Internal Revenue Bulletin 2013-5 (PDF rendition): IRS Revenue Procedures

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Bulletin No. 201
3-5
January 28, 2013
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Proc. 2013–15, page 444.
This procedure sets forth the 2013 cost-of-living adjustments
to certain items due to inflation, and certain items specified
in the American Taxpayer Relief Act of 2012, Pub. L. No.
112–240 (ATRA), that are not adjusted for inflation in 2013.
This procedure also modifies and supersedes Rev. Proc.
2011–52, 2011–45 I.R.B. 701, to reflect a statutory amend-
ment to section 132(f)(2) made by ATRA effective for 2012.
EMPLOYEE PLANS
REG–122707–12, page 450.
Proposed regulations under section 9815 of the Code
proposes amendments to regulations, consistent with the
Affordable Care Act, concerning nondiscriminatory wellness
programs for group health coverage.
ESTATE TAX
Rev. Proc. 2013–15, page 444.
This procedure sets forth the 2013 cost-of-living adjustments
to certain items due to inflation, and certain items specified
in the American Taxpayer Relief Act of 2012, Pub. L. No.
112–240 (ATRA), that are not adjusted for inflation in 2013.
This procedure also modifies and supersedes Rev. Proc.
2011–52, 2011–45 I.R.B. 701, to reflect a statutory amend-
ment to section 132(f)(2) made by ATRA effective for 2012.
Fi
nding Lists begin on page ii.
Index for January begins on page iv.

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.
January 28, 20132013–5 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 1.—Ta
xImposed
The Service pr
ovides inflation adjustments to the
tax rate table
s for individuals, trusts, and estates for
taxable years
beginning in 2013. See Rev. Proc.
2013-15, page
444.
Section 23.—Adoption
Expense
The Service provide inflation adjustment to the
adoption credit allowed for the adoption of a child for
taxable years beginning in 2013. The Service also
provides inflation adjustments to the value used in
calculating the modified adjusted gross income lim-
itations used to determine the amount of adoption
credit that is allowed in taxable years beginning in
2013. See Rev. Proc. 2013-15, page 444.
Section 24.—Child Tax
Credit
The Service provides an inflation adjustment for
the value used in determining the amount of the credit
that may be refundable for taxable years beginning in
2013. See Rev. Proc. 2013-15, page 444.
Section 25A.—Hope and
Lifetime Learning Credits
The Service provides an inflation adjustment for
the amount of qualified tuition and related expenses
that are taken into account in determining the amount
of the Hope Scholarship Credit for taxable years be-
ginning in 2013. Also for taxable years beginning in
2013, the Service provides an inflation adjustment for
the amount of a taxpayers’ modified adjusted gross
income that is taken into account in determining the
reduction in the amount of the Hope Scholarship and
Lifetime Learning Credits otherwise available. See
Rev. Proc. 2013-15, page 444.
Section 32.—Earned
Income
The Service provides inflation adjustments to the
limitations on the earned income credit for taxable
years beginni
ng in 2013. See Rev. Proc. 2013-15,
page 444.
Section 55.—Alternative
Minimum Tax Imposed
The Service provides an inflation adjustment for
the exemption amounts for the alternative minimum
tax for taxable years beginning in 2013. Also for tax-
able years beginning in 2013, the Service provides
an inflation adjustment for the amounts used to deter-
mine the phaseout of the exemption amounts for the
alternative minimum tax. See Rev. Proc. 2013-15,
page 444.
Section 63.—Taxable
Income Defined
The Service provides inflation adjustments to the
standard deduction amounts (including the limitation
in the case of certain dependents, and the additional
standard deduction for the aged or blind) for taxable
years beginning in 2013. See Rev. Proc. 2013-15,
page 444.
Section 68.—Overall
Limitation on Itemized
Deductions
The Service provides overall limitations on item-
ized deductions for individuals for taxable years be-
ginning in 2013. See Rev. Proc. 2013-15, page 444.
Section 132.—Certain
Fringe Benefits
The Service provides inflation adjustments to the
limitations on the exclusion of income for a qualified
transportation fringe benefit for taxable years begin-
ning in 2013. See Rev. Proc. 2013-15, page 444.
Section 137.—Adoption
Assistance Programs
The Service provides inflation adjustments to the
maximum amount that can be excluded from an em-
ployee’s gros
s income in connection with a qualified
adoption assi
stance program for taxable years begin-
ning in 2013. T
he Service also provides inflation ad-
justments to t
he amount used to calculate the modi-
fied adjuste
d gross income limitations used to deter-
mine the amou
nt that can be excluded from an em-
ployee’s gro
ss income for taxableyears beginning in
2013. See Rev
. Proc. 2013-15, page 444.
Section 151.—Allowance
of Deductions for Personal
Exemptions
The Service provides an inflation adjustment to
the personal exemption amount for taxable years be-
ginning in 2013. Also, for taxable years beginning
in 2013, the Service provides adjusted gross income
amounts at which the personal exemptions phase out.
See Rev. Proc. 2013-15, page 444.
Section 221.—Interest on
Education Loans
The Service provides inflation adjustments to the
income limitations used to determine the allowable
deduction for interest on education loans for taxable
years beginning in 2013. See Rev. Proc. 2013-15,
page 444.
Section 20
10.—Unified
Credit Aga
inst Estate Tax
The Servic
e provides an inflation adjustment to the
amount of
the unified credit against estate tax for the
estate of
a decedent dying in calendar year 2013. See
Rev. Proc
. 2013-15, page 444.
2013–5 I.R.B.443January 28, 2013

Part III. Administrative, Procedural, and Miscellaneous
26 CFR 601.602: Tax forms and instructions.
(Also Part I, §§ 1, 23, 24, 25A, 32, 55, 63, 68, 132,
137, 151, 221, 2010.)
Rev. Proc. 2013–15
Table of Contents
SECTION 1. PURPOSE
SECTION 2. 2013 ADJUSTED ITEMS
Code Section
.01 Tax Rate Tables1(a)-(e)
.02 Adoption Credit23
.03 Child Tax Credit24
.04 Hope Scholarship and Lifetime Learning Credits
25A
.05 Earned Income Credit
32
.06 Exemption Amounts for Alternative Minimum Tax
55
.07 Standard Deduction63
.08 Overall Limitation on Itemized Deductions68
.09 Qualified Transportation Fringe Benefit132(f)
.10 Adoption Assistance Programs137
.11 Personal Exemption
151
.12 Interest on Education Loans221
.13 Unified Credit Against Estate Tax2010
SECTION 3. MODIFICATION OF REV. PROC. 2011–52
SECTION 4. EFFECT ON OTHER REVENUE PROCEDURES
SECTION 5. EFFECTIVE DATE
SECTION 6. DRAFTING INFORMATION
SECTION 1. PURPOSE
This revenue procedure sets forth infla-
tion adjusted items for 2013. It also in-
cludes some items whose values for 2013
are specified in the American Taxpayer
Relief Act of 2012, Pub. L. No. 112–240,
126 Stat. 2313 (ATRA): the beginning of
the new 39.6 percent income brackets; the
beginning income levels for the limitation
on certain itemized deductions; and the be-
ginning income levels for the phaseout of
personal exemptions. This revenue pro-
cedure also modifies and supersedes sec-
tion 3.12 of Rev. Proc. 2011–52, 2011–45
I.R.B. 701 to reflect a statutory amendment
to § 132(f)(2) made by ATRA. Other infla-
tion adjusted items for 2013 are set forth in
Rev. Proc. 2012–41, 2012–45 I.R.B. 539
(dated November 5, 2012).
SECTION2.2013ADJUSTEDITEMS
.01Tax Rate Tables. For taxable years
beginning in 2013, the tax rate tables under
§1areasfollows:
January 28, 20134442013–5 I.R.B.

TABLE 1 — Section 1(a) — Married Individuals Filing Joint Returns and Surviving Spouses
If Taxable Income Is:The Tax Is:
Not over $17,850
10% of the taxable income
Over $17,850 but not over $72,500$1,785 plus 15% of the excess over $17,850
Over $72,500 but not over $146,400$9,982.50 plus 25% of the excess over $72,500
Over $146,400 but not over $223,050$28,457.50 plus 28% of the excess over $146,400
Over $223,050 but not over $398,350$49,919.50 plus 33% of the excess over $223,050
Over $398,350 but not over $450,000$107,768.50 plus 35% of the excess over $398,350
Over $450,000$125,846 plus 39.6% of the excess over $450,000
TAB
LE 2 — Section 1(b) — Heads of Households
If Ta
xable Income Is:
The T
ax Is:
Not over $12,750
10% o
f the taxable income
Over $12,750 but not over $48,600$1,275 plus 15% of the excess over $12,750
Ove
r $48,600 but not over $125,450
$6,
652.50 plus 25% of the excess over $48,600
Over $125,450 but not over $203,150$25,865 plus 28% of the excess over $125,450
Over $203,150 but not over $398,350$47,621 plus 33% of the excess over $203,150
Ov
er $398,350 but not over $425,000
$1
12,037 plus 35% of the excess over $398,350
Over $425,000$121,364.50 plus 39.6% of the excess over $425,000
TABLE 3 — Section 1(c) — Unmarried Individuals (other than Surviving Spouses and Heads of Households)
If Taxable Income Is:The Tax Is:
Not over $8,925
10% of the taxable income
Over $8,925 but not over $36,250$892.50 plus 15% of the excess over $8,925
Over $36,250 but not over $87,850$4,991.25 plus 25% of the excess over $36,250
Over $87,850 but not over $183,250$17,891.25 plus 28% of the excess over $87,850
Over $183,250 but not over $398,350$44,603.25 plus 33% of the excess over $183,250
Over $398,350 but not over $400,000$115,586.25 plus 35% of the excess over $398,350
Over $400,000$116,163.75 plus 39.6% of the excess over $400,000
TABLE 4 — Section 1(d) — Married Individuals Filing Separate Returns
If Taxable Income Is:The Tax Is:
Not over $8,925
10% of the taxable income
Over $8,925 but not over $36,250$892.50 plus 15% of the excess over $8,925
Over $36,250 but not over $73,200$4,991.25 plus 25% of the excess over $36,250
Over $73,200 but not over $111,525$14,228.75 plus 28% of the excess over $73,200
Over $111,525 but not over $199,175$24,959.75 plus 33% of the excess over $111,525
Over $199,175 but not over $225,000$53,884.25 plus 35% of the excess over $199,175
Over $225,000$62,923 plus 39.6% of the excess over $225,000
2013–5 I.R.B.445January 28, 2013

TABLE 5 — Section 1(e) — Estates and Trusts
If Taxable Income Is:The Tax Is:
Not over $2,450
15% of the taxable income
Over $2,450 but not over $5,700$367.50 plus 25% of the excess over $2,450
Over $5,700 but not over $8,750$1,180 plus 28% of the excess over $5,700
Over $8,750 but not over $11,950$2,034 plus 33% of the excess over $8,750
Over $11,950$3,090 plus 39.6% of the excess over $11,950
.02Adoption Credit. For taxable years
beginning in 2013, under § 23(a)(3) the
credit allowed for an adoption of a child
with special needs is $12,970. For taxable
years beginning in 2013, under § 23(b)(1)
the maximum credit allowed for other
adoptions is the amount of qualified adop-
tion expenses up to $12,970. The available
adoption credit begins to phase out under
§ 23(b)(2)(A) for taxpayers with modi-
fied adjusted gross income in excess of
$194,580 and is completely phased out for
taxpayers with modified adjusted gross
income of $234,580 or more. (See section
2.10 of this revenue procedure for the ad-
justed items relating to adoption assistance
programs.)
.03Child Tax Credit. For taxable
years beginning in 2013, the value used in
§ 24(d)(1)(B)(i) to determine the amount
of credit under § 24 that may be refundable
is $3,000.
.04Hope Scholarship, American Op-
portunity, and Lifetime Learning Credits.
(1) For taxable years beginning in
2013, the Hope Scholarship Credit under
§ 25A(b)(1), as increased under § 25A(i)
(the American Opportunity Tax Credit), is
an amount equal to 100 percent of qual-
ified tuition and related expenses not in
excess of $2,000 plus 25 percent of those
expenses in excess of $2,000, but not in
excess of $4,000. Accordingly, the maxi-
mum Hope Scholarship Credit allowable
under § 25A(b)(1) for taxable years begin-
ning in 2013 is $2,500.
(2) For taxable years beginning in 2013,
a taxpayer’s modified adjusted gross in-
come in excess of $80,000 ($160,000 for a
joint return) is used to determine the reduc-
tion under § 25A(d)(2) in the amount of the
Hope Scholarship Credit otherwise allow-
able under § 25A(a)(1). For taxable years
beginning in 2013, a taxpayer’s modified
adjusted gross income in excess of $53,000
($107,000 for a joint return) is used to de-
termine the reduction under § 25A(d)(2) in
the amount of the Lifetime Learning Credit
otherwise allowable under § 25A(a)(2).
.05Earned Income Credit.
(1)In general. For taxable years be-
ginning in 2013, the following amounts
are used to determine the earned income
credit under § 32(b). The “earned in-
come amount” is the amount of earned
income at or above which the maximum
amount of the earned income credit is al-
lowed. The “threshold phaseout amount”
is the amount of adjusted gross income
(or, if greater, earned income) above which
the maximum amount of the credit begins
to phase out. The “completed phaseout
amount” is the amount of adjusted gross
income (or, if greater, earned income) at
or above which no credit is allowed. The
threshold phaseout amounts and the com-
pleted phaseout amounts shown in the ta-
ble below for married taxpayers filing a
joint return include the increase provided
in § 32(b)(3)(B)(i), as adjusted for infla-
tion for taxable years beginning in 2013.
January 28, 20134462013–5 I.R.B.

Number of Qualifying Children
ItemOneTwoThree or MoreNone
Earned Income Amount
$ 9,560$13,430$13,430$ 6,370
Maximum Amount of
Credit
$ 3,250$ 5,372$ 6,044$ 487
Threshold Phaseout
Amount (Single,
Surviving Spouse,
or Head of Household)
$17,530$17,530$17,530$ 7,970
Completed Phaseout
Amount (Single,
Surviving Spouse,
or Head of Household)
$37,870$43,038$46,227$14,340
Threshold Phaseout
Amount (Married Filing
Jointly)
$22,870$22,870$22,870$13,310
Completed Phaseout
Amount (Married Filing
Jointly)
$43,210$48,378$51,567$19,680
The instructions for the Form 1040 series
provide tables showing the amount of the
earned income credit for each type of tax-
payer.
(2)Excessive Investment Income.For
taxable years beginning in 2013, the
earned income tax credit is not allowed
under § 32(i) if the aggregate amount
of certain investment income exceeds
$3,300.
.06Exemption Amounts for Alternative
Minimum Tax. For taxable years begin-
ning in 2013, the exemption amounts un-
der § 55(d)(1) are:
Joint Returns or Surviving Spouses
$80,800
Unmarried Individuals (other than Surviving Spous
es)
$51,900
Married Individuals Filing Separate Returns
$40,400
Estates and Trusts
$23,100
For taxable years beginning in 2013, un-
der § 55(b)(1), the excess taxable income
above which the 28 percent tax rate applies
is:
Married Individuals Filing Separate Returns
$ 89,750
Joint Returns, Unmarried Individuals (other than surviving spouses), and Estates and Trusts
$179,500
For taxable years beginning in 2013,
the amounts used under § 55(d)(3) to de-
termine the phaseout of the exemption
amounts are:
Joint Returns or a Surviving Spouses
$153,900
Unmarried Individuals (other than Surviving Spouses)
$115,400
Married Individuals Filing Separate Returns and Estates and Trusts
$ 76,950
.07Standard Deduction.(1)In general. For taxable years be-
ginning in 2013, the standard deduction
amounts under § 63(c)(2) are as follows:
2013–5 I.R.B.447January 28, 2013

