
sonably to extract the cleaned paper pulp from the
process without degradation of the pulp and to sell
the cleaned paper pulp at its dock for a price that ex-
ceeds its costs of extracting the pulp from the process.
Therefore, the paper pulp isthe first useful product
within the meaning of paragraph (e) of this section.
As a result, the portion of Company H’s facility that
processes the discarded magazines is a qualified solid
waste disposal facility, and the portion of Company
H’s facility that produces industrial-sized rolls of pa-
per is not a qualified solid waste disposal facility. If,
however, the only reasonable way Company H could
sell the pulp was to transport the pulp to a distant mar-
ket, then the costs of storing and transporting the pulp
to the market may be taken into account in determin-
ing whether the pulp is the first useful product.
Example 9.Preliminary Function—Energy Con-
version Process. (i) Company I owns a paper mill.
At the mill, logs from nearby timber operations are
processed through a machine that removes bark. The
stripped logs are used to manufacture paper. The
stripped bark has the lowest fair market value of any
product produced from the paper mill. The stripped
bark falls onto a conveyor belt that transports the bark
toastoragebinthatisusedtostorethebarkbriefly
until Company I feeds the bark into a boiler. The
conveyor belt and storage bin are used only for these
purposes. The boiler is used only to create steam by
burning the bark, and the steam is used to generate
electricity. The stripped bark is solid waste because
it is residual material within the meaning of paragraph
(c)(1)(i)(B) of this section and Company I expects to
introduce the bark into an energy conversion process
within a reasonable period of time. The creation of
steamfromthestrippedbarkisanenergyconversion
process that starts with the incineration of the stripped
bark. The energy conversion process is a qualified
solid waste disposal process. The conveyor belt per-
forms a collection activity that is preliminary and that
is directly related to the solid waste disposal func-
tion. The storage bin performs a storage function that
is preliminary and that is directly related to the solid
waste disposal function. Thus, the conveyor belt and
storage bin are solid waste disposal facilities. The
bark removal process is not a preliminary function
because it is not directly related to the energy conver-
sion process and it does not become so related merely
because it results in material that is solid waste.
(ii) The facts are the same as in paragraph (i) of
thisExample 9, except that the stripped bark repre-
sents only 55 percent by weight and volume of the
materials that are transported by the conveyor belt.
The remaining 45 percent of the materials transported
by the conveyor belt are not solid waste and these
October 17, 20115102011–42 I.R.B.

other materials are sorted from the conveyor belt by a
sorting machine immediately before the stripped bark
arrives at the storage bin. Fifty-five percent of the
costs of the conveyor belt and the sorting machine are
allocable to solid waste disposal functions.
Example 10.Preliminary Function—Final Dis-
posal Process. Company J owns a waste transfer
station and uses it to collect, sort, and process solid
waste. Company J uses its trucks to haul the solid
waste to the nearest landfill. At least 65 percent by
weight and volume of the material brought to the
transfer station is solid waste. The waste transfer sta-
tion and the trucks perform functions that are prelim-
inary and directly related to the solid waste disposal
function of the landfill. Thus, the waste transfer sta-
tion and the trucks qualify as solid waste disposal fa-
cilities.
Example 11.Mixed-Input Facility. Company K
owns an incinerator financed by an issue and uses the
incinerator exclusively to burn coal and other solid
material to create steam. Each year while the is-
sue is outstanding, 40 percent by volume and 45 per-
cent by weight of the solid material that Company K
processes in the conversion process is coal. The re-
mainder of the solid material is either used material
or residual material within the meaning of paragraph
(c)(1)(i) of this section. Sixty percent of the costs of
the property used to perform the energy conversion
process are allocable to a solid waste disposal func-
tion.
(i)Effective/Applicability Dates—(1)
In general. Except as otherwise provided
in this paragraph (i), this section applies
to bonds to which section 142 applies that
are sold on or after October 18, 2011.
(2)Elective retroactive application.Is-
suers may apply this section, in whole, but
not in part, to outstanding bonds to which
section 142 applies and which were sold
before October 18, 2011.
(3)Certain refunding bonds.Anissuer
need not apply this section to bonds that
are issued in a current refunding to refund
bonds to which this section does not ap-
ply if the weighted average maturity of the
refunding bonds is no longer than the re-
maining weighted average maturity of the
refunded bonds.
PART 17 [Removed]
Par. 4. Part 17 is removed.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
Approved August 9, 2011.
Emily S. McMahon,
(Acting) Assistant Secretary
oftheTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on August 18,
2011, 8:45 a.m., and published in the issue of the Federal
Register for August 19, 2011, 76 F.R. 51879)
Section 162.—Trade or
Business Expenses
26 CFR 1.162–17: Reporting and substantiation of
certain business expenses of employees.
Rules are provided for substantiating the amount
of a deduction for an expense for meal and incidental
expenses, or for incidental expenses only, incurred
while traveling away from home. See Rev. Proc.
2011-47, page 520.
Section 274.—Disallowance
of Certain Entertainment,
Etc., Expenses
26 CFR 1.274–5: Substantiation requirements.
Rules are provided for substantiating the amount
of a deduction for an expense for meal and incidental
expenses, or for incidental expenses only, incurred
while traveling away from home. See Rev. Proc.
2011-47, page 520.
Section 446.—General Rule
for Methods of Accounting
This revenue procedure provides a book safe
harbor method of accounting for taxpayers using the
nonaccrual-experince method of accounting and pro-
cedures for obtaining automatic consent to change to
the method and to make certain changes within the
method. See Rev. Proc. 2011-46, page 518.
Section 481.—Adjustments
Required by Changes in
Methods of Accounting
This revenue procedure provides procedures for
taxpayers using the nonaccrual-experience (NAE)
method of accounting to change to a book safe harbor
NAE method of accounting. Taxpayer changing to
the NAE book safe harbor method must make an ad-
justment under section 481(a) of the Code, however
taxpayers make certain changes within the method
using a cut-off. See Rev. Proc. 2011-46, page 518.
Section 2010.—Unified
Credit Against Estate Tax
This notice provides guidance under section
2010(c) of the Code on electing portability of a de-
ceased spousal unused exclusion amount on a Form
706(United States Estate (and Generation-Skipping
Transfer) Tax Return). This notice also announces
that the Treasury Department and the Internal Rev-
enue Service intend to issue regulations to implement
the provisions of section 2010(c) of the Code and
invites public comments. See Notice 2011-82, page
516.
Section 2053.—Expenses,
Indebtedness, and Taxes
26 CFR 20.2053–1: Deductions for expenses, indebt-
edness, and taxes; in general
This revenue procedure instructs taxpayers how to
file a protective claim for refund when the estate has
a claim or expense not yet deductible under section
2053 of the Internal Revenue Code and the corre-
sponding regulations. In addition, this revenue pro-
cedure details the procedures the Service will follow
in processing these protective claims for refund. Fi-
nally, this revenue procedure instructs taxpayers how
to notify the Service that a section 2053 protective
claim for refund is ready for consideration. See Rev.
Proc. 2011-48, page 527.
Section 6402.—Authority to
Make Credits or Refunds
26 CFR 301.6402–1: Authority to make credits or
refunds.
This revenue procedure instructs taxpayers how to
file a protective claim for refund when the estate has
a claim or expense not yet deductible under section
2053 of the Internal Revenue Code and the corre-
sponding regulations. In addition, this revenue pro-
cedure details the procedures the Service will follow
in processing these protective claims for refund. Fi-
nally, this revenue procedure instructs taxpayers how
to notify the Service that a section 2053 protective
claim for refund is ready for consideration. See Rev.
Proc. 2011-48, page 527.
Section 6501.—Limitations
on Assessment and
Collection
26 CFR 301.6501(a)–1: Period of limit
ations upon
assessment and collection.
This revenue procedure instructs tax
payers how to
file a protective claim for refund wh
entheestatehas
a claim or expense not yet deductible
under section
2053 of the Internal Revenue Code an
d the corre-
sponding regulations. In addition
, this revenue pro-
cedure details the procedures the S
ervice will follow
in processing these protective cla
ims for refund. Fi-
nally, this revenue procedure inst
ructs taxpayers how
to notify the Service that a section
2053 protective
claim for refund is ready for consid
eration. See Rev.
Proc. 2011-48, page 527.
2011–42 I.R.B.511October 17, 2011

Section 6511.—Limitations
on Credit or Refund
26 CFR 301.6511(a)–1: Period of limitation on filing
claim.
This revenue procedure instructs taxpayers how to
file a protective claim for refund when the estate has
a claim or expense not yet deductible under section
2053 of the Internal Revenue Code and the corre-
sponding regulations. In addition, this revenue pro-
cedure details the procedures the Service will follow
in processing these protective claims for refund. Fi-
nally, this revenue procedure instructs taxpayers how
to notify the Service that a section 2053 protective
claim for refund is ready for consideration. See Rev.
Proc. 2011-48, page 527.
Section 6514.—Credits
or Refunds after Period
of Limitation
26 CFR 301.6514(a)–1: Credits or refunds after pe-
riod of limitation.
This revenue procedure instructs taxpayers how to
file a protective claim for refund when the estate has
a claim or expense not yet deductible under section
2053 of the Internal Revenue Code and the corre-
sponding regulations. In addition, this revenue pro-
cedure details the procedures the Service will follow
in processing these protective claims for refund. Fi-
nally, this revenue procedure instructs taxpayers how
to notify the Service that a section 2053 protective
claim for refund is ready for consideration. See Rev.
Proc. 2011-48, page 527.
October 17, 20115122011–42 I.R.B.

Part III. Administrative, Procedural, and Miscellaneous
2011–2012 Special Per Diem
Rates
Notice 2011–81
SECTION 1. PURPOSE
This annual notice provides the
2011–2012 specialper diemrates for tax-
payers to use in substantiating the amount
of ordinary and necessary business ex-
penses incurred whiletraveling away from
home, specifically (1) the special trans-
portation industry meal and incidental
expenses rates (M&IE rates), (2) the rate
for the incidental expenses only deduc-
tion, and (3) the rates and list of high-cost
localities for purposes of the high-low
substantiation method.
SECTION 2. BACKGROUND
Rev. Proc. 2011–47, 2011–42 I.R.B.
520, provides rules for using aper diem
rate to substantiate, under § 274(d) of the
Internal Revenue Code and § 1.274–5 of
the Income Tax Regulations, the amount of
ordinary and necessary business expenses
paid or incurred while traveling away from
home. Taxpayers using the rates and list of
high-cost localities provided in this notice
must comply with Rev. Proc. 2011–47.
SECTION 3. SPECIAL M&IE RATES
FOR TRANSPORTATION INDUSTRY
The special M&IE rates for taxpayers
in the transportation industry are $59 for
any locality of travel in the continental
United States (CONUS) and $65 for any
locality of travel outside the continental
United States (OCONUS). See section
4.04 of Rev. Proc. 2011–47.
SECTION 4. RATE FOR INCIDENTAL
EXPENSES ONLY DEDUCTION
The rate for any CONUS or OCONUS
locality of travel for the incidental ex-
penses only deduction is $5 per day. See
section 4.05 of Rev. Proc. 2011–47.
SECTION 5. HIGH-LOW
SUBSTANTIATION METHOD
1.Annual high-low rates. For purposes
of the high-low substantiation method, the
per diemrates in lieu of the rates described
in section 4.01 of Rev. Proc. 2011–47
(theper diemsubstantiation method) are
$242 for travel to any high-cost locality
and $163 for travel to any other locality
within CONUS. The amount of the $242
high rate and $163 low rate that is treated
as paid for meals for purposes of § 274(n)
is $65 for travel to any high-cost local-
ity and $52 for travel to any other locality
within CONUS. See section 5.02 of Rev.
Proc. 2011–47. Theper diemrates in lieu
of the rates described in section 4.02 of
Rev. Proc. 2011–47 (the meal and inciden-
tal expenses only substantiation method)
are $65 for travel to any high-cost local-
ity and $52 for travel to any other locality
within CONUS.
2.High-cost localities. The following
localities have a federalper diemrate of
$202 or more, and are high-cost localities
for all of the calendar year or the portion of
the calendar year specified in parentheses
under the key city name.
Key CityCounty or other defined location
Arizona
SedonaCity limits of Sedona
(March 1-April 30)
California
Montere
y
Montere
y
NapaNapa
(October 1-November 30 and April 1-September 30)
San DiegoSan Diego
San FranciscoSan Francisco
Santa BarbaraSanta Barbara
Santa
Monica
City l
imits of Santa Monica
Yosemite National ParkMariposa
(June 1-August 31)
Colorado
AspenPitkin
(De
cember 1-March 31 and June 1-August 31)
Denver/AuroraDenver, Adams, Arapahoe, and Jefferson
Steamboat SpringsRoutt
(December 1-March 31)
TellurideSan Miguel
(December 1-March 31)
2011–42 I.R.B.513October 17, 2011

Key CityCounty or other defined location
VailEagle
(December 1-August 31)
District of Columbia
Washington D.C. (also the cities of Alexandria, Falls Church,and Fairfax, and the counties of Arlington and Fairfax, in
Virginia; and the counties of Montgomery and Prince George’s in Maryland) (See also Maryland and Virginia)
Florida
Fort LauderdaleBroward
(January 1-May 31)
Fort Walton Beach/De Funiak SpringsOkaloosa and Walton
(June 1-Ju
ly 31)
Key WestMonroe
MiamiMiami-Dade
(December 1-March 31)
NaplesCollier
(January 1-April 30)
Illinois
ChicagoCook and Lake
(October 1-November 30 and April 1-September 30)
Louisiana
New O
rleans
Orle
ans, St. Bernard, Jefferson and
Plaq
uemine Parishes
(October 1-June 30)
Maine
Bar HarborHancock
(July 1-August 31)
Maryland
Baltimore CityBaltimore City
(October 1-November 30 and March 1-September 30)
Cambridge/St. MichaelsDorchester and Talbot
(June 1-August 31)
Ocean CityWorcester
(June 1-August 31)
Washington, DC Metro AreaMontgomery and Prince George’s
Massachusetts
Boston/CambridgeSuffolk, City of Cambridge
FalmouthCity limits of Falmouth
(July 1-August 31)
Martha’s VineyardDukes
(July 1-August 31)
NantucketNantucket
(June 1-September 30)
New Hampshire
ConwayCarroll
(July 1-August 31)
October 17, 20115142011–42 I.R.B.

Key CityCounty or other defined location
New York
Floral Park/Garden City/Great NeckNassau
Glens FallsWarren
(July 1-August 31)
Lake PlacidEssex
(July 1-Augus
t31)
Manhattan (includes the boroughs of Manhattan, Brooklyn, the Bronx, Queens
andStatenIsland)
Bronx, Kings, New York, Queens,
Richmond
Saratoga Springs/SchenectadySaratoga and Schenectady
(July 1-August 31)
Tarrytown/
White Plains/New Rochelle
Westcheste
r
North Carolina
Kill DevilDare
(June 1-August 31)
Pennsylv
ania
PhiladelphiaPhiladelphia
Rhode Island
Jamestown/Middletown/NewportNewport
(October 1-October 31 and May 1-September 30)
Utah
Park CitySummit
(January 1-March 31)
Virginia
Was
hington, DC Metro Area
Cit
ies of Alexandria, Fairfax, and Falls
Chu
rch; counties of Arlington and Fairfax
Virginia BeachCity of Virginia Beach
(June 1-August 31)
W
ashington
SeattleKing
WyomingTeton and Sublette
Jackson/Pinedale
(July 1-August 31)
3.Changes in high-cost localities.The
list of high-cost localities in this notice dif-
fers from the list of high-cost localities
in section 5.03 of Rev. Proc. 2010–39
(changes listed by key cities).
a. No localities have been added to the
list of high-cost localities.
b. The portion of the year for which the
following are high-cost localities has been
changed: Yosemite National Park, Califor-
nia; and Chicago, Illinois.
c. The following localities have been
removed from the list of high-cost lo-
calities: Phoenix/Scottsdale, Arizona;
South Lake Tahoe, California; Silver-
thorne/Breckenridge, Colorado; River-
head/Ronkonkoma/Melville, New York;
and Stowe, Vermont.
SECTION 6. EFFECTIVE DATE
This notice is effective forper diemal-
lowances for lodging, meal and inciden-
tal expenses, or for meal and incidental
expenses only that are paid to any em-
ployee on or after October 1, 2011, for
travel away from home on or after Octo-
ber 1, 2011. For purposes of computing the
amount allowable as a deduction for travel
away from home, this notice is effective
for meal and incidental expenses or for in-
cidental expenses only paid or incurred on
or after October 1, 2011. See sections 4.06
and 5.04 of Rev. Proc. 2011–47 for transi-
tion rules for the last 3 months of calendar
year 2011.
DRAFTING INFORMATION
The principal author of this no-
tice is Eric D. Brauer of the Office of
Associate Chief Counsel (Income Tax
& Accounting). For further information
regarding this notice, contact Mr. Brauer
at (202) 622–4970 (not a toll-free call).
2011–42 I.R.B.515October 17, 2011

Guidance on Electing
Portability of Deceased
Spousal Unused Exclusion
Amount
Notice 2011–82
PURPOSE
This notice alerts executors of the
estates of decedents dying after Decem-
ber 31, 2010, of the need to file a Form
706,United States Estate (and Genera-
tion-Skipping Transfer) Tax Return, within
the time prescribed by law (including ex-
tensions) in order to elect to allow the
decedent’s surviving spouse to take ad-
vantage of the deceased spouse’s unused
exclusion amount, if any, pursuant to
section 303(a) of the Tax Relief, Unem-
ployment Insurance Reauthorization, and
Job Creation Act of 2010, P.L. 111–312
(124 Stat. 3302) (TRUIRJCA) and section
2010(c)(5)(A) of the Internal Revenue
Code (Code). In particular, for the execu-
tor of the estate of a decedent to elect under
section 2010(c)(5)(A) (a “portability elec-
tion”) to allow the decedent’s surviving
spouse to use the decedent’s unused exclu-
sion amount, the executor is required to file
a Form 706 for the decedent’s estate, even
if the executor is not otherwise obligated
to file a Form 706. This notice also alerts
executors of the estates of decedents dying
after December 31, 2010, that the estate
of such a decedent will be considered to
have made a portability election if a Form
706 is timely filed in accordance with the
instructions for that form. For those es-
tates filing a Form 706 that choose not to
make a portability election, this notice ad-
dresses how to avoid making the election.
This notice also reminds taxpayers that a
portability election can be made only on
a Form 706 timely filed by the estate of a
decedent dying after December 31, 2010,
and any attempt to make a portability
election on a Form 706 filed for the
estate of a decedent dying on or before
December 31, 2010, will be ineffective.
Finally, this notice alerts taxpayers that
the Treasury Department and the Internal
Revenue Service (Service) intend to issue
regulations under section 2010(c) of the
Code to address issues arising with respect
to the portability election, and anticipate
that those regulations will be consistent
with the provisions of this notice.
BACKGROUND
Sections 302(a)(1) and 303(a) of
TRUIRJCA, enacted on December 17,
2010, amended section 2010(c) of the
Code. Section 2010(c), as amended,
generally allows the surviving spouse of a
decedent dying after December 31, 2010,
to use the decedent’s unused exclusion
amount in addition to the surviving
spouse’s own basic exclusion amount.
Thus, sections 302(a)(1) and 303(a) of
TRUIRJCA eliminate the need for spouses
to retitle property and create trusts solely
to take full advantage of each spouse’s
basic exclusion amount.
Section 2010(c)(1) of the Code pro-
vides that the applicable credit amount is
the amount of the tentative tax that would
be determined under section 2001(c) if the
amount with respect to which the tenta-
tive tax is to be computed were equal to
the applicable exclusion amount. Thus,
generally, the applicable credit amount
effectively exempts from federal estate
and gift tax a person’s taxable transfers
with a cumulative value not exceeding the
applicable exclusion amount.
Under section 2010(c)(2), a person’s
applicable exclusion amount is the sum of
(A) the basic exclusion amount and (B)
in the case of a surviving spouse, the de-
ceased spousal unused exclusion amount,
if any.
Section 2010(c)(3) sets the basic exclu-
sion amount at $5,000,000 in 2011, to be
adjusted annually for inflation after 2011.
Section 2010(c)(4) defines the term
“deceased spousal unused exclusion
amount” to mean, with respect to the sur-
viving spouse of a decedent dying after
December 31, 2010, the lesser of (A) the
basic exclusion amount, or (B) the excess
of (i) the basic exclusion amount of the last
such deceased spouse of such surviving
spouse, over (ii) the amount with respect
to which the tentative tax is determined
under section 2001(b)(1) on the estate of
such deceased spouse. The unused ex-
clusion amount of a deceased spouse who
died before January 1, 2011, cannot be
used by the surviving spouse, regardless
of the date of the surviving spouse’s death.
Under section 2010(c)(5)(A), a de-
ceased spousal unused exclusion amount
may be taken into account by a surviv-
ing spouse in determining the surviving
spouse’s applicable exclusion amount only
if the executor of the deceased spouse
timely files a Form 706 for the deceased
spouse’s estate, on which the executor
computes the deceased spousal unused
exclusion amount and makes a portabil-
ity election. An election, once made, is
irrevocable. However, no election may be
made if the Form 706 is filed after the time
prescribed by law (including extensions)
for filing a Form 706.
Section 6075(a) requires the executor
of a decedent’s estate filing a tax return
to file the Form 706 within 9 months af-
ter the date of the decedent’s death. Sec-
tion 6081(a) providesthat the Secretary
may grant a reasonable extension of time
for filing any return; however, generally,
no such extension may be for more than 6
months. Section 20.6081–1(b) of the Es-
tate Tax Regulations grants executors of
decedents’ estates an automatic 6-month
extension of time to file the Form 706.
Executors currently may request the auto-
matic extension of time to file Form 706 by
timely filing Form 4768,“Application for
Extension of Time To File a Return and/or
Pay U.S. Estate (and Generation-Skipping
Transfer) Taxes.”
Section 2010(c)(5)(B) allows the Secre-
tary to examine a return of the predeceased
spouse, even after the time has expired un-
der section 6501 for assessing tax under
chapter 11 or 12, to make determinations
with respect to the deceased spousal un-
used exclusion amount, notwithstanding
any period of limitation in section 6501.
Section 2010(c)(6) provides that the
Secretary shall prescribe regulations as
may be necessary or appropriate to imple-
ment section 2010(c).
DISCUSSION
The Treasury Department and the Ser-
vice anticipate that, as a general rule,
married couples will want to ensure that
the unused basic exclusion amount of the
first spouse to die will be available to
the surviving spouse and, thus, that the
estates of most (if not all) married dece-
dents dying after December 31, 2010, will
want to make the portability election. As
indicated above, because the election is
to be made on a timely-filed Form 706,
the Treasury Department and the Service
anticipate a significant increase in the
number of Forms 706 that will be filed
by the estates of decedents dying after
October 17, 20115162011–42 I.R.B.

December 31, 2010, and that many of
those returns will be filed by the estates of
decedents whose gross estates have a value
below the applicable exclusion amount.
As a result, the Treasury Department
and the Service believe that the procedure
for making the portability election on the
Form 706 should be as straightforward and
uncomplicated as possible to reduce the
risk of inadvertently missed elections. To
that end, the Treasury Department and the
Service have determined that the timely
filing of a Form 706, prepared in accor-
dance with the instructions for that form,
will constitute the making of a portabil-
ity election by the estate of a decedent dy-
ing after December 31, 2010. Thus, by
timely filing a properly-prepared and com-
plete Form 706, an estate will be con-
sidered to have made the portability elec-
tion without the need to make an affir-
mative statement, check a box, or oth-
erwise affirmatively elect, on the Form
706. Until such time as the IRS revises the
Form 706 to expressly contain the compu-
tation of the deceased spousal unused ex-
clusion amount, a timely-filed and com-
plete Form 706 that is prepared in accor-
dance with the instructions for that form
will be deemed to contain the computa-
tion of the deceased spousal unused ex-
clusion amount, thereby satisfying the re-
quirements in section 2010(c)(5)(A) for
making an effective election.
The Treasury Department and the Ser-
vice acknowledge that an estate may not
want to make the portability election. Not
filing a timely Form 706 will prevent the
making of that election. However, if such
an estate is obligated to file a Form 706 be-
cause the value of the gross estate exceeds
the applicable exclusion amount, or files a
Form 706 for another reason, the execu-
tor must follow the instructions for Form
706 that will describe the necessary steps
to avoid making the election.
The Treasury Department and the Ser-
vice recognize that the due date for filing
Form 706 for those decedents dying in the
first quarter of 2011 is fast approaching
and remind executors of the ability to re-
quest an automatic 6-month extension by
filing Form 4768 before the due date for
filing Form 706. See § 20.6081–1(a) and
(b) of the Estate Tax Regulations.
The Treasury Department and the Ser-
vice intend to issue regulations, pursuant
to the specific authority provided in sec-
tion 2010(c)(6), to address various issues
arising with respect to implementation of
the provisions of section 2010(c).
GUIDANCE
1. If the executor of the estate of a dece-
dent dying after December 31, 2010, in-
tends to make the portability election to
allow the decedent’s surviving spouse to
use the deceased spousal unused exclusion
amount, the executor must file a complete
Form 706 within the time prescribed by
law (including extensions), regardless of
whetherornotthegrossestatehasavalue
in excess of the exclusion amount or oth-
erwise is obligated to file a Form 706.
2. The estate of a decedent dying af-
ter December 31, 2010, will be deemed to
make the portability election to allow the
decedent’s surviving spouse to use the de-
ceased spousal unused exclusion amount
by the timely filing of a complete and prop-
erly-prepared Form 706. To ensure the
correct exclusion amount and tax rates, ex-
ecutors should use the Form 706 issued for
the year of the decedent’s death. Until such
time as the IRS revises the Form 706 to ex-
pressly contain the computation of the de-
ceased spousal unused exclusion amount, a
complete and properly-prepared Form 706
will be deemed to contain the computation
of the deceased spousal unused exclusion
amount.
3. The executor of the estate of a dece-
dent dying after December 31, 2010, that
timely files a complete Form 706, but
that chooses not to make the portability
election to allow the decedent’s surviving
spouse to use the deceased spousal unused
exclusion amount, must follow the in-
structions for Form 706 that will describe
the steps the executor must take to notify
the Service that the decedent’s estate is
not making the portability election. If the
executor of such an estate chooses not to
make the portability election and is not
otherwise obligated to file a Form 706, not
timely filing a Form 706 will effectively
prevent the making of that election.
4. The estate of a decedent dying on or
before December 31, 2010, is not entitled
to make a portability election. Any attempt
to make a portability election on a Form
706 filed for the estate of such a decedent
will be ineffective.
5. The Treasury Department and the
Service intend to issue regulations to im-
plement the provisions of section 2010(c).
REQUEST FOR COMMENTS
Comments are invited on the following
specific issues, which have been identified
for consideration in proposed regulations
to be issued under section 2010(c):
1. The determination in various circum-
stances of the deceased spousal unused ex-
clusion amount and the applicable exclu-
sion amount;
2. The order in which exclusions are
deemed to be used;
3. The effect of the last predeceas-
ing spouse limitation described in section
2010(c)(4)(B)(i);
4. The scope of the Service’s right to
examine a return of the first spouse to die
without regard to any period of limitation
in section 6501; and
5. Any additional issues that should be
considered for inclusion in the proposed
regulations.
Comments will be considered if submit-
ted in writing by October 31, 2011. All
comments will be available for public in-
spection and copying. Comments may be
submitted in one of three ways:
a. By mail to CC:PA:LPD:PR (Notice
2011–82), Room 5203, Internal Rev-
enue Service, P.O. Box 7604, Ben
Franklin Station, Washington, DC
20044.
b. Electronicallyto
Notice.Comments@irscounsel.treas.gov.
Please include “Notice 2011–82” in
the subject line of any electronic
communications.
c. By hand-delivery Monday through
Friday between the hours of 8 a.m.
and 4 p.m. to CC:PA:LPD:PR (Notice
2011–82), Courier’s Desk, Internal
Revenue Service, 1111 Constitution
Ave., NW, Washington, DC 20224.
EFFECTIVE DATE
This notice is applicable with respect
to the estates of decedents dying after De-
cember 31, 2010.
DRAFTING INFORMATION
The principal author of this notice
isKarleneM.LeshooftheOfficeof
Associate Chief Counsel (Passthroughs
2011–42 I.R.B.517October 17, 2011

and Special Industries). For further
information regarding this notice, contact
Karlene M. Lesho at (202) 622–3090 (not
a toll-free call).
26 CFR 601.204: Changes in accounting periods and
in methods of accounting.
(Also Part I, §§ 446, 448, 481.)
Rev. Proc. 2011–46
SECTION 1. PURPOSE
This revenue procedure provides a
book safe harbor method of accounting
for taxpayers using the nonaccrual-ex-
perience (NAE) method of accounting
under § 448(d)(5) of the Internal Revenue
Code and § 1.448–2 of the Income Tax
Regulations. This revenue procedure also
provides the procedures by which a tax-
payer may obtain automatic consent (1)
to change to the NAE book safe harbor
method, and (2) to make certain changes
within the NAE book safe harbor method.
SECTION 2. BACKGROUND
.01 Section 448(d)(5) provides that cer-
tain taxpayers may use the NAE method
to account for amounts to be received for
the performance of services. In general,
taxpayers eligible to use a NAE method
are not required to accrue any portion of
amounts that, based on the taxpayer’s ex-
perience, will not be collected.
.02 The NAE method is available only
to a taxpayer using an accrual method of
accounting that either provides services in
a field described in § 448(d)(2)(A) (health,
law, engineering, architecture, accounting,
actuarial science, performing arts, or con-
sulting), or that meets the $5 million an-
nual gross receipts test of § 448(c). The
NAE method may not be used for amounts
for which the taxpayer charges interest or
penalties for failure to timely pay. See
§ 448(d)(5)(B) and § 1.448–2(c)(1)(ii).
.03 Section 448(d)(5)(C) provides that
the Secretary shall provide guidance that
permits taxpayers to use computations and
formulas that, based on experience, accu-
rately reflect the amount of income that a
taxpayer will not collect (the uncollectible
amount).
.04 Section 1.448–2(f) describes safe
harbor NAE methods that a taxpayer may
use to determine the uncollectible amount.
Section 1.448–2(b) provides that, except
as provided in other published guidance, a
taxpayer that wishes to change to a NAE
method other than one of the safe har-
bor methods must request advance consent
from the Commissioner.
.05 Rev. Proc. 2011–14, 2011–4 I.R.B.
330, provides procedures for a taxpayer to
obtain automatic consent of the Commis-
sioner to change to a method of accounting
described in the Appendix to Rev. Proc.
2011–14.
.06 Rev. Proc. 2006–56, 2006–2 C.B.
1169, provides procedures for requesting
the consent of the Commissioner to make
certain changes to, from, or within a NAE
method of accounting and to adopt certain
NAE methods.
SECTION 3. SCOPE
This revenue procedure applies to a
taxpayer that is eligible to use the NAE
method of accounting under § 448(d)(5)
and § 1.448–2, and hasan applicable fi-
nancial statement, as defined in section
4.02 of this revenue procedure.
SECTION 4. APPLICATION
.01NAE book safe harbor.
(1)In general. A taxpayer within the
scope of this revenue procedure may com-
pute its uncollectible amount under the
NAE book safe harbor method by mul-
tiplying the portion of the year-end al-
lowance for doubtful accounts on the tax-
payer’s applicable financial statement that
is attributable to current year NAE-eligible
accounts receivable by 95 percent. A tax-
payer using the NAE book safe harbor is
generally subject to the rules in § 1.448–2;
however, the NAE book safe harbor is not
subject to the self-testing requirements of
§ 1.448–2(e).
(2)Allowance for doubtful accounts.
For purposes of this revenue procedure,
an allowance for doubtful accounts on a
taxpayer’s applicable financial statement
must represent the amount of outstand-
ing accounts receivable the taxpayer antic-
ipates it will not collect. Therefore, an al-
lowance that is computed to maximize the
deferral of taxable income under this rev-
enue procedure and does not represent the
amount of outstanding accounts receivable
the taxpayer anticipates it will not collect
in the future does not qualify under this
revenue procedure.
(3)Current year NAE-eligible accounts
receivable. Current year NAE-eligible ac-
counts receivable are accounts receivable
described in § 1.448–2(c)(1)(i) that a tax-
payer earns during the current taxable year.
They do not include accounts receivable
for which a taxpayer is prohibited from
using the nonaccrual experience method,
such as amounts not earned through the
performance of services and amounts for
which the taxpayer charges interest or
penalties for failure to timely pay. See
§ 1.448–2(c)(1)(ii).
(4)Computation of NAE-eligible
amount. A taxpayer may use any reason-
able method to determine the amount of
the taxpayer’s applicable financial state-
ment allowance for doubtful accounts that
is attributable to current year NAE-eli-
gible accounts receivable. In general, a
method will not be considered reasonable
if the method fails to consider relevant
information that is readily available to the
taxpayer that would produce a result that
is materially different than the method
employed by the taxpayer.
(5)Periodic system compatibility.The
NAE book safe harbor is a qualifying peri-
odic system of accounting for billings un-
der Notice 88–51, 1988–1 C.B. 535.
.02Applicable financial statement.
A taxpayer’s applicable financial state-
ment is the taxpayer’s financial statement
listed in paragraphs (1) through (3) of this
section 4.02 that has the highest priority
(including priority within paragraph (2)).
A taxpayer that does not have a finan-
cial statement described in this section
4.02 does not have an applicable financial
statement for purposes of this revenue
procedure. A taxpayer’s financial state-
ment that is properly incorporated into a
parent’s consolidated applicable financial
statement that is described in this section
4.02 will qualify as an applicable financial
statement. The financial statements are, in
descending priority —
(1) A financial statement required to
be filed with the Securities and Exchange
Commission (SEC) (the 10-K or the An-
nual Statement to Shareholders);
(2) A certified audited financial state-
ment that is accompanied by the report of
an independent CPA (or in the case of a
foreign corporation, by the report of a sim-
October 17, 20115182011–42 I.R.B.

ilarly qualified independent professional),
that is used for —
(a) Credit purposes,
(b) Reporting to shareholders, or
(c) Any other substantial non-tax pur-
pose; or
(3) A financial statement (other than a
tax return) required to be provided to the
federal or a state government or any fed-
eral or state agency (other than the SEC or
the Internal Revenue Service).
.03Examples.
Example 1. Application of NAE book safe har-
bor. (i) On December 31, 2011, the balance sheet in
calendar-year Taxpayer’s applicable financial state-
ment includes an allowance for doubtful accounts of
$1,300,000. Of this balance, $300,000 represents the
amount attributable to current year accounts receiv-
able that Taxpayer anticipates it will not collect in the
future.
(ii) Taking into account relevant information that
is readily available, Taxpayer makes a reasonable de-
termination that $200,000 of the $300,000 current
year addition to the financial statement allowance for
doubtful accounts is attributable to its current year
NAE-eligible accounts receivable. Taxpayer com-
putes the amount of income that it may exclude un-
der the NAE book safe harbor method by multiply-
ing the $200,000 increment to the financial statement
year-end allowance for doubtful accounts attributable
to current year NAE-eligible accounts receivable by
95%. Therefore, the amountof income that Taxpayer
is not required to accrue for federal income tax pur-
poses under section 448(d)(5) for the taxable year
ending December 31, 2011, is $190,000 ($200,000 x
95%).
Example 2.Recoveries. (i) On December 31,
2011, the balance sheet in Taxpayer’s applicable fi-
nancial statement includes an allowance for doubtful
accounts of $1,300,000, representing outstanding ac-
counts receivable that Taxpayer anticipates it will not
collect in the future. During calendar year 2012, Tax-
payer collects $100,000 ofaccounts receivable that
had been included in its allowance for doubtful ac-
counts.
(ii) Taking into account relevant information
that is readily available,Taxpayer determines that
$60,000 of the $100,000 financial statement recov-
ery from the allowance for doubtful accounts is
attributable to recoveries of NAE-eligible accounts
receivable, all or a portion of which Taxpayer had
properly excluded from income in a prior year under
the NAE rules. As required by § 1.448–2(d)(5),
Taxpayer must include the recovered amount in in-
come in the taxable year ending December 31, 2012.
The amount of additional income that Taxpayer
must include under § 1.448–2(d)(5) is equal to the
amount of the recovery that Taxpayer previously
excluded from income under an NAE method. Thus,
if in a prior year Taxpayer excluded 95% of the
recovered $60,000 under the NAE book safe harbor
method, Taxpayer is required to include $57,000
($60,000 x 95%) in income in the taxable year ending
December 31, 2012.
SECTION 5. CHANGE IN METHOD
OF ACCOUNTING
.01Change to the NAE book safe har-
bor.
(1)In general. A change in a taxpayer’s
method of accounting to the NAE book
safe harbor method is a change in method
of accounting to which the provisions of
§§ 446 and 481 and the regulations there-
under apply. A taxpayer within the scope
of this revenue procedure is granted the
consent of the Commissioner to change to
the NAE book safe harbor method permit-
ted under section 4 of this revenue proce-
dure if the taxpayer complies with the ap-
plicable provisions of Rev. Proc. 2006–56
and Rev. Proc. 2011–14 (or any succes-
sor).
(2)Scope limitations. The scope lim-
itations in section 4.02 of Rev. Proc.
2011–14 (or any successor) do not apply
for a taxpayer’s first taxable year ending
on or after September 28, 2011. However,
if, at the time a taxpayer files a Form
3115 for that year with the national of-
fice, and the taxpayer’s NAE method is
an issue under consideration for a taxable
year under examination, before an ap-
peals office, or before a federal court, then
the audit protection of section 7 of Rev.
Proc. 2011–14 (or any successor) does
not apply. A taxpayer’s NAE method of
accounting is an issue under consideration
for the taxable years under examination if
the taxpayer receives written notification
(for example, by examination plan, infor-
mation document request, or notification
of proposed adjustment, or income tax
examination changes) from the examining
agent(s) specificallyciting the treatment
of the NAE method of accounting as an
issue under consideration.
.02Change in applicable financial
statements and allowance for doubtful
accounts.
(1)In general. A change to a taxpayer’s
method for determining its allowance for
doubtful accounts for its applicable finan-
cial statements is a change in method of ac-
counting to which the provisions of § 446
and the regulations thereunder apply. A
taxpayer within the scope of this revenue
procedure is granted the consent of the
Commissioner to change this method if the
taxpayer complies with the applicable pro-
visions of Rev. Proc. 2011–14 (or any suc-
cessor) and this paragraph 5.02. An adjust-
ment to a taxpayer’s estimates in determin-
ing its allowance for doubtful accounts that
does not change the base or formula is not
a change in the method of determining the
allowance for doubtful accounts under this
paragraph 5.02. For example, if a taxpayer
estimates that 4% of its receivables are un-
collectible in a taxable year, and using the
same methodology estimates that 6% of its
receivables are uncollectible in the subse-
quent taxable year, the adjustment to its
estimate is not a change in the method of
determining the allowance for doubtful ac-
counts.
(2)Restatement of applicable financial
statements. A taxpayer’s restatement of
its applicable financial statements does
not invalidate the taxpayer’s method of
accounting or change its uncollectible
amount determined under the NAE book
safe harbor in earlier taxable years.
(3)Manner of making change.
(a) A taxpayer makes a change in
method of accounting under this paragraph
5.02 by attaching a statement to its original
return for the taxable year of change (or
to an amended return if under the limited
relief for a late application provided in
section 6.02(3)(d) of Rev. Proc. 2011–14,
or any successor). The taxpayer is not re-
quired to file a copy of the statement with
the national office under section 6.02(3)(a)
of Rev. Proc. 2011–14 (or any successor).
The statement must include the following
information:
(i) The taxpayer’s name and taxpayer
identification number for each applicant;
(ii) The beginning and ending dates of
the year of change;
(iii) For each applicant, the type of ap-
plicable financial statement (as defined in
section 4.02 of this revenue procedure) the
taxpayer uses;
(iv) A description of the method the tax-
payer uses to determine its allowance for
doubtful accounts on its applicable finan-
cial statements before and after the change;
and
(v) The designated automatic account-
ing method change number 35.
(b) A change under this paragraph 5.02
is made on a cut-off basis and applies only
to accounts receivable earned on or after
the first day of the taxable year of change.
A taxpayer must continue to apply its for-
mer method to accounts receivable earned
before the taxable year of change. Accord-
2011–42 I.R.B.519October 17, 2011

ingly, a § 481(a) adjustment is neither per-
mitted nor required.
(4)Scope limitations. The scope lim-
itationinsection4.02(7)ofRev. Proc.
2011–14 (or any successor) does not ap-
ply to a change in method of accounting
under this section 5.02. A taxpayer that
is otherwise ineligible to file an automatic
method change because it is under exam-
ination (as defined in section 3.08 of Rev.
Proc. 2011–14 (or any successor)) for any
income tax issue may change its method
of accounting under this paragraph 5.02,
however, the audit protection provisions of
section 7 of Rev. Proc. 2011–14 (or any
successor) do not apply.
.03Change in method of determining
the NAE-eligible amount.
(1)In general. A change in a taxpayer’s
method for determining the portion of its
applicable financial statement allowance
for doubtful accounts that is attributable
to current year NAE-eligible accounts re-
ceivable (as described in section 4.01(4)
of this revenue procedure) is a change in
method of accounting to which the provi-
sions of § 446 and the regulations there-
under apply. A taxpayer within the scope
of this revenue procedure is granted the
consent of the Commissioner to change
this method if the taxpayer complies with
the applicable provisions of Rev. Proc.
2011–14 (or any successor) and this para-
graph 5.03.
(2)Manner of making change.
(a) A taxpayer makes a change in
method of accounting under this paragraph
5.03 by attaching a statement to its original
return for the taxable year of change (or
to an amended return if under the limited
relief for a late application provided in
section 6.02(3)(d) of Rev. Proc. 2011–14,
or any successor). The taxpayer is not re-
quired to file a copy of the statement with
the national office under section 6.02(3)(a)
of Rev. Proc. 2011–14 (or any successor).
The statement must include the following
information:
(i) The taxpayer’s name and taxpayer
identification number for each applicant;
(ii) The beginning and ending dates of
the year of change;
(iii) A description of the method the tax-
payer uses to determine its NAE-eligible
amount before and after the change; and
(iv) The designated automatic account-
ing method change number 35.
(b) A change under this paragraph 5.03
is made on a cut-off basis and applies only
to accounts receivable earned on or after
the first day of the taxable year of change.
A taxpayer must continue to apply its for-
mer method to accounts receivable earned
before the taxable year of change. Accord-
ingly, a § 481(a) adjustment is neither per-
mitted nor required.
(3)Scope limitation. The scope lim-
itation in section 4.02(7) of Rev. Proc.
2011–14 (or any successor) does not apply
to a change in method of accounting under
this section 5.03.
SECTION 6. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2006–56 is modified and
amplified to include the NAE book safe
harbor method in the safe harbors de-
scribed in paragraphs (1), (7), and (8) of
section 3.01 and in section 3.02. There-
fore, a taxpayer may change to the NAE
book safe harbor method using the provi-
sions of section 14.04 of the APPENDIX
of Rev. Proc. 2011–14 (or any successor)
if the taxpayer is otherwise eligible to use
Rev. Proc. 2011–14.
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective
for taxable years ending on or after
September 28, 2011.
SECTION 8. DRAFTING
INFORMATION
The principal author of this revenue
procedure is W. Thomas McElroy, Jr., of
the Office of Associate Chief Counsel
(Income Tax and Accounting). For further
information regarding this revenue pro-
cedure, contact Karla M. Meola at (202)
622–4930 (not a toll-free call).
26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability.
(Also: Part I, §§ 62, 162, 267, 274; 1.62–2, 1.162–17,
1.267(a)–1, 1.274–5.)
Rev. Proc. 2011–47
SECTION 1. PURPOSE
This revenue procedure updates Rev.
Proc. 2010–39, 2010–42 I.R.B. 459, and
provides rules for using aper diemrate
to substantiate, under section 274(d) of
the Internal Revenue Code and section
1.274–5 of the Income Tax Regulations,
the amount of ordinary and necessary
business expenses paid or incurred while
traveling away from home. Taxpayers are
not required to use a method described in
this revenue procedure. A taxpayer may
substantiate actual allowable expenses if
the taxpayer maintains adequate records
or other sufficient evidence.
This revenue procedure provides rules
for using aper diemrate to substantiate
the amount of an employee’s expenses for
lodging, meal, and incidental expenses,
or for meal and incidental expenses only,
that a payor (an employer, its agent, or a
third party) reimburses. Employees and
self-employed individuals that deduct un-
reimbursed expenses for travel away from
home may use aper diemrate for meals
and incidental expenses, or incidental ex-
penses only, under this revenue procedure.
This revenue procedure does not provide
rules for using aper diemrate to substan-
tiate the amount of lodging expenses only.
Announcement 2011–42, 2011–32
I.R.B. 138, advised taxpayers that the In-
ternal Revenue Service intends to discon-
tinue the high-low substantiation method.
Subsequently a number of taxpayers com-
mented that they use the high-low substan-
tiation method and asked that the Service
retain it. Accordingly, this revenue proce-
dure continues to authorize the high-low
substantiation method.
Beginning with the rates for
2011–2012, the Service will publish an
annual notice that provides the specialper
diemrates for purposes of sections 4.04,
4.05, and 5 of this revenue procedure and
the list of high-cost localities for purposes
of section 5 of this revenue procedure and
will update this revenue procedure only as
necessary.
October 17, 20115202011–42 I.R.B.

SECTION 2. BACKGROUND AND
CHANGES
.01 Section 162(a) allows a deduction
for ordinary and necessary expenses paid
or incurred during the taxable year in car-
rying on any trade or business, includ-
ing expenses for travel away from home.
However, under section 262, a taxpayer
may not deduct personal travel or living
expenses.
.02 Section 274(n) generally limits the
amount allowable as a deduction under
section 162 for any expense for food, bev-
erages, or entertainment to 50 percent of
the otherwise allowable amount. For an in-
dividual during, or incident to, a period of
duty subject to the hours of service limita-
tions of the Department of Transportation,
section 274(n)(3) provides that, for taxable
years beginning in 2008 or thereafter, the
deductible percentage for these expenses is
80 percent.
.03 To deduct expenses for travel away
from home, a taxpayer must substantiate
the expenses under section 274(d), which
also authorizes the Secretary to prescribe
that some or all of the substantiation re-
quirements do not apply to an expense that
does not exceed a particular amount.
.04 Section 1.274–5(g) authorizes the
Commissioner to prescribe rules under
which reimbursement arrangements or
per diemallowances are regarded (1) as
equivalent to substantiation, by adequate
records or other sufficient evidence, of
the amount of travel expenses for pur-
poses of section 1.274–5(c), and (2) as
satisfying the requirements of an adequate
accounting to the employer of the amount
of travel expenses for purposes of section
1.274–5(f).
.05 For purposes of determining ad-
justed gross income,section 62(a)(2)(A)
allows an employee to deduct business ex-
penses the employee pays or incurs in per-
forming services under a reimbursement or
other expense allowance arrangement with
apayor.
.06 Section 62(c) provides that an ar-
rangement is not treated as a reimburse-
ment or other expense allowance arrange-
ment for purposes of section 62(a)(2)(A) if
it (1) does not require the employee to sub-
stantiate the expenses covered by the ar-
rangement to the payor, or (2) allows the
employee to retain any amount in excess
of the substantiatedexpenses covered un-
der the arrangement. Section 62(c) fur-
ther provides, however, that substantiation
is not required for the expense to the ex-
tent provided in regulations under section
274(d).
.07 Under section 1.62–2(c), a reim-
bursement or other expense allowance
arrangement satisfies the requirements of
section 62(c) if it meets the requirements
of business connection, substantiation, and
returning amounts in excess of expenses.
In that case, all amounts paid under the
arrangement are treated as paid under an
accountable plan and are excluded from
income and wages. If an arrangement
does not meet one or more of these re-
quirements, all amounts paid under the
arrangement are treated as paid under a
nonaccountable planand are included in
an employee’s gross income, must be re-
ported as wages or compensation on the
employee’s Form W–2, and are subject to
the withholding and payment of employ-
ment taxes.
.08 Section 1.62–2(e)(2) provides that
the amount of a business expense substan-
tiated under section 1.274–5(g) is treated
as substantiated for purposes of section
1.62–2.
.09 Under section 1.62–2(f)(2), the
Commissioner may prescribe rules for
treating an arrangement providingper
diemallowances as satisfying the re-
quirement of returning amounts in excess
of expenses if the arrangement requires
the employee to return amounts that re-
late to unsubstantiated travel days, even
though the arrangement does not require
theemployeetoreturntheportionofthe
allowance that relates to substantiated
travel days but that exceeds the deemed
substantiated amount for those days. The
allowance must be reasonably calculated
not to exceed the amount of the em-
ployee’s expenses or anticipated expenses
and the employee must be required to re-
turn within a reasonable period of time
any portion of the allowance that relates
to unsubstantiated travel days. Under
section 1.62–2(h)(2)(i)(B), the portion of
the allowance that relates to substantiated
travel days but exceeds the substantiated
amount for those days and that the em-
ployee is not required to return is subject
to withholding and payment of employ-
ment taxes. See sections 31.3121(a)–3,
31.3231(e)–1(a)(5), 31.3306(b)–2, and
31.3401(a)–4 of the Employment Tax
Regulations.
.10 Under section 1.62–2(h)(2)
(i)(B)(4), the Commissioner may prescribe
special rules for the timing of withholding
and paying employment taxes onper diem
allowances.
.11 Section 1.274–5(j)(1) authorizes
the Commissioner to establish a method
allowing a taxpayer to treat a specific
amount as paid or incurred for meals while
traveling away from home instead of sub-
stantiating the actual cost.
.12 Section 1.274–5(j)(3) authorizes
the Commissioner to establish a method
allowing a taxpayer to treat a specific
amount as paid or incurred for incidental
expenses while traveling away from home
in lieu of substantiating the actual cost.
.13 This revenue procedure includes
modifications to Rev. Proc. 2010–39 as
follows:
(1) The specialper diemrates are now
published in a separate annual notice. The
notice provides (1) the special transporta-
tion industry meal and incidental expenses
rates(M&IErates),(2)therateforthein-
cidental expenses only deduction, and (3)
the rates and list of high-cost localities
for purposes of the high-low substantiation
method. The Service plans to discontinue
publishing this revenue procedure annu-
ally but will publish modifications as re-
quired. This revenue procedure remains in
effect until superseded.
(2) Section 3.04 clarifies that partners
and volunteers who receive reimburse-
ments from payors may use the methods
allowed under this revenue procedure to
substantiate their expenses.
(3) Under section 5, taxpayers may now
use the high-low substantiation method in
lieu of the meal and incidental expenses
onlyper diemsubstantiation method pro-
vided in section 4.02 for travel within the
continental United States.
(4) Transition rules for the last 3 months
of each calendar year are moved from sec-
tions 3.02(1)(a) and 4.04(6) to new section
4.06andfromsection5.05tosection5.04.
SECTION 3. DEFINITIONS
.01Per diem allowance.Theterm“per
diemallowance” means a payment under a
reimbursement or other expense allowance
arrangement that is —
2011–42 I.R.B.521October 17, 2011

(1) Paid for ordinary and necessary
business expenses incurred, or that the
payor reasonably anticipates will be in-
curred, by an employee for lodging, meal,
and incidental expenses, or for meal and
incidental expenses, for travel away from
home performing services as an employee
of the employer,
(2) Reasonably calculated not to exceed
the amount of the expenses or the antici-
pated expenses, and
(3) Paid at or below the applicable fed-
eralper diemrate, a flat rate or stated
schedule, or in accordance with any other
Service-specified rate or schedule.
.02Federal per diem rate and federal
M&IE rate.
(1)In general. The federalper diem
rate is equal to the sum of the applicable
federal lodging expense rate and the appli-
cable federal M&IE rate for the day and
locality of travel.
(a)CONUS rates.TheGeneralSer-
vices Administration (GSA) publishes the
rates for localities in the continental United
States (CONUS), as noted in Appendix A
to 41 C.F.R. ch. 301. The GSA rates are
available on the internet atwww.gsa.gov.
(b)OCONUS rates. The rates for lo-
calities outside the continental United
States (OCONUS) are established by the
Secretary of Defense(rates for non-for-
eign localities, including Alaska, Hawaii,
Puerto Rico, the Northern Mariana Is-
lands, and the possessions of the United
States) and by the Secretary of State (rates
for foreign localities). These rates are pub-
lished in thePer DiemSupplement to the
Standardized Regulations (Government
Civilians, Foreign Areas) (updated on a
monthly basis) and are available on the
internet atwww.defensetravel.dod.miland
www.state.gov.
(2)Locality of travel. The term “lo-
cality of travel” means the locality where
an employee or self-employed individual
traveling away from home stops for sleep
or rest.
(3)Incidental expenses.Theterm
“incidental expenses has the same mean-
ing as in the Federal Travel Regulations,
41 C.F.R. 300–3.1 (fees and tips given
to porters, baggage carriers, bellhops,
hotel maids, stewards or stewardesses
and others on ships, and hotel servants in
foreign countries; transportation between
places of lodging or business and places
where meals are taken, if suitable meals
can be obtained at the temporary duty
site; and the mailingcost associated with
filing travel vouchers and payment of
employer-sponsored charge card billings).
Future changes to the definition of
incidental expenses in the Federal Travel
Regulations will be announced in the
annual notice providing the specialper
diemrates.
.03Flat rate or stated schedule.
(1)In general. Except as provided in
section 3.03(2) of this revenue procedure,
an allowance is paid at a flat rate or stated
schedule if it is provided on a uniform
and objective basis for the expenses de-
scribed in section 3.01(1) of this revenue
procedure. The allowance may be paid
for the number of days away from home
performing services as an employee or
on any other basis that is consistently ap-
plied and in accordance with reasonable
business practice. Thus, for example, an
hourly payment to cover meal and inci-
dental expenses paid to a pilot or flight
attendant who is traveling away from
home performing services as an employee
is an allowance paid at a flat rate or stated
schedule. Likewise, a payment based on
the number of miles traveled (such as
cents per mile) to cover meal and inci-
dental expenses paid to an over-the-road
truck driver who is traveling away from
home performing services as an employee
is an allowance paid at a flat rate or stated
schedule.
(2)Limitation. An allowance that is
computed on a basis similar to that used
in computing an employee’s wages or
other compensation (such as the number
of hours worked, miles traveled, or pieces
produced) does not meet the business con-
nection requirement of section 1.62–2(d),
is not aper diemallowance, and is not paid
at a flat rate or stated schedule, unless, as
of December 12, 1989, (a) the allowance
was identified by the payor either by mak-
ing a separate payment or by specifically
identifying the amount of the allowance,
or (b) an allowance computed on that ba-
sis was commonly used in the industry in
which the employee performed services.
See section 1.62–2(d)(3)(ii).
.04Partners and volunteers. Individ-
uals subject to the rules of Subchapter K
(partners) and individuals performing ser-
vices without remuneration (volunteers)
who receive reimbursements from payors
may use the methods allowed under this
revenue procedure to substantiate their
expenses. The rules of sections 3, 4, 5,
and 6 (except section 6.06) of this revenue
procedure apply to reimbursements from
payors to partners or volunteers.
SECTION 4. PER DIEM
SUBSTANTIATION METHOD
.01Per diem allowance.Ifapayorpays
aper diemallowanceinlieuofreimburs-
ing actual lodging, meal, and incidental ex-
penses incurred or to be incurred by an
employee for travel away from home, the
amount of the expenses that is deemed sub-
stantiated for each calendar day is equal to
thelesseroftheper diemallowance for
that day or the amount computed at the
federalper diemrate (see section 3.02 of
this revenue procedure) for the locality of
travel for that day (or partial day, see sec-
tion 6.04 of this revenue procedure). See
section 4.06(1) of this revenue procedure
for transition rules.
.02Meal and incidental expenses only
per diem allowance.Ifapayorpaysa
per diemallowance only for meal and in-
cidental expenses in lieu of reimbursing
actual meal and incidental expenses in-
curred or to be incurred by an employee for
travel away from home, the amount of the
expenses that is deemed substantiated for
each calendar day is equal to the lesser of
theper diem
allowance for that day or the
amount computed at the federal M&IE rate
for the locality of travel for that day or par-
tial day. Aper diemallowance is treated
as paid for meal and incidental expenses
only if (1) the payor pays the employee for
actual expenses for lodging based on re-
ceipts submitted to the payor, (2) the payor
provides the lodging in kind, (3) the payor
pays the actual expenses for lodging di-
rectly to the provider of the lodging, (4)
the payor does not have a reasonable belief
that the employee will or did incur lodging
expenses, or (5) the allowance is computed
on a basis similar to that used in computing
an employee’s wages or other compensa-
tion (such as the number of hours worked,
miles traveled, or pieces produced). See
section 4.06(1) of this revenue procedure
for transition rules.
.03Method for meal and incidental ex-
penses only deduction. Instead of the ac-
tual expense amount, employees and self-
employed individuals may substantiate the
amount of deductible meal expenses by
October 17, 20115222011–42 I.R.B.

using an amount computed at the federal
M&IE rate for the locality of travel for
each calendar day or partial day the em-
ployee or self-employed individual is trav-
eling away from home. This amount is
deemed substantiated for purposes of sec-
tion 1.274–5T(b)(2)(i) and (c), provided
the employee or self-employed individual
substantiates the elements of time, place,
and business purpose of the travel for that
day or partial day in accordance with those
regulations. See section 6.05(1) of this
revenue procedure for rules related to the
application of the section 274(n) limitation
to amounts determined under this section
4.03. See section 4.05 of this revenue pro-
cedure for a method for substantiating the
deductible amount of incidental expenses
that employees or self-employed individu-
als who do not pay or incur meal expenses
may use. See section 4.06(1) of this rev-
enue procedure for transition rules.
.04Special rules for the transportation
industry.
(1)In general. This section 4.04 ap-
plies to (a) a payor that pays aper diem
allowance only for meal and incidental
expenses for travel away from home to
an employee in the transportation indus-
try and computes the amount under section
4.02 of this revenue procedure, or (b) an
employee or self-employed individual in
the transportation industry who computes
the deductible amount for meal and inci-
dental expenses for travel away from home
under section 4.03 of this revenue proce-
dure.
(2)Transportation industry defined.
For purposes of this section 4.04, an em-
ployee or self-employed individual is in
the transportation industry only if the
employee’s or self-employed individ-
ual’s work (a) is of the type that directly
involves moving people or goods by air-
plane, barge, bus, ship, train, or truck, and
(b) involves regularly traveling away from
home and stopping during a single trip
at localities with differing federal M&IE
rates. For purposes of the preceding sen-
tence, a payor must determine that an
employee or a group of employees is in the
transportation industry by using a method
that is consistently applied and in accor-
dance with reasonable business practice.
(3)Rates. A taxpayer described in
section 4.04(1) of this revenue procedure
may use the CONUS and OCONUS spe-
cial M&IE rates (published in an annual
notice) for the transportation industry. A
payor that uses either or both of these
special rates for an employee must use
the special rate(s) for all amounts deemed
substantiated under section 4.02 of this
revenue procedure paid to that employee
for travel away from home within CONUS
and/or OCONUS during the calendar year.
Similarly, an employee or self-employed
individual who uses either or both of these
special rates must use the special rate(s)
for all amounts deemed substantiated un-
der section 4.03 of this revenue procedure
for travel away from home within CONUS
and/or OCONUS during the calendar year.
See section 4.06(2) of this revenue proce-
dure for transition rules.
(4)Periodic rule. A payor described
in section 4.04(1) of this revenue proce-
dure may compute the amount of an em-
ployee’s expenses that is deemed substan-
tiated under section 4.02 of this revenue
procedure periodically (not less frequently
than monthly) rather than daily by compar-
ing the totalper diemallowance paid for
the period to the sum of the amounts com-
puted either at the federal M&IE rate(s) for
the localities of travel, or at the special rate
described in section 4.04(3), for the days
or partial days the employee is away from
home during the period.
(5)Examples.
(a)Example 1. Taxpayer, an employee in the
transportation industry, travels away from home on
business within CONUS for 10 days during a calen-
dar month. A payor pays Taxpayer aper diemal-
lowance for meal and incidental expenses only that
the payor computes using section 4.04(3) of this rev-
enue procedure. The CONUS special M&IE rate is
$59 per day. The amount deemed substantiated un-
der section 4.02 of this revenue procedure is equal to
thelesserofthetotalper diemallowance paid for the
month or $590 (10 days away from home at $59 per
day).
(b)Example 2. Taxpayer, a truck driver employee
in the transportation industry, is paid a “cents-per-
mile” allowance that qualifies as an allowance paid
under a flat rate or stated schedule as defined in sec-
tion 3.03 of this revenue procedure. Taxpayer trav-
els away from home on business for 10 days. Based
on the number of miles Taxpayer is expected to drive
per day, Taxpayer’s employer pays an allowance of
$500 for the 10 days of business travel. The CONUS
special M&IE rate is $59 per day. Taxpayer actually
drives for 8 days, and does not drive for the other 2
days Taxpayer is away from home. Taxpayer is paid
under the periodic rule used for transportation indus-
try employers and employees in accordance with sec-
tion 4.04(4) of this revenue procedure. The amount
deemed substantiated is the full $500 because that
amount does not exceed $590 (10 days away from
home at $59 per day).
.05Method for incidental expenses only
deduction. Instead of using actual ex-
penses in computing the amount allow-
able as a deduction for ordinary and nec-
essary incidental expenses paid or incurred
for travel away from home, employees and
self-employed individuals who pay or in-
cur incidental expenses but do not pay or
incur meal expenses for a calendar day
or partial day of travel away from home
may use, for each calendar day or par-
tial day the employee or self-employed in-
dividual is away from home, an amount
that the Service publishes in an annual no-
tice. This amount is deemed substantiated
for purposes of section 1.274–5T(b)(2)(i)
and (c), provided the employee or self-
employed individual substantiates the el-
ements of time, place, and business pur-
pose of the travel for that day or partial
day in accordance with those regulations.
The method authorized by this section 4.05
may not be used by payors that reimburse
expenses under section 4.01, 4.02, or 5.01
of this revenue procedure, or by employ-
ees or self-employed individuals who use
the method described in section 4.03 of
this revenue procedure to substantiate the
amount of deductible meal and incidental
expenses. See section 6.05(5) of this rev-
enue procedure for rules related to the ap-
plication of the section 274(n) limitation
to amounts determined under this section
4.05.
.06Transition rules.
(1)In general.Inapplyingsection4.01,
4.02, or 4.03 of this revenue procedure,
taxpayers may continue to use the CONUS
rates in effect for the first 9 months of
the calendar year, instead of the updated
GSA rates, for expenses of all CONUS
travel away from home that are paid or in-
curred during the last 3 months of the cal-
endar year. A taxpayer must use either the
rates for the first 9 months of the calen-
dar year or the updated rates for the period
October 1 through December 31 of each
calendar year consistently.
(2)Special transportation industry
rates. Under the calendar-year conven-
tion provided in section 4.04(3) of this
revenue procedure, a taxpayer who uses
the federal M&IE rates during the first 9
months of the calendar year to substan-
tiate the amount of an individual’s travel
expenses under sections 4.02 or 4.03 of
this revenue procedure may not use, for
that individual, the special transportation
2011–42 I.R.B.523October 17, 2011

industry rates published in an annual no-
tice until January 1 of the next calendar
year. Similarly, a taxpayer who uses the
special transportation industry rates dur-
ing the first 9 months of the calendar year
to substantiate the amount of an individ-
ual’s travel expenses may not use, for that
individual, the federal M&IE rates until
January 1 of the next calendar year.
SECTION 5. HIGH-LOW
SUBSTANTIATION METHOD
.01In general. A payor that pays aper
diemallowance in lieu of reimbursing ac-
tual expenses an employee pays or incurs
or will pay or incur for travel away from
home may use the high-low substantiation
methoddescribedinthissection5inlieu
of theper diemsubstantiation method de-
scribed in section 4.01 of this revenue pro-
cedure or the meal and incidental expenses
only method described in section 4.02 of
this revenue procedure. If a payor uses
the high-low substantiation method, the
amount of the expenses that is deemed sub-
stantiated for each calendar day is equal to
the lesser of the actualper diemallowance
for that day or the amount computed un-
der section 5.02 of this revenue procedure.
Employees and self-employed individuals
may not use the high-low substantiation
method in lieu of the meal and incidental
expenses only deduction method described
in section 4.03 of this revenue procedure.
.02Application of high-low method.
Under the high-low substantiation method,
a high rate applies to localities desig-
nated as high-cost localities and a low
rate applies to every other locality within
CONUS (one high rate and one low rate
for lodging, meal, and incidental expenses
and one high rate and one low rate for
meal and incidental expenses only). The
high or low rates, as appropriate, apply as
if they were the federalper diemrate or
the federal M&IE rate for the locality of
travel. The high and low rates, amounts
treated as meal expenses for purposes of
§ 274(n), and a list of high-cost localities
are published in an annual notice.
.03Limitation. A payor that uses the
high-low substantiation method for an
employee must use that method for all
amounts paid to that employee for travel
away from home within CONUS during
the calendar year. The payor may use any
permissible method (actual expenses, the
per diemsubstantiation method described
in section 4.01 of this revenue procedure,
or the meal and incidental expenses only
per diemsubstantiation method described
in section 4.02 of this revenue proce-
dure) to reimburse that employee for any
OCONUS travel away from home.
.04Transition rules. For travel in the
last 3 months of a calendar year—
(1) A payor must continue to use the
same method (per diemmethod under sec-
tions 4.01 or 4.02 of this revenue proce-
dure, or high-low method) for an employee
as the payor used during the first 9 months
of the calendar year; and
(2) A payor may use either the rates and
high-cost localities in effect for the first 9
months of the calendar year or the updated
rates and high-cost localities in effect for
the last 3 months of the calendar year if
the payor uses the same rates and localities
consistently for all employees reimbursed
under the high-low method.
.05Examples.
(1)Example 1. Employer pays aper diemal-
lowance for lodging, meal, and incidental expenses
to Employee for travel away from home using the
high-low substantiation method. Employee travels
away from home for 5 full days to City A within
CONUS. City A is listed as a high-cost locality. Em-
ployer reimburses employee at a rate of $225 per day
for each of employee’s 5 days of travel. Theper
diemrate for a high-cost locality is $250. The amount
deemed substantiated under section 5 of this revenue
procedure is $225 per day (the lesser of theper diem
allowance for each day ($225) or theper diemrate for
a high-cost locality ($250)).
(2)Example 2. Employer pays aper diemal-
lowance for meal and incidental expenses only to Em-
ployee for travel away from home using the high-low
substantiation method. Employee travels away from
home to City B (within CONUS) each month of Year
1. For all of Year 1, Employer reimburses Employee
at a rate of $50 per day for meal and incidental ex-
penses only. For the first 9 months of Year 1, City B
is listed as a high-cost locality. The M&IE rate is $60
for a high-cost locality and $45 for all other localities.
For the last 3 months of Year 1, City B is not listed
as a high-cost locality, and the M&IE rate for City B
is $48. Employer chooses to use the rates and list of
high-cost localities in effect during the first 9 months
of Year 1 for the last 3 months of Year 1 (instead of
the updated rates for the last 3 months of Year 1). If
Employer uses the rates and high-cost localities in ef-
fect during the first 9 months of Year 1 for the last 3
months of Year 1 consistently for all employees, the
amount deemed substantiated for Employee’s travel
to City B during the last 3 months of Year 1 is $50,
the lesser of the M&IE rate for a high-cost locality
($60) or the employee’sper diemallowance for each
day ($50).
SECTION 6. LIMITATIONS AND
SPECIAL RULES
.01In general. The federalper diem
rate and the federal M&IE rate described
in section 3.02 of this revenue procedure
for the locality of travel apply in the same
manner as they apply under the Federal
Travel Regulations, 41 C.F.R. Part 301, ex-
cept as provided in sections 6.02 through
6.04 of this revenue procedure.
.02Federal per diem rate. A receipt
for lodging expenses is not required in de-
termining the amount of expenses deemed
substantiated at the federalper diemrate
(including lodging, meal, and incidental
expenses in one rate) under section 4.01
or 5.01. See section 7.01 of this revenue
procedure for the requirement that an em-
ployee substantiate the time, place, and
business purpose of the expense.
.03Mealsprovidedinkind. A payor is
not required to reduce the federalper diem
rate or the federal M&IE rate for the lo-
cality of travel for meals provided in kind,
provided the payor has a reasonable belief
that the employee incurred or will incur
meal and incidental expenses during each
day of travel.
.04Proration of the federal per diem
or M&IE rate. Under the Federal Travel
Regulations, in determining the federalper
diemrate or the federal M&IE rate for the
locality of travel, the full applicable fed-
eral M&IE rate is available for a full day
of travel from 12:01 a.m. to 12:00 mid-
night. A taxpayer must use the method de-
scribed in section 6.04(1) of this revenue
procedure for purposes of determining the
amount deemed substantiated for meal and
incidental expenses or for incidental ex-
penses only under section 4.03, 4.05, or 5
of this revenue procedure for partial days
of travel away from home. For purposes
of determining the amount deemed sub-
stantiated for a reimbursement for lodging,
meal, and incidental expenses under sec-
tion 4.01, 4.02, or 5 of this revenue pro-
cedure for partial days of travel away from
home, a payor may use either of the follow-
ing methods to prorate the federal M&IE
rate to determine the federalper diemrate
or the federal M&IE rate for the partial
days of travel:
(1) The rate may be prorated using the
method prescribed by the Federal Travel
Regulations for meal and incidental ex-
penses for partial days, see 41 C.F.R.
October 17, 20115242011–42 I.R.B.

301–11.101, by allocating three-fourths of
the applicable rate to each partial day of
travel; or
(2) The rate may be prorated using any
method that is consistently applied and is
consistent with reasonable business prac-
tice. For example, if an employee trav-
els away from home from 9 a.m. one day
to 5 p.m. the next day, a method of pro-
ration that results in an amount equal to
two times the federal M&IE rate is con-
sistent with reasonable business practice
(even though the Federal Travel Regula-
tions allow only one and a half times the
federal M&IE rate).
.05Application of the appropriate sec-
tion 274(n) limitation on meal expenses.
Except as provided in section 6.05(5) of
this revenue procedure, all or part of the
amount of an expense deemed substanti-
ated under this revenue procedure is sub-
ject to the appropriate limitation under sec-
tion 274(n) (see section 2.02 of this rev-
enue procedure) on the deductibility of
food and beverage expenses.
(1) A taxpayer must treat the entire
amount computed for meal and incidental
expenses under section 4.03 of this rev-
enue procedure as an expense for food and
beverages.
(2)Ifaper diemallowance is paid for
meal and incidental expenses only, a payor
must treat an amount equal to the lesser of
the allowance or the federal M&IE rate for
the locality of travel for each day or partial
day (see section 6.04 of this revenue pro-
cedure) as an expense for food and bever-
ages.
(3)Ifaper diemallowance is paid for
lodging, meal, and incidental expenses for
each calendar day or partial day an em-
ployee is away from home at a rate equal
to or in excess of the federalper diemrate
for the locality of travel, a payor must treat
an amount equal to the federal M&IE rate
for the locality of travel for each calendar
dayorpartialdayasanexpenseforfood
or beverages.
(4)Ifaper diemallowance is paid for
lodging, meal, and incidental expenses for
each calendar day or partial day an em-
ployee is away from home at a rate less
than the federalper diemrate for the lo-
cality of travel, a payor must:
(a) Treat an amount equal to the federal
M&IE rate for the locality of travel for
each calendar day or partial day or, if less,
the amount of the allowance, as an expense
for food or beverages; or
(b) Treat an amount equal to 40 percent
of the allowance as an expense for food or
beverages.
(5) None of the amount for incidental
expenses computed under section 4.05 of
this revenue procedure is subject to limita-
tion under section 274(n).
.06No double reimbursement or de-
duction. Ifapayorpaysaper diemal-
lowance in lieu of reimbursing actual lodg-
ing, meal, and incidental expenses, or meal
and incidental expenses only, under sec-
tion 4 or 5 of this revenue procedure, and
the amount is treated as paid under an
accountable plan, any additional payment
for those expenses is treated as paid un-
der a nonaccountable plan, is included in
an employee’s gross income, is reported
as wages or other compensation on the
employee’s Form W–2, and is subject to
withholding and payment of employment
taxes. Similarly, if an employee or self-
employed individual computes the amount
allowable as a deduction for meal and inci-
dental expenses for travel away from home
under section 4.03 or 4.04 of this revenue
procedure, no other deduction is allowed
to the employee or self-employed individ-
ual for those expenses. For example, an
employee receives aper diemallowance
from a payor for meal and incidental ex-
penses incurred while traveling away from
home and the amount is treated as paid un-
der an accountable plan. During that trip,
the employee pays for dinner for the em-
ployee and two business associates. The
payor reimburses as a business entertain-
ment meal expense the meal expense for
the employee and the two business asso-
ciates. Because the payor also pays the
employee aper diemallowance for meal
and incidental expenses, the amount paid
for the employee’s portion of the business
entertainment meal expense is treated as
paid under a nonaccountable plan, is re-
ported as wages or other compensation on
the employee’s Form W–2, and is subject
to withholding and payment of employ-
ment taxes.
.07Related parties. Sections 4.01 and
5 of this revenue procedure do not apply if
a payor and an employee are related within
the meaning of section 267(b), but for this
purpose the percentage of ownership inter-
est referred to in section 267(b)(2) is 10
percent.
SECTION 7. APPLICATION
.01 An employee satisfies the adequate
accounting and substantiation require-
ments of section 1.274–5(c) and (f)(4) and
section 1.274–5T(c) if—
(1) The employee uses this revenue
procedure to substantiate to a payor the
amount of the employee’s travel expenses,
and
(2) Within a reasonable period of time,
the employee also substantiates to the
payor the elements of time, place, and
business purpose of the travel in accor-
dance with section 1.274–5T(b)(2) and (c)
and section 1.274–5(c) (other than section
1.274–5(c)(2)(iii)(A)).
.02 An arrangement providingper diem
allowances is treated as satisfying the re-
quirement of section 1.62–2(f)(2) of re-
turning amounts in excess of expenses if
an employee is required to return within
a reasonable period of time (as defined
in section 1.62–2(g)) any portion of the
allowance that relates to unsubstantiated
travel days, even though the arrangement
does not require the employee to return
the portion of the allowance that relates
to substantiated travel days and that ex-
ceeds the amount of the employee’s ex-
penses deemed substantiated. For exam-
ple, a payor provides an employee an ad-
vanceper diemallowance for meal and in-
cidental expenses of $250, based on an an-
ticipated 5 days of business travel at $50
per day to a locality for which the fed-
eral M&IE rate is $46, and the employee
substantiates 3 full days of business travel.
The requirement to return excess amounts
is treated as satisfied if the employee is re-
quired to return within a reasonable period
of time (as defined in section 1.62–2(g))
the portion of the allowance that is attribut-
able to the 2 unsubstantiated days of travel
($100), even though the employee is not
required to return the portion of the al-
lowance ($12) that exceeds the amount of
the employee’s expenses deemed substan-
tiated under section 4.02 of this revenue
procedure ($138) for the 3 substantiated
days of travel. However, the $12 excess
portion of the allowance is treated as paid
under a nonaccountable plan as discussed
in section 7.04 of this revenue procedure.
.03 An employee is not required to in-
clude in gross income the portion of aper
diemallowance received from a payor that
is less than or equal to the amount deemed
2011–42 I.R.B.525October 17, 2011

substantiated under the rules provided in
section 4 or 5 of this revenue procedure
if the employee substantiates the business
travel expenses covered by theper diemal-
lowance in accordance with section 7.01
of this revenue procedure. See section
1.274–5T(f)(2)(i). If the remaining re-
quirements for an accountable plan pro-
vided in section 1.62–2 are satisfied, that
portion of the allowance is treated as paid
under an accountable plan, is not reported
as wages or other compensation on the em-
ployee’s Form W–2, and is exempt from
the withholding and payment of employ-
ment taxes. See section 1.62–2(c)(2) and
(c)(4).
.04Anemployeeisrequiredtoin-
clude in gross income only the portion of
theper diemallowance received from a
payor that exceeds the amount deemed
substantiated under the rules provided in
section 4 or 5 of this revenue procedure
if the employee substantiates the business
travel expenses covered by theper diem
allowance in accordance with section 7.01
of this revenue procedure. See section
1.274–5T(f)(2)(ii). In addition, the excess
portion of the allowance is treated as paid
under a nonaccountableplan, is reported
as wages or other compensation on the
employee’s Form W–2, and is subject to
withholding and payment of employment
taxes. See section 1.62–2(c)(3)(ii), (c)(5),
and (h)(2)(i)(B).
.05 If the amount of the expenses that is
deemed substantiated under the rules pro-
vided in section 4.01, 4.02, or 5 of this rev-
enue procedure is less than the amount of
an employee’s business expenses for travel
away from home, an employee may claim
an itemized deduction for the amount by
which the business travel expenses exceed
the amount that is deemed substantiated,
provided the employee substantiates all the
business travel expenses (not just the ex-
cess over the federalper diemrate), in-
cludes on Form 2106, “Employee Business
Expenses,” the deemed substantiated por-
tion of theper diemallowance received
from the payor, and includes in gross in-
cometheportion(ifany)oftheper diem
allowance received from the payor that ex-
ceeds the amount deemed substantiated.
See section 1.274–5T(f)(2)(iii). However,
for purposes of claiming this itemized de-
duction for meal and incidental expenses,
substantiation of the amount of the ex-
penses is not required if the employee is
claiming a deduction that is equal to or less
than the amount computed under section
4.03 of this revenue procedure minus the
amount deemed substantiated under sec-
tions 4.02 and 7.01 of this revenue proce-
dure. The itemized deduction is subject to
the appropriate limitation (see section 2.02
of this revenue procedure) on meal and en-
tertainment expenses in section 274(n) and
the 2-percent floor on miscellaneous item-
ized deductions in section 67.
.06 An employee who pays or incurs
meal expenses and does not receive aper
diemallowance for meal and incidental ex-
penses may deduct an amount computed
under section 4.03 of this revenue proce-
dure only as an itemized deduction. This
itemized deduction is subject to the ap-
propriate limitation on meal and entertain-
ment expenses in section 274(n) and the
2-percent floor on miscellaneous itemized
deductions in section 67.
.07 An employee who does not pay or
incur amounts for meal expenses and does
not receive aper diemallowance for in-
cidental expenses may deduct an amount
computed under section4.05ofthisrev-
enue procedure only as an itemized deduc-
tion. This itemized deduction is subject to
the 2-percent floor on miscellaneous item-
ized deductions in section 67.
.08 A self-employed individual who
pays or incurs meal expenses for a cal-
endar day or partial day of travel away
from home may deduct an amount com-
puted under section 4.03 of this revenue
procedure in determining adjusted gross
income under section 62(a)(1), subject
to the appropriate limitation on meal and
entertainment expenses in section 274(n).
.09 A self-employed individual who
does not pay or incur meal expenses for a
calendar day or partial day of travel away
from home may deduct an amount com-
puted under section 4.05 of this revenue
procedure in determining adjusted gross
income under section 62(a)(1).
SECTION 8. WITHHOLDING AND
PAYMENT OF EMPLOYMENT TAXES
.01 The portion of aper diemal-
lowance, if any, that relates to the days
of business travel substantiated and that
exceeds the amount deemed substanti-
ated for those days under section 4.01,
4.02, or 5 of this revenue procedure is
treated as paid under a nonaccountable
plan and is subject to withholding and pay-
ment of employment taxes. See section
1.62–2(h)(2)(i)(B).
.02 In the case of aper diemallowance
paid as a reimbursement, the excess de-
scribed in section 8.01 of this revenue pro-
cedure is subject to withholding and pay-
ment of employment taxes in the payroll
period in which a payor reimburses the ex-
penses for the days of travel substantiated.
See section 1.62–2(h)(2)(i)(B)(2).
.03 In the case of aper diemallowance
paid as an advance, the excess described
in section 8.01 of this revenue procedure
is subject to withholding and payment of
employment taxes no later than the first
payroll period following the payroll period
in which the days of travel for which the
advance was paid are substantiated. See
section 1.62–2(h)(2)(i)(B)(3). If an em-
ployee does not substantiate some or all
of the days of travel for which the ad-
vance was paid within a reasonable pe-
riod of time or does not return the por-
tion of the allowance that relates to those
days within a reasonable period of time,
the portion of the allowance that relates
to those days is subject to withholding
and payment of employment taxes no later
than the first payroll period following the
end of the reasonable period. See section
1.62–2(h)(2)(i)(A).
.04 In the case of aper diemallowance
only for meal and incidental expenses for
travel away from home paid to an em-
ployee in the transportation industry by a
payor that uses the rule in section 4.04(4)
of this revenue procedure, the excess of
theper diemallowance paid for the pe-
riod over the amount deemed substantiated
for the period under section 4.02 of this
revenue procedure (after applying section
4.04(4) of this revenue procedure), is sub-
ject to withholding and payment of em-
ployment taxes no later than the first pay-
roll period following the payroll period in
which the excess is computed. See section
1.62–2(h)(2)(i)(B)(4).
.05 For example, an employer pays an
employee aper diemallowance under an
arrangement that otherwise meets the re-
quirements of an accountable plan to cover
business expenses for meals and lodging
for travel away from home at a rate of 120
percent of the federalper diemrate for
the localities to which the employee trav-
els. The employer does not require the em-
ployee to return the 20 percent by which
October 17, 20115262011–42 I.R.B.