Filing StatusStandard Deduction
Married Individuals Filing Joint Returns and Surviving Spouses (§ 1(a))
$12,200
Heads of Households (§ 1(b))
$8,950
Unmarried Individuals (other than Surviving Spouses and Heads of Households) (§ 1(c))
$6,100
Married Individuals Filing Separate Returns (§ 1(d))
$6,100
(2)Dependent. For taxable years be-
ginning in 2013, the standard deduction
amount under § 63(c)(5) for an individual
who may be claimed as a dependent by an-
other taxpayer cannot exceed the greater of
(1) $1,000, or (2) the sum of $350 and the
individual’s earned income.
(3)Aged or blind. For taxable years
beginning in 2013, the additional standard
deduction amount under § 63(f) for the
aged or the blind is $1,200. The additional
standard deduction amount is increased to
$1,500 if the individual is also unmarried
and not a surviving spouse.
.08Overall Limitation on Itemized De-
ductions. For taxable years beginning
in 2013, the applicable amounts under
§ 68(b) are $300,000 in the case of a joint
return or a surviving spouse, $275,000 in
the case of a head of household, $250,000
in the case of an individual who is not
married and who is not a surviving spouse
or head of household, and $150,000 in
the case of a married individual filing a
separate return.
.09Qualified Transportation Fringe
Benefit. For taxable years beginning
in 2013, the monthly limitation under
§ 132(f)(2)(A) regarding the aggregate
fringe benefit exclusion amount for trans-
portation in a commuter highway vehicle
and any transit pass is $245. The monthly
limitation under § 132(f)(2)(B) regarding
the fringe benefit exclusion amount for
qualified parking is $245.
.10Adoption Assistance Programs.For
taxable years beginning in 2013, under
§ 137(a)(2) the amount that can be ex-
cluded from an employee’s gross income
for the adoption of a child with special
needs is $12,970. For taxable years be-
ginning in 2013, under § 137(b)(1) the
maximum amount that can be excluded
from an employee’s gross income for the
amounts paid or expenses incurred by an
employer for qualified adoption expenses
furnished pursuant to an adoption assis-
tance program for other adoptions by the
employee is $12,970. The amount exclud-
able from an employee’s gross income be-
gins to phase out under § 137(b)(2)(A) for
taxpayers with modified adjusted gross in-
come in excess of $194,580 and is com-
pletely phased out for taxpayers with mod-
ified adjusted gross income of $234,580 or
more. (See section 2.02 of this revenue
procedure for the adjusted items relating to
the adoption credit.)
.11Personal Exemption.
(1) For taxable years beginning in 2013,
the personal exemption amount under
§ 151(d) is $3,900.
(2)Phaseout. For taxable years be-
ginning in 2013, the personal exemption
phases out for taxpayers with the follow-
ing adjusted gross income amounts:
Filing StatusAGI — Beginning of PhaseoutAGI — Completed Phaseout
Married Individuals Filing Joint Returns
and Surviving Spouses (§ 1(a))
$300,000$422,500
Heads of Households (§ 1(b))
$275,000$397,500
Unmarried Individuals (other than
Surviving Spouses and Heads of
Households) (§ 1(c))
$250,000$372,500
Married Individuals Filing Separate
Returns (§ 1(d))
$150,000$211,250
.12Interest on Education Loans.For
taxable years beginning in 2013, the
$2,500 maximum deduction for inter-
est paid on qualified education loans
under § 221 begins to phase out under
§ 221(b)(2)(B) for taxpayers with mod-
ified adjusted gross income in excess of
$60,000 ($125,000 for joint returns), and
is completely phased out for taxpayers
with modified adjusted gross income of
$75,000 or more ($155,000 or more for
joint returns).
.13Unified Credit Against Estate Tax.
For an estate of any decedent dying dur-
ing calendar year 2013,the basic exclusion
amount is $5,250,000 for determining the
amount of the unified credit against estate
tax under § 2010.
SECTION 3. MODIFICATION OF REV.
PROC. 2011–52
To reflect a statutory amendment made
by ATRA to § 132(f)(2), section 3.12 of
Rev. Proc. 2011–52 is modified to read as
follows:
.12Qualified Transportation Fringe
Benefit. For taxable years beginning
in 2012, the monthly limitation under
§ 132(f)(2)(A) regarding the aggregate
fringe benefit exclusion amount for trans-
portation in a commuter highway vehicle
and any transit pass is $240. The monthly
limitation under § 132(f)(2)(B) regarding
the fringe benefit exclusion amount for
qualified parking is $240 for 2012.
January 28, 20134482013–5 I.R.B.

SECTION 4. EFFECT ON OTHER
REVENUE PROCEDURES
This revenue procedure modifies and
supersedes section 3.12 of Rev. Proc.
2011–52.
SECTION 5. EFFECTIVE DATE
Except for section 3, this revenue pro-
cedure applies to taxable years beginning
in 2013. Section 3 of this revenue proce-
dure applies to taxable years beginning in
2012.
SECTION 6. DRAFTING
INFORMATION
The principal author of this revenue
procedure is William Ruane of the Office
of Associate Chief Counsel (Income Tax
& Accounting). For further information
regarding this revenue procedure, contact
Mr. Ruane at (202) 622–4920 (not a
toll-free call).
2013–5 I.R.B.449January 28, 2013

Part IV. Items o
fGeneralInterest
Notice of Prop
osed
Rulemaking
Incentives fo
r
Nondiscrimin
atory Wellness
Programs in G
roup Health
Plans
REG–122707–12
AGENCIES:Internal Revenue Service,
Department of the Treasury; Employee
Benefits Security Administration, Depart-
ment of Labor; Centers for Medicare &
Medicaid Services, Department of Health
and Human Services.
ACTION:Not
ice of Proposed Rulemak-
ing.
SUMMARY: This document proposes
amendments to regulations, consistent
with the Affordable Care Act, regarding
nondiscriminatory wellness programs in
group health coverage. Specifically, these
proposed regulations would increase the
maximum permissible reward under a
health-contingent wellness program of-
fered in connection with a group health
plan (and any related health insurance
coverage) from 20 percent to 30 percent
of the cost of coverage. The proposed
regulations would further increase the
maximum permissible reward to 50 per-
cent for wellness programs designed to
prevent or reduce tobacco use. These
regulations also include other proposed
clarifications regarding the reasonable
design of health-contingent wellness pro-
grams and the reasonable alternatives they
must offer in order to avoid prohibited
discrimination.
DATES: Comments are due on or before
January 25, 2013.
ADDRE
SSES:Written comments may be
submi
tted to the Department of Labor as
speci
fied below. Any comment that is sub-
mitte
d will be shared with the other De-
partm
ents and will also be made available
to the
public. Warning: Do not include any
pers
onally identifiable information (such
as name, addre
ss, or other contact informa-
tion) or confi
dential business information
thatyoudonot
want publicly disclosed.
All comments m
ay be posted on the In-
ternet and can
be retrieved by most Inter-
net search en
gines. No deletions, mod-
ifications,
or redactions will be made to
the comments
received, as they are pub-
lic records.
Comments may be submitted
anonymousl
y.
Comments, id
entified by “Wellness
Programs”,
may be submitted by one of
the followi
ng methods:
FederaleRu
lemakingPortal:
http://www
.regulations.gov. Follow the
instructio
ns for submitting comments.
Mail or Hand
Delivery:Officeof
Health Plan
Standards and Compliance
Assistance
, Employee Benefits Secu-
rity Admin
istration, Room N–5653, U.S.
Departmen
t of Labor, 200 Constitution
Avenue NW,
Washington, DC 20210,At-
tention:W
ellness Programs.
Comments r
eceived will be posted
without ch
ange towww.regulations.gov
andwww.d
ol.gov/ebsa, and available for
public in
spection at the Public Disclosure
Room, N–1
513, Employee Benefits Se-
curity Ad
ministration, 200 Constitution
Avenue,
NW, Washington, DC 20210,
includi
ng any personal information pro-
vided.
FOR FURT
HER INFORMATION
CONTACT
:Amy Turner or Beth Baum,
Employe
e Benefits Security Adminis-
tratio
n, Department of Labor, at (202)
693–83
35; Karen Levin, Internal Rev-
enue Se
rvice, Department of the Treasury,
at (202
) 622–6080; or Jacob Ackerman,
Center
s for Medicare & Medicaid Ser-
vices
, Department of Health and Human
Servi
ces, at (410) 786–1565.
Custo
mer Service Information:In-
divid
uals interested in obtaining infor-
matio
n from the Department of Labor
conce
rning employment-based health cov-
erage
laws may call the EBSA Toll-Free
Hotli
ne at 1–866–444–EBSA (3272) or
visi
t the Department of Labor’s website
(www
.dol.gov/ebsa). In addition, informa-
tion
from HHS on private health insurance
for c
onsumers can be found on the Centers
for Medicare &
Medicaid Services (CMS)
website (www.
cciio.cms.gov/)andinfor-
mationonheal
th reform can be found at
www.HealthCa
re.gov.
SUPPLEMENTARY INFORMATION:
I. Background
A.Introducti
on
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
to make them applicable to group health
plans and health insurance issuers provid-
ing health insurance coverage in connec-
tion with group health plans. The PHS Act
sections incorporated by these references
are sections 2701 through 2728.
B.Wellness Exception to HIPAA
Nondiscrimination Provisions
Prior t
o the enactment of the Afford-
able Ca
re Act, Titles I and IV of the Health
Insur
ance Portability and Accountability
Act of
1996 (HIPAA), Pub. L. 104–191,
added
section 9802 of the Code, section
702 of
ERISA, and section 2702 of the
PHS Ac
t (HIPAA nondiscrimination and
welln
ess provisions). These provisions
gene
rally prohibit group health plans and
grou
p health insurance issuers from dis-
crim
inating against individual participants
and b
eneficiaries in eligibility, benefits, or
1
The term “group health plan” is used in title XXVII of the PHS Act, part 7 of ERISA, and chapter 100 of the Code, and is distinct from the term “health plan,”as used in other provisions of
title I of the Affordable Care Act. The term “health plan” does not include self-insured group health plans.
January 28, 20134502013–5 I.R.B.

premiums based on a health factor.
2
An ex-
ception to the general rule allows premium
discounts or rebates or modification to oth-
erwise applicable cost sharing (including
copayments, deductibles or coinsurance)
in return for adherence to certain programs
of health promotion and disease preven-
tion. The Departments of Labor, Health
and Human Services (HHS), and the Trea-
sury (collectively, the Departments) have
implemented this exception by allowing
benefits (including cost sharing), premi-
ums, or contributions to vary based on par-
ticipation in a wellness program if such a
program adheres to certain conditions set
forth in regulations.
The Departments published joint fi-
nal regulations on December 13, 2006
at 71 FR 75014 (the 2006 regulations)
regarding the HIPAA nondiscrimination
and wellness provisions.
3
The 2006
regulations divide wellness programs into
two general categories. The first category
is programs that either do not require
an individual to meet a standard related
to a health factor in order to obtain a
reward or that do not offer a reward at
all (“participatory wellness programs”).
Participatory wellness programs comply
with the nondiscrimination requirements
without having to satisfy any additional
standards if participation in the program
is made available to all similarly situated
individuals.
4
Examples of participatory
wellness programs in the 2006 regulations
include a fitness center reimbursement
program,
5
a diagnostic testing program
that does not base any reward on test
outcomes, a program that waives cost
sharing for prenatal or well-baby visits,
6
a program that reimburses employees for
the costs of smoking cessation programs
regardless of whether the employee quits
smoking, and a program that provides
rewards for attending a free health
education seminar. There is no limit on
the financial incentives for participatory
wellness programs.
The second category of wellness pro-
grams under the 2006 regulations consists
of programs that require individuals to sat-
isfy a standard related to a health factor
in order to obtain a reward (“health-con-
tingent wellness programs”). This cate-
gory includes wellness programs that re-
quire an individual to attain or maintain a
certain health outcome in order to obtain
a reward (such as not smoking, attaining
certain results on biometric screenings, or
meeting targets for exercise). As outlined
in the 2006 regulations,
7
plans and issuers
may vary benefits (including cost-sharing
mechanisms), premiums, or contributions
based on whether an individual has met the
standards of a wellness program that meets
the requirements of paragraph (f). Para-
graph (f)(2) of the 2006 regulations pre-
scribes the following consumer-protection
conditions for health-contingent wellness
programs:
1. The total reward for such wellness
programs offered by a plan sponsor
does not exceed 20 percent of the total
cost of coverage under the plan.
2. The program is reasonably designed
to promote health or prevent disease.
For this purpose, it must have a rea-
sonable chance of improving health or
preventing disease, not be overly bur-
densome, not be a subterfuge for dis-
criminating based on a health factor,
and not be highly suspect in method.
3. The program gives eligible individu-
als an opportunity to qualify for the re-
ward at least once per year.
4. The reward is available to all sim-
ilarly situated individuals. For this
purpose, a reasonable alternative stan-
dard (or waiver of the otherwise appli-
cable standard) must be made avail-
able to any individual for whom it is
unreasonably difficult due to a medi-
cal condition to satisfy the otherwise
applicable standardduring that period
(or for whom it is medically inadvis-
able to attempt to satisfy the otherwise
applicable standard).
5. In all plan materials describing the
terms of the program, the availabil-
ity of a reasonable alternative stan-
dard (or the possibility of waiver of
the otherwise applicable standard) is
disclosed.
C.Amendments Made by the Affordable
Care Act
The Affordable Care Act (section 1201)
amended the nondiscrimination and well-
ness program provisions of the PHS Act
(but not of ERISA section 702 or Code sec-
tion 9802). (Affordable Care Act section
1201 also moved those provisions from
PHSActsection2702toPHSActsec-
tion 2705). As amended by the Affordable
Care Act, the nondiscrimination and well-
ness provisions of PHS Act section 2705
largely reflect the 2006 regulations (except
as discussed later in this preamble), and ex-
tend the nondiscrimination protections to
the individual market.
8
The wellness pro-
gram exception to the prohibition on dis-
crimination under PHS Act section 2705
applies with respect to group health plans
(and any health insurance coverage offered
2
The HIPAA nondiscrimination provisions set forth eight health status-related factors, which the December 13, 2006 final regulations on nondiscrimination and wellness programs refer to as
“health factors.” Under HIPAA and the 2006 regulations, the eight health factors are health status, medical condition (including both physical and mental illnesses), claims experience, receipt
of health care, medical history, genetic information, evidence of insurability (including conditions arising out of acts of domestic violence), and disability.See66 FR 1379, January 8, 2001.
3
See26 CFR 54.9802–1; 29 CFR 2590.702; 45 CFR 146.121. Prior to issuance of the final 2006 regulations, the Departmentspublished interim final regulations with request for comment
implementing the HIPAA nondiscrimination provisions on April 8, 1997 at 62FR 16894, followed by proposed regulations regarding wellness programs on January 8, 2001 at 66 FR 1421.
4
Seeparagraph (f)(1) of the 2006 regulations.See also26 CFR 54.9802–1(d), 29 CFR 2590.702(d), and 45 CFR 146.121(d), which provide that, generally, distinctions among groups of
similarly situated participants in a health plan must be based onbona fideemployment-based classifications consistent with the employer’s usual business practice. A plan may also distinguish
between beneficiaries based on, for example, their relationship to the planparticipant (such as spouse or dependent child) or based on the age of dependent children. Distinctions are not
permitted to be based on any of the health factors noted earlier.
5
The Treasury and the IRS note that satisfying the rules for wellness programs does not determine the tax treatment ofbenefits provided by the wellnessprogram. For example, fitness center
fees are generally consideredexpenses for general good health and thus payment of the fee by the employer is not excluded from income as the reimbursementofamedicalexpense.
6
Note that section 2713 of the PHS Act, as added by the Affordable Care Act, and the Departments’ interim final regulations at 26 CFR 54.9815–2713T, 29 CFR 2590.715–2713, and 45 CFR
147.130 require non-grandfathered group health plans and health insurance issuers offering non-grandfathered group or individual health insurance coverage to provide benefits for certain
preventive health services without the imposition of cost sharing.See also26 CFR 54.9815–1251T, 29 CFR 2590.715–1251, and 45 CFR 147.140 (regarding the definition of grandfathered
health plan coverage).
7
See26 CFR 54.9802–1(b)(2)(ii) and (c)(3); 29 CFR 2590.702(b)(2)(ii) and (c)(3); and 45 CFR 146.121(b)(2)(ii) and (c)(3).
8
Section 1201 of the Affordable Care Act also moved the guaranteed availability provisions that were previously codified in PHS Act section 2711 to PHSAct section 2702, and extended
those requirements to the individual market.
2013–5 I.R.B.451January 28, 2013