the reimbursement for those expenses ex-
ceeds the federalper diemrate. The em-
ployee substantiates 6 days of travel away
from home: 2 days in a locality where the
federalper diemrate is $150 and 4 days
in a locality where the federalper diem
rate is $130. The employer reimburses
the employee $984 for the 6 days of travel
away from home (2 x (120% x $150) + 4 x
(120% x $130)), and does not require the
employee to return the excess payment of
$164 (2 days x $30 ($180-$150) + 4 days
x $26 ($156-$130)). For the payroll pe-
riod in which the employer reimburses the
expenses, the employer must withhold and
pay employment taxes on $164. See sec-
tion 8.02 of this revenue procedure.
.06 All payments to an employee under
aper diemallowance arrangement are
treated as paid under a nonaccountable
plan if the reimbursement arrangement
evidences a pattern of abuse. An arrange-
ment evidences a pattern of abuse if, for
example, it has no process to determine
when an allowance exceeds the amount
that may be deemed substantiated and the
arrangement routinely pays allowances in
excess of the amount that may be deemed
substantiated without requiring actual sub-
stantiation or repayment of the excess
amount, or treating the excess allowances
as wages for employment tax purposes.
See section 62(c), section 1.62–2(k), and
Rev. Rul. 2006–56, 2006–2 C.B. 874.
Thus, these payments are included in the
employee’s gross income, are reported
as wages or other compensation on the
employee’s Form W–2, and are subject to
withholding and payment of employment
taxes. See sections 1.62–2(c)(3), (c)(5),
and (h)(2).
SECTION 9. EFFECTIVE DATE
This revenue procedure is effective for
per diemallowances for lodging, meal and
incidental expenses, or for meal and inci-
dental expenses only that are paid to an
employee on or after October 1, 2011, for
travel away from home on or after Octo-
ber 1, 2011. For purposes of computing the
amount allowable as a deduction for travel
away from home, this revenue procedure is
effective for meal and incidental expenses
or for incidental expenses only paid or in-
curred on or after October 1, 2011.
SECTION 10. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2010–39 is modified and
amplified and, as modified and amplified,
is superseded.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Eric D. Brauer of the Office
of Associate Chief Counsel (Income Tax
& Accounting). For further information
regarding this revenue procedure, con-
tact Mr. Brauer at (202) 622–4970 (not a
toll-free call) or the individual identified
in the most recent annualper diemnotice.
26 CFR 601.105. Examination of returns and claims
for refund, credit or abatement; determination of
correct tax liability.
(Also Part I, §§ 2053, 6402; 20.2053–1;
301.6402–2.)
Rev. Proc. 2011–48
SECTION 1. PURPOSE
This revenue procedure provides guid-
ance related to the filing and subsequent
resolution of a protective claim for refund
of estate tax that is based on a deduction
for a claim or expenseunder section 2053
of the Internal Revenue Code (Code) and
the corresponding regulations.
SECTION 2. BACKGROUND
Final regulations (T.D. 9468, 2009–44
I.R.B. 570) under section 2053 of the Code
were published in theFederal Register
on October 20, 2009 (74 FR 53652) to
provide guidance in determining the de-
ductible amount of a claim against a dece-
dent’s estate under section 2053. The fi-
nal regulations provide, with certain ex-
ceptions, that the amount deductible for
a section 2053 claim or expense is lim-
ited to the amount actually paid in settle-
ment or satisfaction of that claim or ex-
pense (subject to any applicable limita-
tions in § 20.2053–1). For amounts that
are not paid or otherwise deductible at the
time of filing theUnited States Estate (and
Generation-Skipping Transfer) Tax Return
(Form 706), § 20.2053–1(d)(5)(i) of the
Estate Tax Regulations permits the filing
of a protective claim for refund.
Section 20.2053–1(d)(5)(i) provides in
part that a protective claim for refund may
be filed at any time before the expira-
tion of the period of limitation prescribed
in section 6511(a) to preserve the estate’s
right to claim a refund in the case of a
claim or expense that might not be paid
or might not otherwise meet the require-
ments of deductibility under section 2053
and the corresponding regulations until af-
ter the expiration of the period of limita-
tion for filing a claim for refund. Such a
claim for refund is referred to herein as
a “section 2053 protective claim for re-
fund.” Section 20.2053–1(d)(5)(i) further
provides that a protective claim must iden-
tify the outstanding claim or expense that
would have been deductible under section
2053(a) or (b) if such item already had
been paid, and must describe the reasons
and contingencies delaying the actual pay-
ment of the claim or expense. When the
contingencies delaying actual payment are
resolved, § 20.2053–1(d)(5)(i) requires the
fiduciary acting on behalf of the estate
to notify the Service within a reasonable
period that the contingency has been re-
solved and that the amount deductible un-
der § 20.2053–1 has been established. A
deduction will be allowed to the extent the
claim or expense that was the subject of the
protective claim satisfies the requirements
for deductibility under § 2053 and the cor-
responding regulations, subject to any ap-
plicable limitations in § 20.2053–1.
Commentators responding to proposed
regulations issued under section 2053 of
the Code (published in theFederal Reg-
isteron April 23, 2007 (72 FR 20080))
requested detailed guidance on protec-
tive claim for refund procedures. Section
20.2053–1(d)(5)(i) provides that a pro-
tective claim for refund shall be made in
accordance with guidance that may be
provided from time to time by publica-
tion in the Internal Revenue Bulletin (see
§ 601.601(d)(2)(ii)(b)).
SECTION 3. SCOPE
This revenue procedure applies only to
section 2053 protective claims for refund.
Section 4 of this revenue procedure sets
forth procedures for filing a section 2053
protective claim for refund, and Section 5
of this revenue procedure sets forth proce-
dures for notifying the Service that a sec-
tion 2053 protective claim for refund is
2011–42 I.R.B.527October 17, 2011

ready for consideration. A taxpayer that
files a protective claim for refund and pro-
vides notification for consideration to the
Service in accordance with the procedures
set forth in this revenue procedure will sat-
isfy the generally applicable procedural re-
quirements for claiming a refund as well
as the procedural requirements specific to
section 2053 for claiming a refund. A tax-
payer that chooses not to follow or fails
to comply with the procedures set forth in
this revenue procedure for a section 2053
protective claim for refund is subject to
all of the generally applicable provisions
governing claims for refund as well as to
the specific section 2053 provisions re-
lating to claims for refund, and will not
have the benefit of the limited review de-
scribed in Notice 2009–84, 2009–44 I.R.B.
592, and section 5.01 of this revenue pro-
cedure. See §§ 6402, 6511, and 6514;
§ 20.2053–1(d)(5).
SECTION 4. PROCEDURE
— FILING A SECTION 2053
PROTECTIVE CLAIM FOR REFUND
.01Time period for filing a protective
claim for refund. A section 2053 protec-
tive claim for refund must be filed before
the expiration of the period of limitation
prescribed in section 6511(a) for the filing
of a claim for refund. Section 6511(a) pro-
vides, in relevant part, that a claim for re-
fund shall be filed by the taxpayer within
3 years from the time the return was filed
or 2 years from the time the tax was paid,
whichever of such periods expires later,
or if no return was filed by the taxpayer,
within 2 years from the time the tax was
paid. Only if a protective claim for refund
was timely filed may the Internal Revenue
Service (Service) refund overpaid estate
taxes in those situations where the amount
deductible under § 20.2053–1 is not es-
tablished until after the expiration of the
period of limitation. See §§ 6511(b) and
6514(a).
.02Generally applicable regulatory re-
quirements for a claim for refund.Under
§ 301.6402–2 of the Procedure and Ad-
ministration Regulations, a claim for re-
fund must set forth, in a written decla-
ration that is executed under penalties of
perjury, each ground upon which a refund
is claimed and facts sufficient to apprise
the Commissioner of the exact basis of the
claim. The method under this revenue pro-
cedure for satisfying these requirements
with respect to a section 2053 protective
claim for refund requires that the protec-
tive claim for refund identify and describe
in detail the claim or expense for which a
deduction may be claimed under section
2053 of the Code and otherwise comply
with the procedures in this section.
.03Who can file a protective claim
for refund. A protective claim for refund
must be accompanied by documentary
evidence, including certified copies of the
letters testamentary, letters of administra-
tion, or other similar evidence, to establish
the legal authority of a fiduciary or other
person to file and pursue a protective
claim for refund on behalf of the estate
of a decedent. See § 301.6402–2(e) of
the Procedure and Administration Regu-
lations. In the estate tax context, proof of
legal authority typically is established at
the time of filing theFederal Estate (and
Generation-Skipping Transfer) Tax Return
(Form 706). Accordingly, if the fiduciary
or other person filing the protective claim
for refund on behalf of a decedent’s estate
is the same fiduciary or other person who
filed the decedent’s Form 706, the protec-
tive claim for refund need only include a
statement affirming that the fiduciary or
other person filing the protective claim for
refund also filed the Form 706 and that
such fiduciary or other person is still act-
ing in a representative capacity on behalf
of the estate. If the fiduciary or other per-
son filing the protective claim for refund
on behalf of a decedent’s estate is not the
same fiduciary or other person who filed
the decedent’s Form 706, the protective
claim for refund must be accompanied
by the necessary documentary evidence
establishing proof of legal authority. See
section 5.04 of this revenue procedure for
guidance on the authority of a transferee
or other person to represent the estate in
pursuing a section 2053 claim for refund.
.04Manner of filing a section 2053 pro-
tective claim for refund.
(1)Methods of filing. To be properly
filed under this revenue procedure, sec-
tion 2053 protective claims for refund that
are filed for decedents dying on or after
January 1, 2012, must be filed using any
method described in paragraph (a) or (b).
For those section 2053 protective claims
for refund filed for decedents dying after
October 19, 2009, and before January 1,
2012, the section 2053 protective claims
for refund must be filed using the method
described in paragraph (b). If a taxpayer
hasmadeafilingpriortotheissuanceof
this revenue procedure in an effort to make
a protective claim for refund under section
2053, and if the taxpayer has any concern
as to whether the prior filing meets the re-
quirements of this revenue procedure, or if
the taxpayer wants the benefit of section
4.06 of this revenue procedure, the tax-
payer may replace the initial filing with a
timely filing in accordance with this sec-
tion 4.04.
(a)Schedule PC with Form 706. A sec-
tion 2053 protective claim for refund may
befiledbyattachingoneormorecom-
pleted Schedules PC to the estate’s Form
706 at the time of filing that return. Sched-
ule PC is expected to be first available as
part of the 2012 Form 706. The Form 706
should indicate that one or more Sched-
ules PC are being filed with the return in
order to facilitate the proper processing of
Schedule(s) PC, in accordance with the in-
structions for that schedule.
(b)Form 843. A section 2053 protec-
tive claim for refund may be filed by fil-
ing a Form 843 where the Form 706 for
the decedent’s estate was previously filed
(currently, at the Cincinnati campus), with
the notation “Protective Claim for Refund
under Section 2053” entered across the top
of page 1 of the form. For filing a sec-
tion 2053 protective claim for refund, the
address for the “Cincinnati campus” is:
Department of Treasury, Internal Revenue
Service Center, 300 Madison Avenue, Stop
823G, Covington, KY 41011, or as oth-
erwise specified in the instructions to the
form.
(2)Separate protective claim for refund
for each section 2053 claim or expense.To
be properly filed under this revenue pro-
cedure, a separate section 2053 protective
claim for refund must be filed as described
in section 4.04(1) of this revenue proce-
dure for each claim or expense for which
a deduction may be claimed in the future
under section 2053 (section 2053 claim or
expense). Specifically, a Form 706 may in-
clude more than one Schedule PC. In ad-
dition, a section 2053 protective claim for
refund must not include any claim for re-
fund not based on a deduction under sec-
tion 2053. Each section 2053 protective
claim for refund should indicate whether
other protective claims for refund are be-
October 17, 20115282011–42 I.R.B.

ing filed or were previously filed and the
approximate date on which each was filed.
.05Identification of the claim or ex-
pense.
(1)General rule. In order for a sec-
tion 2053 protective claim for refund to
be properly filed under this revenue pro-
cedure, the outstanding claim or expense
that forms the basis of a potential deduc-
tion under section 2053 must be clearly
identified so that the Service has notice of
each claim or expense for which a deduc-
tion under section 2053 will be claimed. In
addition, as provided in § 20.2053–1(d)(5),
proper identification of the claim or ex-
pense must include an explanation of the
reasons and contingencies delaying the ac-
tual payment to be made in satisfaction of
the claim or expense. Finally, except as
provided in section 4.05(2) of this revenue
procedure, claims or expenses related to
but separate from a particular section 2053
claim or expense must be separately iden-
tified. The use of vague or broad language
that does not describe a specific claim or
expense that would be deductible under
section 2053 does not provide clear identi-
fication of a section 2053 claim or expense
for purposes of this revenue procedure.
(2)Related ancillary expenses. A sec-
tion 2053 claim or expense that has been
adequately identified in a protective claim
for refund (in accordance with this sec-
tion) will be deemed to include, without
the need for any further identification, cer-
tain related and ancillary expenses relat-
ing to resolving, defending, or satisfying
the identified claim or expense as well as
certain expenses relating to pursuing the
claim for refund for the identified claim
or expense. For instance, attorneys’ fees,
court costs, appraisal fees, and accounting
fees, may be considered as part of the claim
for refund to which it relates, without the
need for separate identification of those re-
lated administration or litigation expenses.
Note, however, that although no separate
identification for certain related and ancil-
lary expenses is required under the proce-
dures in this revenue procedure, this proce-
dure shall not be construed to concede that
the expenses are deductible under section
2053 in all events. A claim or expense that
is the subject of a section 2053 claim for
refund must meet the substantive require-
ments of section 2053 and the correspond-
ing regulations in order to be deductible
and the amount of the deduction is subject
to any applicable limitations.
(3)Claims against the estate involv-
ing contested matters. To satisfy the re-
quirements of this section, each section
2053 protective claim for refund involving
a contested claim against the estate must
notify the Service of the contested mat-
ter and the potential liability of the estate.
Identification of all ofthe following facts,
as applicable, generally will be sufficient
to appropriately identify a claim against
the estate involving a contested matter: the
name or names of the claimant(s), the ba-
sis of the claim or other description of the
subject matter of the contested matter, the
extent or amount of the liability claimed,
and a brief statement reporting the status of
the contested matter at the time the protec-
tive claim for refund is filed with the Ser-
vice. For a contested matter that is being
litigated, attaching acopy of the relevant
pleadings and making reference thereto on
the section 2053 protective claim for re-
fund generally will be sufficient to identify
appropriately the claim.
(4)Claims or expenses for which de-
ductions under § 20.2053–1(d)(4) or
§ 20.2053–4(b) or (c) are claimed on Form
706. Subject to applicable limitations, an
estate may preserve the estate’s right to
claim a refund based on the amount of
any section 2053 claim or expense that
is in addition to the amount claimed as a
deduction for that claim or expense under
§ 20.2053–1(d)(4) or § 20.2053–4(b) or
(c) on Form 706, if the additional amount
might not be paid or might not meet the
requirements of § 20.2053–1(d)(4) until
after the expiration of the period of limita-
tion prescribed in section 6511(a) for the
filing of a claim for refund. To be prop-
erly filed under this revenue procedure, a
protective claim for refund that is based
upon the potential deductibility of such
an additional amount must satisfy all of
the procedural, identification, and other
requirements of this revenue procedure,
as applicable. In addition, however, the
estate must disclose the amount of the
deduction already claimed on Form 706
for the subject claim or expense and must
reference the regulatory provision under
which the deduction was claimed in or-
der to identify properly the section 2053
claim or expense on a protective claim for
refund.
.06Period after filing the section 2053
protective claim for refund.
(1)Initial processing of section 2053
claim for refund by the Service. Although
the Service generally will not engage in a
substantive review of a section 2053 pro-
tective claim for refund until the amount
of the section 2053 claim or expense has
been established, when a section 2053 pro-
tective claim for refund is received by the
Service, the Service may reject the claim
if it appears that one or more preliminary
procedural requirements for a valid claim
for refund have not been satisfied. For
example, the Service may reject a claim
that (a) is not timely filed by a fiduciary
or other person having legal authority to
file a claim for refund on behalf of the es-
tate, (b) does not include a properly exe-
cuted penalty of perjury statement, or (c)
does not adequately describe a claim or ex-
pense that, if substantiated at a later time,
would support a deduction under section
2053. For those section 2053 protective
claims for refund that are not initially re-
jected by the Service, the Service will ac-
knowledge in written correspondence that
the claim has been received. Note, how-
ever, that the Service’s written acknowl-
edgement that the claim has been received
does not constitute a determination that the
preliminary procedural requirements for a
valid protective claim for refund have been
satisfied. Accordingly, upon consideration
of the claim once the amount of the sec-
tion 2053 claim or expense has been estab-
lished, the Service nevertheless may deter-
mine that one or more procedural require-
ments are not satisfied and the claim for
refund then may be denied.
(2)Contacting the Service when no
communication received. Although a
timely-filed section 2053 protective claim
for refund will be timely filed even if the
Service does not acknowledge its receipt
and/or process the protective claim, the
fiduciary or other person filing the form
on behalf of the estate promptly should
contact the Service at (866) 699–4083 (or
other appropriate number) to inquire into
the Service’s receipt and processing of
that protective claim for refund if the es-
tate does not receive from the Service the
written acknowledgement of receipt de-
scribed in section 4.06(1) of this revenue
procedure within 180 days of filing a sec-
tion 2053 protective claim for refund on
a Schedule PC attached to the Form 706,
2011–42 I.R.B.529October 17, 2011

or within 60 days of filing a section 2053
protective claim for refund on a Form 843.
A certified mail receipt or other evidence
of delivery to the Service is not sufficient
to ensure and confirm the Service’s receipt
and processing of the protective claim for
purposes of this revenue procedure. See
section 4.06(3) of this revenue procedure
regarding the possible consequences of
notcontactingtheServicewithin30days
after the expiration of these periods.
(3)Opportunity to cure an inadequately
identified section 2053 protective claim for
refund. A section 2053 protective claim
for refund must satisfy the timely-filing re-
quirement set forth in section 4.01 of this
revenue procedure. The failure of a section
2053 protective claim for refund to sat-
isfy certain other preliminary procedural
requirements for a valid claim for refund,
including the penalty of perjury statement
requirement set forth in section 4.02 of
this revenue procedure, may be cured be-
fore the expiration of the period of limita-
tion prescribed in section 6511(a). How-
ever, the failure of a section 2053 protec-
tive claim for refund to satisfy the identifi-
cation requirement set forth in section 4.05
of this revenue procedure may be cured, as
further described below, after the expira-
tion of the period of limitation prescribed
in section 6511(a), as long as the section
2053 protective claim for refund as orig-
inally filed was timely and properly exe-
cuted under the penalty of perjury. To cure
the section 2053 protective claim for re-
fund, the fiduciary or other person must
adequately identify the section 2053 claim
or expense in accordance with section 4.05
of this revenue procedure by submitting a
corrected (and signed)protective claim for
refund before the expiration of the period
of limitation prescribed in section 6511(a)
or within 45 days after the date of the Ser-
vice’s notice, if any, to the fiduciary or
other person of the defect, whichever oc-
curs later. If the Service fails to provide the
written acknowledgement of receipt de-
scribed in section 4.06(1) of this revenue
procedure and the fiduciary or other per-
son who filed the section 2053 protective
claim for refund fails to contact the Service
within 30 days after the applicable time
period described in section 4.06(2) of this
revenue procedure to confirm the Service’s
receipt and processing of that section 2053
protective claim for refund, the fiduciary
or other person will not have the oppor-
tunity to cure the inadequate identification
of the section 2053 protective claim for re-
fund after the expiration of the period of
limitation prescribed in section 6511(a).
(4)Effect of section 2053 protective
claim for refund on examination of Form
706. When a fiduciary or other person
having authority to file a Form 706 on
behalf of an estate also files a section 2053
protective claim for refund on behalf of
the estate, generally the Service will not
suspend the substantive review and exam-
ination of the Form 706 and will not delay
issuing a closing letter on the basis that a
protective claim for refund has been filed
in that estate. Instead, the Form 706 will
be processed and examined by the Service
in accordance with the regular processing
and examination procedures followed for
estate tax returns.
SECTION 5. PROCEDURE
— NOTIFICATION FOR
CONSIDERATION OF A SECTION
2053 PROTECTIVE CLAIM FOR
REFUND
.01In general.TheServicewillre-
fund overpaid estate tax if the Service
determines there is an overpayment of tax
in connection with a timely-filed section
2053 protective claim for refund, even
though the claim or expense that is the
subject of the claim for refund does not be-
come deductible under section 2053 until
after the expiration of the period of limita-
tion prescribed in section 6511(a) for the
filing of a claim for credit or refund. In ac-
cordance with Notice 2009–84, 2009–44
I.R.B. 592, in determining whether there
is an overpayment of tax based on a
timely-filed section 2053 protective claim
for refund that becomes ready for consid-
eration after the expiration of the period
of limitation on assessment prescribed in
section 6501, generally the Service will
limit its review of the Form 706 to the
deduction under section 2053 that was
the subject of the protective claim. When
the section 2053 claim or expense that
was the subject of the timely-filed section
2053 protective claim for refund meets
the requirements for deductibility under
§ 20.2053–1, a taxpayer must provide a
notification to the Service that the claim
for refund is ready for consideration as
described in section 5.03 of this revenue
procedure, and such notification must be
executed under penalty of perjury, within
the time period described in section 5.02
of this revenue procedure, by the fiduciary
or other person having legal authority to
file and pursue the claim for refund. The
notification generally should describe the
relevant facts that support, and provide ev-
idence to substantiate, a deduction under
section 2053 and should claim a refund
of the overpayment of tax based on the
deduction under section 2053 and the re-
sulting recomputation of the estate tax
liability.
.02Time period for providing notifica-
tion for consideration of a section 2053
protective claim for refund.
(1)General rule.Under
§ 20.2053–1(d)(5)(i), a fiduciary or other
person having legal authority to pursue
the claim for refund must notify the
Service within a reasonable period that
the reason or contingency delaying the
actual payment of the section 2053 claim
or expense has been resolved and/or that
the amount deductible under § 20.2053–1
has been established. For purposes of
this revenue procedure, this requirement
is satisfied when the fiduciary or other
person having legal authority to pursue
the claim for refund on behalf of the
estate notifies the Service within 90 days
after the date the claim or expense is paid
or 90 days after the date on which the
amount of the claim or expense becomes
certain and is no longer subject to any
contingency, whichever occurs later.
When the notification to the Service by
the fiduciary or other person occurs after
the expiration of that 90-day period, the
fiduciary or other person should provide
an explanation sufficient to establish that
there is reasonable cause for the delay.
The methods by which a fiduciary or other
person having legal authority to file and
pursue the claim for refund must notify the
Serviceunderthisrevenueprocedureare
described in section 5.03 of this revenue
procedure.
(2)Multiple or recurring payments.
For a section 2053 claim or expense in-
volving multiple payments or a series
of recurring payments, the payment of
which is necessary to claim a deduction
based on that claim or expense (such
as a contingent obligation described in
§ 20.2053–4(d)(6)(ii) of the Estate Tax
Regulations), the 90-day period described
in section 5.02(1) of this revenue proce-
October 17, 20115302011–42 I.R.B.

durewillbeginwithregardtotheentire
amount of the claim or expense on the
date of the last and final payment. Thus,
the fiduciary or other person having legal
authoritytofileandpursue the claim for
refund may notify the Service within 90
days after the date the liability for the
claim or expense is fully satisfied, regard-
less of the amount of time over which
the earlier, partial payments were made.
Notwithstanding the preceding sentence,
however, the fiduciary or other person
having legal authority to file and pursue
the claim for refund may notify the Ser-
vice in accordance with section 5.02(1) of
this revenue procedure, but not more often
than annually (except in the case of a final
payment) of all payments made since the
last notification for consideration, if any,
in partial satisfaction of a liability for a
section 2053 claim or expense, and may
thereby claim a partial refund attributable
to such payment(s).
.03Manner of notifying the Service for
consideration of a section 2053 claim for
refund.
(1)Methods of filing. To meet the no-
tification requirements under this revenue
procedure, whether with regard to the en-
tire claim or expense or to partial payments
as made, a notification for consideration
of a section 2053 protective claim for re-
fund that is to be filed for a decedent dying
on or after January 1, 2012, must be filed
using any method described in paragraph
(a) or (b). For a notification for consid-
eration of a section 2053 protective claim
for refund that is to be filed for a dece-
dent dying after October 19, 2009, and
before January 1, 2012, a notification for
consideration of a section 2053 protective
claim for refund must be filed using
the method described in paragraph (b).
A notification for consideration of a
section 2053 protective claim for refund
additionally must meet the applicable
requirements in section 5.01 and 5.02 of
this revenue procedure.
(a)Supplemental Form 706. A notifi-
cation for consideration of a section 2053
protective claim for refund may be filed by
filing, at the same location where the sec-
tion 2053 protective claim for refund was
previously filed, an updated (and signed)
Form 706, including each schedule af-
fected by the allowance of the deduction(s)
whose amount has been established and
including an updated Schedule PC for each
section 2053 claim or expense that has
become deductible. The notation “Sup-
plemental Information — Notification for
Consideration of Section 2053 Protective
Claim(s) for Refund filed on [DATE OF
PROTECTIVE CLAIM]” must be entered
across the top of page 1 of Form 706. In
addition, a copy of the originally-filed
section 2053 protective claim(s) for refund
(filed as described in section 4.04(1) of
this revenue procedure) that identifies the
section 2053 claims or expenses that now
have become deductible must be attached
to the Form 706.
(b)Form 843. A notification for consid-
eration of a section 2053 protective claim
forrefundmaybefiledbyfiling,atthe
same location where the section 2053 pro-
tective claim for refund was previously
filed, one or more updated (and signed)
Forms 843 with the notation “Notification
for Consideration of Section 2053 Protec-
tive Claim for Refund filed on [DATE OF
PROTECTIVE CLAIM]” entered across
the top of page 1 of the form(s). A copy of
the originally-filed section 2053 protective
claim(s) for refund (filed as described in
section 4.04(1) of this revenue procedure)
that identifies the section 2053 claims or
expenses that now have become deductible
must be attached to the Form(s) 843.
(2)Separate notifications for consider-
ation for each section 2053 claim or ex-
pense. To be properly filed under this rev-
enue procedure, a separate notification for
consideration of a section 2053 protective
claim for refund must be filed as described
in section 5.03(1) of this revenue proce-
dure for each section 2053 claim or ex-
pense for which a section 2053 protective
claim for refund was filed. Specifically,
an updated Form 706 may include more
than one updated Schedule PC. In addition,
a notification for consideration of a sec-
tion 2053 protective claim for refund must
not include any claim not based on a de-
duction under section 2053. Each notifi-
cation for consideration of a section 2053
protective claim for refund should indicate
whether other notifications for considera-
tion are being filed contemporaneously or
were previously filed and the approximate
date of each such filing.
.04Authority of a transferee or other
person to represent the estate in pursuit
of a claim for refund. If a fiduciary is
no longer acting on behalf of the estate
at the time that the amount deductible un-
der § 20.2053–1 is established and the sec-
tion 2053 protective claim for refund is
ready for consideration, one or more per-
sons that are transferees of the probate or
nonprobate estate may establish under ap-
plicable local law that person’s legal au-
thority to pursue the claim for refund on
behalf of the estate. For purposes of this
provision, any transferee or other person
having established legal authority to pur-
sue the claim for refund shall be deemed
to have the authority to pursue the claim
for refund on behalf of all such transferees
or other persons. The transferee or other
person must attach to the notification for
consideration of a section 2053 protective
claim for refund (filed as described in sec-
tion 5.03 of this revenue procedure) doc-
umentary evidence thatsubstantiates that
person’s assertion of authority to pursue
the claim. Depending on applicable local
law, the evidence requirement may be sat-
isfied by providing one or more of the fol-
lowing: a certified copy of the final ac-
counting of the estate showing the source
of the initial tax payment; relevant testa-
mentary instruments of the decedent such
as a will or trust instrument; an affidavit
executed under penalties of perjury by the
executor or other appropriate party confer-
ring the authority or the right to pursue the
refund to one or more transferees or other
persons; and such other evidence as may
be requested by the Service. The Service
will pay the refund of tax to the person or
individual who paid the tax, as required by
section 6402(a) and subject to regulations
under that section.
.05Consequences of a section 2053
claim for refund on the marital and char-
itable deduction. Because of the applica-
tion of section 20.2053–1(d)(5)(ii), neither
the charitable deduction nor the marital
deduction is reduced by the amount of any
claim or expense that may be the subject
of a section 2053 protective claim for re-
fund until the claim or expense has met
the requirements for a deduction under
section 2053. The computation of the
amount to be refunded under section 2053,
as required on Form 843 or a supplemental
Form 706, should identify any necessary
adjustment to the marital and charitable
deductions claimed by the estate, as well
as any other arithmetic adjustments that
result from the allowance of the deduction.
2011–42 I.R.B.531October 17, 2011

SECTION 6. EFFECTIVE DATE
This revenue procedure is applicable
with respect to protective claims for refund
filed on behalf of estates of decedents dy-
ing on or after October 20, 2009, the date
final regulations (T.D. 9468) under section
2053 were published in theFederal Reg-
ister(74 FR 53652), but only to the extent
that the relevant sections of the Code are
applicable to the decedent’s estate.
SECTION 7. DRAFTING
INFORMATION
The principal author of this rev-
enue procedure is Karlene M. Lesho of
the Office of Associate Chief Counsel
(Passthroughs & Special Industries). For
further information regarding this revenue
procedure, contact Karlene M. Lesho at
(202) 622–3090 (not a toll free call).
October 17, 20115322011–42 I.R.B.

Part IV. Items o
fGeneralInterest
Withdrawal of Notice of
Proposed Rulemaking; Notice
of Proposed Rulemaking and
Notice of Public Hearing
Section 67 Limitations on
Estates or Trusts
REG–128224–06
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Withdrawal of notice of pro-
posed rulemaking; notice of proposed rule-
making and notice of public hearing
SUMMARY: This document with-
draws the notice of proposed rulemak-
ing (REG–128224–06, 2007–2 C.B.
551 [72 FR 41243]) that was published
in theFederal Registeron July 27,
2007, providing guidance on which
costs incurred by estates or trusts other
than grantor trusts (non-grantor trusts)
are subject to the 2-percent floor for
miscellaneous itemized deductions
under section 67(a). This document
contains proposed regulations that provide
guidance on which costs incurred by
estates or trusts other than grantor trusts
(non-grantor trusts) are subject to the
2-percent floor for miscellaneous itemized
deductions under section 67(a). The
regulations affect estates and non-grantor
trusts. This document also provides notice
of a public hearing on these proposed
regulations.
DATES: Written and electronic comments
must be received by December 7, 2011.
Outlines of topics to be discussed at the
public hearing scheduled for December 19,
2011 must be received by December 7,
2011.
ADDRESSES: Send submissions to
CC:PA:LPD:PR(REG–128224–06),
Room 5203, Internal Revenue Service, PO
Box 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–128224–06),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, NW,
Washington, DC, or sent electroni-
cally via the Federal eRulemaking Por-
tal athttp://www.regulations.gov/(IRS
REG–128224–06). The public hearing
will be held in the IRS Auditorium,
Internal Revenue Building, 1111
Constitution Avenue, NW, Washington,
DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Jennifer N. Keeney, (202)
622–3060; concerning submissions of
comments, the hearing, or to be placed on
the building access list to attend the hear-
ing, Richard A. Hurst, (202) 622–7180
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed reg-
ulations amending 26 CFR Part 1 under
section 67 of the Internal Revenue Code
(Code) by adding §1.67–4 regarding which
costs incurred by an estate or a non-grantor
trust are subject to the 2-percent floor for
miscellaneous itemized deductions under
section 67(a).
Section 67(a) of the Code provides
that, for an individual taxpayer, miscel-
laneous itemized deductions are allowed
only to the extent that the aggregate of
those deductions exceeds 2 percent of
adjusted gross income. Section 67(b) ex-
cludes certain itemized deductions from
the definition of “miscellaneous itemized
deductions.” Section 67(e) provides that,
for purposes of section 67, the adjusted
gross income of an estate or trust shall be
computed in the same manner as in the
case of an individual. However, section
67(e)(1) provides that the deductions for
costs paid or incurred in connection with
the administration of the estate or trust
that would not have been incurred if the
propertywerenotheldinsuchestateor
trust shall be treated as allowable in arriv-
ing at adjusted gross income. Therefore,
deductions described in section 67(e)(1)
are not subject to the 2-percent floor for
miscellaneous itemized deductions under
section 67(a).
A notice of proposed rulemaking
(REG–128224–06, 2007–2 C.B. 551) was
published in theFederal Register(72 FR
41243) on July 27, 2007. The proposed
regulations provide that a cost is fully
deductible to the extent that the cost is
unique to an estate or trust. If a cost is not
unique to an estate or trust, such that an in-
dividualcouldhave incurred the expense,
then that cost is subject to the 2-percent
floor. For this purpose, the proposed regu-
lations clarify that it is the type of product
or service provided to the estate or trust
in exchange for the cost, rather than the
description of the cost of that product or
service, that is tested to determine the
uniqueness of the cost. The proposed reg-
ulations also address costs subject to the
2-percent floor that are included as part
of a comprehensive commission or fee
paid to the trustee or executor (“Bundled
Fiduciary Fee”).
Written comments were received in re-
sponse to the notice of proposed rulemak-
ing. A public hearing was held on Novem-
ber 14, 2007, at which several commenta-
tors offered comments on the notice of pro-
posed rulemaking.
On January 16, 2008, the Supreme
Court of the United States issued its de-
cision inMichael J. Knight, Trustee of
the William L. Rudkin Testamentary Trust
v. Commissioner, 552 U.S. 181, 128 S.
Ct. 782 (2008), holding that fees paid to
an investment advisor by a non-grantor
trust or estate generally are subject to the
2-percent floor for miscellaneous item-
ized deductions under section 67(a). The
Court reached this decision on a reading
of section 67(e) that differed from that in
the proposed regulations. The Court held
that the proper reading of the language
in section 67(e), which asks whether the
expense “would not have been incurred if
the property were not held in such trust or
estate,” requires an inquiry into whether
a hypothetical individual who held the
same property outside of a trust “custom-
arily” or “commonly” would incur such
expenses. Expenses that are “customarily”
or “commonly” incurred by individuals
are subject to the 2-percent floor.
Following the Supreme Court’s deci-
sion inKnight, the Internal Revenue Ser-
vice (IRS) and the Treasury Department is-
sued Notice 2008–32, 2008–12 I.R.B. 593
(March 24, 2008) to provide interim guid-
2011–42 I.R.B.533October 17, 2011

ance on the treatment of Bundled Fidu-
ciary Fees. The notice provided that tax-
payers will not be required to determine
the portion of a Bundled Fiduciary Fee
that is subject to the 2-percent floor un-
der section 67 for any taxable year be-
ginning before January 1, 2008. In the
notice, the IRS and the Treasury Depart-
ment reopened the comment period on the
proposed regulations with regard to possi-
ble factors on which to base safe harbors
for the allocation of a Bundled Fiduciary
Fee between costs subject to the 2-percent
floor and those exempt from the applica-
tion of that floor. Written comments were
received in response to the notice. The
IRS and the Treasury Department subse-
quently issued Notice 2008–116, 2008–52
I.R.B. 1372 (December 29, 2008) extend-
ing the interim guidance provided in No-
tice 2008–32 to taxable years that begin
before January 1, 2009, Notice 2010–32,
2010–16 I.R.B. 594 (April 19, 2010) ex-
tending the interim guidance provided in
Notice 2008–116 and Notice 2008–32 to
taxable years that begin before January 1,
2010, and Notice 2011–37, 2011–20 I.R.B.
785 (May 16, 2011) extending the existing
interim guidance to taxable years that be-
gin before the publication of final regula-
tions in theFederal Register.
All comments were considered and are
available for public inspection. Many of
the comments recommended that the pro-
posed regulations be withdrawn and that
new proposed regulations be issued to al-
low the public to comment on the impact
of theKnightdecision on the regulations to
be issued under section 67(e). After con-
sideration of all of the comments received
since the issuance of the proposed regula-
tions, the proposed regulations published
on July 27, 2007, are withdrawn and this
document contains new proposed regula-
tions.
Explanation of Provisions
In General
InKnight, the Supreme Court held
that the deductibility of an expense under
section 67(e)(1) depends upon whether
the cost is “commonly” or “customarily”
incurred when such property is held in-
stead by an individual. In other words,
section “67(e)(1) excepts from the 2-per-
cent floor only those costs that it would be
uncommon (or unusual, or unlikely) for
such a hypothetical individual” holding
the same property to incur (emphasis in
original). In applying this interpretation of
the statute to investment advisory fees in-
curred by a trust, the Court held that such
fees generally are not uncommonly in-
curred by individual investors and thus are
subject to the 2-percent floor. The Court
noted, however, that it is conceivable “that
a trust may have an unusual investment
objective, or may require a specialized bal-
ancing of the interests of various parties,
such that a reasonable comparison with
individual investors would be improper.”
The Court went on to provide that, “in
such a case, the incremental cost of expert
advice beyond what would normally be
required for the ordinary taxpayer would
not be subject to the 2-percent floor.” The
Court held that the investment advisory
fees of the trust inKnightproperly were
subject to the 2-percent floor, and that the
trustee did not assert any such unusual
facts that would have brought this cost
within the exception.
These proposed regulations reflect the
reasoning and holding inKnightand pro-
vide guidance relating to the limited por-
tion of the cost of investment advice that
is not subject to the 2-percent floor. To the
extent that a portion (if any) of an invest-
ment advisory fee exceeds the fee gener-
ally charged to an individual investor, and
that excess is attributable to an unusual in-
vestment objective of the trust or estate
or to a specialized balancing of the inter-
ests of various parties such that a reason-
able comparison with individual investors
would be improper, that excess is not sub-
ject to the 2-percent floor. Thus, where
the costs charged to the trust do not exceed
the costs charged to an individual investor,
the cost attributable to taking into account
the varying interests of current beneficia-
ries and remaindermen is included in the
usual investment advisory fees and is not
the type of cost that is excluded from the
2-percent floor under this narrow excep-
tion. Individual investors commonly have
investment objectives that may require a
balance between investing for income and
investing for growth and/or a specialized
approach for particular assets. Comments
are requested on the types of incremen-
tal charges, as described in this paragraph,
thatmaybeincurredbytrustsorestates,as
well as a specific description and rationale
for any such charges.
Many of the comments received in re-
sponse to Notice 2008–32 highlighted the
legislative intent of the provision imposing
the 2-percent floor for miscellaneous item-
ized deductions. The commentators noted
that the intent was tosimplify recordkeep-
ing, reduce taxpayer errors, ease admin-
istrative burdens for the IRS, and reduce
taxpayer errors in distinguishing between
nondeductible personal expenditures and
deductible miscellaneous itemized deduc-
tions. The IRS and the Treasury Depart-
ment recognize the administrative diffi-
culty of determining whether every type
of cost incurred by a trust or estate is the
type of cost that would be incurred com-
monly or customarily by individuals own-
ing the same property. Therefore, the pro-
posed regulations provide simplified rules
for the application of section 67(e).
Several commentators questioned the
authority of the IRS and the Treasury De-
partment to require the unbundling of fidu-
ciary commissions. However, theKnight
decision posited just such an unbundling in
the case of investment advisory costs ren-
dered for certain services, the cost of which
exceeds the costs charged to an individual
investor. In determining whether a cost is
subject to the 2-percent floor, the relevant
cost at issue under section 67(e)(1) should
be defined by reference to the products or
services that were provided in exchange
for that cost, rather than the label that is
given to the cost. Therefore, if a fidu-
ciary is performing services that are com-
monly or customarily performed by an in-
vestment advisor retained by an individual
investor, then the costs attributable to those
services are subject to the 2-percent floor.
Many of the comments received in re-
sponse to Notice 2008–32 objected to a
rule that would require any unbundling
of a unitary fee due to the cost and ad-
ministrative difficulty of implementing a
process to track which portions of a sin-
gle fee are subject to the 2-percent floor.
Some commentators anticipated that such
a rule would require corporate trustees to
invest in expensive software to track and
measure the value of the various types of
services provided on a trust-by-trust and
year-by-year basis.
These proposed regulations do not re-
quire the allocation described in the July
2007 proposed regulations. Instead, the
October 17, 20115342011–42 I.R.B.

proposed regulations apply section 67(e)
as interpreted by the Supreme Court in
Knight,while also addressing the Govern-
ment’s and taxpayers’ interests in reduc-
ing the administrative burden of comply-
ing with the tax law. The proposed regula-
tions limit the costs that are subject to allo-
cations pursuant to section 67(e) and allow
the use of any reasonable method to per-
form such allocations.
Specifically, the proposed regulations
provide that the portion of a bundled fee
attributable to investment advice (includ-
ing any related services that would be pro-
vided to any individual investor as part of
the investment advisory fee) will be sub-
ject to the 2-percent floor. In addition, the
proposed regulations provide that, except
for the portion so allocated to investment
advice, a fiduciary fee not computed on an
hourly basis is fully deductible with cer-
tain exceptions. The exceptions are pay-
ments made to third parties out of the bun-
dled fee that would have been subject to
the 2-percent floor if they had been paid
directly by the non-grantor trust or estate,
and any payments for expenses separately
assessed (in addition to the usual or ba-
sic fiduciary fee or commission) by the
fiduciary or other service provider that are
commonly or customarily incurred by an
individual owner of such property. An ex-
ample of such a separately assessed ex-
pense subject to the 2-percent floor might
be an additional fee charged by the fidu-
ciary for managing rental real estate owned
by the non-grantor trust or estate.
The proposed regulations allow the
fiduciary and/or return preparer to use
any reasonable method to make these al-
locations. However, the amount of each
payment (if any) out of the fiduciary’s
fee or commission to a third party for ex-
penses subject to the 2-percent floor, and
of each separately assessed expense that
is commonly or customarily incurred by
an individual owner of such property, is
readily identifiable without any discretion
on the part of the fiduciary. Therefore,
the reasonable method standard does not
apply to these amounts that are to be de-
ducted from the portion of the bundled
fiduciary fee that is not subject to the
2-percent floor.
Comments are requested on the types
of methods for making a reasonable allo-
cation, including possible factors on which
a reasonable allocation is most likely to
be based, and on the related substantiation
that will be needed to satisfy the reason-
able method standard proposed in these
regulations. Specifically, the IRS and
the Treasury Department are interested
in methods for reasonably estimating the
portion of a bundled fee that is attributable
to investment advice. For methods based
in whole or in part on time devoted to
providing investment advice, the IRS and
Treasury Department ask for suggestions
for alternatives to contemporaneous time
records for specific activities that could
be used to substantiate the reasonableness
of the allocation. The IRS and Treasury
Department have considered comments
regarding possible numerical or percent-
age safe harbors in response to Notice
2008–32. Commentators noted that, in
many cases, fiduciaries could not rely on
safe harbors because their fiduciary du-
ties would require them to make a more
accurate estimate so as to not harm the
trust or their beneficiaries. In addition,
safe harbors could increase complexity
by requiring complicated anti-abuse rules.
Therefore, comments are requested on
methods other than numerical or percent-
age safe harbors.
Effective Applicability Dates
Notice 2011–37 provides that taxpayers
will not be required to determine the por-
tion of a Bundled Fiduciary Fee that is sub-
ject to the 2-percent floor under section 67
for taxable years beginning before the date
that these regulations are published as final
regulations in theFederal Register.
Availability of IRS Documents
The IRS notices cited in the preamble
are published in the Cumulative Bulletin
and are available athttp://www.irs.gov.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. 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 regulations, and because
these regulation do not impose a collec-
tion of information on small entities, the
Regulatory Flexibility Act (5 U.S.C. chap-
ter 6) does not apply. Pursuant to section
7805(f), the notice of proposed rulemak-
ing preceding these regulations was sub-
mitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written (a signed origi-
nal and eight (8) copies)orelectroniccom-
ments that are submitted timely to the IRS.
The IRS and the Treasury Department also
request comments on the clarity of the pro-
posed rules and how they can be made eas-
ier to understand. All comments will be
available for public inspection and copy-
ing.
A public hearing has been scheduled for
December 19, 2011, beginning at 10 a.m.
in the IRS Auditorium, Internal Revenue
Building, 1111 Constitution Avenue, NW,
Washington, DC. Due to building security
procedures, visitors must enter at the Con-
stitution Avenue entrance. In addition, all
visitors must present photo identification
to enter the building. Because of access re-
strictions, visitors will not be admitted be-
yond the Internal Revenue Building lobby
more than 30 minutes before the hearing
starts. For information about having your
name placed on the building access list to
attend the hearing, see the “FOR FUR-
THER INFORMATION CONTACT” sec-
tion of this preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written or electronic comments by
December 7, 2011 and submit an outline
of the topics to be discussed and the time
to be devoted to each topic (signed orig-
inal and eight (8) copies) by December 7,
2011. A period of 10 minutes will be allot-
ted to each person for making comments.
An agenda showing the schedule of speak-
ers will be prepared after the deadline for
receiving outlines has passed. Copies of
theagendawillbeavailablefreeofcharge
at the hearing.
Drafting Information
The principal author of these regula-
tions is Jennifer N. Keeney, Office of the
Associate Chief Counsel (Passthroughs
2011–42 I.R.B.535October 17, 2011

and Special Industries). However, other
personnel from the IRS and the Treasury
Department participated in their develop-
ment.
*****
Withdrawal of Notice of Proposed
Rulemaking
Accordingly, under the authority of
26 U.S.C. 7805, the notice of proposed
rulemaking amending 26 CFR parts 1 and
301 that was published in theFederal
Registeron July 27, 2007, 72 FR 41243
(REG–128224–06), is withdrawn.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
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 1.67–4 is added to read
as follows:
§1.67–4 Costs paid or incurred by estates
or non-grantor trusts.
(a)In general. Section 67(e) provides
an exception to the 2-percent floor on mis-
cellaneous itemized deductions for costs
that are paid or incurred in connection with
the administration of an estate or a trust
not described in §1.67–2T(g)(1)(i) (a non-
grantor trust) and which would not have
been incurred if the property were not held
in such estate or trust. A cost is subject to
the2-percentfloortotheextentthatitis
included in the definition of miscellaneous
itemized deductions under section 67(b), is
incurred by an estate or non-grantor trust,
and commonly or customarily would be in-
curred by a hypothetical individual hold-
ing the same property.
(b) “Commonly” or “Customarily” In-
curred—(1)In general. In analyzing a cost
to determine whether it commonly or cus-
tomarily would be incurred by a hypotheti-
cal individual owning the same property, it
is the type of product or service rendered to
the estate or non-grantor trust in exchange
for the cost, rather than the description of
the cost of that product or service, that is
determinative. In addition to the types of
costs described in paragraphs (b)(2), (3)
and (4) of this section, costs that are in-
curred commonly or customarilybyindi-
viduals also include expenses that do not
depend upon the identity of the payor (in
particular, whether the payor is an individ-
ual or instead is an estate or trust). Such
commonly or customarily incurred costs
include, but are not limited to, costs in-
curred in defense of a claim against the es-
tate, the decedent, or the non-grantor trust
that are unrelated to the existence, validity,
or administration oftheestateortrust.
(2)Ownership costs. Ownership costs
are costs that are chargeable to or incurred
by an owner of property simply by reason
of being the owner of the property, such as
condominium fees, real estate taxes, insur-
ance premiums, maintenance and lawn ser-
vices, automobile registration and insur-
ance costs, and partnership costs deemed
to be passed through to and reportable by
a partner. For purposes of section 67(e),
ownership costs are commonly or custom-
arily incurred by a hypothetical individual
owner of such property.
(3)Tax preparation fees. The applica-
tion of the 2-percent floor to the cost of
preparing tax returns on behalf of the es-
tate, decedent, or non-grantor trust will de-
pend upon the particular tax return. All
estate and generation-skipping transfer tax
returns, fiduciary income tax returns, and
the decedent’s final individual income tax
returns are not subject to the 2-percent
floor. The costs of preparing other indi-
vidual income tax returns, gift tax returns,
and tax returns for a sole proprietorship or
a retirement plan, for example, are costs
commonly and customarily incurred by in-
dividuals and thus are subject to the 2-per-
cent floor.
(4)Investment advisory fees. Fees for
investment advice (including any related
services that would be provided to any
individual investor as part of an invest-
ment advisory fee) are incurred commonly
or customarily by a hypothetical individ-
ual investor and therefore are subject to
the 2-percent floor. However, certain in-
cremental costs of investment advice be-
yond the amount that normally would be
charged to an individual investor are not
subject to the 2-percent floor. For this pur-
pose, such an incremental cost is a special,
additional charge added solely because the
investment advice is rendered to a trust or
estate instead of to an individual, that is at-
tributable to an unusual investment objec-
tive or the need for a specialized balanc-
ing of the interests of various parties (be-
yond the usual balancing of the varying in-
terests of current beneficiaries and remain-
dermen), in each case such that a reason-
able comparison with individual investors
would be improper.
(c)Bundled fees—(1)In general.Ifan
estate or a non-grantor trust pays a single
fee, commission, or other expense (such as
a fiduciary’s commission, attorney’s fee,
or accountant’s fee) for both costs that are
subject to the 2-percent floor and costs (in
more than ade minimusamount) that are
not, then the single fee, commission, or
other expense (bundled fee) must be allo-
cated, for purposes of computing the ad-
justed gross income of the trust or estate
in compliance with section 67(e), between
the costs subject to the 2-percent floor and
those that are not. Out-of-pocket expenses
billed to the trust or estate are treated as
separate from the bundled fee.
(2)Exception. If a bundled fee is not
computed on an hourly basis, only the por-
tion of that fee that is attributable to in-
vestment advice is subject to the 2-percent
floor; the remaining portion is not subject
to that floor. In addition, payments made
from the bundled fee to third parties that
would have been subject to the 2-percent
floor if they had been paid directly by the
non-grantor trust or estate are subject to
the 2-percent floor, as are any fees or ex-
penses separately assessed by the fiduciary
or other payee of the bundled fee (in addi-
tion to the usual or basic bundled fee) for
services rendered to the trust or estate that
are commonly or customarily incurred by
an individual.
Example. A corporate trustee charges a percent-
age of the value of the trust income and corpus as
its annual commission. In addition, the trustee bills
a separate amount to the trust each year as compen-
sation for leasing and managing the trust’s rental
real estate. The separate real estate management fee
is subject to the 2-percent floor because it is a fee
commonly or customarily incurred by an individual
owner of rental real estate.
(3)Reasonable Method. Any reason-
ablemethodmaybeusedtoallocatea
bundled fee between those costs that are
subject to the 2-percent floor and those
costs that are not, including without lim-
itation the allocation of a portion of a
fiduciary commission that is a bundled
fee to investment advice. The reason-
able method standard does not apply to
October 17, 20115362011–42 I.R.B.

determine the portion of the bundled fee
attributable to payments made to third par-
ties for expenses subject to the 2-percent
floor or to any other separately assessed
expense commonly or customarily in-
curred by an individual, because those
payments and expenses are readily iden-
tifiable without any discretion on the part
of the fiduciary or return preparer.
(d)Effective/applicability date.These
regulations apply to taxable years begin-
ning on or after the date that these regula-
tions are published as final regulations in
theFederal Register.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on September 6,
2011, 8:45 a.m., and published in the issue of the Federal
Register for September 7, 2011, 76 F.R. 55322)
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 54 and 602
DEPARTMENT OF LABOR
Employee Benefits Security
Administration
29 CFR Part 2590
DEPARTMENT OF HEALTH
AND HUMAN SERVICES
45 CFR Part 147
Notice of Proposed
Rulemaking
Summary of Benefits and
Coverage and the Uniform
Glossary
REG–140038–10
AGENCIES:Internal Revenue Service,
Department of the Treasury; Employee
Benefits Security Administration, Depart-
ment of Labor; Centers for Medicare &
Medicaid Services, Department of Health
and Human Services.
ACTION:Notice of proposed rulemak-
ing.
SUMMARY: This document contains
proposed regulations regarding disclosure
of the summary of benefits and coverage
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. This document implements the dis-
closure requirements to help plans and
individuals better understand their health
coverage, as well as other coverage op-
tions. The templates and instructions to
be used in making these disclosures are
being issued separately in today’s Federal
Register.
DATE:Comment date. Comments are due
on or before October 21, 2011.
ADDRESSES: Written comments may be
submitted to any of the addresses specified
below. Any comment that is submitted to
any Department will be shared with the
other Departments. Please do not submit
duplicates.
All comments will be made available
to the public.WARNING: Do not in-
clude any personally identifiable informa-
tion (such as name, address, or other con-
tact 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, modifications, or redactions
will be made to the comments received, as
they are public records. Comments may be
submitted anonymously.
Department of Labor. Comments to the
Department of Labor, identified by RIN
1210–AB52, by one of the following meth-
ods:
•FederaleRulemakingPortal:
http://www.regulations.gov. Follow
the instructions for submitting com-
ments.
•Email:E-OHPSCA2715.EBSA@dol.gov.
•Mail or Hand Delivery:Officeof
Health Plan Standards and Compliance
Assistance, Employee Benefits Secu-
rity Administration, Room N–5653,
U.S. Department of Labor, 200 Con-
stitution Avenue NW, Washington, DC
20210,Attention: RIN 1210–AB52.
Comments received by the Depart-
ment of Labor will be posted without
change tohttp://www.regulations.govand
http://www.dol.gov/ebsa, and available for
public inspection at the Public Disclosure
Room, N–1513, Employee Benefits Se-
curity Administration, 200 Constitution
Avenue, NW, Washington, DC 20210.
Department of Health and Human Ser-
vices. In commenting, please refer to file
code CMS–9982–P. Because of staff and
resource limitations, we cannot accept
comments by facsimile (FAX) transmis-
sion.
You may submit comments in one of
four ways (please choose only one of the
ways listed):
1.Electronically. You may submit
electronic comments on this regulation to
http://www.regulations.gov. Follow the
instructions under the “More Search Op-
tions” tab.
2.By regular mail.Youmaymail
written comments to the following address
ONLY:
Centers for Medicare &
Medicaid Services,
Department of Health and
Human Services,
Attention: CMS–9982–P,
P.O. Box 8016,
Baltimore, MD 21244–1850.
Please allow sufficient time for mailed
comments to be received before the close
of the comment period.
3.By express or overnight mail.You
may send written comments to the follow-
ing address ONLY:
Centers for Medicare &
Medicaid Services,
Department of Health and
Human Services,
Attention: CMS–9982–P,
Mail Stop C4–26–05,
7500 Security Boulevard,
Baltimore, MD 21244–1850.
4.By hand or courier. If you prefer,
you may deliver (by hand or courier) your
written comments before the close of the
comment period to either of the following
addresses:
a. For delivery in Washington, DC—
2011–42 I.R.B.537October 17, 2011

Centers for Medicare &
Medicaid Services,
Department of Health and
Human Services,
Room 445-G, Hubert H.
Humphrey Building,
200 Independence Avenue, SW,
Washington, DC 20201.
(Because access to the interior of the
Hubert H. Humphrey Building is not read-
ily available to persons without Federal
government identification, commenters
are encouraged to leave their comments
in the CMS drop slots located in the main
lobby of the building. A stamp-in clock is
available for persons wishing to retain a
proof of filing by stamping in and retain-
ing an extra copy of the comments being
filed.)
b. For delivery in Baltimore, MD—
Centers for Medicare &
Medicaid Services,
Department of Health and
Human Services,
7500 Security Boulevard,
Baltimore, MD 21244–1850.
If you intend to deliver your comments
to the Baltimore address, please call (410)
786–7195 in advance to schedule your ar-
rival with one of our staff members.
Comments mailed to the addresses in-
dicated as appropriate for hand or courier
delivery may be delayed and received after
the comment period.
Submission of comments on paperwork
requirements. You may submit comments
on this document’s paperwork require-
ments by following the instructions at the
end of the “Collection of Information Re-
quirements” section in this document.
Inspection of Public Comments:All
comments received before the close of
the comment period are available for
viewing by the public, including any
personally identifiable or confidential
business information that is included in
a comment. We post all comments re-
ceived before the close of the comment
period on the following website as soon
as possible after they have been received:
http://www.regulations.gov. Follow the
search instructions on that Web site to
view public comments.
Comments received timely will also
be available for public inspection as they
are received, generally beginning ap-
proximately three weeks after publication
of a document, at the headquarters of
the Centers for Medicare & Medicaid
Services, 7500 Security Boulevard, Balti-
more, Maryland 21244, Monday through
Friday of each week from 8:30 a.m. to
4 p.m. EST. To schedule an appoint-
ment to view public comments, phone
1–800–743–3951.
Internal Revenue Service. Comments
to the IRS, identified by REG–140038–10,
by one of the following methods:
•FederaleRulemakingPortal:
http://www.regulations.gov. Follow
the instructions for submitting com-
ments.
•Mail:CC:PA:LPD:PR
(REG–140038–10), room 5205, Inter-
nal Revenue Service, P.O. Box 7604,
Ben Franklin Station, Washington, DC
20044.
•Hand or courier delivery:Mon-
day through Friday between the
hours of 8 a.m. and 4 p.m. to:
CC:PA:LPD:PR (REG–140038–10),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue,
NW, Washington, DC 20224.
All submissions to the IRS will be open
to public inspection and copying in room
1621, 1111 Constitution Avenue, NW,
Washington, DC from 9 a.m. to 4 p.m.
FOR FURTHER INFORMATION
CONTACT:Amy Turner or Heather
Raeburn, Employee Benefits Security
Administration, Department of Labor, at
(202) 693–8335; Karen Levin, Internal
Revenue Service, Department of the Trea-
sury, at (202) 622–6080; Jennifer Libster
or Padma Shah, Centers for Medicare &
Medicaid Services, Department of Health
and Human Services, at (301) 492–4252.
CUSTOMER SERVICE
INFORMATION:
Individuals interested in obtaining infor-
mation from the Department of Labor
concerning employment-based health cov-
erage laws may call the EBSA Toll-Free
Hotline at 1–866–444–EBSA (3272) or
visit the Department of Labor’s web-
site (http://www.dol.gov/ebsa). In ad-
dition, information from HHS on pri-
vate health insurance for consumers can
be found on the Centers for Medicare
& Medicaid Services (CMS) website
(http://www.cms.hhs.gov/HealthInsRe-
formforConsume/01_Overview.asp)and
information on health reform can be found
athttp://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 in-
surance issuers in the group and individual
markets. The term “group health plan” in-
cludes both insured and self-insured group
health plans.
1
The Affordable Care Act
adds section 715(a)(1) to the Employee
Retirement Income Security Act (ERISA)
and section 9815(a)(1) to the Internal Rev-
enue Code (the Code) to incorporate the
provisions of part A of title XXVII of
the PHS Act into ERISA and the Code,
and make them applicable to group health
plans, and health insurance issuers provid-
ing health insurance coverage in connec-
tion with group health plans. The PHS
Act sections incorporated by this reference
are sections 2701 through 2728. PHS Act
sections 2701 through 2719A are substan-
tially new, though they incorporate some
provisions of prior law. PHS Act sections
2722 through 2728 are sections of prior
law renumbered, with some, mostly minor,
changes.
Subtitles A and C of title I of the Af-
fordable Care Act amend the requirements
of title XXVII of the PHS Act (changes
to which are incorporated into ERISA
by section 715). The preemption provi-
sions of ERISA section 731 and PHS Act
1
1 The term “group health plan” is used in title XXVII of the PHS Act, part 7 of ERISA, and chapter 100 of the Code, and is distinct from the term “health plan,”asusedinotherprovisions
of title I of the Affordable Care Act. The term “health plan” does not include self-insured group health plans.
October 17, 20115382011–42 I.R.B.

section 2724
2
(implemented in 29 CFR
2590.731(a) and 45 CFR 146.143(a)) ap-
ply so that the requirements of part 7 of
ERISA and title XXVII of the PHS Act,
as amended by the Affordable Care Act,
are not to be “construed to supersede any
provision of State law which establishes,
implements, or continues in effect any
standard or requirement solely relating
to health insurance issuers in connection
with group or individual health insurance
coverage except to the extent that such
standard or requirement prevents the ap-
plication of a requirement” of provisions
added to the PHS Act by the Affordable
Care Act. Accordingly, State laws with
stricter health insurance issuer require-
ments than those imposed by the PHS
Act will not be superseded by those pro-
visions. Preemption and State flexibility
under PHS Act section 2715 are discussed
more fully below under section II.D.
The Departments of Health and Human
Services (HHS), Labor, and the Treasury
(the Departments) are taking a phased ap-
proach to issuing regulations implement-
ing the revised PHS Act sections 2701
through 2719A and related provisions of
the Affordable Care Act. These proposed
regulations propose standards for imple-
menting PHS Act section 2715. As dis-
cussed more fully below, templates and in-
structions for meeting the disclosure re-
quirements of PHS Act section 2715 are
being issued separately in today’s Federal
Register.
II. Overview of the Proposed
Regulations
A.Summary of Benefits and Coverage
1.In General
Section 2715 of the PHS Act, added
by the Affordable Care Act, directs the
Departments to develop standards for use
by a group health plan and a health insur-
ance issuer in compiling and providing a
summary of benefits and coverage (SBC)
that “accurately describes the benefits
and coverage underthe applicable plan
or coverage.” The statute directs the De-
partments, in developing such standards,
to “consult with the National Association
of Insurance Commissioners” (referred
to in this preamble as the “NAIC”), “a
working group composed of representa-
tives of health insurance-related consumer
advocacy organizations, health insurance
issuers, health care professionals, patient
advocates including those representing
individuals with limited English profi-
ciency, and other qualified individuals.”
The NAIC convened a working group
(NAIC working group) comprised of a
diverse group of stakeholders. This work-
ing group met frequently each month for
over one year while developing its rec-
ommendations.
3
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 com-
ments. In addition to participation from
the NAIC working group members, con-
ference calls and in-person meetings were
open to other interested parties and indi-
viduals and provided an opportunity for
non-member feedback. The Departments
have received transmittals from the NAIC
that include a recommended template for
the SBC (with instructions and samples to
be used in completing the template) and a
recommended uniform glossary.
4
These regulations generally propose
standards for group health plans (and their
plan administrators), and health insurance
issuers offering group or individual health
insurance coverage, that will govern who
provides an SBC, who receives an SBC,
when the SBC will be provided, and how it
will be provided. The Departments invite
comment on the standards of the proposed
regulations.
In conjunction with these proposed
regulations, the Departments are publish-
ing a document today that provides the
proposed template for the SBC (with pro-
posed instructions and sample language
for completing the template) and the pro-
posed uniform glossary that are identical
to the documents that were developed and
agreed to by the entire NAIC working
group and then voted on and approved by
the full NAIC. Instead of proposing possi-
ble changes to the NAIC’s proposed SBC
template and related materials, the docu-
ment published today incorporates all of
the NAIC working group’s recommended
materials (with the exception of a sample
coverage example
5
) and invites public
comment. The Departments recognize
that changes to the SBC template may be
appropriate to accommodate various types
of plan and coverage designs, to provide
additional information to individuals, or
to improve the efficacy of the disclosures
recommended by the NAIC. In addition,
the SBC template and related documents
were drafted by the NAIC primarily for
use by health insurance issuers.
6
In general, the Departments have heard
concerns about the potential redundancies
2
C
ode section 9815 incorporates the preemption provisions of PHS Act section 2724. Prior to the Affordable Care Act, there were no express preemption provisions in chapter 100 of the
C
ode.
3
In developing its recommendations, the NAIC considered the results of various consumer testing sponsored by both insurance industry and consumer associations. Specifically,
the draft SBC template, including the coverage examples, and the draft uniform glossary underwent consumer testing to assist in determining adjustments to ensure the final product
was consumer friendly. Summaries of this testing are available at:http://www.naic.org/documents/committees_b_consumer_information_101012_ahip_focus_group_summary.pdf;
http://www.naic.org/documents/committees_b_consumer_information_110603_ahip_bcbsa_consumer_testing.pdf;http://www.naic.org/documents/committees_b_consumer_informa-
tion_101014_consumers_union.pdf(a more detailed summary of which is accessible at:http://prescriptionforchange.org/pdf/CU_Consumer_Testing_Report_Dec_2010.pdf);and
http://www.naic.org/documents/committees_b_consumer_information_110603_consumers_union_testing.pdf.
4
Information on the NAIC working group, including drafts of SBC materials and other supporting documents developed for compliance with PHS Act section 2715, working group member-
ship lists, and meeting minutes, is available at:http://www.naic.org/committees_b_consumer_information.htm.
5
The Appendices do not include a sample coverage example calculation for breast cancer in the individual market that was transmitted by the NAIC. Upon review, it appeared that some of
the data in the example might be subject to copyright protection. Moreover,the sample coverage example provided by NAIC was limited to breast cancer in the individual market and did not
address the other two coverage examples — maternity coverage and diabetes.Finally, particular coding information and pricing information included in the sample would change annually,
which would result in the data included in the sample becoming outdated relatively quickly. Accordingly, HHS is publishing on its website (at http://cciio.cms.gov), the coding and pricing
information necessary to perform coverage example calculations for all three coverage examples. HHS will update this information annually.
6
National Association of Insurance Commissioners, Consumer Information Working Group, December 17, 2010 Letter to the Secretaries. Available athttp://www.naic.org/documents/com-
mittees_b_consumer_information_ppaca_letter_to_sebelius.pdf.
2011–42 I.R.B.539October 17, 2011

and additional cost associated with ele-
ments of the SBC requirement — includ-
ing the uniform glossary and the coverage
facts labels — particularly for those plans
and group health insurance issuers that al-
ready provide a Summary Plan Descrip-
tion (SPD) under 29 CFR 2520.104b–2.
Comments are solicited on whether the
SBC should be allowed to be provided
within an SPD if the SBC is intact and
prominently displayed at the beginning of
the SPD (for example, immediately after a
cover page and table of contents), and if
the timing requirements for providing the
SBC (described in paragraph (a) of the pro-
posed regulations) are satisfied. The De-
partments also welcome further comments
on ways the SBC might be coordinated
with other group health plan disclosure
materials (e.g., application and open sea-
son materials) to communicate effectively
with participants and beneficiaries about
their coverage and make it easy for them
to compare coverage options while also
avoiding undue cost or burden on plans
and group health insurance issuers.
Consistent with the goals of balancing
effective communication and ease of com-
parison for individuals with minimization
of cost and duplication, other sections of
this preamble outline and invite comment
on potential approaches to major elements
of the SBC — the statutorily-required uni-
form glossary and the coverage examples
— in the interest of streamlining standards
and making implementation of these com-
ponents as helpful and user-friendly for in-
dividuals, and as workable and efficient as
possible.
As discussed below, PHS Act section
2715 generally directs group health plans
and health insurance issuers to comply
with the SBC requirements beginning on
or after March 23, 2012. Comments are
requested regarding factors that may affect
the feasibility of implementation within
this time frame. After the public comment
period on these documents, the Depart-
ments will finalize the SBC template and
instructions. Consistent with PHS Act
section 2715(c), the Departments will
periodically review and update the docu-
ments as appropriate, taking into account
public comments.
2.Providing the SBC
Paragraph (a) of the proposed regula-
tions implements the general disclosure re-
quirement and sets forth the proposed stan-
dards for who provides an SBC, to whom,
and when. PHS Act section 2715 gener-
ally sets forth that an SBC be provided
to applicants, enrollees, and policyhold-
ers or certificate holders. PHS Act section
2715(d)(3) places the responsibility to pro-
vide an SBC on “(A) a health insurance is-
suer (including a group health plan that is
not a self-insured plan) offering health in-
surance 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).”
7
Accordingly, these proposed regulations
would interpret PHS Act section 2715 to
apply to both group health plans and health
insurance issuers offering group or indi-
vidual health insurance coverage. In addi-
tion, consistent with the statute, these pro-
posed regulations would make a plan ad-
ministrator of a group health plan respon-
sible for providing an SBC. Under the pro-
posed regulations, the SBC would be pro-
vided in writing free of charge.
In general, the proposed rules direct
that the SBC be provided when a plan or
individual is comparing health coverage
options. If the information in the SBC
changes between the time of application,
when the coverage is offered, and when
a policy is issued (often the case only for
individual market coverage), the proposal
would require that an updated SBC be pro-
vided. If the information is unchanged,
the SBC does not need to be provided
again, except upon request. This general
approach is explained more fully below.
a.Provision of the SBC Automatically by
an Issuer to a Plan
Paragraph (a)(1)(i) of the proposed reg-
ulations provides that a health insurance is-
suer offering group health insurance cov-
erage provide the SBC to a group health
plan (including, for this purpose, its spon-
sor)uponanapplicationorrequestforin-
formation by the plan about the health cov-
erage (see section II.A.2.c. of this pream-
ble, below, for a discussion of this pro-
posal). Under this proposal, the SBC must
be provided as soon as practicable follow-
ing the request, but in no event later than
seven days following the request. If an
SBC is provided upon request for infor-
mation about health coverage and the plan
subsequently applies for health coverage,
a second SBC will be provided automati-
cally only if the information in the SBC has
changed. If there is a change to the infor-
mation in the SBC before the coverage is
offered, or before the first day of coverage,
the issuer must update and provide a cur-
rent SBC to the plan no later than the date
of the offer (or no later than the first day of
coverage, as applicable). The Departments
recognize that often the only change to the
SBC is a final premium quote (usually in
the individual health insurance market or
the small group market). The Departments
request comments on whether, in such cir-
cumstances, premium information can be
provided in another way that is easily un-
derstandable and useful to plan sponsors
and individuals, other than by sending a
new, full SBC.
An issuer also must provide a new
SBC if and when the policy, certificate,
or contract (for simplicity, referred to col-
lectively as a “policy” in the remainder of
this preamble) is renewed or reissued. In
the case of renewal or reissuance, if the is-
suer requires written application materials
for renewal (in either paper or electronic
form), it must provide the SBC no later
than the date the materials are distributed.
If renewal or reissuance is automatic, the
SBC must be provided no later than 30
days prior to the first day of the new policy
year.
b.Provision of the SBC Automatically
by a Plan or Issuer to Participants and
Beneficiaries
Under paragraph (a)(1)(ii) of the pro-
posed regulations, a group health plan
(including the plan administrator), and
a health insurance issuer offering group
health insurance coverage, must provide
7
ERISA section 3(16) defines an administrator as: (i) the person specificallydesignated 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.
October 17, 20115402011–42 I.R.B.

an SBC to a participant or beneficiary
8
with respect to each benefit package of-
fered for which the participant or ben-
eficiary is eligible.
9
The SBC must be
provided as part of any written application
materials that are distributed by the plan or
issuer for enrollment. If the plan does not
distribute written application materials for
enrollment, the SBC must be distributed
no later than the first date the participant
is eligible to enroll in coverage for the
participant and any beneficiaries. If there
isanychangetotheinformationrequired
to be in the SBC 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.
The plan or issuer must also provide
the SBC to special enrollees within seven
days of a request for enrollment pursuant
to a special enrollment period.
10
Addition-
ally, the plan or issuer must provide a new
SBC if and when the coverage is renewed.
Specifically, if written application materi-
als are required for renewal (in either paper
or electronic form), the SBC must be pro-
vided no later than the date the materials
are distributed. If renewal is automatic, the
proposed rules provide that the SBC must
be provided no later than 30 days prior to
the first day of coverage in the new plan
year.
c.Provision of the SBC Upon Request
The regulations propose that a health
insurance issuer offering group health in-
surance coverage provide the SBC to a
group health plan (and a plan or issuer
must provide the SBC to a participant or
beneficiary) upon request, as soon as prac-
ticable, but in no event later than seven
days following the request. Although PHS
Act section 2715 does not specifically
reference furnishing SBCs on request,
PHS Act section 2715(a) authorizes the
Departments to develop standards for pro-
viding the SBC to applicants, enrollees,
policyholders, and certificate holders. The
Departments believe that this provision
recognizes that plans and individuals may
need or desire the information provided
in the SBC at times other than those set
forth in the statute to ensure that the plans
and individuals have continuous access
to coverage and cost information to make
informed choices abouthealth coverage.
11
In addition, while the “upon request”
provision may result in some additional
administrative work for plans and issuers,
the Departments have used discretion else-
where in these proposed regulations to
create special rules for avoiding duplica-
tion and also propose to reduce burden
by facilitating electronic transmittal of the
SBC, where appropriate. Accordingly,
the Departments have sought to balance
providing consumer access to SBCs with
minimizing burdens on employers and
insurers.
d.Special Rules to Prevent Unnecessary
Duplication With Respect to Group Health
Coverage
The Departments propose, in paragraph
(a)(1)(iii), three rules to streamline provi-
sion of the SBC and prevent unnecessary
duplication with respect to group health
plan coverage. First, the requirement to
provide an SBC will be considered satis-
fied for all entities if the SBC is provided
by any entity, so long as all timing and con-
tent requirements are also satisfied. For
example, if a health insurance issuer offer-
ing group health insurance coverage pro-
vides a complete, timely SBC to the plan’s
participants and beneficiaries, the plan’s
requirement to provide the SBC will be
satisfied.
Second, if a participant and any bene-
ficiaries are known to reside at the same
address, providing a single SBC to that ad-
dress will satisfy the obligation to provide
the SBC for all individuals residing at that
address. However, if a beneficiary’s last
known address is different than the partic-
ipant’s last known address, a separate SBC
must be provided to the beneficiary at the
beneficiary’s last known address.
Finally, to further reduce unnecessary
duplication with respect to a group health
plan that offers multiple benefit packages,
in connection with renewal, the plan and
issuer only need to automatically provide a
new SBC with respect to the benefit pack-
age in which a participant or beneficiary is
enrolled. SBCs are not required to be pro-
vided automatically with respect to ben-
efit packages in which the participant or
beneficiary is not enrolled. However, if a
participant or beneficiary requests an SBC
with respect to another benefit package for
which the participant or beneficiary is eli-
gible, the SBC must be provided as soon as
practicable, but in no event later than seven
days following the request.
e.Provision of the SBC by an Issuer
Offering Individual Market Coverage
Under these regulations, the Secretary
of HHS sets forth proposed standards
applicable to individual health insurance
coverage for who provides an SBC, to
whom, and when. The intent is to parallel
the proposed group market requirements
described above, with only those changes
necessary to reflect the differences be-
tween the two markets. For example,
individual policyholders and dependents
in the individual market are comparable
to group health plan participants and ben-
eficiaries. Accordingly, an issuer offering
individual health insurance coverage must
provide an SBC as soon as practicable
after receiving a request for application or
a request for information, but in no event
later than seven days after receipt of the
request. If an individual later applies for
thesamepolicy,asecondSBCisrequired
to be provided only if the information in
the SBC has changed.
An issuer that makes an offer of cover-
age must provide an updated SBC only if it
has modified the terms of coverage for the
8
ERISA 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 or members of such organization, or whose beneficiariesmay 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.
9
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
II.A.2.d., “Special Rules to Prevent Unnecessary Duplication With Respectto Group Health Coverage”, if eitherthe issuer or the plan provides the SBC, both will have satisfied their obliga-
tions. As they do with other notices required of both plans and issuers underPart 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, theremainder of this preamble generally refers to requirements for plans or issuers.
10
Regulations regarding special enrollment can be found at 26 CFR 54.9801–6, 29 CFR 2590.701–6, and 45 CFR 146.117.
11
Moreover, this provision is consistent with requirements under ERISA section 104(b)(4), which requires ERISA-covered group health plans to provide to participants and beneficiaries,
upon request, copies of the instruments underwhich the plan is established or operated.
2011–42 I.R.B.541October 17, 2011

individual (including as a result of med-
ical underwriting) that are required to be
reflected in the SBC. Similarly, when an
individual accepts the offer of coverage, if
any terms are modified before the first day
of coverage, an updated SBC must again
be provided no later than the first day of
coverage. A health insurance issuer will
provide an SBC annually at renewal, no
later than 30 days before the start of the
new policy year, reflecting any changes ef-
fective for the new policy year.
Finally, similar to the group health cov-
erage rules, for individual health insurance
coverage that covers more than one indi-
vidual (or an application for coverage that
is being made for more than one individ-
ual), if all those individuals are known to
resideatthesameaddress,asingleSBC
may be provided to that address. This sin-
gle SBC will satisfy the requirement to
provide the SBC for all individuals resid-
ing at that address. However, if an individ-
ual’s last known address is different than
the last known address of the individual re-
questing coverage, the policyholder, or a
dependent of either, a separate SBC must
be provided to that individual at the indi-
vidual’s last known address.
3.Content
PHS Act section 2715(b)(3) generally
provides that the SBC must include:
a. Uniform definitions of standard insur-
ance terms and medical terms so that
consumers may compare health cov-
erage and understand the terms of (or
exceptions to) their coverage;
b. A description of the coverage, includ-
ing cost sharing, for each category
of benefits identified by the Depart-
ments;
c. The exceptions, reductions, and limi-
tations on coverage;
d. The cost-sharing provisions of the
coverage, including deductible, coin-
surance, and copayment obligations;
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 condi-
tions) and related cost sharing based
on recognized clinical practice guide-
lines;
g. A statement about whether the plan
provides minimum essential coverage
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 re-
quirements;
h. A statement that the SBC is only a
summary and that the plan document,
policy, or certificate of insurance
should be consulted to determine 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 ob-
tained.
The proposed regulations generally paral-
lel the content elements set forth in the
statute. As discussed above, the Depart-
ments are issuing a document that pro-
poses to use the NAIC’s recommended
SBC template and instructions to satisfy
the SBC content and appearance require-
ments of PHS Act section 2715.
A few of the content elements included
in the NAIC’s recommendations warrant
further explanation and discussion. The
template developed by the NAIC work-
inggroupandtransmittedtotheDepart-
ments includes four elements not speci-
fied in the statute. Consistent with the De-
partments’ approach of including all of the
NAIC’s recommended materials, the pro-
posed regulations include these additional
recommended elements. The four addi-
tional elements are: (1) for plans and is-
suers that maintain one or more networks
of providers, an Internet address (or similar
contact information) for obtaining a list of
the network providers; (2) for plans and is-
suers that maintain a prescription drug for-
mulary, an Internet address where an in-
dividual may find more information about
the prescription drug coverage under the
plan or coverage; (3) an Internet address
where an individual may review and ob-
tain the uniform glossary; and (4) premi-
ums (or cost of coverage for self-insured
group health plans).
The Departments have included these
elements in the proposed regulation con-
sistent with the NAIC’s recommendations.
PHS Act section 2715(a) requires the De-
partments to develop regulations for pro-
vision of an SBC that accurately describes
benefits and coverage, which includes the
statutory content elements listed above,
but the Departments believe they are not
limited to them. The statute also requires
the Departments to consult with the NAIC
on the development of the standards for
the SBC, which includes content. The
Departments’ proposal includes all of the
NAIC’s recommendations, including the
additional content, and the Departments
invite comments on this approach and the
four additional SBC content elements. For
example, with respect to the requirement
to include an Internet address that may be
used to obtain a copy of the uniform glos-
sary, the Departments invite comments
on whether the SBC also should disclose
the option to receive a paper copy of the
uniform glossary upon request.
The NAIC instructions provide that
the premium generally is the premium
as charged by the issuer (which may be
evidenced in a rate table attached to the
SBC),
12
or the cost of coverage in the
case of self-insured plans. The NAIC in-
structions further provide that, in the case
of a group health plan, a participant or
beneficiary should consult the employer
for information regarding the actual cost
of coverage net of any employer subsidy.
This raises issues regarding the ability to
compare premium or cost information be-
tween coverage options. The Departments
request comments regarding whether the
SBC should include premium or cost in-
formation and if so, the extent to which
such information should reflect the actual
cost to an individual net of any employer
contribution, as well as the extent to which
the cost information should include costs
for different tiers of coverage (for exam-
ple, self-only, family). The Departments
also request comments on how this in-
formation can be provided in a way that
allows individuals and plan sponsors to
make meaningful comparisons about the
cost of their coverage options.
With respect to the definitions, the De-
partments propose to follow an approach
12
See page 4 of the NAIC Draft Instruction Guide for Group Policies (available athttp://www.naic.org/documents/committees_b_consumer_information_hhs_dol_submis-
sion_1107_inst_grp.pdf).
October 17, 20115422011–42 I.R.B.