in connection with such plans). Section
2705(l) separately provides for a 10-State
wellness program demonstration project in
the individual market, to be established not
later than July 1, 2014 (as such, this pro-
posed rule does not include wellness pro-
gram policy for the individual market).
D.Application to Grandfathered Plans
Section 1251 of the Affordable Care
Act provides that certain amendments
made by the Affordable Care Act generally
do not apply to plans or health insurance
coverage that are in effect on the date
of enactment (and that are not changed
in ways specified in implementing reg-
ulations),
9
except as specified in section
1251(a)(3) and (4) of the Affordable Care
Act. Specifically, section 1251(a)(2) of
the Affordable Care Act provides that sub-
titles A and C of title I of the Affordable
Care Act, and the amendments made by
such subtitles, “shall not apply” to such
grandfathered health plans.
Because the amendments made to the
PHS Act in section 1201 of the Affordable
Care Act do not apply to grandfathered
health plans, the version of PHS Act sec-
tion 2702 in effect at the time of enactment
oftheAffordableCareAct(andthe2006
regulations under that section) continues
to apply to grandfathered health plans,
while the provisions of the new PHS Act
section 2705 apply to non-grandfathered
health plans for plan years (in the individ-
ual market, policy years) beginning on or
after January 1, 2014.
10
ERISA section
702 and Code section 9802 continue to
govern all group health plans, including
grandfathered health plans, and, for plan
years beginning on or after January 1,
2014, ERISA section 715(a)(1) and Code
section 9815(a)(1) will also apply new
PHS Act section 2705 to non-grandfa-
thered health plans.
However, because the Departments
believe that the provisions of these pro-
posed regulationswould be authorized
under either HIPAA or the Affordable
Care Act, the Departments are proposing
in this rulemaking to apply the same set
of standards to both grandfathered and
non-grandfathered health plans. As noted,
PHS Act section 2705(j) largely adopts the
wellness program provisions of the 2006
regulations with some modification and
clarification. Consistent with the statu-
tory approach, these proposed regulations
would apply the rules of PHS Act section
2705, governing rewards for adherence
to certain wellness programs, to grandfa-
thered health plans by regulation under
authority in the HIPAA nondiscrimination
and wellness provisions as was done in
the 2006 regulations. This approach is
intended to avoid inconsistency across
group health coverage and to provide
grandfathered plans the same flexibility
to promote health and prevent disease as
non-grandfathered plans.
II. Overview of the Proposed Rule
These regulations generally propose
standards for group health plans and
health insurance issuers offering group
health insurance coverage with respect
to wellness programs. These proposed
regulations would replace the wellness
program provisions of paragraph (f) of
the 2006 regulations and would apply to
both grandfathered and non-grandfathered
group health plans and group health insur-
ance coverage for plan years beginning on
or after January 1, 2014. These regulations
also propose to implement the nondis-
crimination provisions made applicable to
the individual market by section 1201 of
the Affordable Care Act. This rulemaking
does not propose to modify provisions of
the 2006 regulations other than paragraph
(f).
A.Two Categories of Wellness Programs
Consistent with the 2006 regulations
and PHS Act section 2705(j), these pro-
posed regulations would continue to divide
wellness programs into two categories:
“participatory wellness programs”, which
are a majority of wellness programs (as
noted below) and “health-contingent well-
ness programs.” Participatory wellness
programs are programs that are made
available to all similarly situated indi-
viduals and that either do not provide a
reward or do not include any conditions
for obtaining a reward that are based on an
individual satisfying a standard that is re-
lated to a health factor. Several examples
of participatory wellness programs are
provided in these proposed regulations,
including: (1) a program that reimburses
for all or part of the cost of membership
in a fitness center; and (2) a program that
provides a reward to employees for attend-
ing a monthly, no-cost health education
seminar. Participatory programs are not
required to meet the five requirements
applicable to health-contingent wellness
programs.
In contrast, health-contingent wellness
programs require an individual to satisfy
a standard related to a health factor to
obtain a reward (or require an individual
to do more than a similarly situated in-
dividual based on a health factor in or-
der to obtain the same reward). Like the
2006 regulations, these proposed regula-
tions would continue to permit rewards to
be in the form of a discount or rebate of
a premium or contribution, a waiver of
all or part of a cost-sharing mechanism
(such as deductibles, copayments, or coin-
surance), the absence of a surcharge, the
value of a benefit that otherwise would not
be provided under the plan, or other finan-
cial or nonfinancial incentives or disincen-
tives. Examples of health-contingent well-
ness programs in these proposed regula-
tions are: (1) a program that imposes a pre-
mium surcharge based on tobacco use; and
(2) a program that uses a biometric screen-
ing or a health risk assessment to identify
employees with specified medical condi-
tions or risk factors (such as high choles-
terol, high blood pressure, abnormal body
mass index, or high glucose level) and pro-
vides a reward to employees identified as
within a normal or healthy range (or at low
risk for certain medical conditions), while
requiring employees who are identified as
outside the normal or healthy range (or at
risk) to take additional steps (such as meet-
ing with a health coach, taking a health
or fitness course, adhering to a health im-
provement action plan, or complying with
a health care provider’s plan of care) to ob-
tain the same reward. Under paragraphs
9
See26 CFR 54.9815–1251T, 29 CFR 2590.715–1251, and 45 CFR 147.140 (75 FR 34538, June 17, 2010), as amended (75 FR 70114, November 17, 2010).See alsoQ5 of Affordable Care
Act Implementation FAQs Part II (October 8, 2010), available athttp://www.dol.gov/ebsa/faqs/faq-aca2.htmlandhttp://cciio.cms.gov/resources/factsheets/aca_implementation_faqs2.html.
10
See26 CFR 54.9815–1251T(c)(2), 29 CFR 2590.715–1251(c)(2), and 45 CFR 147.140(c)(2), providing that a grandfathered health plan must comply with the requirements of the PHS
Act, ERISA, and the Code applicable prior to the changes enacted by the Affordable Care Act, to the extent not inconsistent with the rules applicable toa grandfathered health plan (75 FR
34538, June 17, 2010).
January 28, 20134522013–5 I.R.B.

(b)(2)(ii) and (c)(3) of the 2006 regulations
(which remain unchanged),
11
health-con-
tingent wellness programs are permissible
only if they comply with the provisions of
paragraph (f)(3), which are proposed to be
amended in this rulemaking.
12
The Departments believe that appro-
priately designed wellness programs have
the potential to contribute importantly to
promoting health and preventing disease.
Even after the issuance of the 2006 regu-
lations and the enactment of the Afford-
able Care Act wellness provisions, how-
ever, stakeholder feedback suggests that
there continues to be a degree of confusion
regarding the scope of the rules govern-
ing wellness programs. The Departments
hope that these proposed regulations will
help dispel the confusion by reiterating
that the five regulatory requirements relat-
ing to frequency of opportunity to qual-
ify, size of reward, uniform availability
and reasonable alternative standards, rea-
sonable design, and notice of other means
of qualifying for the reward (summarized
below and contained in paragraph (f)(3)
of the proposed regulations) apply only to
those wellness programs that meet the def-
inition of “health-contingent” programs.
As discussed above, these are wellness
programs that both provide a reward and
condition the reward on satisfying a stan-
dard that is related to a health factor. Many
wellness programs (those characterized in
these regulations as “participatory well-
ness programs”) do not both provide a re-
ward and condition the reward on satisfy-
ing a standard that is related to a health
factor. Accordingly, as noted, participa-
tory wellness programs are not required to
meet the five enumerated requirements ap-
plicable to health-contingent wellness pro-
grams, but they are required to be made
available to all similarly situated individ-
uals.
B.Requirements for Health-Contingent
Wellness Programs
Consistent with the 2006 regulations,
these proposed regulations generally
would maintain the five requirements for
health-contingent wellness programs with
one significant modification relating to
the size of the reward. In addition, several
regulatory provisions have been re-or-
dered, and clarifications are proposed to
address questions and issues raised by
stakeholders since the 2006 regulations
were issued and to be consistent with the
amendments made by the Affordable Care
Act, as discussed below.
(1)Frequency of Opportunity to Qual-
ify.
These proposed regulations would,
consistent with the 2006 regulations and
the amendments made by the Affordable
Care Act, require health-contingent well-
ness programs to give individuals eligible
for the program the opportunity to qualify
for the reward at least once per year. As
stated in the preamble to the 2006 reg-
ulations, the once-per-year requirement
was included as a bright-line standard for
determining the minimum frequency that
is consistent with a reasonable design for
promoting good health or preventing dis-
ease.
13
(2)Size of Reward.
Like the 2006 regulations, these pro-
posed regulations would continue to limit
the total amount of the reward for health-
contingent wellness programs with respect
to a plan, whether offered alone or coupled
with the reward for other health-contin-
gent wellness programs. Specifically, the
total reward offered to an individual un-
der an employer’s health-contingent well-
ness programs could not exceed a speci-
fied percentage (referred to as the “appli-
cable percentage” in the proposed regula-
tions) of the total cost of employee-only
coverage under the plan, taking into ac-
count both employer and employee con-
tributions towards the cost of coverage.
If, in addition to employees, any class of
dependents (such as spouses, or spouses
and dependent children) may participate
in the health-contingent wellness program,
the reward could not exceed the applicable
percentage of the total cost of the cover-
age in which the employee and any depen-
dents are enrolled (such as family coverage
or employee-plus-one coverage).
Some stakeholders have raised ques-
tions about health-contingent wellness
programs that allow dependents to par-
ticipate, and what portion of the reward
should be attributableto each participating
dependent. If a class of dependents may
participate in a health-contingent wellness
program, some have suggested that there
be a maximum reward attributable to the
employee’s participation in the wellness
program, such as an amount that does
not exceed the applicable percentage of
the cost of employee-only coverage. The
proposed regulation being issued contem-
poraneously by HHS proposes that, to
comply with PHS Act section 2701, with
respect to family coverage, any premium
variation for tobacco use must be applied
to the portion of premium attributable to
each family member. The Departments
invite comments on apportionment of
rewards in health-contingent wellness pro-
grams (which may involve tobacco use
and/or other health factors) — for exam-
ple, should the reward be prorated if only
one family member fails to qualify for it.
The 2006 regulations specify 20 per-
cent as the maximum permissible reward
for participation in a health-contingent
wellness program. PHS Act section
2705(j)(3)(A), effective for plan years
beginning on or after January 1, 2014,
increases the maximum reward to 30 per-
cent and authorizes the Departments to
increase the maximum reward to as much
as 50 percent if the Departments determine
that such an increase is appropriate. In
these proposed regulations, the increase in
the applicable percentage from 20 percent
to 30 percent, which is effective for plan
years beginning on or after January 1,
2014, conforms to the new PHS Act sec-
tion 2705(j)(3)(A). In addition, the Depart-
ments have determined that an increase
of an additional 20 percentage points (to
50 percent) for health-contingent wellness
programs designed to prevent or reduce
tobacco use is warranted to conform to the
new PHS Act section 2701, to avoid in-
consistency across group health coverage,
whether insured or self-insured, or offered
in the small group or large group market,
and to provide grandfathered plans the
same flexibility to promote health and pre-
vent disease as non-grandfathered plans.
11
26 CFR 54.9802–1(b)(2)(ii) and (c)(3); 29 CFR 2590.702(b)(2)(ii) and (c)(3); and 45 CFR 146.121(b)(2)(ii) and (c)(3).
12
Until these proposed regulations are finalized and effective, the provisions of the 2006 regulations, at 26 CFR 54.9802–1(f), 29 CFR 2590.702(f), and 45 CFR 146.121(f) generally remain
applicable to group health plans and group health insurance issuers.
13
See71 FR at 75018.
2013–5 I.R.B.453January 28, 2013

Specifically, PHS Act section 2701, the
“fair health insurance premium” provision,
sets forth the factors that issuers may use
to vary premium rates in the individual
or small group market.
14
PHS Act section
2701(a)(1)(A)(iv) provides that issuers in
the individual and small group markets
cannot vary rates for tobacco use by more
than a ratio of 1.5 to 1 (that is, allow-
ing up to a 50 percent premium surcharge
for tobacco use). Contemporaneously with
the publication of these proposed wellness
program regulations, HHS is publishing a
proposed regulation that would implement
PHS Act section 2701. HHS proposes that
a health insurance issuer in the small group
market would be able to implement the to-
bacco use surcharge under PHS Act sec-
tion 2701 to employees only in connection
with a wellness program meeting the stan-
dards of PHS Act section 2705(j) and its
implementing regulations. As discussed
in the preamble to the proposed regulation
implementing PHS Act section 2701, HHS
is proposing in that rule that the definition
of “tobacco use” for purposes of section
2701 be consistent with the approach taken
with respect to health-contingent wellness
programs designed to prevent or reduce to-
bacco use under section 2705(j). Com-
ments are solicited in the preamble to the
proposed rules implementing section 2701
on possible definitions of “tobacco use”
that would be applied for purposes of PHS
Act sections 2701 and 2705(j).
To coordinate these proposed regula-
tions with the tobacco use rating provi-
sions of PHS Act section 2701, as pro-
posed by HHS, these proposed wellness
program regulations would use the new
authorityinPHSActsection2705(j)(3)(A)
(and, with respect to grandfathered health
plans, the preexisting authority in the
HIPAA nondiscrimination and wellness
provisions) to increase the applicable per-
centage for determining the size of the
reward for participating in a health-con-
tingent wellness program by an additional
20 percentage points (to 50 percent) to
the extent that the additional percentage
is attributed to tobacco use prevention or
reduction. Applying these proposed reg-
ulations to all group health plans would
provide consistency across markets, giv-
ing large, self-insured, and grandfathered
employment-based health plans the same
added flexibility topromote tobacco-free
workforces as small, insured, non-grand-
fathered health plans.
Examples included in these proposed
regulations illustrate how to calculate the
applicable percentage. The Departments
invite comments on the proposed approach
in general and other ideas for coordinating
the implementation of the tobacco rating
factor under PHS Act section 2701 with
the nondiscrimination and wellness pro-
gram provisions. The Departments also
invite comments as to whether additional
rules or examples would be helpful to
demonstrate compliance with the limita-
tion on the size of the reward when the
amount of the reward is variable and is
not determinable at the time the reward is
established (for example, when the reward
is waiver of a copayment for outpatient
office visits, the frequency of which will
not be predictable for any particular par-
ticipant or beneficiary under the plan).
(3)Uniform Availability and Reason-
able Alternative Standards.
A critical element of these proposed
regulations is the requirement that the
reward under a health-contingent well-
ness program be available to all similarly
situated individuals. To meet this require-
ment, a “reasonable alternative standard”
(or waiver of the otherwise applicable
standard) for obtaining the reward must
be provided for any individual for whom,
for that period, it is either unreasonably
difficult due to a medical condition to
meet the otherwise applicable standard, or
for whom it is medically inadvisable to
attempt to satisfy the otherwise applicable
standard. That is, the same, full reward
must be available to individuals who qual-
ify by satisfying a reasonable alternative
standard as is provided to individuals who
qualify by satisfying the program’s other-
wise applicable standard. These proposed
regulations would generally reiterate the
requirements set forth in the 2006 regu-
lations and codified in PHS Act section
2705(j), and provide several additional
clarifications.
First, under these proposed regulations,
as under the 2006 regulations, in lieu of
providing a reasonable alternative stan-
dard, a plan or issuer may always waive
the otherwise applicable standard and pro-
vide the reward. The plan or issuer may
waive the otherwise applicable standard
and provide a reward for an entire class
ofindividualsormaydosoonanindivid-
ual-by-individual basis based on the facts
and circumstances presented.
Second, these proposed regulations
would not require plans and issuers to es-
tablish a particular alternative standard in
advance of an individual’s specific request
for one. However, a reasonable alterna-
tive standard would have to be provided
by the plan or issuer (or the condition for
obtaining the reward would be required to
be waived) upon an individual’s request.
In this connection, the Departments note
that, as stated in the preamble to the 2006
regulations with respect to tobacco cessa-
tion, “overcoming an addiction sometimes
requires a cycle of failure and renewed
effort.”
15
Plans and issuers cannot cease to
provide a reasonable alternative standard
merely because one was not successful
before; they must continue to offer a rea-
sonable alternative standard, whether it
is the same standard or a new reason-
able alternative standard (such as a new
weight-loss class or a new nicotine re-
placement therapy).
16
All the facts and circumstances would
be taken into account in determining
whether a plan or issuer has provided a
reasonable alternative standard, including
but not limited to the following proposed
factors:
•If the reasonable alternative standard is
completion of an educational program,
the plan or issuer must make the edu-
cational program available instead of
14
Small group market means the health insurance market under which individuals obtain health insurance coverage (directly or through any arrangement) on behalf of themselves (and their
dependents) through a group health plan maintained by a small employer.SeePHS Act section 2791(e)(5); 45 CFR 144.103. For plan years beginning on or after January 1, 2014, amendments
made by the Affordable Care Act provide that the term “small employer” means, in connection with a group health plan with respect to a calendar year and aplan year, an employer who
employed an average of at least 1 but not more than 100 employees on business days during the preceding calendar year and who employs at least 1 employee on the first day of the plan year.
SeePHS Act section 2791(e)(4). In the case of plan years beginning before January 1, 2016, a State may elect to substitute “50 employees” for “100 employees” in its definition of a small
employer.Seesection 1304(b)(3) of the Affordable Care Act.
15
See71 FR 75019.
16
Id.
January 28, 20134542013–5 I.R.B.