consistent with the recommendations re-
ceived from the NAIC.
13
Specifically,
PHS Act section 2715(b)(3)(A) requires
plans and issuers to include in the SBC
“uniform definitions” of common health
insurance terms that are consistent with
the standards developed under section
2715(g). PHS Act section 2715(g) directs
the Departments to “provide for the de-
velopment of standards for the definitions
of terms used in health insurance cover-
age,” including specified insurance-related
terms and medical terms, as well as other
terms the Departments determine are im-
portant to define.
The NAIC working group adopted a
two-part approach to the definitions. First,
it drafted a consumer-friendly uniform
glossary, which includes definitions of
health coverage terminology, to be pro-
videdinconnectionwiththeSBC.The
NAIC’s uniform glossary provides simple,
general, descriptive definitions designed
to help consumers understand terms and
concepts commonly used in health cover-
age. For example, “out-of-pocket limit”
is defined in the NAIC’s uniform glossary
as:
The most you pay during a policy pe-
riod (usually a year) before your health
insurance or plan begins to pay 100 %
of the allowed amount. This limit never
includes your premium, balance-billed
charges or health care your health in-
surance or plan doesn’t cover. Some
health insurance or plans don’t count
all of your co-payments, deductibles,
co-insurance payments, out-of-network
payments or other expenses toward this
limit.
In these proposed regulations, and as de-
scribed more fully below under section
II.C. of this preamble under the heading
“Uniform Glossary”, the Departments pro-
pose that the NAIC uniform glossary be
used to satisfy the requirements of PHS
Act 2715(g).
At the same time, these generic glossary
definitions, alone, would not necessarily
help consumers understand what terms
mean under a given plan or policy, nor
would they support meaningful compar-
ison of coverage options under PHS Act
section 2715(b)(3)(A) because the generic
terms used in the glossary are not plan-
or policy-specific and would not enable
consumers to understand what the terms
actually mean in the context of a specific
contract. Therefore, in addition to the uni-
form glossary, the NAIC working group
also developed a “Why this Matters” col-
umn for the draft SBC template (with
instructions for plans and issuers to use
in completing the SBC template).
14
The
instructions specify how plans and issuers
must describe each coverage component
in the SBC. For example, the instructions
indicate what information must be pro-
vided about a plan’s out-of-pocket limit
on cost sharing, including whether copay-
ments, out-of-network coinsurance, and
deductibles are subject to this limit.
In the Departments’ proposal, the “Why
this Matters” column in the SBC template,
together with the instructions for complet-
ing this column, constitute the definitions
required to be provided under PHS Act
section 2715(b)(3)(A). This approach al-
lows plans and issuers flexibility in how
they design benefits and coverage features,
but proposes that benefits and features be
described in a consistent way so that in-
dividuals and employers will understand
them and appreciate differences from one
plan or policy to the next.
With respect to the element of the SBC
regarding a statement about whether a
plan or coverage provides minimum es-
sential coverage (as defined under section
5000A(f) of the Code) and whether the
plan’s or coverage’s share of the total al-
lowed costs of benefits provided under
the plan or coverage meets applicable
minimum value requirements (minimum
essential coverage statement),
15
because
this content is not relevant until other el-
ements of the Affordable Care Act are
implemented, this statement is not in the
NAIC recommendations. For the same
reason, these proposed regulations pro-
vide that the minimum essential coverage
statement is not required to be in the SBC
until the plan or coverage is required to
provide an SBC with respect to coverage
beginning on or after January 1, 2014.
16
Starting in 2014, certain individuals
who purchase health insurance coverage
through the new Affordable Insurance Ex-
changes (“Exchanges”) may be eligible
for a premium tax credit to help pay for the
cost of that coverage. In general, individ-
uals offered affordable minimum essential
coverage under an employer-sponsored
plan will not be eligible to receive a pre-
mium tax credit. Correctly establishing
whether an employer is offering affordable
minimum essential coverage is important
to individuals, employers, and Exchanges
and necessitates the verification of certain
information about employer coverage, in-
cluding the information in the minimum
essential coverage statement. The De-
partments are exploring several reporting
options under the Affordable Care Act and
other applicable statutory authorities
17
to determine how information about em-
ployer-provided coverage can be provided
and verified in a manner that limits the
burden on individuals, employers, and
Exchanges. Because the statutory SBC
elements include the information in the
minimum essential coverage statement,
the Departments invite comments on how
employers might provide this information
to employees and the Exchanges in a man-
ner that minimizes duplication and burden.
The Departments also recognize that some
of the plan level information that is re-
quired to be provided in the SBC is also
required to be provided under section 6056
of the Code (requiring employers to report
13
National Association of Insurance Commissioners, Consumer Information Working Group, December 17, 2010 Letter to the Secretaries. Available athttp://www.naic.org/documents/com-
mittees_b_consumer_information_ppaca_letter_to_sebelius.pdf.
14
National Association of Insurance Commissioners, Consumer Information Working Group, December 17,2010, Final Package of Attachments. Availableathttp://www.naic.org/docu-
ments/committees_b_consumer_information_ppaca_final_materials.pdf.
15
PHS Act section 2715(b)(3)(G) provides that this statement must indicate whether the plan or coverage (1) provides minimum essential coverage (as defined under section 5000A(f) of the
Code) and (2) ensures that the plan’s or coverage’s share of the total allowed costs of benefits provided under the plan or coverage is not less than 60 percent of such costs.
16
The minimum essential coverage and minimum value requirements are part ofa larger set of health coverage reforms that take effect on January 1, 2014. The Departments’ proposal
recognizes this effective date and the need for additional guidance with respect to these requirements and is consistent with the recommendation in the transmittal letter from the NAIC. The
NAIC will continue to work to develop a recommendation for this SBC requirement and will submit it to the Departments at a later date.
17
In addition to section 2715 of the PHS Act, these authorities include, but are not limited to, section 6056 of the Code, as added by section 1514 of the Affordable Care Act (requiring
employers to report to the Internal Revenue Service specific information related to employer-sponsored health coverage provided to employees); and section 18B of the Fair Labor Standards
Act, as added by section 1512 of the Affordable Care Act (requiring employers to disclose to employees information regarding Exchange coverage options).
2011–42 I.R.B.543October 17, 2011

to the IRS specific information related to
employer-sponsored health coverage pro-
vided to employees) and are coordinating
their efforts to determine how and whether
the same data can be used for multiple
purposes. To help develop a simple, effi-
cient system for employers, the Treasury
Department and the IRS intend to request
comments on employer information re-
porting required under section 6056 of the
Code.
The last SBC content item that mer-
its further discussionis the coverage facts
label. The statute requires that an SBC
contain a “coverage facts label.” For ease
of reference, the regulations propose to
use “coverage examples,” the term rec-
ommended by the NAIC, in place of the
statutory term. As specified in the statute,
the proposed regulations provide that the
coverage examples illustrate benefits pro-
vided under the plan or coverage for com-
mon benefits scenarios, including preg-
nancy and serious or chronic medical con-
ditions. The coverage example would esti-
mate what proportion of expenses under an
illustrative benefits scenario might be cov-
ered by a given plan or policy. Consumers
then could use this information to compare
their share of the costs of care under dif-
ferent plan or coverage options to make an
informed purchasing decision.
Under the proposed regulations, con-
sistent with the recommendations of the
NAIC working group, a benefits scenario
is a hypothetical situation, consisting of a
sample treatment plan for a specified med-
ical condition during a specific period of
time, based on recognized clinical prac-
tice guidelines available through the Na-
tional Guideline Clearinghouse.
18
Aben-
efits scenario would include the informa-
tion needed to simulate how claims would
be processed under the scenario to gener-
ate an estimate of cost sharing a consumer
could expect to pay under the benefit pack-
age. The document published contempo-
raneously with these proposed regulations
includes specific instructions and an HHS
website with specific information neces-
sary to simulate benefits covered under the
plan or policy for specified benefits scenar-
ios.
19
These proposed regulations provide
that the Departments may identify up to six
coverage examples that may be required
in an SBC. A maximum of six coverage
examples was discussed by the NAIC
working group, so that consumers may
easily read, understand, and compare how
benefits are provided for different com-
mon medical conditions. In future years,
the SBC may include coverage examples
in addition to the three proposed now. The
Departments propose to limit the number
of coverage examples to no more than six
to limit the burden on plans and issuers
and to ensure that there is adequate space
in the SBC to present coverage examples
in a manner that is easy to read and useful
for individuals. A document published
contemporaneously with these proposed
regulations adopts a phase-in approach
to the coverage examples, and uses the
three coverage examples recommended by
NAIC for inclusion first - having a baby
(normal delivery), treating breast cancer,
and managing diabetes.
20
The Departments invite comments on
the proposed coverage examples, whether
additional benefits scenarios would be
helpful and, if so, what those examples
should be. The Departments also invite
comments on the benefits and costs asso-
ciated with developing multiple coverage
examples, as well as how multiple cover-
age examples might promote or hinder the
ability to understand and compare terms
of coverage. It is anticipated that any
additional coverage examples will only
be required to be provided prospectively,
and that plans and issuers will be pro-
vided with adequate time for compliance.
Additionally, the Departments invite com-
ments on whether and how to phase in
the implementation of the requirement to
provide coverage examples. For example,
one option would provide that in 2012,
coverage examples would only need to
be provided for the SBCs with respect to
a subset of all benefits packages offered
by group health plans or health insurance
issuers, with coverage examples required
to be provided for all benefits packages
in later years. Comments are invited on
these issues.
Comments are also requested on
whether it would be feasible or desir-
able to permit plans and issuers to in-
put plan- or policy-specific information
into a central Internet portal, such as
the Federal healthcare reform website
(www.healthcare.gov), that would use
the information to generate the coverage
examples for each plan or policy. The
examples would then be available on the
Internet portal for access by individuals.
Alternatively, some have suggested
that plans and issuers might provide
individuals, in a convenient format in
the SBC, the several items of plan- or
policy-specific information necessary to
generate the coverage examples and a
reference to the Internet portal, so that
individuals could input the information
into the Internet portal to generate the
coverage examples for the plan or policy.
The Departments note that the NAIC
considered and rejected the idea of a
“cost calculator” or similar tool. The
Departments solicit comments on the
cost and benefits of these alternatives,
including whether such approaches would
provide an efficient and effective method
for individuals, plans, and issuers to
generate or access the coverage examples
and how any such approaches could
adequately serve individuals who do not
have regular access to the Internet (for
example, by disclosing in the SBC the
optiontoobtainpapercopies of coverage
examples generated by the plan or issuer).
4.Appearance.
Section 2715 of the PHS Act sets forth
the appearance for the SBC. Specifically,
the statute provides that the SBC is to be
presented in a uniform formaţutilizing ter-
minology understandable by the average
plan enrollee, that does not exceed four
pages in length, and does not include print
smaller than 12-point font. The proposed
regulations, consistent with the NAIC
18
The National Guideline Clearinghouse, within the Agency for Healthcare Research and Quality (AHRQ), publishes systematically developed statements to assist practitioner and patient
decisions about appropriate health care for specific clinical circumstances, available athttp://www.guideline.gov/.
19
A general instruction guide for completing the coverage examples portion of the SBC, which is identical to that transmitted by the NAIC, is included inthe document published today by
the Departments. These instructions, together with specific assumptionsfor coding data and reimbursement rates published today on HHS’s website comprise the Departments’ instructions
for completing the coverageexamples portion of the SBC.See http://cciio.cms.gov. http://www.naic.org/documents/committees_b_consumer_information_hhs_dol_submission_1107_tem-
plate_blank.xls.The coding and reimbursement rate assumptions were developed by HHS and are also open for public comment.
20
See http://www.naic.org/documents/committees_b_consumer_information_final_coverage_ex.pdf.
October 17, 20115442011–42 I.R.B.

recommendation, interpret the four-page
limitation as four double-sided pages.
21
The Departments’ view is that this ap-
proach will enable group health plans,
participants and beneficiaries, and indi-
viduals in the individual insurance market
to receive enough information to shop for,
compare, and make informed decisions re-
garding various coverage options that may
be available to them.
22
The Departments
seek comments on this approach.
Consistent with the NAIC recommen-
dations provided to the Departments,
23
un-
der these proposed regulations, a group
health plan or a health insurance issuer will
provide the SBC as a stand-alone docu-
ment in the form authorized by the Depart-
ments and completed in accordance with
the instructions and guidance for complet-
ing the SBC that are authorized by the De-
partments. As noted earlier in this pream-
ble, comments are invited on whether and
how the SBC might best be coordinated
with the SPD and other group health plan
disclosure materials.
5.Form and Manner
a.Grouphealthplancoverage
To facilitate faster and less burdensome
disclosure of the SBC, and consistent with
PHS Act section 2715(d)(2), the proposed
regulations set forth rules to facilitate elec-
tronic transmittal of the SBC, where ap-
propriate. Specifically, an SBC provided
by a plan or issuer to a participant or ben-
eficiary may be provided in paper form.
Alternatively, for plans and issuers sub-
ject to ERISA or the Code, the SBC may
be provided electronically if the require-
ments of the Department of Labor’s elec-
tronic disclosure safe harbor at 29 CFR
2520.104b–1(c) are met.
24
For non-Fed-
eral governmental plans, the regulations
propose that the SBC may be provided
electronically if eitherthe substance of the
provisions of the Department of Labor’s
electronic disclosure rule are met, or if the
provisions governing electronic disclosure
in the individual health insurance market
(described below) are met.
With respect to an SBC provided by
an issuer to a plan, the SBC may be
provided in paper form or electronically
(such as email transmittal or an Inter-
net posting on the issuer’s website or
onwww.healthcare.gov). For electronic
forms, the format must be readily
accessible by the plan; the SBC must be
provided in paper form free of charge
upon request; and for Internet postings,
the plan must be notified by paper or
email that the documents are available on
the Internet, and given the web address.
The Departments invite comments on
whether any clarifications are needed
with respect to the “readily accessible”
standard (for example, whether the
requirements for passwords or special
software create a sufficient burden that the
documents are not “readily accessible”).
The Departments also invite comment
on whether modifications or adaptations
of the SBC are necessary to facilitate or
improve electronic disclosure.
b.Individual health insurance coverage
With respect to the individual market,
the proposed regulations set forth the cir-
cumstances in which an issuer offering in-
dividual health insurance coverage may
provide an SBC in either paper or elec-
tronic form. Specifically, under these pro-
posed regulations, unless specified other-
wise by an individual, an issuer would
be required to provide an SBC (and any
subsequent SBC) in paper form if, upon
the individual’s request for information or
request for an application, the individual
makes the request in person, by phone or
by fax, or by U.S. mail or courier ser-
vice; or if, when submitting an applica-
tion, the individual completes the applica-
tion for coverage by hand, by phone or by
fax, or by U.S. mail or courier service. As
an alternative, the Departments seek com-
ments on whether it might be appropriate
to allow issuers to fulfill an individual’s re-
quest in electronic form, unless the indi-
vidual requests a paper form.
Under this proposed rule, an issuer may
provide an SBC (and any subsequent SBC)
in electronic form (such as through an In-
ternet posting or via electronic mail) if an
individual requests information or requests
an application for coverage electronically;
or, if an individual submits an application
for coverage electronically.
To ensure actual receipt of an SBC pro-
vided in electronic form, these proposed
regulations would set forth certain safe-
guards for electronic disclosure in the in-
dividual market. Under the proposed reg-
ulations, an issuer that provides the SBC
electronically must:
•Request that an individual acknowl-
edge receipt of the SBC;
•Make the SBC available in an elec-
tronic format that is readily usable by
the general public;
•If the SBC is posted on the Internet,
display the SBC in a location that is
prominent and readily accessible to the
individual and provide timely notice,
in electronic or non-electronic form, to
each individual who requests informa-
tion about, or an application for, cov-
erage, that apprises the individual the
SBC is available on the Internet and in-
cludes the applicable Internet address;
•Promptly provide a paper copy of the
SBC upon request without charge,
penalty, or the imposition of any other
condition or consequence, and provide
the individual with the ability to re-
quest a paper copy of the SBC both
by using the issuer’s Web site (such as
by clicking on a clearly identified box
to make the request) and by calling a
readily available telephone line, the
number for which is prominently dis-
played on the issuer’s Web site, policy
documents, and other marketing mate-
21
PHS Act section 2715(b)(1) does not prescribe whether the four pages are foursingle-sided pages or four double-sided pages. The SBC template transmitted by NAIC exceeded four
single-sided pages. After considering the extent of statutorily-required content in PHS Act section 2715(b)(3), as well as the appearance and language requirements of PHS Act sections
2715(b)(1) and (2), the Departments are interpreting four pages to be four double-sided pages, in order to ensure that this information is presented in an understandable and meaningful way.
22
PHS Act sections 2715(b)(3)(A) and (g)(2) clearly reference consumers comparing coverage and PHS Act section 2715(b)(1) requires a uniform format,to enable shopping and comparing
health coverage options.
23
National Association of Insurance Commissioners, Consumer Information Working Group, December 17, 2010 Letter to the Secretaries. Available athttp://www.naic.org/documents/com-
mittees_b_consumer_information_ppaca_letter_to_sebelius.pdf.
24
On April 7, 2011, the Department of Labor published a Request for Informationregarding 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 regulations
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 theSBC.
2011–42 I.R.B.545October 17, 2011

rials related to the policy and clearly
identified as to purpose; and
•Ensure an SBC provided in electronic
form is provided in accordance with
the appearance, content, and language
requirements of this section.
The Departments welcome comments as
to whether these or other safeguards are
appropriate.
Finally, consistent with the standards
for electronic disclosure, these proposed
regulations seek to reduce the burden of
providing an SBC to individuals shopping
for coverage. Specifically, these proposed
regulations provide that a health insurance
issuer that complies with the requirements
set forth at 45 CFR 159.120 (75 FR 24470)
for reporting to the Federal health care
reform insurance Web portal would be
deemed to comply with the requirement
to provide the SBC to an individual re-
questing information about coverage prior
to submitting an application. Any SBC
furnished at the time of application or sub-
sequently, however, would be required to
be provided in a form and manner consis-
tent with the rules described above.
6.Language
PHS Act section 2715(b)(2) provides
that standards shall ensure that the SBC “is
presented in a culturally and linguistically
appropriate manner.” These proposed reg-
ulations provide that, to satisfy the require-
ment to provide the SBC in a culturally and
linguisticallyappropriate manner, a plan
or issuer follows the rules for providing
appeals notices in a culturally and lin-
guistically appropriate manner under PHS
Act section 2719, and paragraph (e) of its
implementing regulations.
25
In general,
those rules provide that, in specified coun-
ties of the United States, plans and issuers
must provide interpretive services, and
must provide written translations of the
SBC upon request in certain non-English
languages. In addition, in such counties,
English versions of the SBC must disclose
the availability of language services in
the relevant language.
26
The counties in
which this must be done are those in which
at least ten percent of the population re-
siding in the county is literate only in the
same non-English language, as determined
in guidance. The Departments welcome
comments on whether and how to provide
written translations of the SBC in these
non-English languages. (Note, nothing
in these proposed regulations should be
construed as limiting an individual’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 Advan-
tage, from discriminating on the basis of
race, color, or national origin. To ensure
non-discrimination on the basis of national
origin, recipients are required to take rea-
sonable steps to ensure meaningful access
to their programs and activities by lim-
ited English proficient persons. For more
information, see, “Guidance to Federal
Financial Assistance Recipients Regard-
ing Title VI Prohibition Against National
Origin Discrimination Affecting Limited
English Proficient Persons,” available
athttp://www.hhs.gov/ocr/civilrights/re-
sources/specialtopics/lep/policyguidance-
document.html.)
B.Notice of Modifications
Section 2715(d)(4) of the PHS Act di-
rects that a group health plan or health in-
surance issuer offering group or individual
health insurance coverage to provide no-
tice of a material modification if it makes
a material modification (as defined under
ERISA section 102, 29 U.S.C. 1022) in
any of the terms of the plan or coverage
involved that is not reflected in the most
recently provided SBC. The proposed reg-
ulations interpret thestatutory reference to
the SBC to mean that only a material mod-
ification that would affect the content of
the SBC would require plans and issuers
to provide this notice. In these circum-
stances, the notice must be provided to en-
rollees (or, in the individual market, pol-
icyholders) no later than 60 days prior to
the date on which such change will be-
come effective, if it is not reflected in
the most recent SBC provided and occurs
other than in connection with a renewal or
reissuance of coverage. A material modi-
fication, within the meaning of section 102
of ERISA, includes any modification to the
coverage offered under a plan or policy
that, independently, or in conjunction with
other contemporaneous modifications or
changes, would be considered by an aver-
age plan participant (or in the case of in-
dividual market coverage, an average indi-
vidual covered under a policy) to be an im-
portant change in covered benefits or other
terms of coverage under the plan or pol-
icy.
27
A material modification could be an
enhancement of covered benefits or ser-
vices or other more generous plan or pol-
icy terms. It includes, for example, cover-
age of previously excluded benefits or re-
duced cost-sharing. A material modifica-
tion could also be a material reduction in
covered services or benefits, as defined in
29 CFR 2520.104b–3(d)(3), or more strin-
gent requirements for receipt of benefits.
As a result, it also includes changes or
modifications that reduce or eliminate ben-
efits, increase premiums and cost-sharing,
or impose a new referral requirement.
PHS Act section 2715 and these pro-
posed regulations describe the timing for
when a notice of material modification
must be provided in situations other than
upon renewal at the end of a plan or pol-
icy year when a new SBC is provided
under the rules of paragraph (a) of the
proposed rules. 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, paragraph (b) of
the proposed regulations would require a
notice of modifications to be provided 60
days in advance of the effective date of
the change. This notice could be satisfied
either by a separate notice describing the
material modification or by providing an
updated SBC reflecting the modification.
For ERISA-coveredgroup health plans
subject to PHS Act section 2715, this
notice is in advance of the timing under
the Department of Labor’s regulations set
forth at 29 CFR 2520.104b–3 that require
the provision of a summary of material
modification (SMM) (generally not later
than 210 days after the close of the plan
year in which the modification or change
25
See75 FR 43330 (July 23, 2010), as amended by 76 FR 37208 (June 24, 2011).
26
The SBC template, as recommended by the NAIC, does not include this statement; however, these proposed regulations would require that plans and issuers include it.
27
See DOL Information Letter, Washington Star/Washington-Baltimore Newspaper Guild to Munford Page Hall, II, Baker & McKenzie (February 8, 1985).
October 17, 20115462011–42 I.R.B.

was adopted, or, in the case of a material
reduction in covered services or benefits,
not later than 60 days after the date of
adoption of the modification or change).
In situations where a complete notice is
provided in a timely manner under PHS
Act section 2715(d)(4), of course, an
ERISA-covered plan will also satisfy the
requirement to provide an SMM under
Part 1 of ERISA. The Departments in-
vite comments on this expedited notice
requirement, including whether there are
any circumstances where 60-day advance
notice might be difficult. The Depart-
ments also solicit comments on the format
of the notice of modification, particularly
for plans and issuers not subject to ERISA.
C.Uniform Glossary
Section 2715(g)(2) of the PHS Act di-
rects the Departments to develop standards
for definitions for at least the following
insurance-related terms: co-insurance,
co-payment, deductible, excluded ser-
vices, grievance and appeals, non-pre-
ferred provider, out-of-network co-pay-
ments, out-of-pocket limit, preferred
provider, premium, and UCR (usual, cus-
tomary and reasonable) fees. Section
2715(g)(3) of the PHS Act directs the
Departments to develop standards for def-
initions for at least the following medical
terms: durable medical equipment, emer-
gency medical transportation, emergency
room care, home health care, hospice
services, hospital outpatient care, hospi-
talization, physician services, prescription
drug coverage, rehabilitation services, and
skilled nursing care. Additionally, the
statute directs the Departments to develop
standards for such other terms that will
help consumers understand and compare
the terms of coverage and the extent of
medical benefits (including any excep-
tions and limitations).
The NAIC working group recom-
mended,
28
and the Departments are
proposing to adopt for this purpose, in-
clusion of the following additional terms
in the uniform glossary: allowed amount,
balance billing, complications of preg-
nancy, emergency medical condition,
emergency services, habilitation services,
health insurance, in-network co-insurance,
in-network co-payment, medically nec-
essary, network, out-of-network co-insur-
ance, plan, preauthorization, prescription
drugs, primary care physician, primary
care provider, provider, reconstructive
surgery, specialist, and urgent care. The
uniform glossary proposed by the De-
partments is being issued in a document
published elsewhere in today’s Federal
Register.
The Departments invite comments on
the uniform glossary, including the content
of the definitions and whether there are ad-
ditional terms that are important to include
in the uniform glossary so that individuals
and employers may understand and com-
pare the terms of coverage and the extent
of medical benefits (or exceptions to those
benefits). For example, the Departments
are considering whether glossary defini-
tions of any of the following terms would
be helpful: claim, external review, ma-
ternity care, preexisting condition, preex-
isting condition exclusion period, or spe-
cialty drug. It is anticipated that any addi-
tional terms would be included in the uni-
form glossary prospectively, and that plans
and issuers would be provided adequate
time for compliance.
The proposed regulations direct a plan
or issuer to make the uniform glossary
available upon request within seven days.
The timing of disclosure is intended to be
generally consistent with the proposed re-
quirement, described in section II.A.2.c of
this preamble. A plan or issuer may sat-
isfy this disclosure requirement by provid-
inganInternetaddresswhereanindividual
may review and obtain the uniform glos-
sary, as described in section II.A.3 of this
preamble. This Internet address may be a
place the document can be found on the
plan’s or issuer’s website. It may also be
a place the document can be found on the
website of either the Department of Labor
or HHS. However, a plan or issuer must
make a paper copy of the glossary avail-
able upon request. Group health plans and
health insurance issuers will provide the
uniform glossary in the appearance autho-
rized by the Departments, so that the glos-
sary is presented in a uniform format and
uses terminology understandable by the
average plan enrollee or individual cov-
ered under an individual policy.
D.Preemption
Section 2715 of the PHS Act is in-
corporated into ERISA section 715, and
Code section 9815, and is subject to the
preemption provisions of ERISA sec-
tion 731 and PHS Act section 2724 (im-
plemented in 29 CFR 2590.731(a) and
45 CFR 146.143(a)). These provisions
apply so that the requirements of part
7ofERISAandpartAoftitleXXVII
of the PHS Act, as amended by the
Affordable Care Act, are not to be
“construed to supersede any provision of
State law which establishes, implements,
or continues in effect any standard or
requirement solely relating to health
insurance issuers in connection with group
or individual health insurance coverage
except to the extent that such standard or
requirement prevents the application of
arequirement”ofpartAoftitleXXVII
of the PHS Act. Accordingly, State laws
that impose on health insurance issuers
requirements that are stricter than those
imposed by the Affordable Care Act will
not be superseded by the Affordable Care
Act. Moreover, PHS Act section 2715(e)
provides 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 provided under this section,
as determined by the [Departments].”
Readingthesetwopreemption provi-
sions together, these proposed regulations
would not prevent States from imposing
separate, additional disclosure require-
ments on health insurance issuers. The
Departments recognize the need to balance
States’ interest in information disclosure
regarding insurance coverage with the
primary objective of PHS Act section
2715 (as stated in the section title) of pro-
viding for the development and use of a
short, uniform explanation of coverage
document so that consumers may make
apples-to-apples comparisons of plan and
coverage options.
E.Failure to Provide
PHS Act section 2715(f), incorporated
into ERISA section 715 and Code section
9815, provides that a group health plan (in-
28
National Association of Insurance Commissioners, Consumer Information Working Group, December 17, 2010 Letter to the Secretaries. Available athttp://www.naic.org/documents/com-
mittees_b_consumer_information_ppaca_letter_to_sebelius.pdf.
2011–42 I.R.B.547October 17, 2011

cluding its administrator), and a health in-
surance issuer offering group or individual
health insurance coverage, that “willfully
fails to provide the information required
under this section shall be subject to a fine
of not more than $1,000 for each such fail-
ure.” 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. Due
to the different enforcement jurisdictions
of the Departments, as well as their differ-
ent underlying enforcement structures, the
mechanisms for imposing the new penalty
mayvaryslightly,asdiscussedbelow.
1.Department of HHS
Enforcement of Part A of Title XXVII
of the PHS Act, including section 2715,
is generally governed by PHS Act sec-
tion 2723 and corresponding regulations
at 45 C.F.R. 150.101 et seq. Under those
provisions, a State has the discretion
to enforce the provisions against health
insurance issuers in the first instance, and
the Secretary of HHS only enforces a
provision after the Secretary determines
that a State has failed to substantially
enforce the provision. If a State enforces a
provision such as PHS Act section 2715, it
uses its own enforcement mechanisms. If
the Secretary enforces, the statute provides
for penalties of up to $100 per day for each
affected individual.
PHS Act section 2715(f) provides that
an entity that willfully fails to provide the
information required under PHS Act sec-
tion 2715 shall be subject to a fine of not
more than $1,000 for each such failure.
Such failure with respect to each enrollee
constitutes a separate offense. This penalty
can only be imposed by the Secretary.
Paragraph (e) of the regulations pro-
posed by HHS clarifies that States have
primary enforcement authority over health
insurance issuers for any violations,
whether willful or not, using their own
remedies. These proposed regulations also
clarify that PHS Act section 2715 does not
limit the Secretary’s authority to impose
penalties for willful violations regardless
of State enforcement. However, the Secre-
tary intends to use enforcement discretion
if the Secretary determines that the State is
adequately addressing willful violations.
The Secretary of HHS has direct en-
forcement authority for violations by
non-Federal governmental plans, and will
use the appropriate penalty for violations
of section 2715, depending on whether
the violation is willful. Proposed para-
graph (e) of the HHS regulations cross
references the enforcement regulations at
45 CFR 150.101et seq., and states that
they relate to any failure, regardless of
intent, by a health insurance issuer or
non-Federal governmental plan, to comply
with any requirement of section 2715 of
the PHS Act.
2.Departments of Labor and the Treasury
The Department of Labor enforces the
requirements of part 7 of ERISA and the
Department of the Treasury enforces the
requirements of chapter 100 of the Code
with respect to group health plans main-
tained by an entity that is not a governmen-
tal entity. Generally the enforcement au-
thority under these provisions applies to all
nongovernmental group health plans, but
the Department of Labor does not enforce
the requirements of part 7 of ERISA with
respect to church plans.
On April 21, 1999, pursuant to section
104 of the Health Insurance Portability
and Accountability Act of 1996 (HIPAA),
Pub. L. 104–191, the Secretaries entered
into a memorandum of understanding
29
that, among other things, established a
mechanism for coordinating enforcement
and avoiding duplication of effort for
shared jurisdiction. The memorandum
of understanding applies, as appropriate,
to health legislation enacted after April
21, 1999 over which at least two of
the Departments share jurisdiction,
including section 2715 of the PHS Act as
incorporated into ERISA and the Code.
Therefore, in enforcing PHS Act section
2715, the Departments of Labor and
the Treasury will coordinate to avoid
duplication in the case of group health
plans that are not church plans and that are
not maintained by a governmental entity.
a.Department of Labor
The Department of Labor will issue
separate regulations in the future describ-
ing the procedures for assessment of the
civil fine provided under PHS Act section
2715(f) as incorporated by section 715
of ERISA. In accordance with ERISA
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.
b.Department of the Treasury
If a group health plan (other than a plan
maintained by a governmental entity) fails
to comply with the requirements of chap-
ter 100 of the Code, an excise tax is im-
posed under section 4980D of the Code.
The excise tax is generally $100 per day
per individual for each day that the plan
fails to comply with chapter 100 with re-
spect to that individual. Numerous rules
under section 4980D reduce the amount of
the excise tax for failures due to reason-
able cause and not to willful neglect. Spe-
cial rules apply for church plans. Taxpay-
ers subject to the excise tax under section
4980D are required to report the failures
under chapter 100 and the amount of the
excise tax on IRS Form 8928. See 26 CFR
54.4980D–1, 54.6011–2, and 54.6151–1.
Section 2715(f) of the PHS Act sub-
jects a plan sponsor or designated admin-
istrator to a fine of not more than $1,000
for each failure to provide an SBC. Unless
and until future guidance provides other-
wise, group health plans subject to chap-
ter 100 of the Code should continue to re-
port the excise tax of section 4980D on IRS
Form 8928 with respect to failures to com-
ply with PHS Act section 2715. The Sec-
retaries of Labor and the Treasury will co-
ordinate to determine appropriate cases in
which the fine of section 2715(f) should be
imposed on group health plans that are not
maintained by a governmental entity.
F.Applicability
PHS Act section 2715 directs that the
requirement for group health plans and
health insurance issuers to provide an SBC
“prior to any enrollment restriction” ap-
plies not later than 24 months after the
date of enactment (i.e., beginning on or
29
See64 FR 70164 (December 15, 1999).
October 17, 20115482011–42 I.R.B.

after March 23, 2012).
30
As noted ear-
lier, the statute also directs the Depart-
ments to consult with the NAIC in devel-
oping the SBC standards. The Depart-
ments are appreciative of the detailed and
valuable work the NAIC and its working
group has performed in developing recom-
mended standards and materials, including
the NAIC’s extensive efforts to involve nu-
merous stakeholder groups in that process
for over a year and to provide drafts of its
evolving materials to the Departments pe-
riodically. Accordingly, as noted, the De-
partments are appending to the document
accompanying these proposed regulations
the NAIC’s SBC work product for public
comment.
The NAIC transmitted its final materi-
als to the Departments on July 29, 2011.
In recognition of existing disclosure re-
quirements under 29 CFR 2520.104b–2 for
those group health plans that already pro-
vide SPDs to participants and concerns
raised about providing SBCs by the statu-
tory deadline, comments are solicited on
whether and, if so, how practical consid-
erations might affect the timing of imple-
mentation. In coordination with the re-
quest for comment elsewhere in this pre-
amble on a potential phase-in of the im-
plementation of the requirement to provide
coverage examples, comments are invited
also on how any potential phase-in of those
requirements could or should be coordi-
nated with the timing of the effectiveness
of the general SBC standards.
The Departments also request com-
ments on whether any special rules are
necessary to accommodate expatriate
plans. The Departments note that, in the
context of group health plan coverage,
section 4(b)(4) of ERISA provides that a
plan maintained outside the United States
primarily for the benefit of persons sub-
stantially all of whom are nonresident
aliens is exempt from ERISA title I, in-
cluding ERISA section 715. At the same
time, in the Department of HHS’s in-
terim final regulations relating to medical
loss ratio (MLR) provisions published at
75 FR 74864, a special rule was included
for expatriate insurance policies. The
Departments invite comments on whether
any adjustments are needed under PHS
Act section 2715 for expatriate plans and,
if so, for what types of coverage.
III. Economic Impact and Paperwork
Burden
A. Executive Orders 12866 and
13563–Department of Labor and
Department of Health and Human
Services
Executive Orders 12866 and 13563
direct 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; distributiveimpacts; and equity).
Executive Order 13563 emphasizes the
importance of quantifying both costs and
benefits, of reducing costs, of harmonizing
rules, and of promoting flexibility. This
rule has been designated a “significant
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 eco-
nomically significant effects ($100 million
or more in any 1 year). As discussed
below, the Departments have concluded
that these proposed regulations would not
have economic impacts of $100 million or
more in any one year or otherwise meet
the definition of an “economically signif-
icant rule” under Executive Order 12866.
Nonetheless, consistent with Executive
Orders 12866 and 13563, the Departments
have provided an assessment of the poten-
tial benefits and the costs associated with
this proposed regulation. The Depart-
ments invite comment on this assessment.
1. Current Regulatory Framework
Health plan sponsors and issuers do not
currently uniformly disclose information
to consumers about benefits and coverage
in a simple and consistent way. ERISA-
covered group health plan sponsors are re-
quired to describe important plan informa-
tion concerning eligibility, benefits, and
participant rights and responsibilities in a
summary plan description (SPD). But as
these documents have increased in size and
complexity — for example, due to the in-
sertion of more legalistic language that is
designed to mitigate the employer’s risk of
litigation — they have become more dif-
ficult for participants and beneficiaries to
understand.
31
Indeed, a recent analysis of
SPDs from 40 employerhealth plans from
across the United States (varying based on
geography, firm size, and industry sector)
found that, on average, SPDs are generally
written at a first year college reading level
(with readability ranging from 9th grade
reading level to nearly a college gradu-
ate reading level).
32
Moreover, the formats
of existing SPDs are not standardized; for
example, while these documents could be
dozens of pages long, there is no require-
ment that they include an executive sum-
mary. Additionally, group health plans not
covered by ERISA, such as plans spon-
sored by State and local governments, are
not required to comply with such disclo-
sure requirements.
In the individual market, health insur-
ance issuers are subject to various, diverse
State disclosure laws. For example, States
like Massachusetts,
33
New York,
34
Rhode
Island,
35
Utah
36
and Vermont
37
have es-
tablished minimum standards for disclo-
sure of health insurance information but
even within such States, consumer disclo-
sures vary widely with respect to their re-
30
Section 2715 is applicable to both grandfathered and non-grandfathered health plans.See26 CFR 54.9815–1251(d), 29 CFR 2590.715–1251(d), and 45 CFR 147.120(d).
31
ERISA Advisory Council. Report of the Working Group on health and Welfare Benefit Plans’ Communication. November 2005. Available at:http://www.dol.gov/ebsa/publica-
tions/AC_1105c_report.html.
32
“How Readable Are Summary Plan Descriptions For Health Care Plans?” Employee Benefit Research Institute (EBRI) Notes. October 2006, Vol. 27, No. 10.Available at:
http://www.ebri.org/pdf/notespdf/EBRI_Notes_10–20061.pdf.
33
M.G.L.A. 176Q § 5 (2010).
34
NY Ins. Law § 3217–a (2010).
35
Office of the Health Insurance Commissioner Regulation 5: Standards for Readability of Health Insurance Forms, State of Rhode Island and ProvidencePlantations, August 21, 2010.
36
Utah Code § 31A–22–613.5 (2010).
37
Division of Health Care Administration, Rule 10.000: Quality Assurance Standards and Consumer Protections for Managed care Plans, State of Vermont, September 20, 1997.
2011–42 I.R.B.549October 17, 2011

quired content. Additionally, some State
disclosure laws are limited to current en-
rollees, so that individuals shopping for
coverage do not receive information about
health insurance coverage options. Other
State disclosure requirements only extend
to managed care organizations, and not to
other segments of the market.
38
2. Need for Regulatory Action
Congress added new PHS Act section
2715 through the Affordable Care Act to
ensure that plans and issuers provide ben-
efits and coverage information in a more
uniform format that helps consumers to
better understand their coverage and bet-
ter compare coverage options. These pro-
posed regulations are necessary to provide
standards for a summary of benefits and
coverage and a uniform glossary of terms
used in health coverage. This approach
is consistent with Executive Order 13563,
which directs agencies to “identify and
consider regulatory approaches that reduce
burdens and maintain flexibility and free-
dom of choice for the public. These ap-
proaches include [...] disclosure require-
mentsaswellasprovisionofinformation
to the public in a form that is clear and in-
telligible.”
The patchwork of consumer disclosure
requirements makes the process of shop-
ping for coverage an inefficient, difficult,
and time-consuming task. Consumers in-
cur significant searchcosts while trying
to locate reliable cost, coverage and ben-
efit data.
39
Such search costs arise, in part,
due to a lack of uniform information across
the various coverage options, particularly
in the individual market but also in some
large employer plans. Although not di-
rectly comparable, in Medigap, a market
with standardized benefits, the average per
beneficiary search cost was estimated at
$72—farhigherthaninotherinsurance
markets, such as auto insurance.
40
Given this difficulty in obtaining rel-
evant information, consumers may not
always make informed purchase decisions
that best meet the health and financial
needs of themselves, their families, or
their employees. Similarly, workers may
overestimate or underestimate the value of
employer-sponsored health benefits, and
thus their total compensation; and health
insurance issuers and employers may face
less pressure to compete on price, benefits,
andquality,leadingtoinefficiencyinthe
health insurance and labor markets.
Furthermore, research suggests that
many consumers do not understand how
health insurance works. Oftentimes,
health insurance contracts and benefit de-
scriptions are written in technical language
that requires a sophisticated level of health
insurance literacy many people do not
have.
41
One study found that consumers
have particular difficulty understanding
cost sharing and tend to underestimate
their coverage for mental health, substance
abuse and prescription drug benefits,
while overestimating their coverage for
long-term care.
42
3. Summary of Impacts
Table 1 below depicts an accounting
statement summarizing the Departments’
assessment of potential benefits, costs, and
transfers associated with this regulatory
action. The Departments have limited the
period covered by the RIA to 2011–2013.
Estimates are not provided for subsequent
years, because there will be significant
changes in the marketplace in 2014 related
to the offering of new individual and small
group plans through the Affordable In-
surance Exchanges, and the wide-ranging
scope of these changes makes it difficult
to project results for 2014 and beyond.
The direct benefits of these proposed
regulations come from improved informa-
tion, which will enable consumers to better
understand the coverage they have and al-
low consumers choosing coverage to more
easily compare coverage options. As a re-
sult, consumers may make better cover-
age decisions, which more closely match
their preferences with respect to benefit
design, level of financial protection, and
cost. The Departments believe that such
improvements will result in a more effi-
cient, competitive market. These proposed
regulations would also benefit consumers
by reducing the time they spend searching
for and compiling health plan and cover-
age information.
Under the proposed regulations, group
health plans and health insurance issuers
would incur costs to compile and provide
the summary of benefits and coverage
disclosures (that includes coverage ex-
amples (CEs)) and a uniform glossary of
health coverage and medical terms. The
Departments estimate that the annualized
cost may be around $50 million, although
there is uncertainty arising from general
data limitations and the degree to which
economies of scale exist for disclosing this
information. The costs estimates employ
assumptions that we believe fully capture
expected issuer and third-party administra-
tor (TPA) costs, and perhaps overestimate
them if, for example, economies of scale
are achievable.
The Departments anticipate that the
provisions of these proposed regulations
will help consumers make better health
coverage choices and more easily under-
stand their coverage. In accordance with
Executive Orders 12866 and 13563, the
Departments believe that the benefits of
this regulatory action justify the costs.
38
For example, New York requires Health Maintenance Organizations to provideto prospective members, as well as policyholders, information on cost-sharing, including out-of-network
costs, limitations and exclusions on benefits, prior authorization requirements, and other disclosures such as appeal rights. NY Ins. Law § 3217–a (2010). Utah requires each insurer issuing
a health benefit plan to provide all enrollees, prior to enrollment in the health benefit plan, written disclosure of restrictions or limitations on prescription drugs and biologics, coverage limits
under the plan, and any limitation or exclusion of coverage. Utah Code § 31A–22–613.5 (2010). Rhode Island requires all health insurance forms to meetminimum readability standards.
Office of the Health Insurance Commissioner Regulation 5: Standards for Readability of Health Insurance Forms, State of Rhode Island and ProvidencePlantations, August 21, 2010.
39
M. Susan Marquis et al., “Consumer Decision Making in the Individual HealthInsurance Market,” 25 Health Affairs w.226, w.231-w.232 (May 2006). Available at:http://content.healthaf-
fairs.org/content/25/3/w226.full.pdf+html.
40
Nicole Maestas et al., “Price Variation in Markets with Homogenous Goods:The Case of Medigap,” National Bureau of Economic Research (January 2009).
41
For example, as discussed earlier, the average Summary Plan Description iswritten at a first-year college reading level. See Employee Benefit Research Institute, October 2006.
42
D.W. Garnick, A.M. Hendricks, K.E. Thorpe, J.P. Newhouse, K. Donelan and R.J. Blendon. “How well do Americans understand their health coverage?” Health Affairs, 12(3). 1993:204–12.
Available at:http://content.healthaffairs.org/content/12/3/204.full.pdf.
October 17, 20115502011–42 I.R.B.

Table 1. Accounting Table
Benefits:
Qualitative:
Improved information will enable consumers to more easily and efficiently understand and compare coverage, and as a
result, make better choices.
Costs:EstimateYear
Dollar
Discount
Rate
Percent
Period Covered
$51
201172011–2013
Annualized Monetized
($ millions/year)
$47
201132011–2013
4. Benefits
In developing these proposed regu-
lations, the Departments carefully con-
sidered their potential effects, including
costs, benefits, and transfers. Because of
data limitations, the Departments did not
attempt to quantify expected benefits of
these proposed regulations. Nonetheless,
the Departments were able to identify sev-
eral benefits, which are discussed below.
These proposed regulations could gen-
erate significant economic and social
welfare benefits to consumers. Under
these proposed regulations, health insur-
ance issuers and group health plans would
provide clear and consistent information
to consumers. Uniform disclosure is an-
ticipated to benefit individuals shopping
for, or enrolled in, group and individ-
ual health insurance coverage and group
health plans. The direct benefits of these
proposed regulations come from improved
information, which will enable consumers
to better understand the coverage they
have and allow consumers choosing cov-
erage to more easily compare options.
As a result, consumers will make better
coverage decisions, which more closely
match their preferences with respect to
benefit design, level of financial protec-
tion, and cost. The Departments believe
that such improvements will result in a
more efficient, competitive market.
These proposed regulations would also
benefit consumers by reducing the time
they spend searching for and compiling
health plan and coverage information.
As stated above, consumers in the indi-
vidual market, as well as consumers in
some large employer-sponsored plans,
have a number of coverage options and
must make a choice using disclosures
and tools that vary widely in content and
format. A growing body of decision-mak-
ing research suggeststhat the abundance
and complexity of information can over-
whelm consumers and create a significant
non-price barrier to coverage.
43
For ex-
ample, a RAND study of California’s
individual market found that reducing bar-
riers to information about health insurance
products would lead to increases in pur-
chase rates comparable to modest price
subsidies.
44
By ensuring consumers have
access to readily available, concise, and
understandable information about their
coverage options, these proposed regu-
lations could reduce consumers’ cost of
obtaining information and may increase
health insurance purchase rates.
Furthermore, greater transparency in
pricing and benefits information will allow
consumers to make more informed pur-
chasing decisions, resulting in cost-sav-
ings for some value-conscious consumers
who today pay higher premiums because
of imperfect information about benefits.
45
In particular, the use of coverage exam-
ples
46
called for by these proposed regu-
lations would better enable consumers to
understand how key coverage provisions
operate in the context of recognizable
health care situations and more mean-
ingfully compare the level of financial
protection offered by a plan or coverage,
resulting in potential cost-savings.
47,48
The Departments therefore expect that
uniform disclosures under these proposed
regulations would enable consumers
to derive more value from their health
coverage and enhance the ability of plan
sponsors, particularly small businesses,
to purchase products that are appropriate
to both their needs and the health and
financial needs of their employees.
Finally, these proposed regulations are
expected to facilitate consumers’ ability
to understand their coverage. As stated
above, research suggests that consumers
do not understand how coverage works or
the terminology used in health insurance
policies. Consequently, consumers may
face unexpected medical expenses if they
become seriously ill. They may also be-
come confused by a coverage or payment
decision made by their plan or issuer, lead-
ingtoinefficiencyintheoperationofem-
43
Judith H. Hibbard and Ellen Peters, “Supporting Informed Consumer Health Care Decisions: Data Presentation Approaches that Facilitate the Use of Information in Choice,” 24Annu.
Rev. Public Health413, 416 (2003).
44
M. Susan Marquis et al., “Consumer Decision Making in the Individual HealthInsurance Market,” 25 Health Affairs w.226, w.231-w.232 (May 2006). Available at:http://content.healthaf-
fairs.org/content/25/3/w226.full.pdf+html.
45
A study of California’s individual market found that 25 percent of consumers chose products with premiums that were more than 30 percent higher than the median price for an actuarially
equivalent product for a similar person. Melinda Beeuwkes Buntinet al.,“Trends and Variability In Individual Insurance Products,” Health Affairs w3.449, w3.457 (2003), available at
http://content.healthaffairs.org/content/early/2003/09/24/hlthaff.w3.449.citation.
46
The NAIC recommends that the term “coverage examples” be used as reference to the statutory term “coverage facts labels,” and the Departments concur with this recommendation.
47
Shoshanna Sofaeret al., “Helping Medicare Beneficiaries Choose Health Insurance: The Illness Episode Approach,” 30 The Gerontologist 308–315 (1990).
48
Michael Schoenbaumet al., “Health Plan Choice and Information about Out-of-Pocket Costs: An Experimental Analysis,” 38Inquiry35–48 (Spring 2001).
2011–42 I.R.B.551October 17, 2011

ployee benefit plans and health insurance
coverage. By making it easier for con-
sumers to understand the key features of
their coverage, these proposed regulations
would enhance consumers’ ability to use
their coverage. Additionally, the uniform
format will make it easier for consumers
who change jobs or insurance coverage to
see how their new plan or coverage bene-
fits are similar to and different from their
previous coverage.
5. Costs
Section 2715 of the PHS Act and these
proposed regulations direct group health
plans and health insurance issuers to com-
pile and provide a summary of benefits and
coverage (SBC) (that includes coverage
examples (CEs)) and a uniform glossary
of health coverage and medical terms. The
Departments have attempted to quantify
one-time start-up costs as well as mainte-
nance costs. However, there is uncertainty
arising from general data limitations and
the degree to which economies of scale
can be realized to reduce costs for issuers
and TPAs. The costs estimates employ as-
sumptions that we believe more than fully
capture expected issuer and third-party
administrator costs, and perhaps overesti-
mate them if, for example, economies of
scale are achievable. On the basis of such
assumptions, the Departments estimate
that issuers and TPAs will incur approxi-
mately $25 million in costs in 2011, $73
million in costs in 2012, and $58 million
in costs in 2013. These costs and the
methodology used to estimate them are
discussed below, and presented in Tables
2–5 below.
General Assumptions
In order to assess the potential admin-
istrative costs relating to these proposed
regulations, the Departments consulted
with industry experts to gain insight into
the tasks and level of resources required.
Based on these discussions, the Depart-
ments estimate that there will be two
categories of principal costs associated
with the standards in these proposed regu-
lations: one-time start-up costs and main-
tenance costs. The one-time start-up costs
include costs to develop teams to review
the new standards and costs to implement
workflow and process changes, partic-
ularly the development of information
technology (IT) systems interfaces that
would generate SBC disclosures through
data housed in a number of different sys-
tems. The maintenance costs include costs
to maintain and update IT systems in com-
pliance with the proposed standards; to
produce, review, distribute, and update
the SBC disclosures;
49
to produce and
distribute notices of modifications, and to
provide the glossary in paper form upon
request.
With respect to the individual market,
issuers are responsible for generating, re-
viewing, updating, and distributing SBCs.
With respect to employer-sponsored cov-
erage, the Departments assume fully-in-
sured plans will rely on health insurance
issuers, and self-insured plans will rely on
TPAs, to perform these functions. While
plans may prepare the SBC disclosures in-
ternally, the Departments make this simpli-
fying assumption because most plans ap-
pear to rely on issuers and TPAs for the
purpose of administrative duties such as
enrollment and claims processing.
50
Thus,
the Departments use health insurance is-
suers and TPAs as the unit of analysis for
the purposes of estimating administrative
costs.
As discussed in the Medical Loss Ratio
(MLR) interim final rule (75 FR 74918),
the Departments estimate there are about
440 firms offering comprehensive cov-
erage in the individual, small, or large
group markets, and 75 million covered
lives therein.
51
The number of covered
lives includes individuals in the individual
market as well as those in insured group
health plans.
With respect to the self-insured mar-
ket, the Departments estimate there are
77 million individuals in self-insured
ERISA-covered plans and approximately
14 million individuals in self-insured
non-Federal governmental plans.
52
The
Departments note that, according to 2007
Economic Census data, there are 2,243
TPAs providing administrative services
for health and/or welfare funds. However,
there is some uncertainty as to whether
all of those TPAs serve self-insured plans;
many issuers, for example, have subsidiary
lines of business through administrative
services only (ASO) contracts through
which they perform third-party adminis-
trative functions for self-insured plans.
53
Based on conversations with one national
TPA association, the Departments assume
that about one-third of the total number
of TPAs, or about 748 TPAs, are relevant
for purposes of this analysis. However,
given the considerable overlap between
issuers and TPAs, the Departments recog-
nize there may be fewer affected TPAs, so
these estimates should be considered an
upper bound of burden estimates. These
estimates may be adjusted proportionally
in the final regulations based upon addi-
tional information about the number of
TPAs serving self-insured plans.
Because the SBC disclosures are
closely related to disclosures that issuers
and TPAs provide today as a part of their
normal operations (e.g., information on
premiums, covered benefits, and cost shar-
ing), the incremental costs of compiling
and providing such readily available in-
formation in the proposed, standardized
format is estimated to be modest.
54
The
per-issuer or -TPA cost will largely be
determined by its size (based on annual
premium revenues) and current prac-
tices-most importantly, whether the issuer
49
Plans and issuers subject to ERISA or the Code may provide SBCs electronicallyonly if the requirements of the Department of Labor’s electronic disclosure safe harbor at 29 CFR
2520.104b–1 are met. Otherwise, by default, plans and issuers must use paper versions of SBCs.
50
See, for example, the Department of Labor’s March 2011 report to Congress on self-insured health plans, available athttp://www.dol.gov/ebsa/pdf/ACAReportToCongress032811.pdf.
51
The NAIC data actually indicate 442 issuers and 74,830,101 covered lives. But the Departments have limited these values to only two significant figures given general data uncertainty.
For example, the NAIC data do not include issuers regulated by California’sDepartment of Managed Health Care (DMHC) as well as small, single-State issuersthatarenotrequiredbyState
regulators to submit NAIC annual financial statements.
52
U.S. Department of Labor, EBSA calculations using the March 2009 Current Population Survey Annual Social and Economic Supplement and the 2009 Medical Expenditure Panel Survey;
see also interim final rule for internal claims and appeals and external review processes (75 FR 43330, 43345).
53
See, for example, the Department of Labor’s March 2011 report to Congress on self-insured health plans, available athttp://www.dol.gov/ebsa/pdf/ACAReportToCongress032811.pdf.
54
For example, issuers in the individual and small group markets already report some of the SBC information to HHS for display in the plan finder on the HealthCare.gov website. Issuers
have been reporting data to HHS since May 2010 and have refreshed that data on aquarterly basis. These reporting entities have demonstrated that they have the capacity to report information
on plan benefit design. Seehttp://finder.healthcare.gov/. Further, ERISA-covered plans already report some of the SBC information in summary plan descriptions (SPDs).
October 17, 20115522011–42 I.R.B.

or TPA maintains a robust information
technology infrastructure, including a plan
benefits design database. Moreover, with
regard to issuers, administrative costs may
be related to the number of markets in
which it operates (that is, individual, small
group, or large group market); the number
of policies it offers; and the number of
States and licensed entities through which
it offers coverage.
To account for variations among is-
suers, the Departments classify them by
size as small, medium, and large issuers
based on 2009 premium revenue for in-
dividual, small group, and large group
comprehensive coverage.
55
Consistent
with the assumptions that were used in the
MLR interim final rule, small issuers are
defined as those earning up to $50 mil-
lion in annual premium revenue; medium
issuers as those earning between $50 mil-
lion and $1 billion in annual premium
revenue; and large issuers as those earning
more than $1 billion in annual premium
revenue. Based on these assumptions, the
Departments estimate there are 140 small,
230 medium, and 70 large issuers.
To account for variations among TPAs,
the Departments applied the proportions of
small, medium, and large issuers to the es-
timated 750 TPAs. The Departments ac-
knowledge that issuers and TPAs are dif-
ferent and may not have the same size vari-
ation. Nonetheless, given general data lim-
itations, the Departments have adopted this
methodology, and, on its basis, estimate
that there are 240 small, 390 medium, and
120 large TPAs. Table 2 below provides
a synopsis of the number of issuers and
TPAs.
Table 2.Issuer and TPA size classification
SmallMediumLarge
Issuers14023070
TPAs240390120
Staffing Assumptions
Table 6 below summarizes the Depart-
ments’ staffing assumptions, including the
estimated number of hours for each task
for a small, medium, or large issuer/TPA
as well as the percentage of time that dif-
ferent professionals devote to each task.
The following assumptions are based on
the best information available to the De-
partments at this time. Particularly, the
following series of assumptions are based
on conversations with industry experts, the
Departments’ understanding of the regu-
lated community, and previous analysis in
the MLR interim final rule. We welcome
comments that provide better information
or data about any of the following assump-
tions.
IT Systems and Workflow Process
Changes
The Departments estimate that it would
take a large issuer/TPA about 960 hours
to implement IT systems and workflow
process changes, based on discussions
with a large issuer. The Departments as-
sume that these IT systems and workflow
process changes would be implemented
only by IT professionals. Furthermore,
the Departments assume that a medium
issuer/TPA would need about 75% of
large issuer’s/TPA’s time, and a small is-
suer would need about 50% of a large
issuer’s/TPA’s time, to implement IT sys-
tems and workflow process changes.
The Departments estimate that it would
take a large issuer/TPA about 160 hours
to develop teams to analyze the new stan-
dards in relation to their current workflow
processes. The Departments assume such
teams would be comprised of IT profes-
sionals (45%), benefits/sales profession-
als (50%), and attorneys (5%). We scale
down the burden for medium and small is-
suers/TPAs by assuming the same relative
proportion as above (that is, 75 percent and
50 percent, respectively).
The Departments assume that each
issuer/TPA would incur a maintenance
cost to maintain IT systems and address
changes in regulatory requirements. The
Departments assume the maintenance cost
would equal 15% of the total one-time
burden noted above (for example, the
Departmentsassumeitwilltakealarge
issuer 15% of 1120 hours, or 168 hours).
The Departments further assume that the
teams to implement the maintenance tasks
would be comprised of IT professionals
(55%), benefits/salesprofessionals (40%),
and attorneys (5%).
The Departments assume that the
one-time and maintenance costs to imple-
ment IT systems changes and to address
these regulations would be split between
the costs to produce SBCs (50%) and the
costs to produce the CEs (50%).
Production and Review of SBCs and CEs
The Departments estimate that each is-
suer/TPA would need 3 hours to produce,
and 1 hour to review, SBCs (not including
CEs) for all products. The Departments
assume that the 3 hours needed to produce
the SBCs would be equally divided be-
tween IT professionalsand benefits/sales
professionals. The Departments assume
that the 1 hour needed to review the
SBCs would be equally divided between
financial managers for benefits/sales pro-
fessionals and attorneys.
In 2012 and 2013, issuers and TPAs
would produce CEs forthree benefits sce-
narios. The Departments estimate it will
take each issuer/TPA 90 hours to produce,
and 30 hours to review, CEs for all appli-
cable products. The Departments assume
that the 90 hours to produce the CEs would
be equally divided between IT profession-
als and benefits/sales professionals. The
Departments also assume that the 30 hours
to review the CEs would be equally di-
vided between financial managers for ben-
efits/sales professionals and attorneys.
The Departments assume that in 2012
and 2013, respectively, issuers and TPAs
55
The premium revenue data come from the 2009 NAIC financial statements, also known as “Blanks,” where insurers report information about their variouslines of business.
2011–42 I.R.B.553October 17, 2011

would provide, upon request, a paper copy
of the uniform glossary to 2.5% and 5%
of covered individuals who receive a glos-
sary. The Departments assume that indi-
viduals who do not request a paper copy
of the glossary will access it electronically
using the Internet address provided in the
SBC.
For each individual who receives the
SBC or uniform glossary in paper form,
the Departments estimate that printing and
distributing the paper disclosures would
take clerical staff about 1 minute (0.02
hours) in the group markets and about
2 minutes (0.03 hours) in the individual
market. The Departments assume that the
individual market has lower economies
of scale and, thus, increased distribution
costs.
Labor Cost Assumptions
Table 7 below presents the Depart-
ments’ hourly labor cost assumptions
(stated in 2011 dollars) for each staff
category based on BLS data. The De-
partments use mean hourly wage esti-
mates from the Bureau of Labor Statis-
tics’ (BLS) May 2009 National Occupa-
tional Employment and Wage Estimates
(accessed athttp://www.bls.gov/oes/cur-
rent/oes_nat.htm#00–0000)forcom-
puter systems analysts (Occupation Code
15–1051), insurance underwriters (Occu-
pation Code 13–2053), financial managers
(Occupation Code 23–1011), executive
secretaries and administrative assistants
(Occupation Code 43–6011), and attor-
neys (Occupation Code 23–1011) as the
basis for estimating labor costs for 2011
through 2013 and adjust the hourly wage
rate to include a 33% fringe benefit esti-
mate for private sector employees.
56
Distribution Assumptions
The Departments make the following
assumptions regarding the distribution of
the SBC disclosures (including CEs).
57
These assumptions are based on the best
information available to the Departments
at this time. Particularly, the following
series of assumptions are based on con-
versations with industry experts, the De-
partments’ understanding of the regulated
community, and previous analysis in the
MLR interim final rule. The distribution
assumptions are as follows:
•The SBCs would be limited to one per
household for family members located
at the same residence. According to
one large issuer, there are 2.2 covered
lives per family.
•The number of individuals who would
receive an SBC before enrolling in the
plan or coverage equals 20% of the
number of enrollees at any point dur-
ing the course of a year.
58
•In 2013, about 2% of covered individu-
als would receive a notice of modifica-
tions.
59
Further, the burden and cost of
providing such notices would be pro-
portional to the combined burden and
cost of providing the SBCs, including
CEs. In 2012, the first year of im-
plementation, the number of notices of
modifications would be negligible.
•Electronic distribution will account
for 38 percent of all disclosures in the
group market and 70 percent of all dis-
closures in the individual market. The
estimate for the group market is based
on the methodology used to analyze
the cost burden for the DOL claims
procedure regulation (OMB Control
Number 1210–0053).
60
The estimate
for the individual market is based
on statistics set forth by the National
Telecommunications and Information
Administration, which indicate that
30% of Americans do not use the In-
ternet.
61
•SBC disclosures would be distributed
with usual marketing and enrollment
materials, thus, costs to mail the doc-
uments will be negligible. However,
notices of modifications would require
mailing and supply costs as follows:
$0.44 postage cost per mailing and
$0.05 supply cost per mailing.
•Printing costs $0.03 cents per side of
a page. Thus, it would cost $0.18 to
print a complete SBC (which is six
sides of a page based on the length
of the NAIC sample completed SBC)
and $0.12 cents to print the uniform
glossary (which is four sides of a page,
basedonthelengthoftheNAICrec-
ommended uniform glossary). This
cost burden is in addition to the 1
minute or 2 minutes it would take cler-
ical staff to print and distribute the
SBC or glossary.
Cost Estimate
The Tables below present costs and bur-
den hours for issuers and TPAs associated
the proposed disclosure requirements of
PHS Act section 2715. Tables 3–5 con-
tain cost estimates for 2011, 2012, and
2013, derived from the labor hours pre-
sented in Table 3 and the hourly rate es-
timates presented in Table 7, as well as es-
timates of non-labor costs. Labor hour es-
timates were developed for each one-time
and maintenance task associated with an-
alyzing requirements, developing IT sys-
tems, and producing SBCs (that include
CEs).
56
See the Technical Appendix to the MLR interim final rule, available athttp://cciio.cms.gov.
57
Although CEs are an integral component of SBCs, the costs associated with CEs are different from the rest of the SBC, and, thus, are separately calculated within this analysis.
58
Based on this assumption, the Departments estimated that small issuers or TPAs have about 180,000 shoppers in a given year, medium issuers or TPAs have3,700,000 shoppers in a given
year, and large issuers or TPAs have 11,000,000 shoppers in a given year.
59
ERISA section 104(b) requires ERISA-covered plansto furnish participants and beneficiaries with a Summary of Material Modifications (SMM) no later than 210 days after the end of the
plan year in which the material change was adopted. As part of its analysis for the Department of Labor’s SPD/SMM regulations (29 CFR 2520.104b–(3)), the Department estimated that
about 20 percent of health plans would need to distribute SMM in a given year due to plan amendments. However, almost all of these modification occur between plan years — not during a
plan year; therefore, the modifications would berequired to be disclosed in a SBC that is distributed upon renewal of coverage. The Departments, thus, expects that only two percent of plans
will need to issue an updated SBC mid-year, because mid-year changes that would result in an update tothe SBC are very rare. For purposes of simplification, the Departments extend this
assumption to the individual market as well.
60
See the ERISA e-disclosure rule at 29 CFR 2520.104b–1.
61
U.S. Department of Commerce, National Telecommunications and Information Administration, Digital Nation (February 2010), available athttp://www.ntia.doc.gov/reports/2010/NTIA_in-
ternet_use_report_Feb2010.pdf.
October 17, 20115542011–42 I.R.B.

TABLE 3. 2011 Hour Burden, Equivalent Cost, and Cost Burden — 2011 Dollars
Number of Affected
Entities
Hour Burden
Equivalent Cost
SBC Requirements —
Issuers — One Time
44088,000
$4,600,000
SBC Requirements —
TPAs — One-Time
750150,000
$7,800,000
Coverage Example
Requirements —
Issuers — One Time
44088,000
$4,600,000
Coverage Example
Requirements — TPAs — One-Time
750150,000
$7,800,000
Total
240,000
$25,000,000
TABLE 4. 2012 Hour Burden, Equivalent Cost, and Cost Burden — 2011 Dollars
Number of
Affected
Entities
Hour Burden
Equivalent Cost Cost Burden
(non-labor)
Number of
Disclosures
SBC Requirements — Issuers440
540,000
$18,000,000$2,900,000
41,000,000
SBC Requirements — TPAs
750
660,000
$23,000,000$3,700,000
49,000,000
Coverage Example
Requirements — Issuers
440140,000
$7,600,000$1,500,000
41,000,000
Coverage Example
Requirements — TPAs
750
240,000
$13,000,000$1,800,000
49,000,000
Glossary Requests — Issuers44011,000
$330,000$370,000
610,000
Glossary Requests — TPAs
750
13,000
$370,000$470,000
770,000
Subtotal
1,600,000
$62,000,000$11,000,000
91,000,000
Total 2012 Costs
$73,000,000
2011–42 I.R.B.555October 17, 2011

TABLE 5. 2013 Hour Burden, Equivalent Cost, and Cost Burden — 2011 Dollars
Number of
Affected
Entities
Hour Burden
Equivalent Cost Cost Burden
(non-labor)
Number of
Disclosures
SBC Requirements — Issuers440480,000
$15,000,000$2,900,000
41,000,000
SBC Requirements — TPAs
750560,000
$17,000,000$3,700,000
49,000,000
Coverage Example
Requirements — Issuers
44079,000
$4,300,000$1,500,000
41,000,000
Coverage Example
Requirements — TPAs
750
130,000
$7,200,000$1,800,000
49,000,000
Notice of Material
Modifications — Issuers
44010,000
$320,000$330,000
820,000
Notice of Material
Modifications — TPAs
750
12,000
$400,000$400,000
1,000,000
Glossary Requests — Issuers44023,000
$660,000$700,000
1,200,000
Glossary Requests — TPAs
750
26,000
$750,000$900,000
1,500,000
Subtotal
1,300,000
$46,000,000$12,000,000
95,000,000
Total 2013 Costs
$58,000,000
TABLE 6.Estimated Staffing Hours for Small, Medium, and Large Issuers and TPAs
Percent of
Hours by Task
Hours
STAFFING HOUR
ASSUMPTIONS
Small Issuer/
TPA
Medium Issuer/
TPA
Large Issuer/
TPA
IT Development and
Workflow Process
Change
One-Time
Develop Teams
/Analyze
Requirements (IT,
underwriting /
sales)
80120160
IT Professionals
45%
36
54
72
Benefits / Sales
Professionals
50%
406080
Attorneys
5%
468
Implementing
Systems Changes
(IT and workflow)
480720960
IT Professionals100%480720960
October 17, 20115562011–42 I.R.B.

Maintenance
Updating to
Address Changes
in Requirements
84126168
IT Professionals
55%
46.2069.3092.40
Benefits / Sales
Professionals40%33.60
50.40
67.20
Attorneys
5%
4.206.308.40
SBC Requirement
(maintenance)
Producing SBCs333
IT Professionals
50%1.51.51.5
Benefits / Sales
Professionals
50%1.51.51.5
Internal Review of
SBCs
111
Financial
Managers —
50%0.50.50.5
Benefits / Sales
Professionals
Attorneys
50%0.50.50.5
Producing and
Distributing Paper
Version of SBCs
(Group Markets)
Clerical Staff100%0.020.020.02
Producing and
Distributing
Paper Version of
SBCs (Individual
Market)
Clerical Staff100%0.030.030.02
CE Requirement
(maintenance)
Producing 3 CEs909090
IT Professionals
50%454545
Benefits / Sales
Professionals
50%454545
2011–42 I.R.B.557October 17, 2011

Internal Review of
3CEs
303030
Financial
Managers —
Benefits / Sales
Professionals
50%151515
Attorneys
50%151515
TABLE 7. Estimated Loaded Hourly Wages for Staff Categories
Staff CategoryBLS Code
Loaded Hourly
Wage (2011 Dollars)
IT ProfessionalsComputer Systems Analysts
(Occupation Code 15–1051)
$53.26
Financial Professionals — Benefits / SalesInsurance Underwriters
(Occupation Code 13–2053)
$41.94
Financial ManagerFinancial Managers
(Occupation Code 11–3031)
$75.32
AttorneysLawyers
(Occupation Code 23–1011)
$85.44
Clerical StaffExecutive Secretaries and Administrative
Assistants
(Occupation Code 43–6011)
$29.15
6. Regulatory Alternatives
Several provisions in these proposed
regulations involved policy choices. A
first policy choice involved determining
how to minimize the burden of providing
the SBC to individuals and employers
shopping for health insurance coverage.
The Departments recognize it may be
difficult for issuers to provide accurate
information about the terms of coverage
prior to underwriting. Accordingly, the
proposed regulations provide that issuers
offering health insurance coverage in con-
nection with the individual market that
make information for their standard poli-
cies available on the Secretary of HHS’s
Web portal (HealthCare.gov), in com-
pliance with 45 CFR 159.120, will have
satisfied the requirement to provide an
SBC to individuals who request informa-
tion about coverage. The Departments
believe this approach promotes regulatory
efficiency, minimizing the administrative
burden on health insurance issuers without
lessening the protections under PHS Act
section 2715.
A second choice related to whether, in
the case of covered individuals residing at
the same address, one SBC would satisfy
the disclosure requirement with respect to
all such individuals, or whether multiple
SBCs would be required to be provided.
Under the proposed regulations, the De-
partments allow a plan or issuer to provide
a single SBC in circumstances in which a
participant and any beneficiaries (or, in the
individual market, the primary subscriber
and any covered dependents) are known to
reside at the same address.
In the group market, the proposed reg-
ulations would further limit burden by re-
quiring a plan or issuer to provide, at re-
newal, a new SBC for only the benefit
package in which a participant or benefi-
ciary is enrolled. That is, if the plan of-
fers multiple benefits packages, an SBC is
not required for each benefit package of-
fered under the group health plan, which
the Departments believe would otherwise
create an undue burden during open sea-
son. Participants and beneficiaries would
be able to receive upon request an SBC
for any benefits package for which they
are eligible. The Departments believe this
balanced approach addresses the needs of
plans, issuers, and consumers, at renewal.
A third policy choice related to the
interpretation of the PHS Act section
2715(d)(4), which requires notice of any
material modification (as defined for pur-
poses of section 102 of ERISA) in any of
the terms of the plan or coverage that is
not reflected in the most recently provided
SBC. The Departments note that a mate-
rial modification, within the meaning of
section 102 of ERISA and its implement-
ing regulations at 29 CFR 2520.104b–3,
is broadly defined to include any modifi-
cation to the coverage offered under the
plan or policy, that independently, or in
conjunction with other contemporaneous
modifications or changes, would be con-
sidered by the average plan participant to
be an important change in covered benefits
or other terms of coverage under the plan
or policy. The proposed regulations would
interpret this provision as requiring notice
only for a material modification that (1)
affects the information in the SBC; and
(2) occurs other than in connection with
October 17, 20115582011–42 I.R.B.

renewal or reissuance of coverage (that is,
a mid-plan or -policy year change). This
approach is consistent with the language
of section 2715(d)(4) and is more nar-
rowly focused on what we interpret to be
the purpose of that provision.
B. Regulatory Flexibility Act—Department
of Labor and Department of Health and
Human Services
The Regulatory Flexibility Act (RFA)
requires agencies that issue a regulation
to analyze options for regulatory relief of
small businesses if a proposed rule has a
significant impact on a substantial num-
ber of small entities. The RFA generally
defines a ’’small entity’’ as (1) a propri-
etary firm meeting the size standards of the
Small Business Administration (SBA), (2)
a nonprofit organization that is not domi-
nant in its field, or (3) a small government
jurisdiction with a population of less than
50,000. (States and individuals are not in-
cluded in the definition of ’’small entity.’’)
The Departments use as their measure of
significant economic impact on a substan-
tial number of small entities a change in
revenues of more than 3 to 5 percent.
As discussed in the Web Portal interim
final rule (75 FR 24481), HHS examined
the health insurance industry in depth in
the Regulatory Impact Analysis we pre-
pared for the proposed rule on establish-
ment of the Medicare Advantage program
(69 FR 46866, August 3, 2004). In that
analysis, HHS determined that there were
few if any insurance firms underwriting
comprehensive health insurance policies
(in contrast, for example, to travel insur-
ance policies or dental discount policies)
that fell below the size thresholds for
’’small’’ business established by the SBA.
Currently, the SBA size threshold is $7
million in annual receipts for both health
insurers (North American Industry Classi-
fication System, or NAICS, Code 524114)
and TPAs (NAICS Code 524292).
Additionally, as discussed in the Med-
ical Loss Ratio interim final rule (75 FR
74918), HHS used a data set created from
2009 National Association of Insurance
Commissioners (NAIC) Health and Life
Blank annual financial statement data to
develop an updated estimate of the num-
ber of small entities that offer comprehen-
sive major medical coverage in the indi-
vidual and group markets. For purposes of
that analysis, HHS used total Accident and
Health (A&H) earned premiums as a proxy
for annual receipts. HHS estimated that
there were 28 small entities with less than
$7millioninA&Hearnedpremiumsof-
fering individual or group comprehensive
major medical coverage; however, this es-
timate may overstate the actual number
of small health insurance issuers offering
such coverage, since it does not include re-
ceipts from these companies’ other lines of
business. These 28 small entities represent
about 6.4 percent of the approximately 440
health insurers that are accounted for in
this RIA. Based on this calculation, the De-
partments assume that there are an equal
percentage of TPAs that are small entities.
That is, 48 small entities represent about
6.4 percent of the approximately 750 TPAs
that are accounted for in this RIA.
The Departments estimate that issuers
and TPAs earning less than $50 million
in annual premium revenue, including the
76 small entities mentioned above, would
incur costs of approximately $15,000,
$26,000, and $15,000 per issuer/TPA in
2011, 2012 and 2013, respectively. Num-
bers of this magnitude do not approach the
amounts necessary to be considered a “sig-
nificant economic impact” on firms with
revenues in the order of millions of dol-
lars. Additionally, as discussed earlier, the
Departments believe that these estimates
overstate the number of small entities that
will be affected by the requirements in this
proposed regulation, as well as the rela-
tive impact of these requirements on these
entities, because the Departments have
based their analysis on the affected enti-
ties’ total A&H earned premiums (rather
than their total annual receipts). Accord-
ingly, the Departments have determined
and certify that these proposed rules will
not have a significant economic impact on
a substantial number of small entities, and
that a regulatory flexibility analysis is not
required.
C. 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. Therefore,
a regulatory assessment is not required.
It has also been determined that sec-
tion 553(b) of the Administrative Proce-
dure Act (5 U.S.C. chapter 5) does not
apply to these proposed regulations. It
is hereby certified that the collections
of information contained in this notice
of proposed rulemaking will not have a
significant impact on a substantial number
of small entities. Accordingly, a regulatory
flexibility analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is
not required. Section 54.9815–2715 of
the proposed regulations would require
both group health insurance issuers and
group health plans to distribute an SBC
and notice of any material modifications
to the plan that affect the information
required in the SBC. Under these proposed
regulations, if a health insurance issuer
satisfies the obligations to distribute an
SBC and a notice of modifications, those
obligations are satisfied not just for the
issuer but also for the group health plan.
For group health plans maintained by
small entities, it is anticipated that the
health insurance issuer will satisfy these
obligations for both the plan and the
issuer in almost all cases. For this reason,
these information collection requirements
will not impose a significant impact on
a substantial number of small entities.
Pursuant to section 7805(f) of the Code,
this regulation has been submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
D. Unfunded Mandates Reform
Act—Department of Labor and
Department of Health and Human
Services
Section 202 of the Unfunded Man-
dates Reform Act (UMRA) of 1995 states
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 annually
for inflation. In 2011, that threshold level
is approximately $136 million. These pro-
posed regulations include no mandates on
State, local, or Tribal governments. These
proposed regulations include directions
to produce standardized consumer disclo-
sures that will affect private sector firms
(for example, health insurance issuers of-
2011–42 I.R.B.559October 17, 2011

fering coverage in the individual and group
markets, and third-party administrators
providing administrative services to group
health plans), but we tentatively conclude
that these costs will not exceed the $136
million threshold. Thus, we tentatively
conclude that these proposed regulations
do not impose an unfunded mandate on
State, local or Tribal governments or the
private sector. Regardless, consistent with
policy embodied in UMRA, this notice of
proposed rulemaking has been designed
to be the least burdensome alternative for
State, local and Tribal governments, and
the private sector while achieving the ob-
jectives of the Affordable Care Act.
E. Paperwork Reduction Act
1. Department of Labor and Department
of the Treasury
Section 2715 of the PHS Act directs the
Departments, in consultation with the Na-
tional Association of Insurance Commis-
sioners (NAIC) and a working group com-
prised of stakeholders, to “develop stan-
dards for use by a group health plan and
a health insurance issuer in compiling and
providing to applicants, enrollees, and pol-
icyholders and certificate holders a sum-
mary of benefits and coverage explanation
that accurately describes the benefits and
coverage under the applicable plan or cov-
erage.” Plans and issuers are required to
begin providing the disclosure (herein re-
ferred to as a “summary of benefits and
coverage” or SBC) no later than March 23,
2012.
To implement this provision, 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.
In developing these collections of in-
formation, the Departments have incorpo-
rated the documents recommended by the
NAIC, including the SBC template (with
instructions, samples and a guide for cov-
erage examples calculations to be used in
completing the template) and the uniform
glossary. These collection instruments
were developed over a period of several
months and agreed to by the entire NAIC
working group and recommended to the
Departments by the NAIC.
Currently, the Departments are solicit-
ing public comments for 60 days concern-
ing these disclosures. The Departments
have submitted a copy of these interim fi-
nal regulations to OMB in accordance with
44 U.S.C. 3507(d) for review of the infor-
mation collections. The Departments and
OMB are particularly interested in com-
ments that:
•Evaluate whether the collection of in-
formation is necessary for the proper
performance of the functions of the
agency, including whether the infor-
mation will have practical utility;
•Evaluate the accuracy of the agency’s
estimate of the burden of the collection
of information, including the validity
of the methodology and assumptions
used;
•Enhance the quality, utility, and clarity
of the information to be collected; and
•Minimize the burden of the collection
of information on those who are to re-
spond, including through the use of
appropriate automated, electronic, me-
chanical, or othertechnological collec-
tion techniques or other forms of in-
formation technology, for example, by
permitting electronic submission of re-
sponses.
Comments should be sent to the Office
of Information and Regulatory Affairs,
Attention: Desk Officer for the Employee
Benefits Security Administration either
by fax to (202) 395–5806 or by e-mail to
oira_submission@omb.eop.gov.Acopy
of the ICR may be obtained by contact-
ing the PRA addressee: G. Christopher
Cosby, Office of Policy and Research,
U.S. Department of Labor, Employee
Benefits Security Administration, 200
Constitution Avenue, NW, Room N–5718,
Washington, DC 20210. Telephone:
(202) 693–8410; Fax: (202) 219–4745.
These are not toll-free numbers. E-mail:
ebsa.opr@dol.gov. ICRs submitted to
OMB also are available atreginfo.gov
(http://www.reginfo.gov/public/do/PRA-
Main).
The Departments estimate 858 respon-
dents each year from 2011–2013. This es-
timate reflects approximately 220 issuers
offering comprehensive major medical
coverage in the small and large group mar-
kets, and approximately 638 third-party
administrators (TPAs).
62
To account for variation in firm size, the
Departments estimate a weighted burden
on the basis of issuer’s 2009 total earned
premiums for comprehensive major med-
ical coverage.
63
The Departments define
small issuers as those with total earned
premiums less than $50 million; medium
issuers as those with total earned premi-
ums between $50 million and $999 mil-
lion; and large issuers as those with to-
tal earned premiums of $1 billion or more.
Accordingly, the Departments estimate ap-
proximately 70 small, 115 medium, and
35 large issuers. Similarly, the Depart-
ments estimate approximately 204 small,
332 medium, and 102 large TPAs.
2011 Burden Estimate
While the disclosures in these proposed
regulations are not required until March
2012, the Departments estimate a one-time
administrative cost of about $36,000,000
across the industry and a total of about
680,000 burden hours to prepare for the
provisions of these proposed regulations.
This calculation is made assuming issuers
and TPAs will need to implement two
principal tasks: (1) develop teams to an-
alyze current workflow processes against
the new rules and (2) make appropriate
changes to IT systems and processes.
With respect to task (1), the Depart-
ments estimate about 97,000 burden
hours and an equivalent cost of about
$4,800,000. The Departments calculate
these estimates as follows:
64
62
The Departments estimate that there are 440 issuers and 750 TPAs. Because the Department of Labor and the Department of the Treasury share the hour and cost burden for issuers and
TPAs with the Department of Health and Human Services, the burden to produce the SBCs including Coverage Examples for group health plans is calculatedusing half the number of issuers
(220) and 85% of the TPAs (638). While the group health plans could prepare their own SBCs including coverage examples, the Departments assume that SBCs including coverage examples
would be prepared by service providers,i.e.,issuersandTPAs.
63
The premium revenue data come from the 2009 NAIC financial statements, also known as “Blanks,” where insurers report information about their variouslines of business
64
For the purposes of these and other estimates in this section III.E, the Departments again use the assumptions outlined above in section III.A.5.
October 17, 20115602011–42 I.R.B.