requiring an individual to find such a
program unassisted, and may not re-
quire an individual to pay for the cost
of the program.
•If the reasonable alternative standard
is a diet program, the plan or issuer
is not required to pay for the cost of
food but must pay any membership or
participation fee.
•If the reasonable alternative standard
is compliance with the recommenda-
tions of a medical professional who
is an employee or agent of the plan
or issuer, and an individual’s personal
physician states that the medical pro-
fessional’s recommendations are not
medically appropriate for that individ-
ual, the plan or issuer must provide a
reasonable alternative standard that ac-
commodates the recommendations of
the individual’s physician with regard
to medical appropriateness.
17
Plans
and issuers may impose standard cost
sharing under the plan or coverage for
medical items and services furnished
in accordance with the physician’s rec-
ommendations.
The Departments intend that these clar-
ifications with respect to offering reason-
able alternative standards will help pre-
vent health-contingent wellness programs
that provide little to no support to enrollees
to improve individuals’ health. In addi-
tion, as explained later in this preamble,
clarifications are proposed to ensure that a
health-contingent wellness program is rea-
sonably designed to improve health and is
not a subterfuge for underwriting or reduc-
ing benefits based on health status. Com-
ments are invited on these provisions, as
well as whether other facts and circum-
stances should be specifically addressed.
For example, the Departments seek com-
ment on whether any additional rules or
clarifications are needed with respect to
the process for determining a reasonable
alternative standard.
Finally, the 2006 regulations provided
that it is permissible for a plan or issuer
to seek verification, such as a statement
from the individual’s personal physician,
that a health factor makes it unreasonably
difficult for the individual to satisfy, or
medically inadvisable for the individual
to attempt to satisfy, the otherwise ap-
plicable standard. The Affordable Care
Act amendments codified this provision
with one modification: PHS Act section
2705(j)(3)(D)(ii) makes clear that physi-
cian verification may be required by a
plan or issuer “if reasonable under the cir-
cumstances.” These proposed regulations
clarify that it would not be reasonable for
a plan or issuer to seek verification of a
claim that is obviously valid based on the
nature of the individual’s medical condi-
tion that is known to the plan or issuer.
Plans and issuers are permitted under the
proposed regulations to seek verification
of claims that require the use of medical
judgment to evaluate. The Departments
solicit comments on whether additional
clarifications would be helpful regarding
the reasonableness of physician verifica-
tion.
(4)Reasonable Design.
Consistent with the 2006 regulations
and PHS Act section 2705(j), these pro-
posed regulations would continue to re-
quire that health-contingent wellness pro-
grams be reasonably designed to promote
health or prevent disease, not be overly
burdensome, not be a subterfuge for dis-
crimination based on a health factor, and
not be highly suspect in the method chosen
to promote health or prevent disease. The
preamble to the 2006 regulations stated
that the “reasonably designed” standard
was designed to prevent abuse, but other-
wise was “intended to be an easy standard
to satisfy ... There does not need to be a
scientific record that the method promotes
wellness to satisfy this standard. The stan-
dard is intended to allow experimentation
in diverse ways of promoting wellness.”
18
The preamble also stated that the Depart-
ments did not “want plans and issuers to
be constrained by a narrow range of pro-
grams ... but want plans and issuers to feel
free to consider innovative programs for
motivating individuals to make efforts to
improve their health.”
19
These proposed
regulations would continue to provide
plans and issuers flexibility and encour-
age innovation. Also, as discussed later
in this preamble, the regulations include
several clarifications to ensure against
subterfuge and discrimination. Comments
are welcome on whether certain standards,
including evidence-or practice-based
standards, are needed to ensure that well-
ness programs are reasonably designed to
promote health or prevent disease. The
Departments also welcome comments
on best practices guidance regarding ev-
idence- and practice-based strategies in
order to increase the likelihood of well-
ness program success. Resources for
employers and plans include the Health-
ier Worksite Initiative of the Centers for
Disease Control and Prevention (CDC) at
http://www.cdc.gov/nccdphp/dnpao/hwi/.
Under the proposed regulations, the de-
termination of whether a health-contingent
wellness program is reasonably designed
is based on all the relevant facts and cir-
cumstances. To ensure that programs are
not a subterfuge for discrimination or un-
derwriting based on health factors such
as weight, blood pressure, glucose levels,
cholesterol levels, or tobacco use with no
or insufficient support to improve individ-
uals’ health, the Departments propose that,
to the extent a plan’s initial standard for
obtaining a reward (or a portion of a re-
ward) is based on results of a measure-
ment, test, or screening that is related to
a health factor (such as a biometric exam-
ination or a health risk assessment), the
plan is not reasonably designed unless it
makes available to all individuals who do
not meet the standard based on the mea-
surement, test, or screening a different,
reasonable means of qualifying for the re-
ward. Accordingly, the general approach
that was adopted in the 2006 regulations
is preserved, which allows plans and is-
suers to conduct screenings and employ
measurement techniques in order to target
wellness programs effectively. For exam-
ple, plans and issuers could target individ-
uals with high cholesterol for participation
in cholesterol reduction programs, or in-
dividuals who use tobacco for participa-
tion in tobacco cessation programs, rather
17
As stated in the preamble to the Departments’ regulations on internal claims and appeals and externalreview processes, adverse benefit determinations based on whether a participant or
beneficiary is entitled to a reasonable alternative standard for a reward under a plan’s wellness program are situations in which a claim is considered to involve medical judgment and therefore
is eligible for Federal external review. See 76 FR 37216.
18
71 FR 75018.
19
71 FR 75019.
2013–5 I.R.B.455January 28, 2013

than the entire population of participants
and beneficiaries if individuals who do not
meet a plan’s target biometrics (or similar
standards) are provided a different, reason-
able means of qualifying for the same re-
ward. The Departments invite comments
on this approach, including on ways to en-
sure that employeeswill not be subjected
to an unreasonable “one-size-fits-all” ap-
proach to designing the different means
of qualifying for the reward that would
fail to take an employee’s circumstances
into account to the extent that, as a prac-
tical matter, they would make it unrea-
sonably difficult for the employee to ac-
cess those different means of qualifying.
Comments also are invited on whether any
other consumer protections are needed to
ensure that wellness programs are reason-
ably designed to promote health or prevent
disease.
(5)Notice of Other Means of Qualifying
for the Reward.
These proposed regulations, consistent
with the 2006 regulations and the amend-
ments made by the Affordable Care Act,
would require plans and issuers to disclose
the availability of other means of quali-
fying for the reward or the possibility of
waiver of the otherwise applicable stan-
dard in all plan materials describing the
terms of a health-contingent wellness pro-
gram. If plan materials merely mention
that a program is available, without de-
scribing its terms, this disclosure is not re-
quired. For example, a summary of ben-
efits and coverage (SBC) required under
section 2715 of the PHS Act that notes that
cost sharing may vary based on participa-
tion in a diabetes wellness program, with-
out describing the standards of the pro-
gram, would not trigger this disclosure.
The 2006 regulations provided sam-
ple language that could be used to satisfy
this requirement in both the regulatory
text and in several examples. However,
feedback and experience since the 2006
regulations were published have indicated
that the sample language was complicated
and confusing to some individuals and
may have led fewer individuals to seek a
reasonable alternative standard than were
eligible. Accordingly, these proposed reg-
ulations provide new sample language in
the regulatory text and in examples that
is intended to be simpler for individuals
to understand and to increase the likeli-
hood that those who qualify for a different
means of obtaining a reward will contact
the plan or issuer to request it. The De-
partments invite comment on the sample
language in both the regulatory text and in
the examples.
C.Application to the Individual Health
Insurance Market
PHS Act sections 2705(a) and (b), as
addedbysection1201oftheAffordable
Care Act, apply the HIPAA nondiscrim-
ination requirements to health insurance
issuers in the individual health insurance
market. Accordingly, the HHS proposed
regulations include a new §147.110 which
applies the nondiscrimination protections
of the 2006 regulations to non-grandfa-
thered, individual health insurance cover-
age, effective for policy years beginning
on or after January 1, 2014. By their terms,
the wellness program provisions of PHS
Act section 2705(j), however, do not apply
to health insurance coverage in the indi-
vidual market. Accordingly, the wellness
program provisions of §146.121(f) apply
only to group health plans and group health
insurance coverage, not individual market
coverage.
D.Applicability Date
These proposed regulations would
apply for plan years (in the individual
market, policy years) beginning on or af-
ter January 1, 2014, consistent with the
statutory effective date of PHS Act section
2705, as well as PHS Act section 2701.
Comments are invited on this proposed
applicability date.
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; distributive impacts; and equity).
Executive Order 13563 emphasizes the
importance of quantifying both costs and
benefits, reducing costs, harmonizing
rules, and promoting flexibility. The Of-
fice of Management and Budget (OMB)
has determined that this proposed rule is
a “significant regulatory action’’ under
section 3(f)(4) of Executive Order 12866,
because it raises novel legal or policy is-
sues arising from the President’s priorities.
Accordingly, the rule has been reviewed
by the OMB.
January 28, 20134562013–5 I.R.B.

TABLE 1.—Accounting Table
BenefitsQuantified:Minimal due to low expected use of higher reward limits.
Qualitative:Benefits include the ability to increase the reward based on a health factor to incentivize
individuals to meet a health standard associated with improved health, which could reduce health care
costs. Improved standards could reduce the use of wellness programs as a subterfuge for discrimination
based on a health factor.
CostsQuantified:Minimal since employers are expected to create or expand wellness programs only if the
expected benefit exceeds the cost as well as due to low expected use of higher reward limits.
Qualitative:Costs of the rule include clarifications regarding what costs individuals may pay as part
of an alternative means of complying with the health standard. To the extent an individual faces an
increased cost for not meeting a health standard, the individual would have reduced resources to
use for other purposes.
TransfersQuantified:Minimal due to low expected use of higher reward limits.
Qualitative:Transfers resulting from therule include transfers from those who do not meet a health
standard to those who do meet the standard or the associated alternative standard.
Based on the Departments’ review of
the most recent literature and studies re-
garding wellness programs, the Depart-
ments reached the conclusion that the im-
pact of the benefits, costs, and transfers as-
sociated with the proposed rules will be
minimal. As discussed in this analysis,
few health-contingent wellness programs
today come close to meeting the 20 percent
limit (based on the data, the usual reward
percentage ranges from three to 11 per-
cent); therefore, the Departments do not
believe that expanding the limit to 30 per-
cent (or 50 percent for programs designed
to prevent or reduce tobacco use) will re-
sult in significantly higher participation of
employers in such programs. The Depart-
ments provide a qualitative discussion be-
low and cite the survey data used to sub-
stantiate this conclusion. Moreover, most
wellness programs appear to be participa-
tory programs that do not require an indi-
vidual to meet a standard related to a health
factor in order to obtain a reward. As
stated earlier in this preamble, these partic-
ipatory wellness programs are not required
to meet the five requirements that apply to
health-contingent wellness programs, but
they are required to be made available to
all similarly situated individuals.
Although the Departments believe few
plans will expand the reward percentage,
the Departments provide a qualitative dis-
cussion regarding the sources of benefits,
costs, and transfers that could occur if
plans were to expand the reward beyond
the current maximum of 20 percent. Cur-
rently, insufficient broad-based evidence
makes it difficult to definitively assess the
impact of workplace wellness programs
on health outcomes and cost, although,
overall, employers largely report that
workplace wellness programs in general
(participatory programs and health-con-
tingent programs) are delivering on their
intended benefit of improving health and
reducing costs.
The one source of potential additional
cost discussed in the impact analysis is the
clarification that plans must provide a rea-
sonable alternative means of satisfying the
otherwise applicable standard. The De-
partments present evidence that currently
employers not only allow a reasonable al-
ternative standard, but that most employers
already pay for these alternatives. The De-
partments do not have an estimate of how
many plans are not currently paying for
alternatives consistent with the clarifica-
tions set forth in the proposed regulations,
but the number appears to be small. The
Departments also employ economic logic
to conclude that employers will create or
expand their wellness program and pro-
vide reasonable alternatives only if the ex-
pected benefits exceed the expected costs.
Therefore, the Departments believe that
the benefits of the proposed rule will jus-
tify the costs. The Departments invite
comments on these conclusions and re-
quest input for improving the analysis, in-
cluding additional data, surveys, or stud-
ies.
B.Background and Need for Regulatory
Action—Department of Labor and
Department of Health and Human
Services
As discussed earlier in this preamble,
on December 13, 2006, the Departments
issued joint final regulations regarding the
HIPAA nondiscrimination and wellness
provisions. The 2006 regulations set forth
the requirements for wellness programs
that provide a reward to individuals who
satisfy a standard related to a health factor
or provide a reward to individuals to do
more than a similarly situated individual
based on a health factor.Seesection I.B.
of this preamble for a detailed discussion
of the HIPAA nondiscrimination and well-
ness provisions and the 2006 regulations.
PHS Act section 2705 largely reflects
the provisions of the 2006 regulations with
some modification andclarification. Most
notably, it increased the maximum reward
that can be provided under a health-con-
tingent wellness program from 20 percent
to 30 percent of the total cost of cover-
age under the plan and authorized the De-
partments to increase this percentage to
as much as 50 percent of the total cost
of coverage under the plan, if the Depart-
ments determine that such an increase is
appropriate. Accordingly, as discussed in
section II.B of this preamble, these pro-
posed regulations increase the applicable
percentage for the maximum reward from
20 percent to 30 percent, with an addi-
tional increase of 20 percentage points (to
50 percent) for health-contingent wellness
2013–5 I.R.B.457January 28, 2013

programs designed to prevent or reduce
tobacco use. The additional increase is
warrantedtoconformtoPHSActsection
2701, to avoid inconsistency across group
health coverage, whether insured or self-
insured, or offered in the small group or
large group market, and to provide grand-
fathered plans the same flexibility to pro-
mote health and prevent disease as non-
grandfathered plans.
20
C.Regulatory Alternatives—Department
of Labor and Department of Health and
Human Services
As stated earlier in this preamble, the
2006 regulations prescribed several re-
quirements for health-contingent wellness
programs, including a limitation on the
maximum reward of 20 percent of the
total cost of coverage under the plan.
21
PHS Act section 2705 largely reflects the
requirements for wellness programs from
the 2006 regulations with some modifi-
cation and clarification. Most notably, it
increased the maximum reward that can
be provided under a health-contingent
wellness program from 20 percent to 30
percent of the total cost of coverage under
the plan and authorized the Departments
to increase this percentage to as much as
50 percent, if the Departments determine
that such an increase is appropriate.
PHS Act section 2701(a)(1)(A)(iv) pro-
vides that issuers in the individual and
small group markets cannot vary rates for
tobacco use by more than a ratio of 1.5 to
1(thatis,allowinguptoa50percentrat-
ing factor for tobacco use) for non-grand-
fathered plans. PHS Act section 2701 ap-
plies to the individual market and the small
group market, but does not apply in the
large group market or to self-insured plans.
Contemporaneously with the publication
of these proposed regulations, HHS is pub-
lishing a proposed rule that would pro-
vide that an issuer in the small group mar-
ket would not be able to impose the to-
bacco rating factor on an individual in the
plan under PHS Act section 2701 unless it
was imposed as part of a wellness program
meeting the standards of PHS Act section
2705(j) and its implementing regulations.
An important policy goal of the De-
partments is to provide the large group
market and self-insured plans and grand-
fathered health plans with the same flex-
ibility as non-grandfathered plans in the
small group market to promote tobacco-
free workforces. TheDepartments consid-
ered several regulatory alternatives to meet
this objective, including the following:
(1)Stacking premium differentials.One
alternative considered was to permit a 50
percent premium differential for tobacco
use in the small group market under PHS
Act section 2701 without requiring a rea-
sonable alternative standard. Under PHS
Act section 2705, an additional 30 percent
premium differential would also be per-
mitted if the five criteria for a health-con-
tingent wellness program are met (includ-
ing the offering of a reasonable alternative
standard). Under this option, an 80 percent
premium differential would have been al-
lowable in the small group market based
on factors related to health status. Large
and self-insured plans would have been
limited to the 30 percent maximum reward.
Allowing such a substantial difference be-
tween what was permissible in the small
group market and the large group market
was not in line with the Departments’ pol-
icy goal of providing consistency in flexi-
bility for plans.
(2)Concurrent premium differentials
with no reasonable alternative required to
be offered for tobacco use. Another alter-
native would be to read sections 2701 and
2705 together such that, for non-grand-
fathered health plans in the small group
market, up to a 50 percent premium dif-
ferential would be permitted based on
tobacco use, as authorized under PHS Act
section 2701(a)(1)(A)(iv), with no rea-
sonable alternative standard required for
the tobacco use program. With respect to
non-tobacco-related wellness programs,
a reward could be offered only to the
extent that a tobacco use wellness pro-
gram were less than 30 percent of the cost
of coverage because the two provisions
apply concurrently, and a reward would
not be permitted under PHS Act section
2705 if the maximum reward already were
exceeded by virtue of PHS Act section
2701. Thus, the 50 percent tobacco sur-
charge under PHS Act section 2701 would
be available only to non-grandfathered,
insured, small group plans. The chosen
approach is intended to avoid inconsis-
tency and to provide grandfathered plans
the same flexibility to promote health
and prevent disease as non-grandfathered
plans.
D.Current Use of Wellness Programs and
Economic Impacts—Department of Labor
and Department of Health and Human
Services
The current use of wellness programs
and economic impacts of these proposed
regulations are discussed in this analysis.
Wellness programs
22
have become
common among employers in the United
States. The 2012 Kaiser/HRET survey
indicates that 63 percent of all employers
who offered health benefits also offered
at least one wellness program.
23
The up-
take of wellness programs continues to
be more common among large employ-
ers. For example, the 2012 Kaiser/HRET
survey found that health risk assessments
are offered by 38 percent of large employ-
ers offering health benefits, but only 18
percent of employers with fewer than 200
workers.
The Kaiser/HRET survey indicates that
29 percent of all firms and 53 percent of
large firms offered weight loss programs,
while 30 percent and 64 percent, respec-
tively, offered gym memberships or on-site
exercise facilities. Meanwhile, 32 per-
cent of all employers and 63 percent of
large employers offered smoking cessation
resources. Despite widespread availabil-
ity, actual participation of employees in
wellness programs remains limited. While
no nationally representative data exist, a
2010 non-representative survey suggests
that typically less than 20 percent of eli-
gible employees participate in wellness in-
terventions such as smoking cessation.
24
20
For a discussion of PHS Act section 2701 and the HHS proposed regulation being published contemporaneously with these proposed regulations, see section II.B.2. of this preamble.
21
Seesection I.B, earlier in this preamble.
22
On behalf of the Departments, RAND researchers did a review of the current literature on this topic. “A Review of the U.S. Workplace Wellness Market” February 2012. The report can
be found athttp://www.dol.gov/ebsa/pdf/workplacewellnessmarketreview2012.pdf.
23
Kaiser Family Foundation,Employer Health Benefits: 2011 Annual Survey. 2011, The Kaiser Family Foundation, Menlo Park, CA; Health Research & Educational Trust, Chicago, IL.
24
Nyce, S.Boosting Wellness Participation Without Breaking the Bank. TowersWatson Insider. July, 2010:1–9.
January 28, 20134582013–5 I.R.B.

Currently, insufficient broad-based ev-
idence makes it difficult to definitively
assess the impact of workplace wellness
on health outcomes and cost. Yet, overall,
employers largely report that workplace
wellness programs are delivering on their
intended benefit of improving health and
reducing costs. According to the 2011
Kaiser/HRET survey, 65 percent of re-
spondents that offered wellness programs
stated that these programs improved em-
ployee health, and 53 percent believed that
they reduced costs. Larger firms (defined
as those with more than 200 workers in the
Kaiser/HRET survey) were significantly
more positive, as 74 percent affirmed that
workplace wellness programs improved
health and 65 percent said that it reduced
cost, as opposed to 65 percent and 52 per-
cent, respectively, among smaller firms.
25
Forty percent of respondents to a survey
by Buck Consultants indicated that they
had measured the impact of their well-
ness program on the growth trend of their
health care costs, and of these, 45 percent
reported a reduction in that growth trend.
The majority of these employers, 61 per-
cent, reported that the reduction in growth
trend of their health care costs was be-
tween two and five percentage points per
year.
26
There are numerous accounts of
the positive impact of workplace wellness
programs in many industries, regions, and
types of employers. For example, a recent
article published by theHarvard Business
Reviewcited positive outcomes reported
by private-sector employers along sev-
eral different dimensions, including health
care savings, reduced absenteeism, and
employee satisfaction.
27
Several studies that looked at the impact
of smoking cessation programs found sig-
nificantly higher quit rates or less tobacco
use.
28
,
29
Smoking cessation programs typ-
ically offered education and counseling to
increase social support.
30
Two studies re-
ported that individuals in the intervention
group quit smoking at a rate approximately
10 percentage points higher than those in
the control group, and another reported
that participants were almost four times
as likely as nonparticipants to reduce to-
bacco use.
31
,
32
However, these effects
should be interpreted with caution. One
study showed significant differences in
smoking rates at a one-month follow-up,
but showed no significant differences in
quit rates at six months, highlighting the
importance of long-term follow-up to in-
vestigate the sustainability of results.
33
While employer sponsors generally
are satisfied with the results, more than
half stated in a recent survey that they do
not know their programs’ return on in-
vestment.
34
The peer-reviewed literature,
while predominantly positive, covers only
a small proportion of the universe of pro-
grams, limiting the generalizability of the
reported findings. Evaluating such com-
plex interventions is difficult and poses
substantial methodological challenges that
can invalidate findings.
Overall, surveys suggest that a rela-
tively small percentage of employers use
incentives, dollar or otherwise, for well-
ness programs, although incentive use is
more prevalent among larger employers.
Data from the 2011 Kaiser/HRET Sur-
vey of Employer Health Benefits indicate
that 14 percent of all employers offered
cash, gift cards, merchandise, or travel as
incentives for wellness program participa-
tion. Among large firms (greater than 200
workers), only 27 percent offered these
kinds of incentives. Mercer Consulting’s
2009 National Survey of Employer-Spon-
sored Health Plans found similar patterns,
estimating that six percent of all firms
and 21 percent of those with 500 or more
employees provided financial incentives
for participating in at least one program.
35
Employers are also looking to continue to
add incentives to their wellness programs,
for example 17 percent intend to add a
reward or penalty based on tobacco-use
status.
36
The use of incentives to promote
employee engagement remains poorly
understood, so it is not clear how type
(e.g., cash or non-cash), direction (reward
versus penalty), and strength of incen-
tive are related to employee engagement
and outcomes. The Health Enhancement
Research Organization and associated
organizations also recognized this defi-
ciency and provided seven questions for
future research.
37
There are also no data
on potential unintended effects, such as
25
Kaiser Family Foundation, Employer Health Benefits: 2010 Annual Survey. 2010, The Kaiser Family Foundation, Menlo Park, CA; Health Research & Educational Trust, Chicago, IL.
26
Buck Consultants, Working Well: A Global Survey of Health Promotion and Workplace Wellness Strategies. 2010, Buck Consultants: San Francisco, CA.
27
Berry, L., A. Mirabito, and W. Baun,What’s the Hard Return on Employee Wellness Programs? Harvard Business Review, 2010. 88(12): p. 104.
28
Heirich, M. and C.J. Sieck, Worksite cardiovascular wellness programs as a route to substance abuse prevention. J Occup Environ Med, 2000. 42(1): p. 47–56; 40; McMahon, S.D. and
L.A. Jason, Social support in a worksite smoking intervention. A test of theoretical models. Behav Modif, 2000. 24(2): p. 184–201; Okechukwu, C.A.,et al., MassBuilt: effectiveness of
an apprenticeship site-based smoking cessation intervention for unionized building trades workers. Cancer Causes Control, 2009. 20(6): p. 887–94;Sorensen,G.,et al., A comprehensive
worksite cancer prevention intervention: behaviorchange results from a randomized controlled trial (United States). J Public Health Policy, 2003. 24(1): p. 5–25.
29
Gold, D.B., D.R. Anderson, and S.A. Serxner,Impact of a telephone-based intervention on the reduction of health risks. Am J Health Promot, 2000. 15(2): p. 97–106; Herman, C.W.,
et al.,Effectiveness of an incentive-based online physical activity intervention on employee health status. Journal of Occupational and Environmental Medicine, 2006. 48(9): p. 889–895;
Ozminkowski, R.J.,et al.,The impact of the Citibank, NA, health management program on changes in employee health risks over time.J Occup Environ Med, 2000. 42(5): p. 502–11.
30
Heirich, M. and C.J. Sieck, Worksite cardiovascular wellness programs as a route to substance abuse prevention. J Occup Environ Med, 2000. 42(1): p. 47–56; McMahon, S.D. and L.A.
Jason, Social support in a worksite smoking intervention. A test of theoretical models. Behav Modif, 2000. 24(2): p. 184–201.
31
Heirich, M. and C.J. Sieck, Worksite cardiovascular wellness programs as aroute to substance abuse prevention. J Occup Environ Med, 2000. 42(1): p. 47–56; Okechukwu, C.A.,et al.,
MassBuilt: effectiveness of an apprenticeship site-based smoking cessation intervention for unionized building trades workers. Cancer Causes Control, 2009. 20(6): p. 887–94.
32
In the study, 42% of participants reduced their risk for tobacco use. See Gold, D.B., D.R. Anderson, and S.A. Serxner, Impact of a telephone-based intervention on the reduction of health
risks. Am J Health Promot, 2000. 15(2): p. 97–106.
33
Okechukwu, C.A.,et al., MassBuilt: effectiveness of an apprenticeship site-based smoking cessation intervention for unionized building trades workers. Cancer Causes Control, 2009.
20(6): p. 887–94.
34
Buck Consultants, Working Well: A Global Survey of Health Promotion and Workplace Wellness Strategies. 2010, Buck Consultants: San Francisco, CA.
35
Mercer, National Survey of Employer-Sponsored Health Plans: 2009 Survey Report. 2010, Mercer
36
“Employer Survey on Purchasing Value in Health Care,” 17th Annual Towers Watson/National Business Group on Health Employer Survey on Purchasing Value in Health Care.
37
“Guidance for a Reasonably Designed, Employer-Sponsored Wellness Program Using Outcomes-Based Incentives,” joint consensus statement of the Health Enhancement Research Organ-
ization, American College of Occupational and Environmental Medicine, American Cancer Society and American Cancer Society Cancer Action Network,American Diabetes Association,
and American Heart Association.
2013–5 I.R.B.459January 28, 2013

discrimination against employees based
on their health or health behaviors.
Currently, the most commonly incen-
tivized program appears to be associated
with completion of a health risk assess-
ment. According to the 2009 Mercer sur-
vey, 10 percent of all firms and 23 percent
of large employers that offered a health
risk assessment provided an incentive for
completing the assessment. For other
types of health management programs that
the survey assessed, only two to four per-
cent of all employers and 13 to 19 percent
of large employers offered incentives.
38
The 2011 Kaiser/HRET survey found that
10 percent of all employers and 42 percent
of large firms that offered a health risk
assessment provided a financial incentive
to employees who completed it.
Incentives are offered in a variety of
forms, such as cash, gift cards, merchan-
dise, time off, awards, recognition, raffles
or lotteries, reduced health plan premiums
and co-pays, and contributions to flexi-
ble spending or health savings accounts.
As noted previously, the Kaiser/HRET
2011 survey reported that among firms
offering health benefits with more than
200 workers, 27 percent offered cash
or cash equivalent incentives (including
gift cards, merchandise, or travel incen-
tives). In addition, 11 percent of these
firms offered lower employee health plan
premiums to wellness participants, two
percent offered lower deductibles, and 11
percent offered higher health reimburse-
ment account or health savings account
contributions. Meanwhile, 13 percent of
firms with fewer than 200 workers offered
cash or equivalent incentives, and each of
the other types of incentives were offered
by only two percent or less of firms.
Cash and cash-equivalent incentives
remain the most popular incentive for
completion of a health risk assessment.
The Kaiser/HRET 2011 survey reports
that among employers incentivizing com-
pletion of a health risk assessment, 41
percent offered cash, gift cards, merchan-
dise or travel, 23 percent allowed workers
to pay a smaller proportion of premiums,
12 percent offered lower deductibles, and
one percent offered lower coinsurance.
Among large employers, 57 percent uti-
lized cash incentives, 34 percent offered
smaller premiums, six percent provided
lower deductibles, and three percent pro-
vided lower coinsurance. Findings from
Mercer’s 2009 survey suggest similar
trends, with five percent of all employ-
ers and ten percent of those with 500 or
more workers providing cash incentives
for completion of a health risk assessment;
one percent and two percent, respectively,
offering lower cost sharing; and two per-
cent and seven percent, respectively, offer-
ing lower premium contributions.
39
Note
that in the Mercer survey, the results cited
reflect the incentives provided by all firms
that offer a health risk assessment, while
the Kaiser/HRET results previously men-
tioned reflect only firms that incentivize
completion of a health risk assessment.
Incentives may be triggered by a range
of different levels of employee engage-
ment. The simplest incentives are trig-
gered by program enrollment-that is, by
merely signing up for a wellness pro-
gram. At the next level, incentives are
triggered by program participation-for
instance, attending a class or initiating
a program, such as a smoking cessation
intervention. Other incentive programs
may require completion of a program,
whether or not any particular health-re-
lated goals are achieved, to earn an in-
centive. The health-contingent incentive
programs require successfully meeting a
specific health outcome (or an alternative
standard) to trigger an incentive, such as
verifiably quitting smoking. There is little
representative data indicating the rela-
tive prevalence of these different types
of triggers. The most common form of
outcome-based incentives is reportedly
awarded for smoking cessation. The 2010
survey by NBGH and TowersWatson indi-
cated that while 25 percent of responding
employers offered a financial incentive for
employees to become tobacco-free, only
four percent offered financial incentives
for maintaining a BMI within target levels,
three percent did so for maintaining blood
pressure within targets, and three percent
for maintaining targeted cholesterol lev-
els.
40
The value of incentives can vary
widely. Estimates from representative sur-
veys of the average value of incentives per
year range between $152
41
and $557,
42
or between three and 11 percent of the
$5,049 average cost of individual cov-
erage in 2010,
43
among employees who
receive them. This suggests that compa-
nies typically are not close to reaching the
20 percent of the total cost of coverage
thresholdsetforthinthe2006regula-
tions. These findings indicate that based
on currently available data, increasing the
maximum reward for particpating in a
health-contingent wellness program to 30
percent (and the Departments’ decision
to propose an additional 20 percentage
points for programs designed to prevent
or reduce tobacco use) is unlikely to have
a significant impact. Additionally, as dis-
cussed earlier in this preamble, today most
incentive-based wellness programs are as-
sociated with completion of a health risk
assessment irrespective of the results, and
therefore are not subject to the limitation,
because such programs are not health-con-
tingent wellness programs.
The Departments lack sufficient infor-
mation to assess how firms that currently
are at the 20 percent limit will respond to
the increased limits and welcome public
comments regarding this issue. If firms
already viewed the current 20 percent re-
ward limit as sufficient, then the Depat-
ments would not expectthat increasing the
limit would provide an incentive for pro-
gram design changes.
It is possible that the increased wellness
program reward limits will incentivize
firms without health-contingent well-
ness programs to establish them. The
Departments, however, do not expect a
significant number of new programs to be
created as a result of this change because
firms without health-contingent wellness
programs could already have provided
rewards up to the 20 percent limit before
38
Mercer, National Survey of Employer-Sponsored Health Plans: 2009 Survey Report. 2010, Mercer.
39
Mercer, National Survey of Employer-Sponsored Health Plans: 2009 Survey Report. 2010, Mercer.
40
TowersWatson, Raising the Bar on Health Care: Moving Beyond Incremental Change.
41
Mercer,National Survey of Employer-Sponsored Health Plans: 2009 Survey Report. 2010, Mercer.
42
Linnan, L., et al.,Results of the 2004 national worksite health promotion survey. American Journal of Public Health, 2008. 98(8): p. 1503–1509.
43
Kaiser Family Foundation,Employer Health Benefits: 2010 Annual Survey.
January 28, 20134602013–5 I.R.B.

the enactment of the Affordable Care Act,
but did not.
Two critical elements of these proposed
regulations are (1) the standard that the re-
ward under a health-contingent wellness
program be available to all similarly situ-
ated individuals and (2) the standard that
a program be reasonably designed to pro-
mote health or prevent disease.
44
As discussed earlier in this preamble,
the regulation does not prescribe a particu-
lar type of alternative standard that must be
provided. Instead, it permits plan sponsors
flexibility to provide any reasonable alter-
native. The Departments expect that plan
sponsors will select alternatives that entail
the minimum net costs (or, stated differ-
ently, the maximum net benefits) that are
possible to achieve derive offsetting ben-
efits, such as a higher smoking cessation
success rate.
It seems reasonable to presume that the
net cost plan sponsors will incur in the
provision of alternatives, including trans-
fers as well as new economic costs and
benefits, will not exceed the transfer cost
of waiving surcharges for all plan partic-
ipants who qualify for alternatives. The
Departments expect that many plan spon-
sors will find more cost effective ways
to satisfy this requirement, should they
exercise the option to provide incentives
through a health-contingent wellness pro-
gram and that the true net cost to them will
therefore be much smaller than the trans-
fer cost of waiving surcharges for all plan
participants who qualify for alternatives.
The Departments have no basis for esti-
mating the magnitude of the cost of pro-
viding alternative standards or of potential
offsetting benefits, however, and therefore
solicit comments from the public on this
question.
The Departments note that plan spon-
sors will have strong motivation to identify
and provide alternative standards that
have positive net economic effects. Plan
sponsors will be disinclined to provide
alternatives that undermine their overall
wellness program and worsen behavioral
and health outcomes, or that make finan-
cial rewards available absent meaningful
efforts by participants to improve their
health habits and overall health. Instead
plan sponsors will be inclined to provide
alternatives that sustain or reinforce plan
participants’ incentive to improve their
health habits and overall health, and/or
that help participants make such improve-
ments. It therefore seems likely that gains
in economic welfare from this requirement
will equal or outweigh losses. The De-
partments intend that the requirement to
provide reasonable alternatives will reduce
instances where wellness programs serve
only to shift costs to higher risk individu-
als and increase instances where programs
succeed at helping high risk individuals
improve their health. The Departments
solicit comments on its assumption.
In considering the transfers that might
derive from the availability of (and partic-
ipants’ satisfaction with) alternative means
of qualifying for the reward, the trans-
fers arising from this requirement may take
the form of transfers to participants who
satisfy new alternative wellness program
standards from plan sponsors, to such par-
ticipants from other participants, or some
combination of these. The existence of a
wellness program witha reward contigent
on meeting a standard related to a health
factor creates a transfer from those who
do not meet the standard to those who do
meet the standard. Allowing individuals to
meet an alternative standard to receive the
reward is a transfer to those who use the
alternative standard from everyone else in
the risk pool.
The reward associated with the well-
ness program is an incentive to encourage
individuals to meet health standards as-
sociated with better or improved health,
which in turn is associated with lower
health care costs. If the rewards are ef-
fective, health care costs will be reduced
as an individual’s health improves. Some
of these lower health care costs could
translate into lower premiums paid by em-
ployers and employees, which could offset
some of the transfers. To the extent larger
rewards are more effective at improving
health and lowering costs, these proposed
regulations would produce more benefits
than the current regulations.
Rewards also could create costs to in-
dividuals and to the extent the new larger
rewards create more costs than smaller re-
wards, these proposed regulations could
increase the costs relative to the existing
regulations. To the extent an individual
does not meet a standard or satisfy an al-
ternative standard, they could face higher
costs, for example in the case of a sur-
charge for smoking they could face up to
a 50 percent increase in their premiums.
Based on the foregoing discussion, the
Departments expect the benefits, costs,
and transfers associated with these pro-
posed regulations to be minimal. How-
ever, the Departments are not able to
provide aggregate estimates, because they
do not have sufficent data to estimate the
number of plans that will take advantage
of the new limits.
E.Regulatory Flexibility Act —
Department of Labor and Department of
Health and Human Services
The Regulatory Flexibility Act
(5 U.S.C. 601et seq.) (RFA) applies
to most Federal rules that are subject to
the notice and comment requirements
of section 553(b) of the Administrative
Procedure Act (5 U.S.C. 551et seq.).
Unless an agency certifies that such a
rule will not have a significant economic
impact on a substantial number of small
entities, section 603 of the RFA requires
the agency to present an initial regulatory
flexibility analysis at the time of the
publication of the notice of proposed
rulemaking describing the impact of the
rule on small entities. Small entities
include small businesses, organizations
and governmental jurisdictions.
For purposes of analysis under the RFA,
the Departments propose to continue to
consider a small entity to be an employee
benefit plan with fewer than 100 partici-
pants. The basis of this definition is found
in section 104(a)(3) of ERISA, which per-
mits the Secretary of Labor to prescribe
simplified annual reports for welfare ben-
efit plans that cover fewer than 100 partic-
ipants.
45
44
Seesection II.B , earlier in this preamble for a more detailed discussion of these requirements.
45
Under ERISA section 104(a)(2), the Secretary may also provide exemptions orsimplified reporting and disclosurerequirements for pension plans. Pursuant to the authority of ERISA
section 104(a)(3), the Department of Labor has previously issued at 29 CFR 2520.104–20, 2520.104–21, 2520.104–41, 2520.104–46, and 2520.104b–10 certain simplified reporting provisions
and limited exemptions from reporting and disclosure requirements for small plans, including unfunded or insured welfare plans, that cover fewer than 100 participants and satisfy certain
other requirements.
2013–5 I.R.B.461January 28, 2013