Task 1: Analyze current workflow and new rules
Small Issuer / TPAMedium Issuer/TPALarge Issuer/TPA
Hourly
Wage
Rate
HoursEquivalent CostHours Equivalent Cost Hours Equivalent Cost
IT Professionals
$53.26
36
$1,900
54
$2,900
72
$3,800
Benefits/Sales
Professionals
$41.94
40
$1,700
60
$2,500
80
$3,400
Attorneys
$85.44
4
$340
6
$510
8
$680
Total per
issuer/TPA
80
$3,900
120
$5,900
160
$7,900
Total for all
issuers/TPAs
22,000
$1,100,000
53,000
$2,600,000
22,000
$1,100,000
With respect to task (2), the Depart-
ments estimate about 580,000 burden
hours and an equivalent cost of about $31,000,000. The Departments calculate
these estimates as follows:
Task 2: IT Changes
Small Issuer / TPAMedium Issuer/TPALarge Issuer/TPA
Hourly
Wage
Rate
HoursEquivalent CostHours Equivalent Cost Hours Equivalent Cost
IT Professionals
$53.26
480
$26,000
720
$38,000
960
$51,000
Total per
issuer/TPA
480
$26,000
720
$38,000
960
$51,000
Total for all
issuers/TPAs
130,000
$7,100,000
320,000
$17,000,000
130,000
$7,000,000
The Departments assume the total
one-time administrative burden will be
divided equally between 2011 and 2012.
Thus, in 2011, the Departments estimate
a one-time administrative cost of about
$18,000,000 across the industry and about
340,000 hours. The Departments assume
issuers and TPAs will incur no other costs
in 2011 related to the proposed collection
of information.
2012 Burden Estimate
The estimate hour and cost burden for
the collections of information in 2012 are
as follows:
•The Departments estimate that there
will be about 77,000,000 SBC re-
sponses.
•The Departments assume that of
the total number of SBC responses,
38% would be sent electronically in
the small and large group markets.
Accordingly, the Departments estimate
that about 29,000,000 SBCs would be
electronically distributed, and about
48,000,000 SBCs would be distributed
in paper form. The Departments
assume there are no costs associated
with electronic disclosures; there
are costs only with regard to paper
disclosures.
Summary of Benefits and Cover-
age (not including coverage examples)
— The estimated hour burden is about
820,000 hours, and the estimated total cost
is about $30,000,000. The Departments
calculate these estimates as follows:
2011–42 I.R.B.561October 17, 2011

Task 1: Equivalent Costs for Producing SBCs
Small Issuer / TPAMedium Issuer/TPALarge Issuer/TPA
Hourly
Wage
Rate
HoursEquivalent CostHours Equivalent Cost Hours Equivalent Cost
IT Professionals
$53.26
1.5
$80
1.5
$80
1.5
$80
Benefits/Sales
Professionals
$41.94
1.5
$63
1.5
$63
1.5
$63
Financial
Managers
$75.32
0.5
$38
0.5
$38
0.5
$38
Attorneys
$85.44
0.5
$43
0.5
$43
0.5
$43
Total per
issuer/TPA
4
$220
4
$220
4
$220
Total for all
issuers/TPAs
1100
$61,000
1800
$100,000
550
$31,000
Task 2: Equivalent Costs for Distributing SBCs
Hourly Wage
Rate
Hours per SBC Total Number
of SBCs
Total HoursTotal Equivalent
Cost
Clerical Staff
$29.15
0.01748,000,000820,000
$24,000,000
Task 1: Cost Burden for Printing SBCs
Cost per SBCTotal SBCsTotal Cost Burden
Printing Costs
$0.12
48,000,000
$5,800,0000
Task 2: Coverage Examples—The
estimated hour burden is about 100,000
hours, and the estimated total cost is about $8,700,000. The Departments calculate
these estimates as follows:
Task 2: Equivalent Costs for Producing Coverage Examples
Small Issuer / TPAMedium Issuer/TPALarge Issuer/TPA
Hourly
Wage
Rate
HoursEquivalent CostHours Equivalent Cost Hours Equivalent Cost
IT Professionals
$53.26
45
$2,400
45
$2,400
45
$2,400
Benefits/Sales
Professionals
$41.94
45
$1,900
45
$1,900
45
$1,900
Financial
Managers
$75.32
15
$1,100
15
$1,100
15
$1,100
Attorneys
$85.44
15
$1,300
15
$1,300
15
$1,300
Total per
issuer/TPA
120
$6,700
120
$6,700
120
$6,700
Total for all
issuers/TPAs
33,000
$1,900,000
53,000
$3,000,000
16,000
$900,000
October 17, 20115622011–42 I.R.B.

Task 2: Cost Burden for Printing Coverage Examples
Printing Cost Per CETotal CEs PrintedTotal Cost Burden
Printing Costs
$0.06
48,000,000
$2,900,0000
Task 3: Glossary Requests—TheDe-
partments assume that in 2012, issuers and
TPAs will begin responding to glossary
requests to covered individuals, and that
2.5% of covered individuals, who receive
paper SBCs, will request glossaries. The
Departments further estimate that the bur-
den and cost of providing the notices to be
2.5% of the burden and cost of distributing
paper SBCs, plus an additional cost bur-
den of $0.49 for each glossary (including
$0.44 for first-class postage and $0.05 for
supply costs). Accordingly, in 2012, the
Departments estimate a total cost of about
$1,300,000 and 21,000 burden hours asso-
ciated with about 1,200,000 glossary re-
quests.
Task 4: One-Time Administrative
Costs— As mentioned above, the Depart-
ments estimate a one-time administrative
cost of about $36,000,000 across the in-
dustry and a total of about 680,000 burden
hours, and assume this burden will be
equally divided between 2011 and 2012.
Thus, in 2012, the Departments estimate
a one-time administrative cost of about
$18,000,000 across the industry and about
340,000 burden hours.
The total 2012 burden estimate is about
$58,000,000. The total number of burden
hours is about 1,300,000.
2013 Burden Estimate
Task 1: Summary of Benefits and
Coverage (not including coverage exam-
ples)— The number of SBC responses
is assumed to remain constant. Thus, in
2013, the Departments again estimate a to-
tal cost of about $30,000,000 and about
820,000 burden hours for SBCs (not in-
cluding coverage examples).
Task 2: Coverage Examples—The
Departments again estimate a total cost
of about $8,700,000 and 100,000 burden
hours for coverage examples.
Task 3: Notices of Modifications—
The Departments assume that in 2013,
issuers and TPAs would send notices of
modifications to covered individuals, and
that 2% of covered individuals would
receive such notice. The Departments
further estimate that the burden and cost
of providing the notices to be 2% of the
combined burden and cost of the SBCs
including the coverage examples, plus
an additional cost burden for $0.49 for
each paper notice (including $0.44 for
first-class postage and $0.05 for supply
costs). Accordingly, in 2013, the De-
partments estimate a total cost of about
$1,400,000 and 18,000 burden hours as-
sociated with about 1,500,000 notices of
modification.
Task 4: Glossary Requests—TheDe-
partments assume that in 2013, issuers and
TPAs will again respond to glossary re-
quests to covered individuals, and that 5%
of covered individuals, who receive paper
SBCs, will request glossaries. The De-
partments further estimate that the burden
and cost of providing the glossaries to be
5% of the burden and cost of distributing
paper SBCs, plus an additional cost bur-
den for $0.49 for each glossary (including
$0.44 for first-class postage and $0.05 for
supply costs). Accordingly, in 2013, the
Departments estimate a total cost of about
$2,700,000 and 41,000 burden hours asso-
ciated with 2,400,000 glossary requests.
Task 5: Maintenance Administrative
Costs— In 2013, the Departments as-
sume that issuers and TPAs will need to
make updates to address changes in stan-
dards, and, thus, incur 15% of the one-time
administrative burden. Accordingly, the
estimated hour burden is about 100,000
hours, and the estimated total cost is about
$5,400,000. The Departments calculate
these estimates as follows:
Task 2: Equivalent Costs for Producing Coverage Examples
Small Issuer / TPAMedium Issuer/TPALarge Issuer/TPA
Hourly
Wage
Rate
HoursEquivalent CostHours Equivalent Cost Hours Equivalent Cost
IT Profes
sionals
$53.26
46.2
$2,500
69.3
$3,700
92.4
$4,900
Benefits / Sales
Professionals
$41.94
33.6
$1,800
50.4
$2,700
67.2
$3,600
Attorneys
$85.44
4.2
$220
6.3
$340
8.4
$450
Total per
issuer/TPA
84
$4,500
126
$6,700
168
$8,900
Total for all
issuers/TPAs
23,000
$1,200,000
56,000
$3,000,000
23,000
$1,200,000
2011–42 I.R.B.563October 17, 2011

The total 2013 cost estimate is about
$48,000,000.The total number of burden
hours is about 1,100,000 hours.
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 2012–2013 paperwork burden esti-
mates are summarized as follows:
Type of Review:New collection.
Agencies:Employee Benefits Security Administration, Department of Labor; Internal Revenue Service, U.S. Department of
the Treasury.
Title:Affordable Care Act Uniform Explanation of Coverage Documents
OMB Number:XXXX–XXX; XXXX–XXXX.
Affected Public:Business or other for profit; not-for-profit institutions.
Total Respondents:858.
Total Responses:80,000,000.
Frequency of Response:On-going.
Estimated Total Annual Burden Hours:600,000 hours (Employee Benefits SecurityAdministration); 600,000 hours (Internal
Revenue Service).
Estimated Total Annual Burden Cost:$5,100,000 (Employee Benefits Security Administration); $5,100,000 (Internal Revenue
Service).
2. Department of Health and Human
Services
The Department estimates 333 respon-
dents each year from 2011–2013. This es-
timate reflects the approximately 220 is-
suers offering comprehensive major med-
ical coverage in the individual market and
to fully-insured non-federal governmen-
tal plans, and 113 TPAs acting as service
providers for self-insured non-federal gov-
ernmental plans.
65
To account for variation in firm size, the
Department estimates a weighted burden
on the basis of issuer’s 2009 total earned
premiums for comprehensive major med-
ical coverage.
66
The Department defines
small issuers as those with total earned pre-
miums less than $50 million; medium is-
suers as those with total earned premiums
between $50 million and $999 million; and
large issuers as those with total earned pre-
miums of $1 billion or more. Accordingly,
the Department estimates approximately
70 small, 115 medium, and 35 large is-
suers. Similarly, the Department estimates
approximately 36 small, 59 medium, and
18 large TPAs.
2011 Burden Estimate
While the disclosures in these proposed
regulations are not required until March
2012, the Department estimates a one-time
administrative cost of about $14,000,000
across the industry and 270,000 burden
hours to prepare for the provisions of these
proposed regulations. This calculation is
made assuming issuers and TPAs will need
to implement two principal tasks: (1) de-
velop teams to analyze current workflow
processes against the new standards and
(2) make appropriate changes to IT sys-
tems and processes.
With respect to task (1), the Department
estimates about 38,000 burden hours, and
an equivalent cost of about $1,900,000.
The Department calculates these estimates
as follows:
67
65
The Department estimates that there are 440 issuers and 750 TPAs. Because the Department shares thehour and cost burden for issuers with the Department of Labor and the Department
of the Treasury, the burden to produce the SBCs including coverage examples for non-federal governmental plans and issuers in the individual market is calculated using half the number
of issuers (221) and 15% of TPAs (113). While non-federal governmental planscould prepare their own SBCs includingCoverage Examples, the DepartmentassumesthatSBCsincluding
coverage examples would be prepared by service providers,i.e.,issuersandTPAs.
66
The premium revenue data come from the 2009 NAIC financial statements, also known as “Blanks,” where insurers report information about their variouslines of business
67
For the purposes of these and other estimates in this section III.E, the Departments again use the assumptions outlined above in section III.A.5.
October 17, 20115642011–42 I.R.B.

Task 1: Analyze current workflow and new rules
Small Issuer / TPAMedium Issuer/TPALarge Issuer/TPA
Hourly
Wage
Rate
HoursEquivalent CostHours Equivalent Cost Hours Equivalent Cost
IT Professionals
$53.26
36
$1,900
54
$2,900
72
$3,800
Benefits/Sales
Professionals
$41.94
40
$1,700
60
$2,500
80
$3,400
Attorneys
$85.44
4
$340
6
$510
8
$680
Total per
issuer/TPA
80
$3,900
120
$5,900
160
$7,900
Total for all
issuers/TPAs
8,500
$420,000
21,000
$1,000,000
8,500
$450,000
With respect to task (2), the Department
estimates 230,000 burden hours, and an
equivalent cost of out $12,000,000. The Department calculates these estimates as
follows:
Task 2: IT Changes
Small Issuer / TPAMedium Issuer/TPALarge Issuer/TPA
Hourly
Wage
Rate
HoursEquivalent CostHours Equivalent Cost Hours Equivalent Cost
IT Professionals
$53.26
480
$26,000
720
$38,000
960
$51,000
Total per
issuer/TPA
480
$26,000
720
$38,000
960
$51,000
Total for all
issuers/TPAs
51,000
$2,700,000
125,000
$6,700,000
51,000
$2,700,000
The Department assumes the total one-
time administrative burden will be divided
equally between 2011 and 2012. Thus, in
2011, the Department estimates a one-time
administrative cost of about $7,000,000
across the industry and 135,000 burden
hours. The Department assumes issuers
and TPAs will incur no other costs in 2011
related to the proposed collection of infor-
mation.
2012 Burden Estimate
The hour and cost burden for the collec-
tions of information are as follows:
•The Department estimates that there
will be about 13,000,000 SBC re-
sponses in 2012.
•The Department assumes that 38 per-
cent of the SBCs would be sent elec-
tronically in the group market, and
70 percent of the SBCs would be sent
electronically in the individual mar-
ket. Accordingly, the Department
estimates that about 5,900,000 SBCs
would be electronically distributed,
and about 7,400,000 SBCs would be
distributed in paper form. The De-
partment assumes there are no costs
associated with electronic disclosures,
and there are costs only with regard to
paper disclosures.
Task 1: Summary of benefits and
coverage (not including coverage ex-
amples)— The estimated hour burden is
about 170,000 hours, and the estimated
total cost is about $5,900,000. The Depart-
ment calculates these estimates as follows:
2011–42 I.R.B.565October 17, 2011

Task 1: Equivalent Costs for Producing SBCs
Small Issuer / TPAMedium Issuer/TPALarge Issuer/TPA
Hourly
Wage
Rate
HoursEquivalent CostHours Equivalent Cost Hours Equivalent Cost
IT Professionals
$53.26
1.5
$80
1.5
$80
1.5
$80
Benefits/Sales
Professionals
$41.94
1.5
$63
1.5
$63
1.5
$63
Financial
Managers
$75.32
0.5
$38
0.5
$38
0.5
$38
Attorneys
$85.44
0.5
$43
0.5
$43
0.5
$43
Total per
issuer/TPA
4
$220
4
$220
4
$220
Total for all
issuers/TPAs
420
$24,000
700
$39,000
200
$12,000
Task 1: Equivalent Costs for Distributing SBCs
Hourly Wage
Rate
Hours per SBC Total Number
of SBCs
Total HoursTotal Equivalent
Cost
Clerical Staff, Individual
Market
$29.15
0.0332,700,00089,000
$2,600,000
Clerical, Group Market
$29.15
0.0174,700,00080,000
$2,300,000
Total7,400,000170,000
$4,900,000
Task 1: Cost Burden for Printing SBCs
Cost per SBCTotal SBCsTotal Cost Burden
Printing Costs
$0.12
7,400,000
$890,000
Task 2: Coverage Examples—The
estimated hour burden is about 40,000
hours, and the estimated total cost is about $2,700,000. The Department calculates
these estimates as follows:
October 17, 20115662011–42 I.R.B.

Task 2: Equivalent Costs for Producing Coverage Examples
Small Issuer / TPAMedium Issuer/TPALarge Issuer/TPA
Hourly
Wage
Rate
HoursEquivalent CostHours Equivalent Cost Hours Equivalent Cost
IT Professionals
$53.26
45
$2,400
45
$2,400
45
$2,400
Benefits/Sales
Professionals
$41.94
45
$1,900
45
$1,900
45
$1,900
Financial
Managers
$75.32
15
$1,100
15
$1,100
15
$1,100
Attorneys
$85.44
15
$1,300
15
$1,300
15
$1,300
Total per
issuer/TPA
120
$6,700
120
$6,700
120
$6,700
Total for all
issuers/TPAs
13,000
$710,000
21,000
$1,200,000
6,400
$350,000
Task 2: Cost Burden for Printing Coverage Examples
Printing Cost Per CETotal CEs PrintedTotal Cost Burden
Printing Costs
$0.06
7,400,000
$440,000
Task 3: Glossary Requests—The
Department assumes that in 2012, issuers
andTPAswillbeginrespondingtoglos-
sary requests to covered individuals, and
that 2.5% of covered individuals, who re-
ceive paper SBCs, will request glossaries.
The Departments further estimate that the
burden and cost of providing the glossaries
to be 2.5% of the burden and cost of dis-
tributing paper SBCs, plus an additional
cost burden of $0.49 for each glossary (in-
cluding $0.44 for first-class postage and
$0.05 for supply costs). Accordingly, in
2012, the Department estimates a total cost
of about $240,000 and 4,300 burden hours
associated with about 190,000 glossary re-
quests.
Task 4: One-Time Administrative
Costs:As mentioned above, the Depart-
ment estimates a one-time administrative
cost of about$14,000,000 across the indus-
try and a total of 270,000 burden hours,
and assumes this burden will be equally
divided between 2011 and 2012. Thus, in
2012, the Department estimates a one-time
administrative cost of about $7,000,000
across the industry and 135,000 burden
hours.
The total 2012 burden estimate is about
$16,000,000. The total number of burden
hours is 350,000.
2013 Burden Estimate
Task 1: Summary of benefits and
coverage (not including coverage exam-
ples)— The number of SBC responses
is assumed to remain constant. Thus, in
2013, the Department again estimates a to-
tal cost of about $5,900,000 and 170,000
burden hours for SBCs (not including cov-
erage examples).
Task 2: Coverage Examples—In
2013, the Department again estimates a to-
tal cost of about $2,700,000 and 40,320
burden hours for coverage examples.
Task 3: Notices of Modifications—
The Department assumes that in 2013, is-
suers will begin sending notices of modifi-
cations to covered individuals, and that 2%
of covered individuals will receive such
notice. The Department further estimates
that the burden and cost of providing the
notices to be 2% of the combined burden
and cost of the SBCs including the cover-
age examples, plus an additional cost bur-
den for $0.49 for each paper notice (in-
cluding $0.44 for first-class postage and
$0.05 for supply costs). Accordingly, in
2013, the Department estimate a total cost
of about $300,000 and 4,200 burden hours
associated with about 260,000 notices of
modification.
Task 4: Glossary Requests—TheDe-
partment assumes that in 2013, issuers and
TPAs will again respond to glossary re-
quests to covered individuals, and that 5%
of covered individuals, who receive paper
SBCs, will request glossaries. The Depart-
ment further estimates that the burden and
cost of providing the glossaries to be 5%
of the burden and cost of distributing pa-
per SBCs, plus an additional cost burden
of $0.49 for each glossary (including $0.44
for first-class postage and $0.05 for sup-
ply costs). Accordingly, in 2013, the De-
partment estimates a total cost of $470,000
and 8,500 burden hours associated with
370,000 glossary requests.
Task 5: Maintenance Administrative
Costs— In 2013, the Department assume
that issuers and TPAs will need to make
updates to address changes in standards,
and, thus, incur 15% of the one-time ad-
ministrative burden. Accordingly, the
estimated hour burden is about 40,000
hours, and the estimated total cost is about
$2,000,000. The Departments calculate
these estimates as follows:
2011–42 I.R.B.567October 17, 2011

Task 2: Equivalent Costs for Producing Coverage Examples
Small Issuer / TPAMedium Issuer/TPALarge Issuer/TPA
Hourly
Wage
Rate
HoursEquivalent CostHours Equivalent Cost Hours Equivalent Cost
IT Professionals
$53.26
46.2
$2,500
69.3
$3,700
92.4
$4,900
Benefits / Sales
Professionals
$41.94
33.6
$1,800
50.4
$2,700
67.2
$3,600
Attorneys
$85.44
4.2
$220
6.3
$340
8.4
$450
Total per
issuer/TPA
84
$4,500
126
$6,700
168
$8,900
Total for all
issuers/TPAs
8,900
$470,000
22,000
$1,100,000
8,900
$470,000
The total 2013 cost estimate is about
$11,000,000. The total number of burden
hours is about 260,000 hours.
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 2012–2013 paperwork burden esti-
mates are summarized as follows:
Type of Review:New collection.
Agency:Department of Health and Human Services.
Title:Affordable Care Act Uniform Explanation of Coverage Documents
OMB Number:0938–New.
Affected Public:Business; State, Local, or Tribal Governments.
Total Respondents:333.
Total Responses:13,000,000.
Frequency of Response:On-going.
Estimated Total Annual Burden Hours:310,000 hours.
Estimated Total Annual Burden Cost:$1,600,000.
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/PaperworkReduc-
tionActof1995/PRAL/list.asp#TopOfPage
or email your request, including your
address, phone number, OMB number,
and CMS document identifier, toPaper-
work@cms.hhs.gov, or call the Reports
Clearance Office at 410–786–1326.
If you comment on this information col-
lection and recordkeeping requirements,
please do either of the following:
1. Submit your comments electron-
ically as specified in theADDRESSES
section of this proposed rule; or
2. Submit your comments to the Office
of Information and Regulatory Affairs, Of-
fice of Management and Budget,
Attention: CMS Desk Officer, CMS–9982–P
Fax: 202–395–5806; or
E-mail:OIRA_submission@omb.eop.gov
E. Federalism Statement-Department of
Labor and Department of Health and
Human Services
Executive Order 13132 outlines fun-
damental principles of federalism, and
requires the adherence to specific criteria
by Federal agencies in the process of their
formulation and implementation of poli-
cies that have “substantial direct effects”
on the States, the relationship between the
national government and States, or on the
distribution of power and responsibilities
among the various levels of government.
Federal agencies promulgating regulations
that have federalism implications must
consult with State and local officials and
describe the extent of their consultation
October 17, 20115682011–42 I.R.B.

and the nature of the concerns of State
and local officials in the preamble to the
regulation.
In the Departments’ view, these pro-
posed rules have federalism implications,
because it would have direct effects on
the States, the relationship between na-
tional governments and States, or on the
distribution of power and responsibilities
among various levels of government re-
lating to the disclosure of health insurance
coverage information to consumers. Un-
der these proposed rules, all group health
plans and health insurance issuers offering
group or individual health insurance cov-
erage, including self-funded non-federal
governmental plans as defined in section
2791 of the PHS Act, would be required
to follow uniform standards for compil-
ing and providing a summary of benefits
and coverage to consumers. Such Federal
standards developed under PHS Act sec-
tion 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 provided 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 ben-
efit plan, and preserves State laws that
regulate insurance, banking, or securi-
ties. While ERISA prohibits States from
regulating a plan as an insurance or in-
vestment company or bank, the preemp-
tion provisions of section 731 of ERISA
and section 2724 of the PHS Act (im-
plemented in 29 CFR 2590.731(a) and
45 CFR 146.143(a)) apply so that the
HIPAA requirements (including those of
theAffordableCareAct)arenottobe
“construed to supersede any provision of
State law which establishes, implements,
or continues in effect any standard or
requirement solely relating to health
insurance issuers in connection with group
health insurance coverage 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 “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 latitude to impose requirements
on health insurance 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
coverage required to be provided under
PHS Act section 2715(a), because it would
prevent 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 have engaged in efforts to con-
sultwithandworkcooperativelywithaf-
fected States, including consulting with,
and attending conferences of, the National
Association of Insurance Commissioners
and consulting with State insurance offi-
cials on an individual basis. It is expected
that the Departments will act in a similar
fashion in enforcing the Affordable Care
Act, including the provisions of section
2715 of the PHS Act. Throughout the
process of developing these proposed reg-
ulations, to the extent feasible within the
specific preemption provisions of HIPAA
as it applies to the Affordable Care Act, the
Departments have attempted to balance the
States’ interests in regulating health insur-
ance issuers, and Congress’ intent to pro-
vide uniform minimum protections to con-
sumers in every State. By doing so, it is
the Departments’ view that they have com-
plied 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 Administra-
tion and the Centers for Medicare & Med-
icaid Services have complied with the re-
quirements of Executive Order 13132 for
the attached proposed rule in a meaningful
and timely manner.
IV. Statutory Authority
The Department of the Treasury pro-
posed regulations are proposed to be
adopted pursuant to the authority con-
tained in sections 7805 and 9833 of the
Code.
The Department of Labor proposed
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;
Secretary of Labor’s Order 3–2010, 75 FR
55354 (September 10, 2010).
The Department of Health and Hu-
man Services proposed regulations are
proposed to be adopted pursuant to the
authority contained 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.
*****
Sarah Hall Ingram,
Acting Deputy Commissioner for
Services and Enforcement,
Internal Revenue Service.
Signed this
15thday ofAugust,2011.
2011–42 I.R.B.569October 17, 2011

Phyllis C. Borzi,
Assistant Secretary,
Employee Benefits Security Administration,
Department of Labor.
CMS–9982–P
Dated July 28, 2011.
Donald Berwick,
Administrator,
Centers for Medicare &
Medicaid Services.
Dated August 9, 2011.
Kathleen Sebelius,
Secretary,
Department of Health and
Human Services.
CMS–9982–P
BILLING CODE 4120–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Chapter I
Accordingly, 26 CFR Parts 54 and 602
are proposed to be amended as follows:
PART 54—PENSION EXCISE TAXES
Paragraph 1. The authority citation for
Part 54 is amended by adding an entry for
§54.9815–2715 in numerical order to
read in part as follows:
Authority: 26 U.S.C. 7805. ***
Section 54.9815–2715 also issued un-
der 26 U.S.C. 9833.
Par. 2. Section 54.9815–2715 is added
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 ERISA), and a health insur-
ance 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 accordance with the
rules of this section.
(i)By a group health insurance issuer
to a group health plan— (A) A health in-
surance issuer offering group health insur-
ance coverage must provide the SBC to a
group health plan (or its sponsor) upon ap-
plication or request for information about
the health coverage as soon as practicable
following the request, but in no event later
than seven days following the request. If
an SBC is provided upon request for in-
formation about health coverage and the
plan (or its sponsor) subsequently applies
for health coverage, a second SBC must be
provided under this paragraph (a)(1)(i)(A)
only if the information required to be in the
SBC has changed.
(B) If there is any change in the infor-
mation required to be in the SBC before the
coverage is offered, or 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 date of the offer
(or no later than the first day of coverage,
as applicable).
(C) If the issuer renews or reissues the
policy, certificate, or contract of insur-
ance (for example, for a succeeding policy
year), the issuer must provide a new SBC
when the policy, certificate, or contract is
renewed or reissued.
(1) In the case of renewal or reissuance,
if written application is required for re-
newal (in either paper or electronic form),
the SBC must be provided no later than the
date the materials are distributed.
(2) If renewal or reissuance is auto-
matic, the SBC must be provided no later
than 30 days prior to the first day of the
new policy year.
(D) If a group health plan (or its spon-
sor) requests an SBC from a health insur-
ance issuer offering group health insurance
coverage, it must be provided as soon as
practicable, but in no event later than seven
days following the request for an SBC.
(ii)By a group health insurance issuer
and a group health plan to participants
and beneficiaries— (A) A group health
plan (including its administrator, as de-
fined under section 3(16) of ERISA), and
a health insurance issuer offering group
health insurance coverage, must provide
an SBC to a participant 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 beneficiary is eligible.
(B) The SBC must be provided as part
of any written application materials that
are distributed by the plan or issuer for
October 17, 20115702011–42 I.R.B.

enrollment. If the plan does not distrib-
ute written application materials for enroll-
ment, the SBC must be distributed no later
than the first date the participant is eligible
to enroll in coverage for the participant or
any beneficiaries.
(C) If there is any change to the infor-
mation required to be in the SBC 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) The plan or issuer must provide the
SBC to special enrollees (as described in
§ 54.9801–6) within seven days of a re-
quest for enrollment pursuant to a special
enrollment right.
(E) If the plan or issuer requires partic-
ipants or beneficiaries to renew in order to
maintain coverage (for example, for a suc-
ceeding plan year), the plan or issuer must
provide a new SBC when the coverage is
renewed.
(1) If written application is required
for renewal (in either paper or electronic
form), the SBC must be provided no later
than the date the materials are distributed.
(2) If renewal is automatic, the SBC
must be provided no later than 30 days
prior to the first day of coverage under the
new plan year.
(F) A plan or issuer must provide the
SBC to participants or beneficiaries upon
request, as soon as practicable, but in no
event later than seven days following the
request.
(iii)Special rules to prevent unnec-
essary duplication with respect to group
health coverage— (A) An entity required
to provide an SBC under paragraph (a)(1)
of this section with respect to an individ-
ual satisfies that requirement if another
party provides the SBC, but only to the
extent that the SBC is timely and com-
plete in accordance with the other rules
of this section. Therefore, for example,
in the case of a group health plan funded
through an insurance policy, the plan sat-
isfies the requirement to provide an SBC
with respect to an individual if the issuer
provides a timely and complete SBC to
the individual.
(B) If a participant and any beneficia-
ries are known to reside at the same ad-
dress, and a single SBC is provided to
that address, the requirement to provide the
SBC is satisfied with respect to all individ-
uals residing at that address. If a benefi-
ciary’s last known address is different than
the participant’s last known address, a sep-
arate 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 upon renewal
only with respect to the benefit package
in which a participant or beneficiary is
enrolled; SBCs are not required to be pro-
vided automatically with respect to benefit
packages in which the participant or ben-
eficiary are not 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 in accordance with the rules of
paragraph (a)(1)(ii) of this section, which
requires the SBC to be provided as soon
as practicable, but in no event later than
seven days following the request.
(2)Content—(i)In general.TheSBC
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;
(B) A description of the coverage, in-
cluding cost sharing, for each category
of benefits identified by the Secretary in
guidance;
(C) The exceptions, reductions, and
limitations of the coverage;
(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 beginning
on or after January 1, 2014, a statement
about whether the plan or coverage pro-
vides minimum essential coverage as de-
fined under section 5000A(f) and whether
the plan’s or coverage’s share of the total
allowed costs of benefits provided under
the plan or coverage meets applicable re-
quirements;
(H) A statement that the SBC is only
a summary and that the plan document,
policy, or certificate of insurance should
be consulted to determine the governing
contractual provisions of the coverage;
(I) Contact information for questions
and obtaining a copy of the plan docu-
ment or the insurance policy, certificate, or
contract of insurance (such as a telephone
number for customer service and an Inter-
net address for obtaining a copy of the plan
document or the insurance policy, certifi-
cate, or contract of insurance);
(J) 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;
(K) For plans and issuers that use a for-
mulary in providing prescription drug cov-
erage, an Internet address (or similar con-
tact information) for obtaining information
on prescription drug coverage;
(L) An Internet address for obtaining
the uniform glossary, as described in para-
graph (c) of this section; and
(M) Premiums (or in the case of a self-
insured group health plan, cost of cover-
age).
(ii)Coverage examples. The SBC must
include coverage examples that illustrate
benefits provided under the plan or cov-
erage for common benefits scenarios (in-
cluding pregnancy and serious or chronic
medical conditions) that are identified by
the Secretary in accordance with the fol-
lowing:
(A)Number of examples. The Secretary
mayidentifyuptosixcoverageexamples
thatmayberequiredinanSBC.
(B)Benefits scenarios. For purposes of
this section, a benefits scenario is a hy-
pothetical situation, consisting of a sam-
ple treatment plan for a specified medi-
cal condition during a specific period of
time, based on recognized clinical prac-
tice guidelines available through the Na-
tional Guideline Clearinghouse, Agency
for Healthcare Research and Quality. The
Secretary will specify, in guidance, the
types of services, dates of service, applica-
ble billing codes, and allowed charges for
each claim in the benefits scenario.
(C)Demonstration of benefit provided.
To demonstrate benefits provided under
the plan or coverage, a plan or issuer simu-
lates how claims would be processed under
the scenarios provided by the Secretary to
2011–42 I.R.B.571October 17, 2011

generate an estimate of cost sharing a con-
sumer could expect to pay under the ben-
efit package. The demonstration of bene-
fits will take into account any cost sharing,
excluded benefits, and other limitations on
coverage, as described by the Secretary in
guidance.
(3)Appearance. A group health plan
and a health insurance issuer must provide
an SBC as a stand-alone document in the
form authorized by the Secretary and com-
pleted in accordance with the instructions
for completing the SBC that are authorized
by the Secretary in guidance. The SBC
must be presented in a uniform format, use
terminology understandable by the aver-
age plan enrollee, not exceed four dou-
ble-sided pages in length, and not include
print smaller than 12-point font.
(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 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
thedocumentsareavailableontheInternet
and provides the Internet address.
(ii) An SBC provided by a plan or is-
suer to a participant or beneficiary may be
provided in paper form. Alternatively, the
SBC may be provided electronically if the
requirements of 29 CFR 2520.104b–1 are
met.
(5)Language. A group health plan
or health insurance issuer must provide
the SBC in a culturally and linguisti-
cally appropriate manner. For purposes
of this paragraph (a)(5), a plan or issuer
is considered to provide the SBC in a
culturally and linguistically appropriate
manner if the thresholds and standards of
§54.9815–2719T(e) are met as applied to
the SBC.
(b)Notice of modifications. 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 provided
SBC, and that occurs other than in connec-
tion with a renewal or reissuance of cover-
age, the plan or issuer must provide notice
of the modification to enrollees not later
than 60 days prior to the date on which
such modification will become effective.
The notice of modification must be pro-
vided 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 insurance
issuer offering group health insurance cov-
erage, must make available to participants
and beneficiaries the uniform glossary de-
scribed in paragraph (c)(2) of this section
in accordance with the appearance and for-
mat requirements of paragraphs (c)(3) and
(c)(4) of this section.
(2)Health-coverage-related terms and
medical terms. The uniform glossary must
provide uniform definitions, specified by
the Secretary in guidance, for the fol-
lowing health-coverage-related terms and
medical terms:
(i) Allowed amount, appeal, bal-
ance billing, co-insurance, complications
of pregnancy, co-payment, deductible,
durable medical equipment, emergency
medical condition, emergency medical
transportation, emergency room care,
emergency services, excluded services,
grievance, habilitation services, health
insurance, home health care, hospice
services, hospitalization, hospital out-
patient care, in-network co-insurance,
in-network co-payment, medically nec-
essary, network, non-preferred provider,
out-of-network co-insurance, out-of-net-
work co-payment, out-of-pocket limit,
physician services, plan, preauthorization,
preferred provider, premium, prescription
drug coverage, prescription drugs, primary
care physician, primary care provider,
provider, reconstructive surgery, reha-
bilitation services, skilled nursing care,
specialist, 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 exceptions
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 authorized in guidance, ensuring that
the uniform glossary is presented in a uni-
form format and utilizes terminology un-
derstandable by the average plan enrollee.
(4)Form and manner. A plan or is-
suer must make the uniform glossary de-
scribed in this paragraph (c) available upon
request, in either paper or electronic form
(as requested), within seven days of the re-
quest. (Under the rules of paragraph (a) of
this section, the form authorized in guid-
ance for the SBC will disclose to partici-
pants and beneficiaries their rights to re-
quest a copy of the uniform glossary.)
(d)Preemption. With respect to the
standards for providing an SBC required
under paragraph (a) of this section, State
laws that require a health insurance issuer
to provide an SBC that supplies less infor-
mation than required under paragraph (a)
of this section are preempted.
(e)Failure to provide. A group health
plan or health insurance issuer that will-
fully fails to provide information required
under this section to a participant or bene-
ficiary is subject to a fine of not more than
$1,000 for each such failure. A failure with
respect to each participant or beneficiary
constitutes a separate offense for purposes
of this paragraph (e).
(f)Applicability date. This section is
applicable beginning March 23, 2012.See
§ 54.9815–1251T(d), providing that this
section applies to grandfathered health
plans.
PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 3. The authority citation for part
602 continues to read in part as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 4. Section 602.101(b) is amended
by adding the following entry in numerical
order to the table to read as follows:
§602.101 OMB Control numbers.
*****
(b) * * *
October 17, 20115722011–42 I.R.B.