Further, while some large employers
may have small plans, in general, small
employers maintain most small plans.
Thus, the Departments believe that as-
sessing the impact of these proposed
regulations on small plans is an appropri-
ate substitute for evaluating the effect on
small entities.
The definition of small entity consid-
ered appropriate for this purpose differs,
however, from a definition of small busi-
ness that is based on size standards pro-
mulgated by the Small Business Admin-
istration (SBA) (13 CFR §121.201) pur-
suant to the Small Business Act (15 U.S.C.
631et seq.). The Departments therefore
request comments on the appropriateness
of the size standard used in evaluating the
impact of these proposed regulations on
small entities. The Departments have con-
sulted with the SBA Office of Advocacy
concerning use of this participant count
standard for RFA purposes.See13 CFR
121.902(b)(4).
The Departments expect that these pro-
posed regulations will affect few small
plans. While a large number of small
plans offer a wellness program, the 2011
Kaiser/HRET survey reported that only
13 percent of employers with fewer than
200 employees had a wellness program
that offered cash or cash equivalent incen-
tives (including giftcards, merchandise, or
travel incentives.)
46
In addition, only two
percent of these firms offered lower em-
ployee health plan premiums to wellness
participants, one percent offered lower de-
ductibles, and one percent offered higher
health reimbursement account or health
savings account contributions. There-
fore, the Departments expect that few
small plans will be affected by increasing
the rewards threshold from 20 percent
to 30 percent (50 percent for programs
targeting tobacco use prevention or reduc-
tion), because a small percentage of plans
have rewards-based wellness programs.
Moreover, as discussed in the Economic
Impacts section earlier in this preamble,
few plans that offer rewards-based well-
ness programs come close to reaching the
20 percent limit, and most incentive-based
wellness programs are associated with
completing the health risk assessment ir-
respective of the results, which are not
subject to the limitation.
The Kaiser/HRET survey also reports
that about 88 percent of small plans had
their wellness programs provided by the
health plan provider. Industry experts in-
dicated to the Departments that when well-
ness programs are offered by the health
plan provider, they typically supply alter-
native education programs and offer them
free of charge. This finding indicates that
the requirement in the proposed rule for re-
wards-based wellness programs to provide
and pay for a reasonable alternative stan-
dard for individuals for whom it is either
unreasonably difficult or medically inad-
visable to meet the original standard will
impose little new costs or transfers to the
affected plans.
Based on the foregoing, the Depart-
ments herby certify that these proposed
regulations will not have a significant eco-
nomic impact on a substantial number of
small entities.
F.Paperwork Reduction Act—Department
of Labor and Department of the Treasury
The 2006 final regulations regarding
wellness programs did not include an in-
formation collection request (ICR). These
proposed regulations, like the 2006 final
regulations, provide that if a plan’s well-
ness program requires individuals to meet
a standard related to a health factor in or-
der to qualify for a reward and if the plan
materials describe this standard, the mate-
rials must also disclose the availability of
other means of qualifying for the reward
or the possibility of waiver of the other-
wise applicable standard. If plan materi-
als merely mention that a program is avail-
able, the disclosure relating to alternatives
is not required. These proposed regula-
tions include samples of disclosures that
could be used to satisfy this requirement.
In concluding that these proposed regu-
lations did not include an ICR, the Depart-
ments reasoned that much of the informa-
tion required was likely already provided
as a result of state and local requirements
or the usual business practices of group
health plans and group health insurance is-
suers in connection with the offer and pro-
motion of health care coverage. In addi-
tion, the sample disclosures would enable
group health plans to make any necessary
modifications with minimal effort.
Finally, although the proposed regula-
tions do not include an ICR, the regulations
could be interpretedto require a revision
to an existing collection of information.
Administrators of group health plans cov-
ered under Title I of ERISA are generally
required to make certain disclosures about
the terms of a plan and material changes
in terms through a Summary Plan De-
scription (SPD) or Summary of Material
Modifications (SMM) pursuant to sections
101(a) and 102(a) of ERISA and related
regulations. The ICR related to the SPD
and SMM is currently approved by OMB
under OMB control number 1210–0039,
which is currently scheduled to expire on
April 30, 2013. While these materials
may in some cases require revisions to
comply with the proposed regulations, the
associated burden is expected to be negli-
gible, and is already accounted for in the
SPD, SMM, and the ICR by a burden es-
timation methodology, which anticipates
ongoing revisions. Based on the forego-
ing, the Departments do not expect that
any change to the existing ICR arising
from these proposed regulations will be
substantive or material. Accordingly, the
Departments have not filed an application
for approval of a revision to the existing
ICR with OMB in connection with these
proposed regulations.
G.Paperwork Reduction
Act—Department of Health and
Human Services
Under the Paperwork Reduction Act of
1995, the Department is required to pro-
vide 60-day notice in theFederal Register
and solicit public comment before a collec-
tion of information requirement is submit-
ted to OMB for review and approval. In
order to fairly evaluate whether an infor-
mation collection should be approved by
OMB, section 3506(c)(2)(A) of the Paper-
work Reduction Act of 1995 requires the
Department to solicit comment on the fol-
lowing issues:
•The need for the information collection
and its usefulness in carrying out the
proper functions of our agency.
•The accuracy of our estimate of the
information collection burden.
•The quality, utility, and clarity of the
information to be collected.
46
Kaiser Family Foundation,Employer Health Benefits: 2011 Annual Survey. 2011, The Kaiser Family Foundation, Menlo Park, CA; Health Research & Educational Trust, Chicago, IL.
January 28, 20134622013–5 I.R.B.

•Recommendations to minimize the
information collection burden on the
affected public, including automated
techniques.
Section 146.121(f)(1)(iv) stipulates that
the plan or issuer disclose in all plan ma-
terials describing the terms of the program
the availability of a reasonable alternative
standard to qualify for the reward under
a wellness program. However, for plan
materials that merely mention that a pro-
gram is available, without describing its
terms, the disclosure is not required. The
burden associated with this requirement
was previously approved under OMB con-
trol number 0938–0819. We are not seek-
ing reinstatement of the information col-
lection request underthe aforementioned
OMB control number, since we believe
that much of the information required is
likely already provided as a result of state
and local requirements or the usual busi-
ness practices of group health plans and
group health insurance issuers in connec-
tion with the offer and promotion of health
care coverage. In addition, the sample dis-
closures would enable group health plans
to make any necessary modifications with
minimal effort.
H.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 sig-
nificant regulatory action as defined in Ex-
ecutive Order 12866. Therefore, a regula-
tory 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 proposed
regulations, and, because these proposed
regulations do not impose a collection of
information on small entities, a Regula-
tory Flexibility Analysis under the Regu-
latory Flexibility Act (5 U.S.C. chapter 6)
is not required. Pursuant to section 7805(f)
of the Code, this notice of proposed rule-
making has been submitted to the Small
Business Administration for comment on
its impact on small business.
I.Congressional Review Act
These proposed regulations are sub-
ject to the Congressional Review Act
provisions of the Small Business Regu-
latory Enforcement Fairness Act of 1996
(5 U.S.C. §801et seq.) and, if finalized,
will be transmitted to Congress and the
Comptroller General for review. These
regulations, do not constitute a “major
rule,” as that term is defined in 5 U.S.C.
§804 because they are unlikely to result
in (1) an annual effect on the economy
of $100 million or more; (2) a major in-
crease in costs or prices for consumers,
individual industries, or federal, State or
local government agencies, or geographic
regions; or (3) significant adverse effects
on competition, employment, investment,
productivity, innovation, or on the abil-
ity of United States-based enterprises to
compete with foreign-based enterprises in
domestic or export markets.
J.Unfunded Mandates Reform Act
For purposes of the Unfunded Man-
dates Reform Act of 1995 (Pub. L. 104–4),
as well as Executive Order 12875, these
proposed regulations do not include any
federal mandate that may result in expen-
ditures by state, local, or tribal govern-
ments, nor does it include mandates which
may impose an annual burden of $100 mil-
lion, adjusted for inflation,
47
or more on
the private sector.
K.Federalism Statement — Department
of Labor and Department of Health and
Human Services
Executive Order 13132 outlines fun-
damental principles of federalism, and
requires the adherence to specific criteria
by federal agencies in the process of their
formulation and implementation of poli-
cies that have “substantial direct effects”
on the States, the relationship between the
national government and States, or on the
distribution of power and responsibilities
among the various levels of government.
Federal agencies promulgating regulations
that have these federalism implications
must consult with State and local officials,
and describe the extent of their consulta-
tion and the nature of the concerns of State
and local officials in the preamble to the
regulation.
In the Departments’ view, these pro-
posed regulations have federalism im-
plications, however, in the Departments’
view, the federalism implications of these
final regulations are substantially miti-
gated because, with respect to health in-
surance issuers, the vast majority of States
have enacted laws, which meet or exceed
the federal HIPAA standards prohibiting
discrimination based on health factors.
Therefore, the regulations are not likely to
require substantial additional oversight of
States by the Department of HHS.
In general, through section 514, ERISA
supersedes State laws to the extent that
they relate to any covered employee ben-
efit plan, and preserves State laws that
regulate insurance, banking, or securities.
While ERISA prohibits States from regu-
lating a plan as an insurance or investment
company or bank, HIPAA added a new
preemption provision to ERISA (as well
as to the PHS Act) narrowly preempt-
ing State requirements for group health
insurance coverage. With respect to the
HIPAA nondiscrimination provisions,
States may continue to apply State law
requirements except to the extent that such
requirements prevent the application of
the portability, access,and renewability
requirements of HIPAA, which include
HIPAA’s nondiscrimination requirements
provisions. HIPAA’s Conference Report
states that the conferees intended the nar-
rowest preemption of State laws with
regard to health insurance issuers (H.R.
Conf. Rep. No. 736, 104
th
Cong. 2d
Session 205, 1996). State insurance laws
that are more stringent than the federal
requirements are unlikely to “prevent the
application of” the HIPAA nondiscrimi-
nation provisions, and therefore are not
preempted. Accordingly, States have sig-
nificant latitude toimpose requirements
on health insurance issuers that are more
restrictive than the federal law.
Guidance conveying this interpretation
was published in theFederal Registeron
April 8, 1997 (62 FR 16904) and on De-
cember 30, 2004 (69 FR 78720), and these
proposed regulations clarify and imple-
ment the statute’s minimum standards and
do not significantly reduce the discretion
given the States by the statute. Moreover,
47
In 2012, that threshold level is approximately $139 million.
2013–5 I.R.B.463January 28, 2013

the Departments understand that the vast
majority of States have requirements that
meet or exceed the minimum requirements
of the HIPAA nondiscrimination provi-
sions.
HIPAA provides that the States may en-
force the provisions of HIPAA as they per-
tain to issuers, but that the Secretary of
HHS must enforce any provisions that a
State choose not to or fails to substan-
tially enforce. When exercising its respon-
sibility to enforce provisions of HIPAA,
HHS works cooperatively with the State
for the purpose of addressing the State’s
concerns and avoiding conflicts with the
exercise of State authority.
48
HHS has de-
veloped procedures to implement its en-
forcement responsibilities, and to afford
the States the maximum opportunity to en-
force HIPAA’s requirements in the first in-
stance. In compliance with Executive Or-
der 13132’s requirement that agencies ex-
amine closely any policies that may have
federalism implications or limit the policy
making discretion of the States, DOL and
HHS have engaged in numerous efforts to
consult with and workcooperatively with
affected State and local officials.
In conclusion, throughout the process
of developing these regulations, to the
extent feasible within the specific pre-
emption provisions of HIPAA, the De-
partments have attempted to balance the
States’ interests in regulating health plans
and health insurance issuers, and the rights
of those individuals that Congress in-
tendedtoprotectthrough the enactment of
HIPAA.
IV. Statutory Authority
The Department of the Treasury regula-
tions are proposed to be adopted pursuant
to the authority contained in sections 7805
and 9833 of the Code.
The Department of Labor regulations
are proposed to be adopted pursuant to
the authority contained in 29 U.S.C. 1027,
1059, 1135, 1161–1168, 1169, 1181–1183,
1181 note, 1185, 1185a, 1185b, 1185d,
1191, 1191a, 1191b, and 1191c; sec.
101(g), Public Law104–191, 110 Stat.
1936; sec. 401(b), Public Law 105–200,
112 Stat. 645 (42 U.S.C. 651 note); sec.
512(d), Public Law 110–343, 122 Stat.
3881; sec. 1001, 1201, and 1562(e),
Public Law 111–148, 124 Stat. 119, as
amended by Public Law 111–152, 124
Stat. 1029; Secretary of Labor’s Order
3–2010, 75 FR 55354 (September 10,
2010).
The Department of Health and Human
Services regulations are proposed to be
adopted, with respect to 45 CFR Part 146,
pursuant to the authority contained in sec-
tions 2702 through 2705, 2711 through
2723, 2791, and 2792 of the PHS Act
(42 U.S.C. 300gg–1 through 300gg–5,
300gg–11 through 300gg–23, 300gg–91,
and 300gg–92) prior to the amendments
made by the Affordable Care Act and
sections 2701 through 2763, 2791, and
2792 of the Public Health Service Act
(42 U.S.C. 300gg through 300gg–63,
300gg–91, and 300gg–92), as amended by
the Affordable Care Act; with respect to
45 CFR Part 147, pursuant to the authority
contained in sections 2701 through 2763,
2791, and 2792 of the PHS Act (42 U.S.C.
300gg through 300gg–63, 300gg–91, and
300gg–92), as amended by the Affordable
Care Act.
*****
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement,
Internal Revenue Service.
Signed this8thday ofNovember, 2012.
Phyllis C. Borzi,
Assistant Secretary,
Employee Benefits
Security Administration,
Department of Labor.
Dated:August 1, 2012.
Marilyn Tavenner,
Acting Administrator,
Centers for Medicare &
Medicaid Services.
Dated:August 7, 2012.
48
This authority applies to insurance issued with respect to group health plans generally, including plans covering employees of church organizations. Thus, this discussion of federalism
applies to all group health insurance coverage that is subject to the PHS Act, including those church plans that provide coverage through a health insurance issuer (but not to church plans that
do not provide coverage through a health insurance issuer).
January 28, 20134642013–5 I.R.B.