CFR part or section where
Identified and described
Current OMB
control No.
*****
54.9815–2715
...........................................................
1545–
*****
(Filed by the Office of the Federal Register on August 17,
2011, 11:15 a.m., and published in the issue of the Federal
Register for August 22, 2011, 76 F.R. 52446)
Notice of Proposed
Rulemaking and Notice of
Public Hearing
Swap Exclusion for Section
1256 Contracts
REG–111283–11
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains pro-
posed regulations that describe swaps and
similar agreements that fall within the
meaningofsection1256(b)(2)(B)ofthe
Internal Revenue Code (Code). This doc-
ument also contains proposed regulations
that revise the definition of a notional
principal contract under §1.446–3 of the
Income Tax Regulations. This document
provides a notice of public hearing on
these proposed regulations.
DATES: Written or electronic comments
must be received by December 15, 2011.
Outlines of topics to be discussed at the
public hearing scheduled for January 19,
2012, must be received by December 14,
2011.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–111283–11), room
5203, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington
DC 20044. Submissions may be hand
delivered Monday through Friday, be-
tween the hours of 8 a.m. and 4 p.m.
to CC:PA:LPD:PR (REG–111283–11),
Courier’s Desk, Internal Revenue Ser-
vice, 1111 Constitution Avenue, N.W.,
Washington, DC. Alternatively, tax-
payers may submit comments elec-
tronically via the Federal eRulemak-
ing Portal atwww.regulations.gov/
(IRS-REG–111283–11).The public
hearing will be held in the Auditorium,
Internal Revenue Building, 1111
Constitution Avenue, N.W., Washington,
DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed reg-
ulations, K. Scott Brown (202) 622–7454;
concerning submissions of comments,
the hearing, and/or to be placed on the
building access list to attend the hearing,
Richard Hurst, (202) 622–7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR 1) under sections 1256 and
446 of the Code. Section 1256(b)(2)(B)
was added to the Code by section 1601 of
the Dodd-Frank Wall Street Reform and
Consumer Protection Act (Public Law No.
111–203, §1601, 124 Stat. 1376, 2223
(2010)) (the Dodd-Frank Act). Section
1256(b)(2)(B) provides that certain swaps
and similar agreements are not subject
to section 1256 of the Code. These pro-
posed regulations provide guidance on
the category of swaps and similar agree-
ments that are within the scope of section
1256(b)(2)(B). These proposed regula-
tions also revise the definition and scope
of a notional principal contract under
§1.446–3 of the Income Tax Regulations.
Explanation of Provisions
A.Section 1256(b)(2)(B) Language and
Legislative History
Section 1256 provides that contracts
classified as section 1256 contracts are
marked to market and any gain or loss is
generally treated as 60 percent long-term
capital gain or loss and 40 percent
short-term capital gain or loss. Section
1256(b)(1) defines the term “section 1256
contract” as a regulated futures contract,
foreign currency contract, nonequity op-
tion, dealer equity option, and dealer
securities futures contract. With the ex-
ception of a foreign currency contract,
a section 1256 contract must be traded
on or subject to the rules of a “qualified
board or exchange” as defined in section
1256(g)(7).
Section 1601 of the Dodd-Frank Act
added section 1256(b)(2)(B), which ex-
cludes swaps and similar agreements from
the definition of a section 1256 contract.
Section 1256(b)(2)(B) provides that the
term “section 1256 contract” shall not in-
clude—
any interest rate swap, currency swap,
basis swap, interest rate cap, interest
rate floor, commodity swap, equity
swap, equity index swap, credit default
swap, or similar agreement.
Congressenactedsection
1256(b)(2)(B) to resolve uncertainty
under section 1256 for swap contracts
that are traded on regulated exchanges.
The specific uncertainty addressed by the
enactment of section 1256(b)(2)(B) was
described in the Conference Report:
The title contains a provision to address
the recharacterization of income as a
result of increased exchange-trading of
derivatives contracts by clarifying that
section 1256 of the Internal Revenue
Code does not apply to certain deriva-
tives contracts transacted on exchanges.
H.R. Conf. Rep. No. 111–517, at 879
(2010). Section 1256(b)(2)(B) contem-
plates that a swap contract, even if traded
on or subject to the rules of a qualified
board or exchange, will not be a section
1256 contract.
B.Scope of Swaps Excluded by Section
1256(b)(2)(B)
1.Notional principal contracts and credit
default swaps
Congress incorporated into section
1256(b)(2)(B) a list of swaps that paral-
lels the list of swaps included under the
2011–42 I.R.B.573October 17, 2011

definition of a notional principal contract
in §1.446–3(c) with the addition of credit
default swaps. The parallel language sug-
gests that Congress was attempting to
harmonize the category of swaps excluded
under section 1256(b)(2)(B) with swaps
that qualify as notional principal contracts
under §1.446–3(c), rather than with the
contracts defined as “swaps” under section
721 of the Dodd-Frank Act. Accordingly,
§1.1256(b)–1(a) of the proposed regula-
tions provides that a section 1256 contract
does not include a contract that qualifies
as a notional principal contract as defined
in proposed §1.446–3(c). As discussed
herein, the proposed regulations under
§1.446–3 also expressly provide that a
credit default swap is a notional principal
contract.
2.Option on a notional principal contract
Section 1256(b)(2)(B) raises questions
as to whether an option on a notional
principal contract that is traded on a qual-
ified board or exchange would constitute
a “similar agreement” or would instead
be treated as a nonequity option under
section 1256(g)(3). Since an option on a
notional principal contract is closely con-
nected with the underlying contract, the
Treasury Department and the IRS believe
that such an option should be treated as
a similar agreement within the meaning
of section 1256(b)(2)(B). Accordingly,
§1.1256(b)–1(a) of the proposed regula-
tions also provides that a section 1256
contract does not include an option on
any contract that is a notional principal
contract defined in §1.446–3(c) of the pro-
posed regulations.
3.Ordering rule
The proposed regulations provide an
ordering rule for a contract that trades
as a futures contract regulated by the
Commodity Futures Trading Commission
(CFTC), but that also meets the defini-
tion of a notional principal contract. The
Treasury Department and the IRS believe
that such a contract is not a commodity
futures contract of the kind envisioned by
Congress when it enacted section 1256.
Accordingly, §1.1256(b)–1(a) of the pro-
posed regulations provides that section
1256 does not include any contract, or
option on such contract, that is both a sec-
tion 1256 contract and a notional principal
contract as defined in §1.446–3(c) of the
proposed regulations.
C.Definition of Regulated Futures
Contract
Section 1256(g)(1) defines a regulated
futures contract as “a contract (A) with re-
spect to which the amount required to be
deposited and the amount which may be
withdrawn depends on a system of mark-
ingtomarket,and(B)whichistradedon
or subject to the rules of a qualified board
or exchange.” The apparent breadth of sec-
tion 1256(g)(1) has raised questions in the
past as to whether a contract other than a
futures contract can be a regulated futures
contract. The Treasury Department and
the IRS have historically limited the scope
of a regulated futures contract to those fu-
tures contracts that have the characteristics
of traditional futures contracts. Under the
Dodd-Frank Act, a “designated contract
market” may trade both futures contracts
and swap contracts, although there will be
specific reporting rules for swap contracts.
In order to properly limit section 1256 to
futures contracts that trade on designated
contract markets, §1.1256(b)–1(b) of the
proposed regulations provides that a regu-
lated futures contract is a section 1256 con-
tract only if the contract is a futures con-
tract that is not required to be reported as a
swap under the Commodity Exchange Act
(7 U.S.C. 1) (the CEA). The reporting pro-
visions for swaps under the CEA will not
be effective until the CFTC has published
final rules implementing such provisions.
It is anticipated that swap reporting rules
will be in effect before these regulations
are finalized. If, however, these proposed
income tax regulations are finalized before
the swap reporting provisions become ef-
fective, the Treasury Department and the
IRS will evaluate whether the provisions
of §1.1256(b)–1(b) need to be adjusted.
Questions have also been raised as to
whether the requirement that a regulated
futures contract be “traded on or subject
to the rules of” a qualified board or ex-
change includes off-exchange transactions
such as an exchange of a futures contract
for a cash commodity, or an exchange of
a futures contract for a swap, that are car-
ried out subject to the rules of a CFTC
designated contract market. The phrase
“traded on or subject to the rules of” ap-
pears to have originated under the CEA.
Section 4(a) of the CEA provides, in part,
that it is unlawful to engage in any trans-
action in, or in connection with, a com-
modity futures contract unless such trans-
action is conducted on or subject to the
rules of a board of trade which has been
designated as a contract market and such
contract is executed or consummated by or
through a contract market. Section 5(d)
of the CEA, as amended by section 735
of the Dodd-Frank Act, provides that the
rules of a designated contract market may
authorize, forbona fidebusiness purposes,
transfer trades or office trades, or an ex-
change of (i) futures in connection with
a cash commodity transaction, (ii) futures
for cash commodities, or (iii) futures for
swaps. As such, the Treasury Department
and the IRS believe that a futures con-
tract that results from one of these transac-
tions is a regulated futures contract under
section 1256(g)(1) because the contract is
traded subject to the rules of a designated
contract market.
D.Qualified Board or Exchange
Section 1256(g)(7)(C) provides that
a qualified board or exchange includes
any other exchange, board of trade, or
other market which the Secretary deter-
mines has rules adequate to carry out
the purposes of section 1256. Section
1.1256(g)–1(a) of the proposed regula-
tions specifies that such determinations
are only made through published guidance
in theFederal Registeror in the Internal
Revenue Bulletin.
Since section 1256(g)(7) was adopted,
the Treasury Department and the IRS
have issued determinations for six enti-
ties, all of them foreign futures exchanges.
See Rev. Rul. 2010–3, 2010–3 I.R.B.
272 (London International Financial Fu-
tures and Options Exchange), Rev. Rul.
2009–24, 2009–36 I.R.B. 306 (ICE Fu-
tures Canada), Rev. Rul. 2009–4, 2009–5
I.R.B. 408 (Dubai Mercantile Exchange),
Rev. Rul. 2007–26, 2007–1 C.B. 970
(ICE Futures), Rev. Rul. 86–7, 1986–1
C.B. 295 (The Mercantile Division of
the Montreal Exchange), and Rev. Rul.
85–72, 1985–1 C.B. 286 (International Fu-
tures Exchange (Bermuda)). The IRS has
followed a two step process for making
each of the six qualified board or exchange
determinations under section 1256(g)(7).
See §601.601(d)(2)(ii)(b).
October 17, 20115742011–42 I.R.B.

In the first step, the exchange submitted
a private letter ruling to the IRS request-
ing a determination that the exchange is
a qualified board or exchange within the
meaning of section 1256(g)(7)(C). Once
the IRS determined that the exchange had
rules sufficient to carry out the purposes
of section 1256, the Treasury Department
and the IRS published a revenue ruling an-
nouncing that the named exchange was a
qualified board or exchange. The revenue
rulings apply to commodity futures con-
tracts and futures contract options of the
type described under the CEA that are en-
tered into on the named exchange. The
revenue ruling does not apply to contracts
that are entered into on another exchange
that is affiliated with the named exchange.
In determining whether a foreign ex-
change is a qualified board or exchange
under section 1256(g)(7)(C), the Treasury
Department and the IRS have looked to
whether the exchange received a CFTC
“direct access” no-action relief letter per-
mitting the exchangeto make its electronic
trading and matching system available in
the United States, notwithstanding that the
exchange was not designated as a contract
market pursuant to section 5 of the CEA.
Section 738 of the Dodd-Frank Act, how-
ever, provides the CFTC with authority
to adopt rules and regulations that require
registration of a foreign board of trade
that provides United States participants di-
rect access to the foreign board of trade’s
electronic trading system. In formulating
these rules and regulations, the CFTC is di-
rected to consider whether comparable su-
pervision and regulation exists in the for-
eign board of trade’s home country. Pur-
suant to section 738, the CFTC has pro-
posed a registration system to replace the
direct access no-action letter process. Un-
der the proposed registration system, a for-
eign board of trade operating pursuant to
an existing direct access no-action relief
letter must apply through a limited appli-
cation process for an “Order of Registra-
tion” which will replace the foreign board
of trade’s existing direct access no-action
letter. Many of the proposed requirements
for and conditions applied to a foreign
board of trade’s registration will be based
upon those applicable to the foreign board
of trade’s currently granted direct access
no-action relief letter.
The IRS has conditioned a foreign ex-
change’s qualified board or exchange sta-
tus under section 1256(g)(7)(C) on the ex-
change continuing tosatisfy all CFTC con-
ditions necessary to retain its direct access
no-action relief letter. Consequently, if
the CFTC adopts the proposed registration
system, an exchange that has previously
received a qualified board or exchange de-
termination under section 1256(g)(7)(C)
must obtain a CFTC Order of Registration
in order to maintain its qualified board or
exchange status. The IRS will continue to
evaluate the CFTC’s rules in this regard to
determine if any changes to the IRS’s sec-
tion 1256(g)(7)(C) guidance process are
warranted.
E.Definition and Scope of a Notional
Principal Contract
1.Payments under a notional principal
contract
In 1993, the IRS promulgated
§1.446–3(c) which defines a notional prin-
cipal contract as a financial instrument
that provides for the payment of amounts
by one party to another at specified inter-
vals calculated by reference to a specified
index upon a notional principal amount
in exchange for specified consideration
or a promise to pay similar amounts.
Questions have arisen as to the proper in-
terpretation of this requirement. Sections
1.446–3(c)(1)(i) and (ii) of the proposed
regulations expressly provide that a no-
tional principal contract requires one party
to make two or more payments to a coun-
terparty. For this purpose, the fixing of an
amount is treated as a payment, even if the
actual payment reflecting that amount is to
be made at a later date. Thus, for example,
a contract that provides for a settlement
payment referenced to the appreciation
or depreciation on a specified number of
shares of common stock, adjusted for ac-
tual dividends paid during the term of the
contract, is treated as a contract with more
than one payment with respect to that leg
of the contract.
2.Credit default swaps
In Notice 2004–52, 2004–2 C.B.
168, the Treasury Department and the
IRS described four possible character-
izations of a credit default swap. See
§601.601(d)(2)(ii)(b). These proposed
regulations resolve this uncertainty by
adding credit default swaps to the list
of swaps categorized as notional prin-
cipal contracts governed by the rules of
§1.446–3.
3.Weather-related and other
non-financial index based swaps
Since the time that the §1.446–3 reg-
ulations were promulgated, markets have
developed for contracts based on non-fi-
nancial indices. Many of these contracts
are structured as swaps, and payments are
calculated based on indices such as tem-
perature, precipitation, snowfall, or frost.
For example, payments made under a
weather derivative may be based on heat-
ing degree days and cooling degree days.
As a technical matter, a weather-related
swap currently is not a notional principal
contract because a weather index does
not qualify as a “specified index” under
§1.446–3(c)(2) of the current regulations,
which generally require that such index be
a financial index.
The Treasury Department and the IRS
believe that swaps on non-financial indices
should be treated as notional principal con-
tracts. Accordingly,§1.446–3(c)(2)(ii) of
the proposed regulations expands a speci-
fied index to include non-financial indices
that are comprised of any objectively de-
terminable information that is not within
the control of any of the parties to the con-
tract and is not unique to one of the parties’
circumstances, and that cannot be reason-
ably expected to front-load or back-load
payments accruing under the contract.
4.Excluded contracts
Section 1.446–3(c)(1)(ii) currently pro-
vides that a contract described in section
1256(b) and a futures contract are not
notional principal contracts. In order to
remove the circularity that would oth-
erwise exist between excluded contracts
under §1.446–3(c)(1)(ii) and proposed
§1.1256(b)–1, a contract described in sec-
tion 1256(b) and a futures contract have
been deleted from excluded contracts un-
der proposed §1.446–3(c)(1)(iv).
5.Conforming Amendments
The definition of a notional principal
contract in §1.446–3(c) of the proposed
regulations is intended to be the oper-
ative definition for all Federal income
tax purposes, except where a different
2011–42 I.R.B.575October 17, 2011

or more limited definition is specifically
prescribed. Thus, the regulations under
sections 512, 863, 954, and 988 have been
amended to reference the definition of a
notional principal contract in §1.446–3(c).
Proposed Effective/Applicability Date
These regulations are proposed to apply
to contracts entered into on or after the date
the final regulations are published in the
Federal Register.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a significant
regulatory action as defined in Executive
Order 12866. Therefore, a regulatory
assessment is not required. It has also
been determined thatsection 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regu-
lations, and because the regulation does
not impose a collection of information
on small entitles, the Regulatory Flexi-
bility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the
Code, this notice of proposed rulemaking
will be submitted to the Chief Counsel
for Advocacy of the Small Business
Administration for comment on its impact
on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
(a signed original and eight (8) copies)
or electronic comments that are sub-
mitted timely to the IRS. The Treasury
Department and IRS invite comments
on the clarity of the proposed rules and
how they can be made easier to under-
stand. All comments will be available at
www.regulations.govor upon request.
A public hearing has been sched-
uled for January 19, 2012, beginning
at 10 a.m. in the Auditorium, Internal
Revenue Building, 1111 Constitution
Avenue, N.W., Washington, DC. Due
to building security procedures, visitors
must enter at the Constitution Avenue
entrance. In addition,all visitors must
present photo identification to enter the
building. Because of access restrictions,
visitors will not be admitted beyond the
immediateentranceareamorethan30
minutes before the hearing starts. For
information about having your name
placed on the building access list to attend
the hearing, see the “FOR FURTHER
INFORMATION CONTACT” section of
this preamble.
The rules of 26 CFR 601.601(a)(3) ap-
ply to the hearing. Persons who wish to
present oral comments at the hearing must
submit written or electronic comments by
December 15, 2011 and an outline of the
topics to be discussed and the time to be
devoted to each topic (a signed original
and eight (8) copies) by December 14,
2011. A period of 10 minutes will be
allotted to each person for making com-
ments. An agenda showing the scheduling
of the speakers will be prepared after the
deadline for receiving outlines has passed.
Copies of the agenda will be available free
of charge at the hearing.
Drafting Information
The principal author of these proposed
regulations is K. Scott Brown, Office
of the Associate Chief Counsel (Finan-
cial Institutions and Products). However,
other personnel from the IRS and Treasury
Department participated in their develop-
ment.
*****
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is proposed
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 1.446–3 is amended by:
1. Revising the entries for the table of
contents in §1.446–3(a) for paragraphs (c)
and (j).
2. Revising paragraphs (c)(1), (c)(2),
and (c)(3).
3. Adding and reserving paragraph
(c)(5).
4. Adding paragraph (c)(6).
5. Adding two sentences to the end of
paragraph (j).
The revisions and additions read as fol-
lows:
§1.446–3 Notional principal contracts.
*****
(c) Definitions and scope.
(1) Notional principal contract.
(i) In general.
(ii) Payment defined.
(iii) Included contracts.
(A) Special rule for credit default
swaps.
(B) Special rule for nonfunctional cur-
rency notional principal contracts.
(iv) Excluded contracts.
(v) Transactions within section 475.
(vi) Transactions within section 988.
(2) Specified index.
(i) Specified financial index.
(ii) Specified non-financial index.
(3) Notional principal amount.
(4) Special definitions.
(i) Related person and party to the con-
tract.
(ii) Objective financial information.
(iii) Dealer in notional principal con-
tracts.
(5) [Reserved]
(6) Examples.
*****
(j) Effective/applicability date.
*****
(c)Definitions and scope—(1)Notional
principal contract—(i)In general. A no-
tional principal contract is a financial in-
strument that requires one party to make
two or more payments to the counterparty
at specified intervals calculated by refer-
ence to a specified index upon a notional
principal amount in exchange for specified
consideration or a promise to pay similar
amounts. An agreement between a tax-
payer and a qualified business unit (as de-
fined in section 989(a)) of the taxpayer, or
among qualified business units of the same
taxpayer, is not a notional principal con-
tract because a taxpayer cannot enter into
a contract with itself.
(ii)Payment defined. For purposes of
paragraph (c)(1)(i) of this section, a pay-
ment includes an amount that is fixed on
one date and paid or otherwise taken into
account on a later date. Thus, for exam-
ple, a contract that provides for a settle-
ment payment referenced to the appreci-
ation or depreciation on a specified num-
ber of shares of common stock, adjusted
for actual dividends paid during the term
of the contract, is treated as a contract with
October 17, 20115762011–42 I.R.B.

more than one payment with respect to that
leg of the contract. SeeExample 2of this
paragraph (c).
(iii)Included contracts. Notional prin-
cipal contracts governed by this section in-
clude contracts commonly referred to as
interest rate swaps, currency swaps, ba-
sis swaps, interest rate caps, interest rate
floors, commodity swaps, equity swaps,
equity index swaps, credit default swaps,
weather-related swaps, and similar agree-
ments that satisfy the requirements of para-
graph (c)(1)(i). A collar is not itself a no-
tional principal contract, but a cap and a
floor that comprise a collar may be treated
as a single notional principal contract un-
der paragraph (f)(2)(v)(C) of this section.
A contract may be a notional principal con-
tract governed by this section even though
the term of the contract is subject to ter-
mination or extension. Each confirma-
tion under a master agreement to enter
into an agreement covered by this section
is treated as a separate notional principal
contract (or as more than one notional prin-
cipal contract if the confirmation creates
more than one notional principal contract).
Notwithstanding the rule under paragraph
(c)(3) of this section—
(A)Special rule for credit default
swaps. A credit default swap contract
that permits or requires the delivery of
specified debt instruments in satisfaction
of one leg of the contract is a notional
principal contract if itotherwise satisfies
the requirements of paragraph (c)(1)(i) of
this section.
(B)Special rule for nonfunctional cur-
rency notional principal contracts.Ano-
tional principal contract that permits or re-
quires the delivery of specified currency in
satisfaction of one or both legs of the con-
tract but that otherwise qualifies as a non-
functional currency notional principal con-
tract under §1.988–1(a)(2)(iii)(B) is a no-
tional principal contract.
(iv)Excluded contracts. A forward
contract, an option, and a guarantee are not
notional principal contracts. An instru-
ment or contract that constitutes indebted-
ness under general Federal income tax law
is not a notional principal contract. An
option or forward contract that entitles or
obligates a person to enter into a notional
principal contract is not a notional prin-
cipal contract, but payments made under
such an option or forward contract may
be governed by paragraph (g)(3) of this
section.
(v)Transactions within section 475.To
the extent that the rules provided in para-
graphs (e) and (f) of this section are incon-
sistent with the rules that apply to any no-
tional principal contract that is governed
by section 475 and the regulations there-
under, the rules of section 475 and the reg-
ulations thereunder govern.
(vi)Transactions within section 988.
To the extent that the rules provided in
this section are inconsistent with the rules
that apply to any notional principal con-
tract that is also a section 988 transaction
or that is integrated with other prop-
erty or debt pursuant to section 988(d),
the rules of section 988 and the regula-
tions thereunder govern. The rules of
§1.446–3(g)(4) are not considered to be
inconsistent with the rules of section 988.
See §1.988–2(e)(3)(iv).
(2)Specified index.A specified index
may be either a specified financial index
or a specified non-financial index.
(i)Specified financial index.A speci-
fied financial index is—
(A) A fixed rate, price, or amount;
(B) A fixed rate, price, or amount appli-
cable in one or more specified periods fol-
lowed by one or more different fixed rates,
prices, or amounts applicable in other pe-
riods;
(C) An index that is based on objective
financial information (as defined in para-
graph (c)(4)(ii) of this section); and
(D) An interest rate index that is regu-
larly used in normal lending transactions
between a party to the contract and unre-
lated persons.
(ii)Specified non-financial index.A
specified non-financial index is any objec-
tively determinable information that—
(A) Is not within the control of any of
the parties to the contract and is not unique
to one of the parties’ circumstances;
(B) Is not financial information; and
(C) Cannot be reasonably expected to
front-load or back-load payments accruing
under the contract.
(3)Notional principal amount.For
purposes of this section, a notional prin-
cipal amount is any specified amount of
money or property that, when multiplied
by either a specified financial index or a
specified non-financial index, measures
a party’s rights and obligations under the
contract, but is not borrowed, loaned, or
sold between the parties as part of the
contract. The notional principal amount
may vary over the term of the contract,
provided that it is set in advance or varies
based on objective financial information
(as defined in paragraph (c)(4)(ii) of this
section). If a notional principal contract
references a notional principal amount
that varies, or that references a different
notional principal amount for each party,
and a principal purpose for entering into
the contract is to avoid the application of
the rules in this section, the Commissioner
may recharacterize the contract according
to its substance, including by separating
the contract into a series of notional prin-
cipal contracts for purposes of applying
the rules of this section or by treating the
contract, in whole or in part, as a loan.
*****
(5) [Reserved]
(6)Examples. The following examples
illustrate the application of paragraph (c)
of this section.
Example 1. Forward rate agreement.(i) On Jan-
uary 1, 2012, A enters into a contract with unrelated
counterparty B under which on December 31, 2013,
A will pay or receive from B, as the case may be,
an amount determined by subtracting 6% multiplied
by a notional amount of $10 million from 3 month
LIBOR on December 31, 2013 multiplied by
the same notional amount ((3 month LIBOR X
$10,000,000) – (6% X $10,000,000)). The contract
provides for no other payments.
(ii) Because this contract provides for a single
net payment between A and B determined by inter-
est rates in effect on the settlement date of the con-
tract, the contract is not a notional principal contract
defined in §1.446–3(c)(1)(i).
Example 2. Equity total return contract with div-
idend adjustments.(i) On January 1, 2012, A enters
into a contract with unrelated counterparty B under
which on December 31, 2013, A will receive from B
an amount equal to the appreciation (if any) on a no-
tional amount of 1 million shares of XYZ common
stock, plus any dividends or other distributions that
are paid on 1 million shares of XYZ common stock
during the term of the contract. In return, on Decem-
ber 31, 2013 A will pay B an amount equal to any de-
preciation on 1 million shares of XYZ common stock,
and an amount equal to 3 month LIBOR multiplied by
the notional value of 1 million shares of XYZ stock
on January 1, 2012 compounded over the term of the
contract. All payments are netted such that A and B
are only liable for the net payment due under the con-
tract on December 31, 2013.
(ii) Because both legs of this contract provide
for payments that become fixed during the term of
the contract (the dividend payments and the LIBOR-
based payments), each leg of the contract is treated
as providing for more than one payment. In addi-
tion, since the indices referenced in the contract are
specified indices describedin paragraph (c)(2)(i) of
this section, and the 1 million shares of XYZ com-
2011–42 I.R.B.577October 17, 2011

mon stock are a notional principal amount described
in paragraph (c)(3) of this section, the contract is a no-
tional principal contract defined in §1.446–3(c)(1)(i).
*****
(j)Effective/applicability date.***
The rules of paragraph (c) of this sec-
tion apply to notional principal contracts
entered into on or after the date of publica-
tion of a Treasury decision adopting these
rulesasfinalregulationsintheFederal
Register. Section 1.446–3(c) as contained
in 26 CFR part 1 revised April 1, 2011,
continues to apply to notional principal
contracts entered into before the date
of publication of a Treasury decision
adopting these rules as final regulations in
theFederal Register.
Par. 3. Section 1.512(b)–(1) is
amended by:
1. Revising paragraph (a)(1).
2. Adding two sentences to the end of
paragraph (a)(3).
The revision and addition read as fol-
lows:
§1.512(b)–1 Modifications.
*****
(a)Certain Investment Income—(1)In
general.Dividends, interest, payments
with respect to securities loans (as defined
in section 512(a)(5)), annuities, income
from notional principal contracts (as de-
fined in §1.446–3(c)), other substantially
similar income from ordinary and routine
investments to the extent determined by
the Commissioner, and all deductions di-
rectly connected with any of the foregoing
items of income shall be excluded in com-
puting unrelated business taxable income.
*****
(3) * * * The rules of paragraph (a)(1)
of this section apply to notional principal
contracts as defined in§1.446–3(c) that are
enteredintoonorafterthedateofpub-
lication of a Treasury decision adopting
these rules as final regulations in theFed-
eral Register. Section 1.512(b)–1(a)(1) as
containedin26CFRpart1revisedApril1,
2011, continues to apply to notional princi-
pal contracts entered into before the date of
publication of a Treasury decision adopt-
ing these rules as final regulations in the
Federal Register.
*****
Par. 4. Section 1.863–7 is amended by:
1. Revising the third sentence and re-
moving the fourth sentence of paragraph
(a)(1).
2. Adding two sentences to the end of
paragraph (a)(2).
The revision and addition read as fol-
lows:
§1.863–7 Allocation of income
attributable to certain notional principal
contracts under section 863(a).
(a)Scope—(1)Introduction.***No-
tional principal contract income is income
attributable to a notional principal contract
as defined in §1.446–3(c). * * *
(2)***Therulesofthissectionap-
ply to notional principal contracts as de-
fined in §1.446–3(c) that are entered into
on or after the date of publication of a Trea-
sury decision adoptingthese rules as final
regulations in theFederal Register. Sec-
tion 1.863–7 as contained in 26 CFR part
1 revised April 1, 2011, continues to apply
to notional principal contracts entered into
before the date of publication of a Treasury
decision adopting these rules as final reg-
ulations in theFederal Register.
*****
Par. 5. Section 1.954–2 is amended by:
1. Revising paragraph (h)(3)(i).
2. Adding paragraph (h)(3)(iii).
The revision and addition read as fol-
lows:
§1.954–2 Fo
reign personal holding
company in
come.
*****
(3)Notional principal contracts—(i)
In general.Income equivalent to interest
includes income from notional principal
contracts (as defined in §1.446–3(c)) de-
nominated in the functional currency of
the taxpayer (or a qualified business unit of
the taxpayer, as defined in section 989(a)),
the value of which is determined solely
by reference to interest rates or interest
rate indices, to the extent that the income
from such transactions accrues on or after
August 14, 1989.
*****
(iii)Effective/applicability date.The
rules of paragraph (h)(3) of this section ap-
ply to notional principal contracts as de-
fined in §1.446–3(c) that are entered into
on or after the date of publication of a Trea-
sury decision adopting these rules as final
regulations in theFederal Register. Sec-
tion 1.954–2(h)(3) as contained in 26 CFR
part 1 revised April 1, 2011, continues to
apply to notional principal contracts en-
tered into before the date of publication of
a Treasury decision adopting these rules as
final regulations in theFederal Register.
*****
Par. 6. Section 1.988–1 is amended by:
1. Revising paragraph (a)(2)(iii)(B)(2).
2. Adding two sentences to the end of
paragraph (a)(2)(iii)(C).
The revision and addition read as fol-
lows:
§1.988–1 Certain definitions and special
rules.
(a) * * *
(2) * * *
(iii) * * *
(B) * * *
(2) Definition of notional principal con-
tract. Generally, the term “notional princi-
pal contract” means a contract defined in
§1.446–3(c). However, a “notional princi-
pal contract” shall only be considered as
described in paragraph (a)(2)(iii)(B)(1) of
this section if the underlying property to
which the instrumentultimately relates is
money (for example, functional currency),
nonfunctional currency, or property the
value of which is determined by reference
to an interest rate. Thus, the term “notional
principal contract” includes a currency
swap as defined in §1.988–2(e)(2)(ii), but
does not include a swap referenced to a
commodity or equity index.
(C) * * * The rules of this paragraph
(a)(2)(iii) apply to notional principal con-
tracts as defined in §1.446–3(c) that are en-
tered into on or after the date of publication
of a Treasury decision adopting these rules
as final regulations in theFederal Reg-
ister. Section 1.988–1(a)(2)(iii) as con-
tained in 26 CFR part 1 revised April 1,
2011, continues to apply to notional princi-
pal contracts entered into before the date of
publication of a Treasury decision adopt-
ing these rules as final regulations in the
Federal Register.
*****
Par. 7. Section 1.1256(b)–1 is added to
read as follows:
October 17, 20115782011–42 I.R.B.

§1.1256(b)–1 Section 1256 contract
defined.
(a)General rule. Asection1256con-
tract does not include any contract, or
option on such contract, that is a no-
tional principal contract as defined in
§1.446–3(c). A contract that is defined
as both a notional principal contract in
§1.446–3(c) and as a section 1256 con-
tract in section 1256(b)(1) is treated as a
notional principal contract and not as a
section 1256 contract.
(b)Regulated futures contract.Aregu-
lated futures contract is a section 1256 con-
tract only if the contract is a futures con-
tract—
(1) With respect to which the amount
required to be deposited and the amount
which may be withdrawn depends on a
system of marking to market;
(2) That is traded on or subject to the
rules of a qualified board or exchange; and
(3) That is not required to be reported
as a swap under the Commodity Exchange
Act.
(c)Effective/applicability date.The
rules of this section apply to contracts
entered into on or after the date the final
regulations are published in theFederal
Register.
Par. 8. Section 1.1256(g)–1 is added to
read as follows:
§1.1256(g)–1 Qualified board or
exchange defined.
(a)General rule. A qualified board or
exchange means a national securities ex-
change registered with the Securities Ex-
change Commission, a domestic board of
trade designated as a contract market by
the Commodity Futures Trading Commis-
sion, or any other exchange, board of trade,
or other market for which the Secretary
determines in published guidance in the
Federal Registeror in the Internal Rev-
enue Bulletin (see §601.601(d)(2)(ii) of
this chapter) that such market has rules ad-
equate to carry out the purposes of section
1256.
(b)Effective/applicability date.The
rule of this section applies to taxable
years ending on or after the date the final
regulations are published in theFederal
Register.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on
September 15, 2011, 8:45 a.m., and published in the issue of
the Federal Register for September 16, 2011, 76 F.R. 57684)
2011–42 I.R.B.579October 17, 2011

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cases
in litigation, or the outcome of a Service
study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
October 17, 2011i2011–42 I.R.B.

Numerical Finding List
1
Bulletins 2011–27 through 2011–42
Announcements:
2011-37, 2011-27 I.R.B.37
2011-38, 2011-28 I.R.B.45
2011-39, 2011-28 I.R.B.46
2011-40, 2011-29 I.R.B.56
2011-41, 2011-28 I.R.B.47
2011-42, 2011-32 I.R.B.138
2011-43, 2011-35 I.R.B.198
2011-44, 2011-33 I.R.B.164
2011-45, 2011-34 I.R.B.178
2011-46, 2011-34 I.R.B.178
2011-47, 2011-34 I.R.B.178
2011-48, 2011-36 I.R.B.227
2011-49, 2011-36 I.R.B.228
2011-50, 2011-38 I.R.B.409
2011-51, 2011-38 I.R.B.409
2011-52, 2011-38 I.R.B.409
2011-53, 2011-38 I.R.B.409
2011-54, 2011-38 I.R.B.409
2011-55, 2011-38 I.R.B.409
2011-56, 2011-38 I.R.B.409
2011-57, 2011-38 I.R.B.409
2011-58, 2011-38 I.R.B.410
2011-59, 2011-37 I.R.B.335
2011-61, 2011-39 I.R.B.453
2011-62, 2011-40 I.R.B.483
2011-63, 2011-41 I.R.B.503
2011-64, 2011-41 I.R.B.503
Notices:
2011-47, 2011-27 I.R.B.34
2011-50, 2011-27 I.R.B.35
2011-51, 2011-27 I.R.B.36
2011-52, 2011-30 I.R.B.60
2011-53, 2011-32 I.R.B.124
2011-54, 2011-29 I.R.B.53
2011-55, 2011-29 I.R.B.53
2011-56, 2011-29 I.R.B.54
2011-57, 2011-31 I.R.B.84
2011-58, 2011-31 I.R.B.85
2011-59, 2011-31 I.R.B.86
2011-60, 2011-31 I.R.B.90
2011-61, 2011-31 I.R.B.91
2011-62, 2011-32 I.R.B.126
2011-63, 2011-34 I.R.B.172
2011-64, 2011-37 I.R.B.231
2011-65, 2011-34 I.R.B.173
2011-66, 2011-35 I.R.B.184
2011-67, 2011-34 I.R.B.174
2011-68, 2011-36 I.R.B.205
2011-69, 2011-39 I.R.B.445
2011-70, 2011-32 I.R.B.135
Notices— Continued:
2011-71, 2011-37 I.R.B.233
2011-72, 2011-38 I.R.B.407
2011-73, 2011-40 I.R.B.474
2011-74, 2011-41 I.R.B.496
2011-75, 2011-40 I.R.B.475
2011-76, 2011-40 I.R.B.479
2011-78, 2011-41 I.R.B.497
2011-79, 2011-41 I.R.B.498
2011-81, 2011-42 I.R.B.513
2011-82, 2011-42 I.R.B.516
Proposed Regulations:
REG-128224-06, 2011-42 I.R.B.533
REG-137128-08, 2011-28 I.R.B.43
REG-112805-10, 2011-40 I.R.B.482
REG-120391-10, 2011-39 I.R.B.451
REG-125592-10, 2011-32 I.R.B.137
REG-131491-10, 2011-36 I.R.B.208
REG-140038-10, 2011-42 I.R.B.537
REG-101352-11, 2011-30 I.R.B.75
REG-109006-11, 2011-37 I.R.B.334
REG-111283-11, 2011-42 I.R.B.573
REG-118809-11, 2011-33 I.R.B.162
REG-122813-11, 2011-35 I.R.B.197
REG-126519-11, 2011-39 I.R.B.452
Revenue Procedures:
2011-38, 2011-30 I.R.B.66
2011-39, 2011-30 I.R.B.68
2011-40, 2011-37 I.R.B.235
2011-41, 2011-35 I.R.B.188
2011-42, 2011-37 I.R.B.318
2011-43, 2011-37 I.R.B.326
2011-44, 2011-39 I.R.B.446
2011-45, 2011-39 I.R.B.449
2011-46, 2011-42 I.R.B.518
2011-47, 2011-42 I.R.B.520
2011-48, 2011-42 I.R.B.527
Revenue Rulings:
2011-14, 2011-27 I.R.B.31
2011-15, 2011-30 I.R.B.57
2011-16, 2011-32 I.R.B.93
2011-17, 2011-33 I.R.B.160
2011-18, 2011-39 I.R.B.428
2011-19, 2011-36 I.R.B.199
2011-20, 2011-36 I.R.B.202
2011-21, 2011-40 I.R.B.458
2011-22, 2011-41 I.R.B.489
2011-24, 2011-41 I.R.B.485
Treasury Decisions:
9527, 2011-27 I.R.B.1
9528, 2011-28 I.R.B.38
9529, 2011-30 I.R.B.57
Treasury Decisions— Continued:
9530, 2011-31 I.R.B.77
9531, 2011-31 I.R.B.79
9532, 2011-32 I.R.B.95
9533, 2011-33 I.R.B.139
9534, 2011-33 I.R.B.144
9535, 2011-39 I.R.B.415
9536, 2011-39 I.R.B.426
9537, 2011-35 I.R.B.181
9538, 2011-37 I.R.B.229
9539, 2011-35 I.R.B.179
9540, 2011-38 I.R.B.341
9541, 2011-39 I.R.B.438
9542, 2011-39 I.R.B.411
9543, 2011-40 I.R.B.470
9544, 2011-40 I.R.B.458
9545, 2011-41 I.R.B.490
9546, 2011-42 I.R.B.505
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2011–1 through 2011–26 is in Internal Revenue Bulletin
2011–26, dated June 27, 2011.
2011–42 I.R.B.iiOctober 17, 2011

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2011–27 through 2011–42
Announcements:
2007-47
Updated and superseded by
Ann. 2011-59, 2011-37 I.R.B.335
Notices:
2006-101
Amplified and superseded by
Notice 2011-64, 2011-37 I.R.B.231
2007-93
Obsoleted by
T.D. 9545, 2011-41 I.R.B.490
2010-23
Modified and supplemented by
Notice 2011-54, 2011-29 I.R.B.53
2010-81
Amended and supplemented by
Notice 2011-63, 2011-34 I.R.B.172
2010-88
Modified by
Ann. 2011-40, 2011-29 I.R.B.56
Proposed Regulations:
REG-118761-09
Hearing scheduled by
Ann. 2011-38, 2011-28 I.R.B.45
REG-151687-10
Hearing scheduled by
Ann. 2011-48, 2011-36 I.R.B.227
Revenue Procedures:
72-36
Amplified and modified by
Rev. Proc. 2011-42, 2011-37 I.R.B.318
2004-29
Amplified and modified by
Rev. Proc. 2011-42, 2011-37 I.R.B.318
2006-56
Modified and amplified by
Rev. Proc. 2011-46, 2011-42 I.R.B.518
2007-35
Amplified and modified by
Rev. Proc. 2011-42, 2011-37 I.R.B.318
2008-24
Modified and superseded by
Rev. Proc. 2011-38, 2011-30 I.R.B.66
2008-32
Superseded by
Rev. Proc. 2011-39, 2011-30 I.R.B.68
Revenue Procedures— Continued:
2010-39
Amplified, modified, and superseded by
Rev. Proc. 2011-47, 2011-42 I.R.B.520
2011-4
Modified by
Rev. Proc. 2011-44, 2011-39 I.R.B.446
2011-14
Modified by
Rev. Proc. 2011-43, 2011-37 I.R.B.326
2011-35
Amplified and modified by
Rev. Proc. 2011-42, 2011-37 I.R.B.318
Revenue Rulings:
58-225
Obsoleted by
Rev. Rul. 2011-15, 2011-30 I.R.B.57
Treasury Decisions:
9527
Corrected by
Ann. 2011-49, 2011-36 I.R.B.228
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2011–1 through 2011–26 is in Internal Revenue Bulletin 2011–26, dated June 27, 2011.
October 17, 2011iii2011–42 I.R.B.

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