Kathleen Sebelius,
Secretary,
Department of Health
and Human Services.
DEPARTMENT OF
THE TREASURY
Internal Reve
nue Service
26 CFR Chapter
I
Accordingly,
26 CFR Parts 54 is pro-
posedtobeame
nded as follows:
PART 54—PENS
ION EXCISE TAXES
Paragraph 1
. The authority citation for
Part 54 is am
endedbyaddinganentryfor
§54.9815–2
705 in numerical order to read
in part as fo
llows:
Authority:
26 U.S.C. 7805. ***
Section 54.
9815–2705 also issued un-
der 26 U.S.C
. 9833.
Par. 2. Para
graph (f) of §54.9802–1 is
revisedtor
ead as follows:
§54.9802–
1 Prohibiting discrimination
against pa
rticipants and beneficiaries
based on a h
ealth factor.
*****
(f)Nondi
scriminatory wellness pro-
grams — in
general. A wellness program
is a progr
am of health promotion or dis-
ease prev
ention. Paragraphs (b)(2)(ii) and
(c)(3) o
f this section provide exceptions to
the gene
ral prohibitions against discrim-
ination
based on a health factor for plan
provisi
ons that vary benefits (including
cost-s
haring mechanisms) or the premium
or cont
ribution for similarly situated in-
dividu
als in connection with a wellness
progra
m that satisfies the requirements of
this pa
ragraph (f). If a wellness program
is a pa
rticipatory wellness program, as
defin
ed in paragraph (f)(1) of this section,
that p
aragraph also makes clear that the
welln
ess program does not violate this
secti
on if participation in the program is
made a
vailable to all similarly situated
indi
viduals. If a wellness program is a
heal
th-contingent wellness program, as
defi
ned in paragraph (f)(2) of this section,
the w
ellness program does not violate this
sect
ion if the requirements of paragraph
(f)
(3) of this section are met. Except where
exp
ressly provided otherwise, references
in t
his section to an individual obtaining
a reward inclu
de both obtaining a reward
(such as a prem
ium discount or rebate,
awaiverofall
or part of a cost-sharing
mechanism, a
n additional benefit, or any
financial or
other incentive) and avoid-
ing a penalty
(such as the absence of a
premium surc
harge, or other financial or
nonfinancia
l disincentive). References in
this sectio
ntoaplanprovidingareward
include bot
h providing a reward (such as
apremiumdi
scount or rebate, a waiver of
all or part o
f a cost-sharing mechanism,
an additio
nal benefit, or any financial or
other ince
ntive) and imposing a penalty
(such as a s
urcharge or other financial or
nonfinanc
ial disincentive).
(1)Partic
ipatory wellness programs de-
fined.Ifn
one of the conditions for obtain-
ing a rewa
rd under a wellness program is
basedona
n individual satisfying a stan-
dard that
is related to a health factor (or
if a welln
ess program does not provide a
reward)
, the wellness program is a partici-
patory w
ellness program and, if participa-
tion in t
he program is made available to all
similar
ly situated individuals, does not vi-
olate th
is section. Examples of participa-
tory wel
lness programs are:
(i) A pro
gram that reimburses all or part
of the c
ost for membership in a fitness cen-
ter.
(ii) A d
iagnostic testing program that
provid
es a reward for participation and
does no
t base any part of the reward on out-
comes.
(iii) A
program that encourages preven-
tive ca
re through the waiver of the co-
paymen
t or deductible requirement under
agrou
p health plan for the costs of, for
examp
le, prenatal care or well-baby vis-
its. (
Note that, with respect to non-grand-
fathe
red plans, §54.9815–2713T requires
benef
its for certain preventive health ser-
vice
s without the imposition of cost shar-
ing.
)
(iv)
A program that reimburses employ-
ees f
or the costs of participating, or that
othe
rwise provides a reward for participat-
ing,
in a smoking cessation program with-
out r
egard to whether the employee quits
smok
ing.
(v) A program t
hat provides a reward to
employees for
attending a monthly no-cost
health educat
ion seminar.
(vi) A program
that provides a reward
to employees
who complete a health risk
assessment r
egarding current health status,
without any f
urther action (educational or
otherwise) r
equired by the employee with
regard to the
health issues identified as part
of the asses
sment. (See also§54.9802–3T
for rules pr
ohibiting collection of genetic
informatio
n).
(2)Health-
contingent wellness pro-
grams defin
ed. If any of the conditions for
obtaining a
reward under a wellness pro-
gram is bas
ed on an individual satisfying
astandard
that is related to a health factor,
the wellne
ss program is a health-contin-
gent welln
ess program and the program
is permiss
ible under this section only if
all of the
requirements of paragraph (f)(3)
of this se
ction are satisfied. Examples of
health-c
ontingent wellness programs are:
(i) A prog
ram that imposes a premium
surcharg
e based on tobacco use.
(ii) A pro
gram that uses a biometric
screenin
g or a health risk assessment to
identify
employees with specified med-
ical con
ditions or risk factors (such as
high cho
lesterol, high blood pressure, un-
healthy
body mass index, or high glucose
level) a
nd provides a reward to employees
identif
ied as within a normal or healthy
range f
or biometrics (or at low risk for cer-
tain me
dical conditions), while requiring
employ
ees who are identified as outside
the nor
mal or healthy range (or at risk) to
take ad
ditional steps (such as meeting with
a heal
th coach, taking a health or fitness
cours
e, adhering to a health improvement
actio
n plan, or complying with a health
care p
rovider’s plan of care) to obtain the
same r
eward.
(3)Re
quirements for health-contingent
welln
ess programs. A health-contingent
well
ness program does not violate this sec-
tion
if all of the following requirements are
sati
sfied:
(i)F
requency of opportunity to qual-
ify.
The program must give individuals el-
igib
le for the program the opportunity to
2013–5 I.R.B.465January 28, 2013

qualify for the reward under the program
at least once per year.
(ii)Size of reward. The reward for
a health-contingent wellness program, to-
gether with the reward for other health-
contingent wellness programs with respect
to the plan, must not exceed the appli-
cable percentage of the total cost of em-
ployee-only coverage under the plan, as
defined in this paragraph (f)(3)(ii). How-
ever, if, in addition to employees, any class
of dependents (such as spouses, or spouses
and dependent children) may participate in
the wellness program, the reward must not
exceed the applicable percentage of the to-
tal cost of the coverage in which an em-
ployee and any dependents are enrolled.
For purposes of this paragraph (f)(3)(ii),
the cost of coverage is determined based
on the total amount of employer and em-
ployee contributions for the benefit pack-
age under which the employee is (or the
employee and any dependents are) receiv-
ing coverage.
(A)Applicable percentage. For pur-
poses of this paragraph (f)(3)(ii), the appli-
cable percentage is 30 percent, except that
the applicable percentage is increased an
additional 20 percentage points (to 50 per-
cent) to the extent that the additional per-
centage is in connection with a program
designed to prevent or reduce tobacco use.
(B)Examples. The rules of this para-
graph (f)(3)(ii) are illustrated by the fol-
lowing examples:
Example 1.(i)Facts. An employer sponsors
a group health plan. The annual premium for
employee-only coverage is $6,000 (of which the
employer pays $4,500 per year and the employee
pays $1,500 per year). The plan offers employees
a health-contingent wellness program focused on
exercise, blood sugar, weight, cholesterol, and blood
pressure. The reward for compliance is an annual
premium rebate of $600.
(ii)Conclusion.InthisExample 1, the program
satisfies the requirements of this paragraph (f)(3)(ii)
because the reward for the wellness program, $600,
does not exceed 30 percent of the total annual cost of
employee-only coverage, $1,800. ($6,000 x 30% =
$1,800.)
Example 2.(i)Facts. Same facts asExample 1,
except the wellness programis exclusively a tobacco
prevention program. Employees who have used to-
bacco in the last 12 months and who are not enrolled
in the plan’s tobacco cessation program are charged
a $1,000 premium surcharge (in addition to their em-
ployee contribution towards the coverage). (Those
who participate in the plan’s tobacco cessation pro-
gram are not assessed the $1,000 surcharge.)
(ii)Conclusion.InthisExample 2, the program
satisfies the requirements of this paragraph (f)(3)(ii)
because the reward for the wellness program (absence
of a $1,000 surcharge), does not exceed 50 percent
of the total annual cost of employee-only coverage,
$3,000. ($6,000 x 50% = $3,000.)
Example 3.(i)Facts. Same facts asExample 1,
except that, in addition to the $600 reward for com-
pliance with the health-contingent wellness program,
the plan also imposes an additional $2,000 tobacco
premium surcharge on employees who have used to-
bacco in the last 12 months and who are not enrolled
in the plan’s tobacco cessation program. (Those who
participate in the plan’s tobacco cessation program
are not assessed the $2,000 surcharge.)
(ii)Conclusion.InthisExample 3, the program
satisfies the requirements of this paragraph (f)(3)(ii)
because both: the total of all rewards (including ab-
sence of a surcharge for participating in the tobacco
program) is $2,600 ($600 + $2,000 = $2,600), which
does not exceed 50 percent of the total annual cost of
employee-only coverage ($3,000); and, tested sepa-
rately, the $600 reward for the wellness program un-
related to tobacco use does not exceed 30 percent
of the total annual cost of employee-only coverage,
$1,800.
Example 4.(i)Facts. Anemployersponsorsa
group health plan. The total annual premium for
employee-only coverage (including both employer
and employee contributions towards the coverage) is
$5,000. The plan provides a $250 reward to employ-
ees who complete a health risk assessment, without
regard to the health issues identified as part of the
assessment. The plan also offers a Healthy Heart
program, which is a health-contingent wellness pro-
gram under paragraph (f)(2) of this section, with an
opportunity to earn a $1,500 reward.
(ii)Conclusion.InthisExample 4,theplansat-
isfies the requirements of this paragraph (f)(3)(ii).
Even though the total reward for all wellness pro-
grams under the plan is $1,750 ($250 + $1,500 =
$1,750, which exceeds 30 percent of the cost of the
annual premium for employee-only coverage ($5,000
x 30% = $1,500)), only the reward offered for com-
pliance with the health-contingent wellness program
($1,500) is taken into account in determining whether
the rules of this paragraph (f)(3)(ii) are met. (The
$250 reward is offered in connection with a participa-
tory wellness program and therefore is not taken into
account under this paragraph (f)(3)(ii)). The health-
contingent wellness program offers a reward that does
not exceed 30 percent of the total annual cost of em-
ployee-only coverage.
(iii)Uniform availability and reason-
able alternative standards.Therewardun-
der the program must be available to all
similarly situated individuals.
(A) Under this paragraph (f)(3)(iii), a
reward under a program is not available
to all similarly situated individuals for a
period unless the program meets both of
the following requirements:
(1) The program allows a reasonable al-
ternative standard (or waiver of the other-
wise applicable standard) for obtaining the
reward for any individual for whom, for
that period, it is unreasonably difficult due
to a medical condition to satisfy the other-
wise applicable standard; and
(2) The program allows a reasonable al-
ternative standard (or waiver of the other-
wise applicable standard) for obtaining the
reward for any individual for whom, for
that period, it is medically inadvisable to
attempt to satisfy the otherwise applicable
standard.
(B) While plans are not required to de-
termine a particular alternative standard in
advance of an individual’s request for one,
if an individual is described in either para-
graph (f)(3)(iii)(A)(1)or(2)ofthissection,
a reasonable alternative standard must be
furnished by the plan upon the individual’s
request or the condition for obtaining the
reward must be waived. All the facts and
circumstances are taken into account in de-
termining whether a plan has furnished a
reasonable alternative standard, including
but not limited to the following:
(1) If the reasonable alternative stan-
dard is completion of an educational pro-
gram, the plan must make the educational
program available instead of requiring an
individual to find such a program unas-
sisted, and may not require an individual
to pay for the cost of the program.
(2) If the reasonable alternative stan-
dard is a diet program, plans are not re-
quired to pay for the cost of food but must
pay any membership or participation fee.
(3) If the reasonable alternative stan-
dard is compliance with the recommenda-
tions of a medical professional who is an
employee or agent of the plan, and an indi-
vidual’s personal physician states that the
plan’s recommendations are not medically
appropriate for that individual, the plan
must provide a reasonable alternative stan-
dard that accommodates the recommenda-
tions of the individual’s personal physi-
cian with regard to medical appropriate-
ness. Plans may impose standard cost shar-
ing under the plan or coverage for medi-
cal items and services furnished pursuant
to the physician’srecommendations.
(C) If reasonable under the circum-
stances, a plan may seekverification, such
as a statement from an individual’s per-
sonal physician, that a health factor makes
it unreasonably difficult for the individual
to satisfy, or medically inadvisable for the
individual to attempt to satisfy, the other-
wise applicable standard. It would not be
reasonable, for example, for a plan to seek
verification of a claim that is obviously
valid based on the nature of the individ-
ual’s medical condition that is known to
January 28, 20134662013–5 I.R.B.

the plan. However, plans may seek verifi-
cation in the case of claims for which it is
reasonable to determine that medical judg-
ment is required to evaluate the validity of
the claim.
(iv)Reasonable design. The program
must be reasonably designed to promote
health or prevent disease. A program sat-
isfies this standard if it has a reasonable
chance of improving the health of, or pre-
venting disease in, participating individu-
als and it is not overly burdensome, is not
a subterfuge for discriminating based on
a health factor, and is not highly suspect
inthemethodchosentopromotehealth
or prevent disease. This determination is
based on all the relevant facts and circum-
stances. To the extent a plan’s initial stan-
dard for obtaining a reward (including a
portion of a reward) is based on the results
of a measurement, test, or screening relat-
ing to a health factor (such as a biometric
examination or a health risk assessment),
the plan must make available to any in-
dividual who does not meet the standard
based on the measurement, test, or screen-
ing a different, reasonable means of quali-
fying for the reward.
(v)Notice of availability of other means
of qualifying for the reward.(A)Theplan
must disclose in all plan materials describ-
ing the terms of the program the availabil-
ity of other means of qualifying for the re-
ward or the possibility of waiver of the oth-
erwise applicable standard. If plan materi-
als merely mention that a program is avail-
able, without describing its terms, this dis-
closure is not required.
(B) The following language, or substan-
tially similar language, can be used to sat-
isfy the notice requirement of this para-
graph (f)(3)(v): “Your health plan is com-
mitted to helping you achieve your best
health status. Rewards for participating in
a wellness program are available to all em-
ployees. If you think you might be unable
to meet a standard for a reward under this
wellness program, you might qualify for an
opportunity to earn the same reward by dif-
ferent means. Contact us at [insert contact
information] and we will work with you to
find a wellness program with the same re-
ward that is right for you in light of your
health status.” Additional sample language
is provided in the examples of paragraph
(f)(4) of this section.
(4)Examples. The rules of paragraphs
(f)(3)(iii), (iv), and (v) of this section are
illustrated by the following examples:
Example 1.(i)Facts. A group health plan pro-
vides a reward to individuals who participate in a rea-
sonable specified walking program. If it is unreason-
ably difficult due to a medical condition for an indi-
vidual to participate (or if it is medically inadvisable
for an individual to participate), the plan will waive
the walking program requirement and provide the re-
ward. All materials describing the terms of the walk-
ing program disclose the availability of the waiver.
(ii)Conclusion. The program satisfies the re-
quirements of paragraph (f)(3)(iii) of this section be-
cause the reward under the program is available to
all similarly situated individuals because it accommo-
dates individuals who cannot participate in the walk-
ing program due to a medical condition (or for whom
it would be medically inadvisable to attempt to par-
ticipate) by providing them the reward even if they
do not participate in the walking program (that is,
by waiving the condition). The program satisfies
the requirements of paragraph (f)(3)(iv) of this sec-
tion because the walking program is reasonably de-
signed to promote health and prevent disease. Last,
the plan complies with the disclosure requirement of
paragraph (f)(3)(v) of this section. Thus, the plan sat-
isfies paragraphs (f)(3)(iii), (iv), and (v) of this sec-
tion.
Example 2.(i)Facts. A group health plan offers
a reward to individuals who achieve a count under
200 on a cholesterol test. If a participant does not
achieve the targeted cholesterol count, the plan will
make available a different,reasonable means of qual-
ifying for the reward. In addition, all plan materials
describing the terms of the program include the fol-
lowing statement: “Your health plan wants to help
you take charge of your health. Rewards are avail-
able to all employees who participate in our Choles-
terol Awareness Wellness Program. If your choles-
terol count is under 200, you will receive the reward.
If not, you will still have an opportunity to qualify for
the reward. We will work with you to find a Health
Smart program that is right for you.” IndividualDis
identified as having a cholesterol count above 200.
The plan partnersDwith a nurse who makes recom-
mendations regarding diet and exercise, with which
it is not unreasonably difficult due to a medical con-
dition ofDor medically inadvisable forDto comply,
and which is otherwise reasonably designed, based on
all the relevant facts and circumstances. In addition,
the plan makes available to all other individuals who
do not meet the cholesterol standard a different, rea-
sonable means of qualifying for the reward which is
not unreasonably burdensome or impractical.Dwill
qualify for the discount ifDfollows the recommenda-
tions regardless of whetherDachieves a cholesterol
count that is under 200.
(ii)Conclusion.InthisExample 2, the program
satisfies the requirements of paragraphs (f)(3)(iii),
(iv), and (v) of this section. The program’s initial
standard for obtaining a reward is dependent on the
results of a cholesterol screening, which is related
to a health factor. However, the program is reason-
ably designed under paragraphs (f)(3)(iii) and (iv)
of this section because the plan makes available
to all individuals who do not meet the cholesterol
standard a different, reasonable means of qualifying
for the reward and because the program is other-
wise reasonably designedbased on all the relevant
facts and circumstances. The plan also discloses in
all materials describing the terms of the program
the opportunity to qualify for the reward through
other means. Thus, the program satisfies paragraphs
(f)(3)(iii), (iv), and (v) of this section.
Example 3.(i)Facts. Same facts asExample 2,
except that, followingdiet and exercise,Dagain fails
to achieve a cholesterol count that is under 200, and
the program requiresDto visit a doctor and follow
any additional recommendations ofD’s doctor with
respect toD’s cholesterol. The program permitsDto
selectD’s own doctor for this purpose.DvisitsD’s
doctor, who determinesDshould take a prescription
medication for cholesterol. In addition, the doctor de-
termines thatDmust be monitored through periodic
blood tests to continually reevaluateD’s health sta-
tus. The plan accommodatesDby making the dis-
count available toD, but only ifDactually follows
the advice ofD’s doctor’s regarding medication and
blood tests.
(ii)Conclusion.InthisExample 3, the program’s
requirements to follow up with, and follow the rec-
ommendations of,D’s doctor do not make the pro-
gram unreasonable under paragraphs (f)(3)(iii) or (iv)
of this section. The program continues to satisfy the
conditions of paragraphs (f)(3)(iii), (iv), and (v) of
this section.
Example 4.(i)Facts. A group health plan will
provide a reward to participants who have a body
mass index (BMI) that is 26 or lower, determined
shortly before the beginning of the year. Any partic-
ipant who does not meet the target BMI is given the
same discount if the participant complies with an ex-
ercise program that consists of walking 150 minutes
a week. Any participant for whom it is unreasonably
difficult due to a medical condition to comply with
this walking program (and any participant for whom
it is medically inadvisable to attempt to comply with
the walking program) during the year is given the
same discount if the individual satisfies an alternative
standard that is reasonable taking into consideration
the individual’s medical situation, is not unreason-
ably burdensome or impractical to comply with, and
is otherwise reasonably designed based on all the rel-
evant facts and circumstances. All plan materials de-
scribing the terms of the wellness program include the
following statement: “Fitness is Easy! Start Walking!
Your health plan cares about your health. If you are
overweight, our Start Walking program will help you
lose weight and feel better. We will help you enroll.
(**If your doctor says that walking isn’t right for you,
that’s okay too. We will develop a wellness program
that is.)” IndividualEis unable to achieve a BMI that
is 26 or lower within the plan’s timeframe and is also
not reasonably able to comply with the walking pro-
gram.Eproposes a program based on the recommen-
dations ofE’s physician. The plan agrees to make the
discount available toE, but only ifEactually follows
the physician’s recommendations.
(ii)Conclusion.InthisExample 4, the program
satisfies the requirements of paragraphs (f)(3)(iii),
(iv), and (v) of this section. The program’s initial
standard for obtaining a reward is dependent on the
results of a BMI screening, which is related to a
health factor. However, the plan complies with the
requirements of paragraph (f)(3)(iv) of this section
because it makes available to all individuals who
do not satisfy the BMI standard a different reason-
2013–5 I.R.B.467January 28, 2013

able means of qualifying for the reward (a walking
program that is not unreasonably burdensome or
impractical for individuals to comply with and that
is otherwise reasonably designed based on all the
relevant facts and circumstances). In addition, the
plan complies with the requirements of paragraph
(f)(3)(iii) of this section because, if there are indi-
viduals for whom it is unreasonably difficult due
to a medical condition to comply, or for whom it
is medically inadvisable to attempt to comply, with
the walking program, the plan provides a reasonable
alternative to those individuals. Moreover, the plan
satisfies the requirements of paragraph (f)(3)(v) of
this section because it discloses, in all materials de-
scribing the terms of the program, the availability of
other means of qualifying for the reward or the possi-
bility of waiver of the otherwise applicable standard.
Thus, the plan satisfies paragraphs (f)(3)(iii), (iv),
and (v) of this section.
Example 5.(i)Facts. In conjunction with an
annual open enrollment period, a group health plan
provides a premium differential based on tobacco
use, determined using a health risk assessment. The
following statement is included in all plan materials
describing the tobacco premium differential: “Stop
smoking today! We can help! If you are a smoker,
we offer a smoking cessation program. If you com-
plete the program, you can avoid this surcharge.”
The plan accommodates participants who smoke
by facilitating their enrollment in a smoking ces-
sation program that requires participation at a time
and place that are not unreasonably burdensome or
impractical for participants, and that is otherwise
reasonably designed based on all the relevant facts
and circumstances. The plan pays the cost of the
program. Any participant can avoid the surcharge by
participating in the program, regardless of whether
the participant stops smoking.
(ii)Conclusion.InthisExample 5,thepremium
differential satisfies the requirements of paragraphs
(f)(3)(iii), (iv), and (v) of this section. The program’s
initial standard for obtaining a reward is dependent
on the results of a health risk assessment, which is a
screening. However, the plan is reasonably designed
under paragraph (f)(3)(iv) because the plan provides
a different, reasonable means of qualifying for the
reward to all tobacco users. The plan discloses, in
all materials describing the terms of the program, the
availability of other means of qualifying for the re-
ward. Thus, the plan satisfies paragraphs (f)(3)(iii),
(iv), and (v) of this section.
Example 6.(i)Facts. Same facts asExample 5,
except the plan does not facilitateF’s enrollment in
any program. Instead the plan advisesFto find a pro-
gram, pay for it, and provide a certificate of comple-
tiontotheplan.
(ii)Conclusion.InthisExample 6, the require-
ment forFto find and pay forF’s own smoking ces-
sation program means that the alternative program
is not reasonable. Accordingly, the plan has not of-
fered a reasonable alternative standard that complies
with paragraphs (f)(3)(iii) and (iv) of this section and
the premium differential violates paragraph (c) of this
section.
*****
Par. 3. Section 54.9815–2705 is added
to read as follows:
§54.9815–2705 Prohibiting
discrimination against participants and
beneficiaries based on a health factor.
(a)In general. A group health plan and
a health insurance issuer offering group
health insurance coverage must comply
with the requirementsof §54.9802–1. Ac-
cordingly, with respect to health insurance
issuers offering group health insurance
coverage, the issuer is subject to the re-
quirements of §54.9802–1 to the same
extent as a group health plan.
(b)Applicability date. This section
is applicable to group health plans and
health insurance issuers offering group
health insurance coverage for plan years
beginning on or after January 1, 2014.
See§54.9815–1251T, which provides that
the rules of this section do not apply to
grandfathered health plans.
(Filed by the Office of the Federal Register on November 20,
2012, 11:15 a.m., and published in the issue of the Federal
Register for November 26, 2012, 77 F.R. 70620)
January 28, 20134682013–5 I.R.B.

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.
2013–5 I.R.B.iJanuary 28, 2013

Numerical Finding List
1
Bulletins 2013–1 through 2013–5
Announcements:
2013-1, 2013-1 I.R.B.251
2013-2, 2013-2 I.R.B.271
2013-3, 2013-2 I.R.B.271
2013-4, 2013-4 I.R.B.440
2013-5, 2013-3 I.R.B.306
2013-6, 2013-3 I.R.B.307
2013-7, 2013-3 I.R.B.308
2013-8, 2013-4 I.R.B.440
2013-9, 2013-4 I.R.B.441
2013-10, 2013-3 I.R.B.311
Notices:
2013-1, 2013-3 I.R.B.281
Proposed Regulations:
REG-141066-09, 2013-3 I.R.B.289
REG-122707-12, 2013-5 I.R.B.450
Revenue Procedures:
2013-1, 2013-1 I.R.B.1
2013-2, 2013-1 I.R.B.92
2013-3, 2013-1 I.R.B.113
2013-4, 2013-1 I.R.B.126
2013-5, 2013-1 I.R.B.170
2013-6, 2013-1 I.R.B.198
2013-7, 2013-1 I.R.B.233
2013-8, 2013-1 I.R.B.237
2013-9, 2013-2 I.R.B.255
2013-10, 2013-2 I.R.B.267
2013-11, 2013-2 I.R.B.269
2013-12, 2013-4 I.R.B.313
2013-14, 2013-3 I.R.B.283
2013-15, 2013-5 I.R.B.444
Revenue Rulings:
2013-1, 2013-2 I.R.B.252
Treasury Decisions:
9603, 2013-3 I.R.B.273
9608, 2013-3 I.R.B.274
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2012–27 through 2012–52 is in Internal Revenue Bulletin
2012–52, dated December 27, 2012.
January 28, 2013ii2013–5 I.R.B.

Finding List of Current Actions on
Previously Published Items
1
Bulletins 2013–1 through 2013–5
Notices:
2012-60
Superseded by
Notice 2013-1, 2013-3 I.R.B.281
Proposed Regulations:
REG-140668-07
Corrected by
Ann. 2013-6, 2013-3 I.R.B.307
Revenue Procedures:
2004-66
Modified and superseded by
Rev. Proc. 2013-11, 2013-2 I.R.B.269
2008-35
Modified and superseded by
Rev. Proc. 2013-14, 2013-3 I.R.B.283
2008-50
Modified and superseded by
Rev. Proc. 2013-12, 2013-4 I.R.B.313
2011-49
Modified by
Rev. Proc. 2013-6, 2013-1 I.R.B.198
2011-52
Modified and partly superseded by
Rev. Proc. 2013-15, 2013-5 I.R.B.444
2012-1
Superseded by
Rev. Proc. 2013-1, 2013-1 I.R.B.1
2012-2
Superseded by
Rev. Proc. 2013-2, 2013-1 I.R.B.92
2012-3
Superseded by
Rev. Proc. 2013-3, 2013-1 I.R.B.113
2012-4
Superseded by
Rev. Proc. 2013-4, 2013-1 I.R.B.126
2012-5
Superseded by
Rev. Proc. 2013-5, 2013-1 I.R.B.170
2012-6
Superseded by
Rev. Proc. 2013-6, 2013-1 I.R.B.198
2012-7
Superseded by
Rev. Proc. 2013-7, 2013-1 I.R.B.233
Revenue Procedures— Continued:
2012-8
Superseded by
Rev. Proc. 2013-8, 2013-1 I.R.B.237
2012-9
Superseded by
Rev. Proc. 2013-9, 2013-2 I.R.B.255
2012-10
Superseded by
Rev. Proc. 2013-10, 2013-2 I.R.B.267
2012-30
Corrected and clarified by
Ann. 2013-3, 2013-2 I.R.B.271
Updated by
Ann. 2013-10, 2013-3 I.R.B.311
2013-1
Corrected by
Ann. 2013-9, 2013-4 I.R.B.441
Treasury Decisions:
9564
Corrected by
Ann. 2013-4, 2013-4 I.R.B.440
Amended by
Ann. 2013-7, 2013-3 I.R.B.308
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2012–27 through 2012–52 is in Internal Revenue Bulletin 2012–52, dated December 27,
2012.
2013–5 I.R.B.iiiJanuary 28, 2013

INDEX
Internal Revenue Bulletins 2013–1 to 2013–5
The abbreviation and number in parenthesis following the index entry
refer to the specific item; numbers in roman and italic type following
the parentheses refer to the Internal Revenue Bulletin in which the item
may be found and the page number on which it appears.
Key to Abbreviations:
AnnAnnouncement
CDCourt Decision
DODelegation Order
EOExecutive Order
PLPublic Law
PTEProhibited Transaction Exemption
RPRevenue Procedure
RRRevenue Ruling
SPRStatement of Procedural Rules
TCTax Convention
TDTreasury Decision
TDOTreasury Department Order
EMPLOYEE PLANS
Closing agreements (RP 12) 4,313
Determination letters, issuing procedure (RP 6) 1,198
Letter rulings:
And determination letters, areas which will not be issued
from:
Associates Chief Counsel and Division Counsel (TE/GE)
(RP 3) 1,113
Associate Chief Counsel (International ) (RP 7) 1,233
And general information letters, procedures (RP 4) 1,126
User fees, request for letter rulings (RP 8) 1,237
Proposed Regulations:
26 CFR 54.9815–2705, added; 54.9802–1, revised; rules
relating to incentives for nondiscriminatory wellness pro-
grams (REG–122707–12) 5,450
Rules relating to incentives for nondiscriminatory wellness pro-
grams (REG–122707–12) 5,450
Technical advice to IRS employees (RP 5) 1,170
EMPLOYMENT TAX
Letter rulings and information letters issued by Associate Of-
fices, determination letters issued by Operating Divisions (RP
1) 1,1;correction(Ann9)3,441
Technical Advice Memoranda (TAMs) (RP 2) 1,92
ESTATE TAX
Cost-of-living adjustments for inflation for 2013 (RP 15) 5,444
Letter rulings and information letters issued by Associate Of-
fices, determination letters issued by Operating Divisions (RP
1) 1,1;correction(Ann9)3,441
Technical Advice Memoranda (TAMs) (RP 2) 1,92
EXCISE TAX
Letter rulings and information letters issued by Associate Of-
fices, determination letters issued by Operating Divisions (RP
1) 1,1;correction(Ann9)3,441
Technical Advice Memoranda (TAMs) (RP 2) 1,92
EXEMPT ORGANIZATIONS
Letter rulings:
And determination letters:
Areas which will not be issued from Associates Chief
Counsel and Division Counsel (TE/GE) (RP 3) 1,113
And general information letters, procedures (RP 4) 1,126
Exemption application determination letter rulings under
sections 501, 509, 4940, 4942, and 4947 (RP 10) 2,267
Exemption application determination letter rulings under
sections 501 and 521 (RP 9) 2,255
User fees, request for letter rulings (RP 8) 1,237
Technical Advice Memoranda (TAMs) (RP 2) 1,92
GIFT TAX
Letter rulings and information letters issued by Associate Of-
fices, determination letters issued by Operating Divisions (RP
1) 1,1;correction(Ann9)3,441
Technical Advice Memoranda (TAMs) (RP 2) 1,92
INCOME TAX
Application of section 172(h) including consolidated groups,
correction (Ann 6) 3,307
Awards for information relating to detecting underpay-
ments of tax or violations of the Internal Revenue laws
(REG–141066–09) 3,289
Cost-of-living adjustments for inflation for 2013 (RP 15) 5,444
Deductions for qualified film and television production costs (TD
9603) 3,273
E-signature standards (Ann 8) 4,440
Exceptions to loss transaction filter (RP 11) 2,269
Forms:
1097, 1098, 1099, 3921, 3922, 5498, 8935, and W-2G, re-
quirements for filing electronically, correction (Ann 3) 2,
271
Guidance to tax return preparers, consents to disclose and con-
sentstousetaxreturninformationintheForm1040series,
update to Rev. Proc. 2008–35 (TD 9608) 3,275;(RP14)3,
283
Gross income, per capita payments from proceeds of settlements
of Indian tribal trust cases (Notice 1) 3,281
Interest:
Investment:
Federal short-term, mid-term, and long-term rates for:
January 2013 (RR 1) 2,252
January 28, 2013iv2013–5 I.R.B.

INCOME TAX—Cont.
Letter rulings:
And determination letters, areas which will not be issued
from:
Associates Chief Counsel and Division Counsel (TE/GE)
(RP 3) 1,113
Associate Chief Counsel (International ) (RP 7) 1,233
And information letters issued by Associate Offices, determi-
nation letters issued by Operating Divisions (RP 1) 1,1;
correction (Ann 9) 3,441
Proposed Regulations:
26 CFR 301.6103(h)(4)-1, added; 301.7623–1, revised;
301.7623–2 thru –4, added; awards for information relating
to detecting underpayments of tax or violations of the
Internal Revenue laws (REG–141066–09) 3,289
Publications:
1220, Specifications for Filing Forms 1097, 1098, 1099,
3921, 3922, 5498, 8935, and W-2G Electronically, correc-
tion (Ann 10) 2,311
Qualifying advanced coalproject program (Ann 2) 2,271
Regulations:
26 CFR 1.181–0, amended; 1.181–0T, removed; 1.181–1,
amended; 1.181–1T, amended; 1.181–6, amended;
1.181–6T, removed; deductions for qualified film and
television production costs (TD 9603) 3,273
26 CFR 301.7216–0, amended; 301.7216–0T, removed;
301.7216–2, amended; 301.7216–2T, removed; guidance
to tax return preparers, consents to disclose and consents to
use tax returns information in the Form 1040 series, update
to Rev. Proc. 2008–35 (TD 9608) 3,275
Tangible property, guidance regarding deduction and capitaliza-
tion of expenditures related to, corrections (Ann 7) 3,308;
(Ann 4) 4,440
Tax Conventions:
U.S.-Norway agreement regarding the sourcing of remunera-
tion for government services and social security payments
(Ann 5) 3,306
Technical Advice Memoranda (TAMs) (RP 2) 1,92
SELF-EMPLOYMENT TAX
Letter rulings and information letters issued by Associate Of-
fices, determination letters issued by Operating Divisions (RP
1) 1,1;correction(Ann9)3,441
Technical Advice Memoranda (TAMs) (RP 2) 1,92
2013–5 I.R.B.vJanuary 28, 2013

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